High Cost of Toronto Commercial Real Estate Stokes Suburban Activity

2024 Greater Toronto Commercial Real Estate Trends

While growing optimism has nudged some long-term developers off the sidelines with regards to land sales, there continues to be an overall impasse between buyers and sellers in the Greater Toronto commercial real estate market. this, according to the RE/MAX 2024 Commercial Real Estate Report. Price remains the primary sticking point in negotiations, with seller expectations more in line with 2021/2022 values and buyers underestimating current values. That said, several larger asset sales have occurred in the first quarter of the year, with multi-family and industrial the most favoured asset classes, followed by retail plazas with an upside for development.

Multi-family continues to resonate with investors given incentive programs offered by Canada Mortgage and Housing Corporation (CMHC) that include more favourable financing rates and longer amortization periods. Rising immigration levels and the current supply crunch ensure that multi-family and apartments remain a solid long-term strategy for both larger institutional investors and Real Estate Investment Trusts (REITs). According to Urbanation’s Q1-2024 Rental Market Results, rental construction starts over the past 12 months were up 174 per cent from 2022 lows. While vacancy rates edged higher for purpose-built rentals, sitting at 2.6 per cent in Q1, the figure is still representative of an undersupplied market. Smaller investors have been active in the market, scooping up four-plex and six-plex apartments throughout the GTA. However, the higher inclusion rate on the capital gains tax, that will bring tax on gains over $250,000 to 66 per cent effective June 25, may have an impact on the smaller investors moving forward. Several have already listed their investment properties, hoping to sell before the new tax kicks in.

Industrial remains a coveted asset class characterized by strong demand, despite an increase in availability in the GTA. Availability rates rose to 4.2 per cent in the first quarter of 2024, up from two per cent during the same period one year ago, according to Altus Group. Leasing rates continue to climb, regardless of growing competition in the tight GTA market. There have been some tenants that have moved to industrial parks within the fastest-growing residential communities where space with no improvements can be leased for less, including Pickering, Barrie and Milton. Single tenants are behind the push for small and medium-sized industrial properties as they invest their capital into buying their locations.

Retail strip plazas and malls are experiencing solid demand, with those that have approvals in place for mixed-use residential most sought after. Yorkdale continues to expand, showing strong revenues and boasting the highest price per square foot in the country, as confirmed yet again by the International Council of Shopping Centres (ICSC). The mall recorded an annual sales performance of $2,226 per sq. ft (2022) –12^th in the world. A development application has been submitted to allow Yorkdale to expand its footprint to include retail, office, hotel, and residential usages. Similar applications exist for malls including Bayview Village; Bridlewood; Centerpoint; Cloverdale; Dufferin Mall; Eglinton Square; Fairview; Golden Mile; Humbertown; Jane-Finch Mall; Malvern Town Centre; Scarborough Town Centre; Sherway Gardens; Woodside Square; and Yorkgate Mall.

Small retail and service storefront operations on major arteries are facing several challenges, including but not limited to the amount of construction on city streets in Toronto. Although leasing rates have remained relatively stable, new taxes introduced by the city are adding to operating costs. Foot traffic in the downtown core has yet to return to pre-pandemic levels as the hybrid work model, which continues to impact retail stores and restaurants in the area. There are some positive signs as some retail/service businesses make their foray into the marketplace. Shake Shack, for example, recently announced its entrance into the Canadian fast-food landscape. The high-end continues to prove lucrative. In Yorkville, major luxury retailers continue flock to the area, including the recent additions of Kith, Sadelle’s, Veronica Beard and VRAI. This continues to underscore the old adage – location, location, location –which would apply to Bloor Street from the Mink Mile and west to the Kingsway and Bloor West Village.

Toronto’s office segment continues to be a drag on the commercial market, with landlords in Class B and C buildings in the downtown core, mid-town and the suburbs bearing the brunt of vacancies. Availability rates edged up marginally, sitting at 18.3 per cent in the first quarter of 2024, according to Altus Group, compared to year-ago levels for the same period. A number of factors continue to compound conditions, including the flight-to-quality, hybrid work model and on-going construction along critical transportation routes and high-density nodes. Tenants continue to alter their footprint by reducing their square footage. The outlier in the marketplace appears to be office condominiums, with end users behind the push for units. The trend has gained momentum over the past year and is expected to become more mainstream in the future.

New A-Class space continues to come on stream in the Toronto commercial real estate market. One of the latest mixed-use commercial, residential, and retail projects to hit the streets is The Well, an eight-acre development at King and Spadina that blends into the historic industrial aesthetic of the King West District. The interconnected design, conducive to a live-work-play lifestyle, consists of six condominium and rental buildings with 1,700 available units (under various stages of construction) and a 36-storey office tower boasting 1.2 million sq. ft. in office space. Leasing is underway in the office tower, which is the new home of the Toronto Star. Portland Commons is another commercial development nearing completion at Front and Portland.

While applications for residential conversion have been received by the City of Toronto, only one has received the go-ahead to date–the Canadian Pacific Railway (CP) offices at 69 Yonge St. and 3 King St. The application included the addition of six new storeys to the existing 15-storey footprint, and a 4,500-sq.-ft. lower level for retail/restaurant space. Several more development applications have been received by the City, with most looking to convert to residential or demolish entirely. The viability of conversions may also include purpose-built space in the future, including hotels, life sciences buildings, medical offices, seniors living, and student housing.

Real Estate Investment Trusts (REITS) and institutional investors have largely remained on the sidelines in recent years, but there has been a modest uptick in activity this year, with some offloading portfolios and others picking up portfolios.

Investors continue to look for long-term value in the Greater Toronto commercial real estate market. With current values somewhat depressed, some buyers are cautiously re-entering the market. Land banking is occurring, especially in areas such as Milton, Durham, and Markham-Stouffville, despite an overall shortage of development land within the GTA. Deals are coming together, but typically involve some maneuvering to get to the finish line. The promise of lower rates down the road is just one aspect of the total equation. The market will need to see some relief in terms of construction costs and a solution to labour shortages, as well as better co-ordination for parties who want to build and provide inventory to meet the growing demand for homes and businesses.