The Altus Report Fall 2018 Header Image

as published in Informa’s Canadian Real Estate Forum Magazine – Winter 2018

By Kruti Desai, Manager, National Research and Raymond Wong, Vice President, Data Operations

In this issue of The Altus Report, we discuss real estate investment trends in the Toronto and Vancouver market areas.

A sigh of relief is echoed across Canada as the tentative new trade deal (USMCA) alleviates trade and economic uncertainty particularly for the auto sector. According to the Bank of Canada, the Canadian economy is operating close to its potential and Real GDP is projected to grow by 2.1% before slowing to 1.9% in 2020. As expected, the Bank of Canada raised its benchmark interest rate in October by 25 bps to 1.75, its third increase in 2018 and the highest since December 2008. This increase can not only affect Canadian businesses but may also influence household consumption and the housing market leading to higher mortgage rates. High condominium apartment prices in Toronto and Vancouver continue to deter many potential home-buyers. With another rise in interest rates, residents priced out of these markets are seeking more affordable housing in peripheral areas or choosing to rent longer while they continue to save. Investment activity for purpose-built apartments have picked up across both markets.

Prime Business Rate

Prime Business Rate

The search for developable land continues…

Releasing protected lands for development remains a topic of interest in Toronto and Vancouver. Demand for affordable housing is rising along with population growth and observers believe the relief could potentially help manage future growth. However, protecting these restricted lands is also viewed as a solution to tackle climate change and to preserve arable land. Ontario’s Greenbelt Plan and its boundary were established in 2005 to protect over 2 million acres of environmentally sensitive land in the Greater Golden Horseshoe. According to the Greenbelt Foundation, Ontario is currently looking at more than 600 requests to remove land from the Greenbelt Area, as part of a 10-year review process.

Similarly, Vancouver’s Agricultural Land Reserve (ALR) was created in 1973 to protect extensive land primarily used for farming and managed by the Agricultural Land Commission (ALC). The ALC can authorize adding land to the reserve, converting ALR land for non-farming purposes and allows applications to be submitted to remove land. The NDP government’s upcoming review to “revitalize” the ALR could potentially lead to an expansion of the ALR and rezoning of some protected lands.

Micro cities along transit lines are on trend

The concerns of housing affordability and shortage of land within the core areas of the Toronto and Vancouver markets is putting more pressure on the intensification of suburban areas, in particular along transit lines. Proponents believe it creates walkable communities with access to transit, services and businesses. Factors such as population growth and changing demographics are expected to increase demands of the “live, work, play” as a one-stop shop community. These mini cities have already sprouted in several transit-oriented pockets and have been functioning well.

Metro Vancouver’s Regional Growth strategy already includes plans to develop urban centres along its transit lines. Brighouse Village Area is a prime example. A 109,969 SF site situated in Richmond’s City Centre is slated to be rezoned into a mixed-use commercial, office and residential development and conveniently located near a Skytrain station. Westbank and QuadReal will also be transforming West Vancouver’s Oakridge Centre into a mixed-use community. The same trend can be seen across the Greater Toronto Area. Toronto’s Bayview Village, a short walk from Bayview Subway Station, will add condo towers to its surface parking lots and add an open-air retail promenade. Yorkdale Mall also submitted an Official Plan and zoning by-law amendment application to allow for residential, office, hotel and commercial buildings to the site in the next few years. Mississauga’s Square One neighbourhood, a major transit hub, is not far behind in their plans to develop a high-density community with hotels, condos, stores and offices.

The Smart City paradigm shift towards Artificial Intelligence is changing the built environment

Vancouver is among 20 cities in the running for Infrastructure Canada’s Smart Cities Challenge and considered a front runner. This is primarily due to its smart city transit plans that will leverage multi-modal transportation corridors, autonomous vehicles, and smart technologies to enhance connectivity and reduce their carbon footprint in the region. Toronto did not make the short list, although the city is often regarded as a transforming city that is innovative with an expanding pool of world-class tech-talent. Google’s sister company Sidewalk Labs is working with Waterfront Toronto to create Toronto’s first digital “smart city” neighbourhood. Samsung also recently launched a state-of-the-art artificial intelligence centre in downtown Toronto’s MaRS Discovery District, as part of their strategy to assist with interconnecting the city through technology. Investment in smart building and real estate technology (PropTech) is indeed growing rapidly aiming to change how we effectively design and manage our buildings through digital innovation, machine learning, and automation. The goal is to minimize inefficiencies in real estate and it has already become a major game-changer in several branches of the industry from construction to property management to leasing right down to financing.

Coworking spaces are spreading from Toronto to Vancouver

The nature of the traditional work environment is also changing rapidly as technology advances. Modern workers want flexible, state-of-the art creative workspaces with the rise in startups, freelancers, entrepreneurs and remote workers. In addition to purchasing assets, co-working space provider WeWork also revitalizes their properties to offer more trendy spaces to their clients. Their core business offers shared workspaces to individuals looking for a temporary desk, a “hot” desk, or to companies seeking amenity-rich offices, but without a multi-year lease. WeWork also uses technology to collect and view real-time data on their coworking spaces to efficiently manage their spaces from air-filter changes to the availability of conference rooms. Recently, they have been quite aggressive in their global expansion, including Canada. WeWork opened their first location in Canada in Montreal in 2016. This past summer WeWork opened its fourth and fifth location in downtown Toronto at 100 University Ave and Scotia Plaza at 40 King St. West and is expected to have 20 locations in Toronto by 2020. In August, they also opened their second location in Vancouver at 555 Burrard St and plan to have five locations by 2019. WeWork’s first location in Vancouver opened a year earlier at 595 Burrard St.

Canada expands its downtown footprint in the technology sector

Class A Office vacancy rates continue to remain tight forcing some landlords and tenants to redevelop older outdated assets. Downtown Vancouver is undergoing a major transformation with the redevelopment of the 1.13 million SF Canada Post heritage building. Amazon will be its anchor tenant and it will include a large retail component, food court, restaurants, fitness centre, pharmacy, and a grocery store. Amazon will occupy 416,000 SF of office space in the building by mid-2023 with 3,000 new employees. The tenancies for the remaining 700,000 SF space are unknown. An additional 1,000 employees will be employed at the new office building at 402 Dunsmuir St. Once complete, the total site is expected to accommodate almost 5,000 workers, including the 1,000 workers already employed at Telus Garden. Many anticipate the transformation will attract other major companies to the heart of the downtown core.

In the GTA, high-profile tenant Microsoft Canada recently announced the move of its Mississauga headquarters to downtown Toronto and will occupy 132,000 SF over four floors at the CIBC Square tower. The site is designed as a 2.9 million SF mixed-use development featuring two office towers with a full range of amenities, collaborative spaces, modern building systems and technologies, and a one-acre park spanning across the fourth floor over the rail corridor. The first building is scheduled for completion by Fall 2020 and the second is scheduled for completion in 2023. Toronto-based technology startup accelerator OneEleven, backed by OMERS Ventures currently occupies space in Toronto and Ottawa and is expected to expand to Vancouver by the end of 2018. In Toronto, OneEleven currently hosts over 30 companies and 400 employees at its tech innovation hub (owned by Oxford Properties, a real estate arm of OMERS) encompassing 250,000 SF of renovated space at 325 Front St.

Toronto’s Dominion Public Building, a heritage property located at 1 Front St. adjacent to Union Station and the second phase of CIBC Square may be another multi-billion-dollar redevelopment project to watch for. Development applications have been submitted by Larco Investments to add two large rental towers atop the 5-storey building, as well as a boutique hotel, retail, restaurants, and office space. In Vancouver, several parkades are also being considered for redevelopment as they are ideal for connectivity among buildings via above or underground paths. A 33 storey high-tech office tower is planned for construction on the site of the now-demolished Vancouver Centre Mall parkade and expected to open by 2021. Another 42 storey office building on 400 West Georgia St., former site of a Budget Car & Rental lot is also expected to be completed by 2020. Other redevelopment projects in the works in the eastern part of downtown are the city-owned Larwill Park block, Northeast False Creek, and the new St. Paul’s Hospital campus at Station St.

New Available Class A Office Product Remains Tight

 

Greater Toronto Area – Class A

Greater Toronto Area - Class A

Vancouver Market Area – Class A

Vancouver Market Area - Class A

Class A Office Vacancy Rate

Class A Office Vacancy Rate

Class B Office Vacancy Rate

Class B Office Vacancy Rate

Class A vs. Class B

Greater Toronto Area Office Vacancy Rate

Class A vs. Class B

Greater Vancouver Area Office Vacancy Rate

It’s only getting tighter from here…

Positive absorption continues to drive office vacancies down for Toronto and Vancouver at 8.6% and 6.8% at the end of Q3 2018, respectively. Almost 160,000 SF of new Class A office product in Toronto became available this quarter while vacancy rates dropped slightly to 8.1% from 8.6% in Q2. The Vancouver market only released about 53,000 SF of office product with no availability. As the fight for quality deepens in the core and new supply is not expected to arrive until late 2021/22, many companies may be pursuing a flight to the suburbs in the meantime to avoid rising rental rates and perhaps situate themselves near mixed-use development communities to be closer to where the top talent may live.

Office Space Completions and Absorption

 

12 months ending September in each year

Office Space Completions and Absorption

Office Vacancy Rate

Office Vacancy Rate

Strong Demand for New Supply

 

Total Under Construction, Greater Toronto Area vs. Vancouver Market Area

Total Under Construction, Greater Toronto Area vs. Vancouver Market Area

 

Canadian investors focus on Apartment and Industrial product

Investment sales volume across Canada continued to grow in 2018. According to the respondents to the Altus Group Investment Trends Survey, overall cap rates have decreased moderately. Apartments was among the most active sectors in the second quarter for both markets. The Wynn Group’s disposition of their multi-residential assets accounted for almost two-thirds of the apartment transactions in Q3. Wynn Group is one of Toronto’s largest multi-family property owners and recently sold their assets to Timbercreek and Starlight for a combined total of $842 million. Starlight Investments also focused on multi-residential real estate in Vancouver’s downtown and northern areas purchasing four landmark high-rise apartment buildings for a total of 456 units. Paul Plaza is one of four assets which sold for almost $82 million. The 22 storey high rise tower contains 144 units and is located in the West End District of Vancouver. If population growth continues at its pace and land remains scarce, demand for housing will likely increase along with housing prices. The apartment sector may remain a desirable investment in a tight housing market. However, purpose-built rental properties may come with a hefty price tag as many of these older assets may need significant upgrades in the next few years.

Investment Property Sales Transactions

Vancouver Market Area, Q1 2018 vs. Q2 2018

 

Investment Property Sales Transactions - Vancouver

Greater Toronto Area, Q1 2018 vs. Q2 2018

Investment Property Sales Transactions - GTA

Featured Toronto and Vancouver Market Sales Transactions 2018

Featured Toronto and Vancouver Market Sales Transactions 2018

Top 5 and Bottom 5 Favoured Real Estate Segments

Top 5 and Bottom 5 Favoured Real Estate Segments

Given the need for warehouse space driven by e-commerce and logistics, and the anticipated demands of the cannabis sector, the industrial vacancy rate remains extremely tight at 1.3% in the Greater Toronto Area and 2.1% in the Vancouver market area. In both markets, supply remains limited for the next year or so and rental rates are gradually increasing. Yet, investor demand in the industrial sector remains very strong for both markets. According to respondents to Altus Group’s Investment Trends Survey, Single and Multi-Tenant Industrial product were among the top five real estate segments for investors in Toronto and Vancouver.

The largest industrial sale in the Vancouver market area was a 117,490 SF site on 1751 & 1771 Savage Road in Richmond. The property sold for $57.4 million to Ontario-based Nexus REIT. The largest industrial lease deal in Metro Vancouver goes to Amazon who recently announced it will lease over 453,000 SF at the Delta iPort, currently under construction and scheduled for completion by end of 2018.

Toronto’s investment activity remained steady with a 17% increase in capital flows from the previous quarter. Low vacancy rates and lack of supply have compressed cap rates in the short term making the GTA’s industrial sector a desirable long-term investment. The top industrial transaction in 2018 was by KingSett Capital for the American Business Park & 6325 Northam Drive in Mississauga who acquired the asset from Cominar for $90.6 million.

 

Industrial Vacancy Rates Remain Tight in Toronto

Industrial Vacancy Rates Remain Tight in Toronto

With scarce land, limited availability of space in the core and vacancy rates plummeting, demand for high-quality product in prime locations is expected to rise considerably across the country. As seen in overall real estate trends, access to transportation hubs continue to be an integral factor in many firms’ investment strategies. More and more best-in-class employers continue to seek amenity-rich office spaces and industrial production capacities continue to expand, therefore firms are now looking to reposition their assets and ultimately deliver on their supply sooner rather than later before the market hits even lower vacancy rates. Tight housing markets are also generating more interest in downtown rental units as well as mixed-use communities in peripheral areas as an alternative to home ownership in these expensive cities. A growing number of companies may well look to follow the talent to these areas and consider the move as a cost-effective option potentially igniting a migration to the fringes amid a tight market.

 

Location Barometer for Real Estate Investment

 

Selected Major Markets

Location Barometer for Real Estate Investment

 

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