Toronto commercial real estate report with logo

.

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.

Report Archives

Commercial real estate in Toronto and area continues to display extraordinary resilience, with total investment activity up over 68 per cent to $10.6 billion* in the first quarter of 2022. Industrial and multi-unit residential asset classes lead the way, with some retail tenants repositioning and segments of the office market seeing recovery. This, according to the new 2022 Commercial Real Estate Report from RE/MAX Canada.

Industrial continues to experience unprecedented demand, with availability rates hovering at 1.1 per cent *in the first quarter of the year, compared to 1.8 per cent in the first quarter of 2021. Vacancy rates are significantly off last year’s levels and now sit well under one per cent. Institutional and private investors continue to compete with business owners for industrial product, which has contributed to the largest increase in the value of industrial properties in the Greater Toronto Area, with prices almost doubling in under five years. Overall lease rates have soared as well, rising significantly over the past two years as inventory levels have dwindled.

Sustainability is top of mind in today’s market as interest rates and expenses climb. Industrial tenants are facing difficult decisions regarding their businesses, many asking if they should take a chance on finding space at a lease rate they’re more comfortable with or renegotiate based on new and higher lease rates. Expansion is also limited in this market given the hardship in finding suitable space, leaving performance at less than optimal, which could hurt businesses in the long run.

With more than eight million square feet* currently under construction in the Greater Toronto Area, some relief may be in sight for the extremely tight industrial/warehousing segment where “it’s like playing musical chairs to find a location for clients in need of larger space.” Many of the premises underway offer more optimal ceiling heights and better flexible use designs, preferable for companies that want to have online shopping and physical presence within the same location. Splits are modified in older buildings as well, offering some retail/showroom with alternative proportionate shares, depending on the tenants needs and at the tenant’s expense.

Demand for retail storefront in prime shopping areas throughout the city continues unabated, with end users and investors seeking to amass infill vying for available product and presenting challenges to longer-term leases. On major arteries such as Yonge Street and Avenue Road in the centre core, along the city’s subway lines, mixed-use developments are becoming increasingly common with retail on the ground floor and residential condominiums above. For landlords, in addition to rising expenses, challenges exist in the form of an already fragile retail footprint that is over-saturated in fast food and cannabis operators that might not survive the fierce competition on every major block on high traffic streets. Extra precautions are now taken as a result to ensure prospective tenants have good credit scores, put larger deposits down on property, and offer personal guarantees (if possible).

Given the severe housing shortage in the city, opportunities exist for the re-design of existing buildings and increasing purpose-built rental complexes in the residential sector. According to Urbanation, purpose-built rental vacancy rates hovered at 1.8 per cent in Toronto in the first quarter of the year**. Absorptions surpassed the supply for the third straight quarter. While 118,203 purposed built rentals units are planned and underway, only 7,684 are scheduled for completion in 2022. The increase represents significant growth, up 122 per cent over the 3,461 units delivered in 2021, but still falls short of meeting ever-growing demand. Re-purposing is transpiring in many of the city’s established neighbourhoods where retail strip plazas have been under-utilized. Mixed-use developments consisting of retail, commercial and residential components remain integral to city’s commitment to increase density.

Land designated for employment and residential has been and will continue to be the largest and strongest sector for investment. To accommodate aggressive expansion plans, municipalities and the provincial government need to make changes to official plans and zoning bylaws that fast-track approvals and allow builders to manage rising costs and make developments feasible. The development community is struggling to find enough sites that are approved or can be approved for housing or new industrial development at present.

Institutional and private investors in commercial real estate in Toronto are also looking to the office sector, which is just now starting to stabilize in the downtown core. The January 2022 sale of the Royal Bank Plaza in downtown Toronto for $1.2 billion was hailed as a positive sign, underscoring the sentiment that this segment of the market has much room for growth. There have, however, been some challenges with shared office space and buildings that are not updated, renovated or ready for immediate occupancy. Space that hasn’t already been modified to meet the demands of today’s tenants will require greater transition time as the landlord moves to assemble trades to complete to the tenants’ specifications, given current challenges with labour shortages in the construction industry. In some instances, tenant timelines may not be achievable. Availability rates hovered at 15.5 per cent* in the first quarter of 2022, but improvement is expected as employees return to work.

Strong economic growth is forecast for commercial real estate in Toronto and surrounding areas in the year ahead, with GDP growth expected to rise 4.1 per cent*** in 2022, falling just short of last year’s 4.7 per cent growth rate. The city’s robust financial sector will remain strong, with a rebound expected in the food and hospitality, entertainment, and travel and tourism sectors. Unemployment will continue to fall. Given solid fundamentals, the commercial market is expected to remain active. Inflationary pressure may impact high demand down the road, but so far, intentions remain strong and investors continue to demonstrate exceptional creativity for deals that make sense.

*Altus Group

**Urbanation, Q1 2022 Rental Market Results, April 19th 2022

***Conference Board of Canada, Major City Insights, Toronto – March 2022

More to Explore

Taxes

Should You Pay Property Taxes Through Your Mortgage?

March 28, 2024

5 Things To Do To Prep Your Backyard for Spring and Summer

March 27, 2024

Spring Checklist for Homeowners

Spring Checklist for Homeowners

March 26, 2024

RE/MAX Awards header

About the RE/MAX Awards and Recognition Program

March 25, 2024

Real estate

Real Estate Definition: Title Search

March 25, 2024

moving with pets

RE/MAX and Pet Valu Team Up to Make Moving with Pets Easier

March 25, 2024

8 Easy Outdoor Home Improvements to Consider This Spring

March 23, 2024

Assignment Sale

Real Estate Definition: Assignment Sale

March 22, 2024

How to Move With Pets

How to Move With Pets: A Complete Guide

March 22, 2024

Find the
Right Agent

Sign up
For Our Newsletter

Hidden

Next Steps: Sync an Email Add-On

To get the most out of your form, we suggest that you sync this form with an email add-on. To learn more about your email add-on options, visit the following page (https://www.gravityforms.com/the-8-best-email-plugins-for-wordpress-in-2020/). Important: Delete this tip before you publish the form.
Untitled(Required)

*RE/MAX, LLC, 5075 S. Syracuse St., Denver CO, 80237; RE/MAX Western Canada and RE/MAX Ontario-Atlantic, 639 Queen Street West, Toronto, ON M5V 2B7, 905-542-2400