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The Quartet: Look ForwardToronto | Summer 2014

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RISING LEASEHOLD INVESTMENTSA recent trend of increasing leasehold investments has emerged in the market – in some cases exceeding $300 per square foot. For tenants, the increased adoption of Alternative Workplace Strategies to optimize mobility/productivity and lower on-going costs of space management is the key driver. For landlords, amortizing some of the improvement costs provides increased face revenue.

TENANT STABILITYThe recent insolvency of law firms Heenan Blaikie and Goodman & Carr have caused landlords to reevaluate the credit worthiness of limited liability partnerships (LLP). We see landlords demanding stronger covenants from incoming LLPs and demonstrating reluctance to fund their leasehold improvements. Law firms, many of which are LLPs, make up roughly 15.0 percent of Toronto’s financial core tenancies.

45 BAY STREETIvanhoe Cambridge recently announced a new proposed development at 45 Bay Street. If Ivanhoe builds, they have the benefit of being one of the least

affected landlords in a high-supply market and of pulling tenants primarily from competitors. 45 Bay is estimated to be around one million square feet, and TD, with its 400,000 square feet requirement, could potentially fulfill the pre-leasing threshold Ivanhoe seeks before breaking ground.

WHY RELOCATE AND REVITALIZE? – 3 KEY REASONSObserving tenants that have pre-leased, JLL has identified the major motives to relocate to be LEED certification, consolidation, and the attraction of millennials.

All seven of Toronto’s under construction developments are pursuing LEED Gold/Platinum certifications allowing major cost savings for tenants through lower additional rents. However, a more significant benefit has been the effective densification of the workplace allowing more workers and more productivity within a smaller space. This has further encouraged a second major motive for relocation: consolidation, which enables enhanced footprint reduction. These two changes can work together to lower occupied area. Looking at pre-leasing in new developments, total rentable area leased by the committed tenants is at least 300,000 square feet less than the space(s) from which they are moving. This drives a decrease in occupancy costs and further increases market vacancy upon development delivery. Our final major motive is the attraction of millennials, a key feature for companies looking to stay ahead of their competition. Toronto’s new developments have achieved sleek, modern designs, excellent public transit access and environmental sustainability, values that are held high by the next generations of workers. In doing so, they have achieved a new prestigious and attractive identity for the millennials; separate than the identity established by the traditional bank towers for the Boomer generation.

Downtown Toronto's Confirmed and Proposed DevelopmentsAn analysis of new supply trends in the Downtown Class A office market

Occupied Floor Available Floor Retail Floor

Confirmed Projects Pre-Leasing Developments

1 RBC WaterPark Place III 88 Queen’s Quay West

2 Southcore Financial Tower 120 Bremner Boulvard

5 Bay Adelaide Centre East 22 Adelaide Street West

4 One York 1 York Street

3. Queen Richmond Centre 134 Peter Street

10 45 Bay Street 45 Bay Street

8 Union Centre 20 York Street

9 160 Front Street West 160 Front Street West

6 Richmond Adelaide Centre III 100 Adelaide Street West

7 Globe and Mail Centre 351 King Street East

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AddressRBC WaterPark Place III88 Queen's Quay West

South Core Financial Centre120 Bremner Blvd.

Queen Richmond Centre134 Peter Street

Bay Adelaide Centre East22 Adelaide Street West

One York1 York Street

Ernst & Young Tower100 Adelaide Street West

Globe and Mail Centre351 King Street East

160 Front Street West160 Front Street West

45 Bay Street45 Bay Street

Union Centre20 York Street

Area 886,026 s.f. 674,320 s.f. 285,505 s.f. 1,012,388 s.f. 800,000 s.f. 899,064 s.f. 455,000 s.f. 1,200,000 s.f. 1,000,000 s.f. 1,070,000 s.f.

Floors 30 31 17 44 35 40 17 54 50 48

Typical Floor Plate 26,666 s.f. 24,600 s.f. 23,604 s.f. 23,000 s.f. 27,692 s.f. 23,500 s.f. 25,000 s.f. 26,000 s.f. 21,000 27,000 s.f.

Anchor Tenant(s) Royal Bank of Canada Marsh McLennan Sapient Deloitte HOOPP/Sunlife E&Y Globe and Mail N/A N/A N/A

Available Space 176,892 s.f. 296,527 s.f. 154,472 s.f. 438,092 s.f. 379,610 s.f. 486,241 s.f. 267,500 s.f. 1,200,000 s.f. 1,000,000 s.f. 1,070,000 s.f.

Landlord(s) Oxford BcIMC Allied Brookfield HOOPP/Menkes/Sun Life Oxford First Gulf Cadillac Fairview Ivanhoe Cambridge Allied

Est. Delivery Date Q3 2014 Q3 2014 Q3 2015 Q1 2016 Q2 2016 Q2 2017 2016 + 2018 + 2018 + 2018 +

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New Market DynamicsJLL has identified three new dynamics in the Toronto market: recent tenant insolvency; a trend of rising invest-ment in leasehold improvements; and the entrance of Ivanhoe Cambridge.

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QUEEN STREET W. QUEEN STREET E.

DUNDAS STREET W.

COLLEGE STREET

DUNDAS STREET E.

KING STREET W.

GARDINER EXPRESSWAY

BATHURST STREET

SPADINA AVENUE

BAY STREETBAY STREET

YONGE STREET

U NIVERSITY AVENUE

KING STREET E.

WELLINGTON STREET W.

YORK STREET

JARVIS STREET

PARLIMENT STREET

BERKLEY STREET

PETER STREET

SIMCO

E STREET

FRONT STREET W.

BREMNER BLVD

LAKESHORE BLVD W.

QUEEN’S QUAY W.

QUEEN’S QUAY E.

FRONT STREET E.

RICHMOND STREET W.

GERRARD STREET W. GERRARD STREET E.

RICHMOND STREET E.

ADELAIDE STREET W. ADELAIDE STREET E.

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

11.0%

10.0%

9.0%

8.0%

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0.0%2004 2005 20006 2007 2008 2009 2010 2011 2012 2103 2014F 2015F 2016F 2017F 2018F

Forecast

Confirmed Supply Low Case Vacancy Medium Case Vacancy High Case Vacancy

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Vacancy GraphDowntown Class A Vacancy Forecast

Through late 2014-2016, seven under construction developments will bring an additional 5.0 million square feet to Downtown Toronto, raising the office supply of Canada’s largest business district to over 75 million square feet. Rising vacancy and slower leasing activity have taken over as tenants anticipate better leverage with the increased supply. In these changing market conditions, the launch of another of the city’s seven currently proposed developments has become unclear. Should a landlord decide to venture forward with another new development, the decision to do so relies largely on securing a large and dependable anchor tenant. The Toronto-Dominion Bank, with 400,000 square feet up for lease in 2018, is the best available tenant with a requirement and for the moment, has become the key deciding element on whether or not another development launches.

Toronto Market Leverage

2014 2015 2016 2017Landlord-favourable market

Neutral market

Tenant-favourable market

5 Million s.f.Under Construction

DOWNTOWN CLASS A

56 PercentPre-Leased

JUNE 2014

5.7 Million s.f.Proposed Development

Bay Adelaide Centre East