Toronto's City Dynamics: Canada s Business Metropolis

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1 Toronto

2 2 The Canadian Quartet: Playing on the World Stage Toronto's City Dynamics: Canada s Business Metropolis A global Toronto Toronto is clearly Canada s most dynamic global city. It forms part of a chasing pack of global cities behind the Big Six (of London, Paris, Tokyo, Singapore, New York and Hong Kong), with its closest global rivals in this second-tier group being Sydney, San Francisco, Amsterdam and Frankfurt. It is the only city in the country that regularly features in indices of the world s 20 most important business and financial centres. For example, the city ranks 17th globally for international business links, 19th in JLL s Commercial Attraction Index 24 and 14th in terms of direct commercial real estate volumes. The Economist Intelligence Unit forecasts Toronto to be the 10th most competitive global destination in Financial services underpin success Toronto s credentials for world city status have been built on its hugely successful financial services sector which has broadened the city s scope and created an excellent reputation for stability and reliability - the city sits in 14th position in the influential Z/Yen Global Financial Centres Index. Major banking, life insurance, pension funds and securities firms are the lifeblood of the city economy, with 230,000 people employed directly in centrally located head offices, and a further 100,000 in dependent roles such as accountancy, law and IT. 25 The city s five largest banks generate nearly one-third of their revenues overseas, while J.P. Morgan, Credit Suisse, Morgan Stanley, Macquarie Group and Barclays all have a presence. In vivid contrast to many other global financial centres, financial services have seen strong growth over the past five years in Toronto, with an annual average employment growth of 2.1%. However, despite the vibrant health of the sector, consolidation and new developments supporting higher employee densifications have led to banks taking up less space when their leases expire. Strength in diversity Having been a quintessentially English city until the 1950s, Toronto is now the most ethnically and culturally diverse of Canadian cities. For three decades it has welcomed mixed populations, and celebrated diversity and multiculturalism without demanding national assimilation. This buzz has seen it become a global magnet for higher education students and young graduates seeking to commercialize their knowledge, and has helped to build a highly committed and responsive civic workforce. Toronto s world-class strengths now extend to the medical, life sciences and ICT sectors, and are supporting its emergence as a top-tier enterprise hub; placing 11th in the world in the 2think Now Innovation Index is a clear indication of the city s growing strength as an influential technology centre, with high-tech employment approaching 6%. 26 As a result, demand for modern, millennial-ready real estate is set to grow significantly in coming years.

3 JLL World Winning Cities Series 3 Solid employment growth Toronto s population growth, fuelled significantly by young people and immigrants, saw metropolitan employment rise by 3.8% in 2013 (and by 2.7% in the inner city), far faster than the national average. 27 Much of this growth has been led by the vibrant downtown corridor, where high-income jobs in the financial, medical and education sectors offer unprecedented opportunities for well-qualified job seekers. Multinational firms are choosing Toronto to grow their businesses. Cisco Systems has cited the province s skilled global workforce, strong engineering and business schools and stable economy, along with its competitive business environment, as factors behind the company s expansion plans. 28 'Places to Grow' - a strategy for a healthy wealthy city? Despite some co-ordination challenges between city and region, the Province of Ontario has been active in launching development approaches that are pushing the region slowly towards 'smart growth'. Its Places to Grow legislation includes an urban growth boundary, a 7,000 sq km green belt and 25 designated focal areas for investment in public services, high-density employment, and commercial and recreational development. The city s urban expansion has been fairly well shaped by this legislation and is resulting in higher-density, mid-rise, mixed-use redevelopment. Greater densification of development is also likely to bring with it dividends in the form of buoyant property values that are more resilient in the face of market downturns; it will also avoid the multitude of costs otherwise associated with ever sprawling development. Effective policies but new funding sources needed The city s economic success is bolstered by its very strong system of institutions hospitals, universities, business schools and cultural bodies working with different tiers of government to ensure the right mix of policies and investments are brought online. An urgent collective concern is to find new sources of revenue to fund transport and housing expansion across the region. These could include a fuel tax, a share of sales tax, parking levies, HOT (high-occupancy toll) lanes or highway tolls. The funding of growing commitments means that net city debt is set to peak at over C$4 billion in Toronto will best maximize its future growth prospects if it can effectively manage growth into dense corridors with transit-oriented development (TOD) and other 'smart growth' initiatives, while adequately funding the infrastructure required for this new model. Achieving such will ensure that Toronto continues to build on its success as a magnet for immigration, while growing its appeal to diverse populations and businesses.

4 4 The Canadian Quartet: Playing on the World Stage Toronto Collaborating for Competitiveness If we can successfully implement new policies and tools, we can create a positive cycle of sustained economic growth that will generate new jobs, increase city revenues, and improve the quality of life for residents, business owners and employees within the City. Toronto can stand out amongst large complex urban places by having a fast development cycle compared to alternate locations and a cost competitive structure of municipal costs. Collaborating for Competitiveness, January 2013

5 JLL World Winning Cities Series 5 Toronto's Real Estate Dynamics: Defying the Laws of Economics? Toronto s commercial and residential real estate markets continue to defy the laws of economics. In fact, according to Emporis, Toronto led North America with the most high-rise buildings under construction in More specifically, almost 7 million square feet of office space is currently under construction in the Greater Toronto Area, of which over 5 million square feet is in the CBD. This represents the largest boom in office construction since the early 1990s. With these office developments scheduled for completion over the next four years, the CBD market is estimated to grow by over 7%, bringing the total inventory to 75 million square feet. The financial core expanding up and out The majority of new office developments are located just south of Toronto s financial core in an area previously deemed as too far by many firms; this will inevitably lead to a new and expanded core area. The three developments currently under construction have already signed leases with high-profile tenants such as Royal Bank of Canada, Cisco, Apple and Sun Life Financial. This expansion is creating more opportunities for investors to develop high rises in the next cycle, and/or to purchase high-quality income-producing real estate in a stable and growing economy. Figure 7: Toronto s Office Supply Pipeline, s sq ft 2,500 2,000 Downtown East Downtown West Financial Core Downtown South 1,500 1, Source: Altus InSite

6 6 The Canadian Quartet: Playing on the World Stage TOD to transform the market Aside from the CBD, suburban markets in the Greater Toronto Area (GTA) are seeing an abundance of transit-oriented developments (TOD) and proposals spurred by the Big Move a C$50 billion, 25-year plan to significantly improve public transportation in the GTA and Halton region. While we have witnessed previous TOD attempts in the GTA failing to reach their expectations, we see a great deal of potential in and around the Yonge-University-Spadina subway line (running north-south). York University, for example, has allocated 140 acres of land for mixed-use development that will be anchored by the new Steeles West subway station. In Vaughan, just north of the city, 442 acres have been earmarked for the development of the Vaughan Metropolitan Centre (VMC), a transitoriented development featuring urban living, inspiring offices, residential complexes, restaurants and cafés, hotels and pedestrian shopping. The first building to be constructed is the 300,000 square foot KMPG Tower and, by 2031, VMC is expected to accommodate 12,000 residential units, 25,000 residents and 11,500 jobs. Over the next years we expect a gradual but significant change to the area surrounding Vaughan City Centre. In addition to new commuter lines, a new airport link will connect Pearson International Airport to downtown Toronto s Union Station. The completion of this project is expected in the summer of 2015, in time for the PanAm Games. American retailers discover their neighbour Toronto can claim approximately 50% of the country s retail space under construction. These developments and renovations are largely a result of the influx of American retailers, specifically department stores, which are expected to arrive in the next few years; notably, Saks Fifth Avenue will open its flagship store in the Toronto Eaton Centre and Nordstrom will be replacing various Sears locations. In addition, Toronto s Bloor Street is the most expensive retail street in the country and is home to luxury retailers such as Tiffany s, Hermès and Hugo Boss.

7 JLL World Winning Cities Series 7 Upwards but not onwards mortgage regulation to cool residential growth Toronto s residential sector has arguably been the most exciting in the country to track and predict. The market remained quite stable during the 2009 Global Financial Crisis, accelerated thereafter, and has continued to realize strong appreciation ever since. Much of the new residential supply under construction has been high-rise condominiums, as available land for single-family homes in the downtown area remains extremely rare. As 2013 drew to a close, some 64,000 condominium units worth some C$25 billion were estimated to be under construction across Greater Toronto; around 20,000 of these units may be completed during In addition, numerous five-star hotel and condominium mixed-use properties have opened in the past few years including the Residences at the Ritz-Carlton Toronto, Four Seasons Private Residences Toronto, Shangri-La Toronto Residences, and Trump Toronto Residences. With this volume of supply set to hit the market over the next two years, coupled with price growth and increasing concern about the debt-todisposable income ratio, the Canadian government has introduced additional measures to cool the residential sector. Regulatory actions, which include the reduction of the maximum amortization period for government-insured mortgages and limitations on guarantees to banks on mortgage-backed securities, have led to the more recent tapering of new condominium starts; Toronto s multifamily residential sector is expected to experience a soft landing provided interest rates do not spike and the market is able to absorb the current completions. Despite the aforementioned cooling measures, foreign investors continue to view Toronto s condominium market as a good investment.

8 JLL Canada: Offices Calgary 300, 129 8th Avenue SW Calgary, Alberta T2P 1B4 Tel Mississauga 110 Matheson Blvd West Suite 107 Mississauga, Ontario L5R 4G7 Tel Ottawa 275 Slater Street Suite 1004 Ottawa, Ontario K1P 5H9 Tel Toronto North 251 Consumers Road Suite 910 Toronto, Ontario M2J 4R3 Tel Edmonton Street Suite 1331 Edmonton, Alberta T5J 3G1 Tel Montreal 1 Place Ville Marie Suite 2121 Montréal, Québec H3B 2C6 Tel Toronto 199 Bay Street Suite 4610, Box 407 Toronto, Ontario M5L 1G3 Tel Vancouver 400 Burrard Street 21st Floor Vancouver, British Columbia V6C 3A6 Tel Contributors: Contact: Rosemary Feenan Global Research rosemary.feenan@eu.jll.com Tel Josh Gelormini Americas Research josh.gelormini@am.jll.com Tel Brett Miller President, JLL Canada brett.miller@am.jll.com Tel Jeremy Kelly Global Research jeremy.kelly@eu.jll.com Tel Lucy Fletcher JLL International Capital Group lucy.fletcher@am.jll.com Tel For further information, please visit our website: Thomas Forr Canada Research thomas.forr@am.jll.com Tel David Green-Morgan JLL International Capital Group david.green-morgan@ap.jll.com Tel With special thanks to The Business of Cities for their contribution. For more information on cities around the world visit the new JLL Cities Research Center The JLL Cities Research Center is our new interactive and intuitive web-based platform. It holds our World Winning Cities research and is linked to all JLL s city research from around the world. The site is packed with a wealth of visualisations, comparative data, insights, blogs, articles and videos providing a unique perspective on cities, their performance, plans, politics and real estate opportunities. jll.com/cities-research/ COPYRIGHT JONES LANG LASALLE IP, INC This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.