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Greater Toronto Area’s (GTA) commercial real estate market continues to evolve, with the lingering effects of the pandemic shaping a new commercial landscape. Asset classes are changing up, with demand for office in 2023 lagging behind industrial, retail, multi-use residential, and land sales.
Industrial remains by far the strongest sector, with vacancy rates still under one per cent. The shift from manufacturing to warehousing and distribution that was accelerated during the pandemic will remain the top usage for industrial space. Large transactions continue to occur in the GTA, as evidenced by the recent sale of a $70 million tract of land. Lack of availability continues to hamper activity in the industrial sector, with both sales and leasing opportunities few and far between. While availability rates from Altus Group show improvement over the first quarter of 2022, at just two per cent in Q1 2023, levels in the GTA are still the lowest in the country. Shortages exist in large industrial units for both lease and sale in the 5,000- to 20,000-square-foot range. Demand continues to outpace supply, even for smaller-sized units between 2,000 and 5,000 square feet with loading docks.
Land with approvals in place is most sought after, with the weighted average of estimated approval timelines for residential applications climbing from 21 months to 32 months between 2020 and 2022, according to the Municipal Benchmarking Report by the Canadian Home Builder’s Association (CHBA), prepared by Altus Group.Industrial, retail, and residential apartments in all sizes – multiplex to high-rise – all represent opportunity but finding land at a decent price is challenging, especially after taking into consideration the additional cost of construction, project management, and development charges. There has been little product priced at buyer expectation to date and a much wider gap in returns. Higher risk factors make financing land exceptionally more expensive than in the third quarter of 2022, with conventional interest rates hovering at 8.5 per cent and more today. Vendor take-back (VTB) mortgages are becoming increasingly popular as a result, and some sellers are willing to provide financing if the numbers make sense, which has returned some equilibrium to proformas and respite for end users in the commercial, industrial and retail sectors. In an analysis of closed transactions in the Greater Toronto Area in Q1 2023, the number of vendor-take-back mortgages as a percentage of total sales over $2 million rose substantially over year-ago levels, climbing to 9.55 per cent from 5.82 per cent in Q1 2022, with VTBs now representing close to one in every 10 transactions, according to data available from RealTrack.
As prices continue to climb in the industrial sector, some companies that moved their offices into their industrial facilities may be prompted to re-investigate opportunities available in the office sector. According to Altus Group, availability in Toronto has climbed to 17.8 per cent, up just over two percentage points and higher if you factor in sub-leased space, which will translate into some cost savings for new tenants, especially in B and C class buildings. Leasing rates will remain similar to those charged pre-pandemic in class A space in the core, with landlords offering inducements to offset net effective rents. The downtown core is still struggling with levels of vacancy virtually unheard of in pre-pandemic times as employers attempt to work out some sort of hybrid work schedule. The ability to work remotely, made possible by the pandemic, is now a perk that few employees will discard. In fact, in recent contract negotiations, remote work was front and centre for federal public servants.
In the suburbs, office space has fared slightly better with an uptick in small-sized companies looking for commercial space, particularly in stand-alone buildings. Medical space, and space for schools and daycare facilities are especially coveted.
Retail has shown remarkable resilience, especially urban retail storefront along the city’s main arteries. As construction winds down on streets like Eglinton Avenue, revitalization will take hold, increasing both retail values and rental rates. Vacancies will also decline as more players enter the market. Growth is anticipated in the retail sector as prime new retail spaces come up for lease offering ground floor access in mixed-use developments along streets close to transit hubs such as Avenue Road, Weston Road, Eglinton Avenue, Yonge Street and Kingston Road.
Shopping centres and malls in and around the 416-area code continue to innovate, with residential condominium developments currently under construction or proposed. Construction is already underway at the Promenade Mall where residential development will provide a captive audience for the site’s retail presence. There’s been similar movement at the Hillcrest Mall, the Markham Town Centre, and the Pickering Town Centre. With Nordstrom’s the latest in US retailers to pull out of the Canadian marketplace, there have been some concerns voiced regarding the vacuum they leave as they vacate retail space. Department stores such as the Hudson’s Bay Company now factor real estate holdings in their portfolio into their formula and have sold locations as recently as 2021/2022 in Vancouver and Winnipeg to free up available cash flow.
Perhaps the strongest sign of well-being in the retail sector is the recent closing of Bed, Bath and Beyond. Within days of liquidation, Canadian Tire announced that they had acquired 10 leases (nearly 250,000 square feet) in Ontario, Alberta and British Columbia, while Winners picked up two leases. Rooms + spaces subsequently announced that they, too, had secured 21 BBB stores in Ontario, British Columbia, Alberta, Saskatchewan and Newfoundland.
Multi-unit residential continues to be a top performer, with demand soaring for existing portfolios and values accelerating at a rapid pace. Population growth and a shortage of available rental apartments have contributed to increased demand for purpose-built rentals throughout the GTA, but recent policies regarding rent control and zoning regulations have had an impact on new construction. However, some condominium developers watching the recent pull-back in buying activity over the past year have turned to purpose-built rentals, taking advantage of inducements and credits offered by government and CMHC financing. With vacancy rates hovering at about one and half per cent for purpose-built rentals and the average price of a two-bedroom unit up approximately 20 per cent year-over-year in Toronto, the timing is ideal for the shift, according to the most recent CMHC Rental Report.
Those in the industry remain cautiously optimistic with regards to the commercial real estate market in the Greater Toronto Area moving forward. The outcome of the upcoming mayoralty race may provide greater direction from the mayor’s office in terms of viable solutions to the city’s critical housing issues, with the potential to partner with developers in a public-private relationship committed to increasing the existing stock.