Toronto commercial real estate market update – Q3 2024

A slow recovery is expected in the Greater Toronto Area, with investment volume down by 23% year-over-year

As of the third quarter of 2024, the Greater Toronto Area (GTA) reported $12.9 billion in dollar volume transacted year-to-date, down 23% compared to the same period last year. As inflation decelerated in August, hitting the Bank of Canada’s target of 2%, another interest rate cut on September 4th followed, which brought the overnight rate to 4.25%, down another 25 basis points. Despite the interest rate cuts and the gradual improvements to investor sentiment, the inherent lags mean investment activity will take time to recover. Furthermore, in the second quarter, investors rushed to finalize deals before the capital gains tax increase on June 25th, 2024, which led to diminished investment volumes in the third quarter. The apartment, hotel and retail sectors were the sectors that recorded a positive year-over-year (YoY) change.

Figure 1 – Property transactions – All sectors by year

Conditions in the industrial sector eased to balanced conditions this quarter, with $4.1 billion in dollar volume transacted, a 24% decrease YoY. According to Altus Group’s latest Canadian industrial market update, Toronto’s industrial availability rate climbed by 70 basis points to 5.3% from the previous quarter. Furthermore, the market registered negative absorption for the third consecutive quarter due to a short-term oversupply and higher vacancy rates upon completion. The GTA also saw 1.8 million square feet of new supply, with 94% pre-leased. In addition, nearly 11.3 million square feet are under construction, with an availability rate of 70%.

Conditions in the office sector continued to deteriorate, with $1 billion in dollar volume transacted, a 62% decrease YoY. The narrative has remained unchanged as companies continued to navigate changing workplace preferences (i.e., balancing both hybrid work models and return-to-work mandates) and the bifurcation in the market. As companies continued favouring Class-A office buildings, leaving behind the outdated Class-B and -C buildings, landlords must invest in their older buildings to remain competitive.

Altus Group’s latest Canadian office market update revealed that Toronto’s availability rate climbed by 170 basis points to 19.8%. The market recorded three new office completions totalling 563,731 square feet, with 100% of the space uncommitted. The GTA also has nearly 3.3 million square feet under construction, with 60% of the space pre-leased.

The multi-family sector's activity improved as of the third quarter of 2024, with $1.8 billion in dollar volume transacted, a 34% increase YoY. As the Bank of Canada’s (BoC) 2% inflation target was reached in August, the BoC continued easing its restrictive monetary policy. While some markets saw activity sparked by capital-rich investors looking to get ahead of the inevitable pick-up in the market, the overall market has been slow to recover as investors stayed on the sidelines for better rates in the future. High construction costs have also resulted in construction delays, which only served to tighten market conditions.

The retail sector continued to soften as Canadians prioritized spending on essential goods and services. In response to these changes in consumer behaviour, investors favoured select retail formats, such as neighbourhood and regional shopping centres, primarily centres with grocery anchors or redevelopment opportunities. As of the third quarter, the retail sector recorded $1.5 billion in dollar volume transacted, a 4% increase YoY.

While Toronto’s retail sector is supported by strong population growth and increased downtown foot traffic due to recovering tourism and return-to-work mandates, challenges persist around the limited availability of quality retail spaces, weakened labour market conditions, and lagging economic growth.

The hotel sector reported $519 million in dollar volume through the third quarter of 2024, a dramatic increase compared to the $163 million recorded in the same period last year. The increase was primarily driven by InnVest Hotels acquiring a hotel portfolio from Morguard in January 2024, which sold two properties to Manga Hotels shortly after. The sector has since moderated in the second and third quarter of 2024, with $29 million in dollar volume transacted in the second quarter, and no transactions recorded in the third.

The land (residential and ICI land) sector recorded nearly $3.9 billion in dollar volume transacted, a 29% drop compared to a year ago. The residential land and lots sector recorded $2.7 billion in dollar volume transacted, and the ICI land sector recorded $1.3 billion in dollar volume transacted, a 22% and 46% decrease YoY, respectively. Transaction volume remained below historical standards as challenges with securing financing persisted, and developers continued to be more strategic with their acquisitions.

Figure 2 - Property transactions by asset class (Q3 2023 vs. Q3 2024)

Notable transactions for Q3 2024

8450 Boston Church Road, Milton – Industrial

The $361 million sale of a 1.3 million-square-foot industrial building represents the GTA’s highest transaction in Q3. The Class A distribution centre was acquired by Prologis, a San Francisco-based REIT, for $270 per square foot and will continue to serve as a RONA distribution centre through a 15-year leaseback. It was previously part of a 2023 portfolio purchase by Sycamore Partners, forming a component of Sycamore Partners’ acquisition of Lowe’s Canadian retail business and rebranding its stores into RONA.

Village Green Apartments, Old Toronto – Apartment

The largest apartment transaction in Q3 was the sale of a 705-unit, three-tower apartment complex, which was acquired by Brookfield Properties for $264 million. The property is part of a 1,188-unit apartment portfolio in Toronto, representing an aggregate price per unit of $368,000. The apartments were previously owned and managed by Greenrock, a third-generation family real estate business. As of October 2023, Greenrock had renovated 30% of the units in Village Green Apartments and spent $18.3 million on capital improvements and unit upgrades.

1900 & 1908 Ironoak Way, Oakville – Office

Representing the fourth largest GTA office transaction in 2024 year-to-date, the pair of newly constructed office buildings totalling 101,697 square feet in size were sold for $35 million. The vendor, Carterra, is a prominent Canadian real estate developer who purchased the property as vacant land in 2012. The first building was constructed in 2020 as the global headquarters for its anchor tenant, Samuel, Son & Co., while the second building was completed in 2021. The LEED Silver-certified, Class AAA buildings were 100% leased as of September 2024.

15 Neighbourhood Lane, Etobicoke – Residential Land

Empire Communities acquired this 1.59-acre partially constructed development site for $48 million through a vesting order. The preconstruction development, named The King’s Mill, was in the final phase of construction by the original developer, Vandyk Properties, who envisioned a 10-storey, 234-unit building encompassing 186,446 square feet of residential GFA. To date, Ontario courts have issued receivership orders over ten preconstruction projects belonging to Vandyk Properties, including The King’s Mill.

Figure 3 – OCR trends across 4 benchmark asset classes

Conclusion

A slow recovery is expected for the GTA’s investment market as investors await lower borrowing costs. According to Altus Group’s latest Canadian Investment Trends Survey (ITS), the Toronto market slipped to fourth place as a preferred market for investors. Preferred property types were multi-tenant industrial and food-anchored retail strips. In the third quarter, Toronto led the country in its contribution of new industrial supply despite increased availability rates. Furthermore, the retail sector's narrative has remained unchanged as Canadians prioritize spending on essential goods and services.

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