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.
**Urbanation, Q1 2022 Rental Market Results, April 19th 2022
***Conference Board of Canada, Major City Insights, Toronto – March 2022
National Commercial Real Estate Highlights
With North American stock markets dangerously close to correction, bricks-and-mortar commercial real estate continues to resonate with institutional and private investors, particularly those who are personally vested, across almost every commercial asset class in major Canadian centres, say RE/MAX brokers.
The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential—particularly purpose-built rentals—and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets.
The report examined 12 major Canadian centres from Metro Vancouver to St. John’s. Regional highlights include the following:
- 92 per cent of markets surveyed (11/12) reported extremely tight market conditions for industrial product in the first quarter of 2022. Newfoundland-Labrador was the only outlier.
- 67 per cent of markets surveyed (8/12) found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, Hamilton-Burlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.
- While demand for overall office space in the core remains relatively soft in 92 per cent of markets (11/12) across the country, Metro Vancouver continues to buck the trend.
- Suburban office space continues to prove exceptionally resilient in 67 per cent of markets surveyed (8/12). Those markets include Vancouver, Calgary, Saskatoon, Winnipeg, Hamilton-Burlington-Niagara, Ottawa, Halifax-Dartmouth and Newfoundland-Labrador.
- Development land remained sought after (industrial/residential) in 67 per cent of markets surveyed (8/12) including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and Halifax-Dartmouth.
- End users are encountering challenges in terms of expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.
- Retail is on the rebound in 75 per cent of major Canadian markets (9/12), with strong emphasis on prime locations in neighbourhood microcosms. The trend has been identified in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Hamilton-Burlington-Niagara, Toronto and Ottawa.