There’s Big Demand In Canada’s Retail Shopping Centre Market

In a commercial real estate environment largely devoid of major transactions, one sector continues to surprise: retail. In the wake of media reports that Quebec City’s massive Galeries de la Capitale mall is for sale, another major transaction could be in the offing.

About $2 billion in enclosed shopping centres changed hands in Canada during the past year, according to CBRE vice-chairman Hillel Abergel, a member of the firm’s national investment team. CBRE was involved in approximately $1.3 billion of that activity, he said.

Despite higher interest rates, reluctant lenders and other concerns, there are several reasons large retail transactions continue.

”Retail has effectively proven exceptional resilience through Black Swan moments in a way that it has effectively established this asset class as being among the more stable predictors of cash flow and overall return,” Abergel told RENX.

Having come through so much, including the departures of Sears, Target, Nordstrom and others, COVID and seemingly never-ending predictions of doom, retail has been a resilient CRE survivor – if not always perhaps a favoured sector for banks and other lenders.

Major institutions shifting investments

“Retail had a moment where the proverbial leaves were shaken from the trees, the weak tenancies have fallen,” Abergel said. “Retail is much more lean, much more efficient.

“So you’ve got leasing spreads moving in the right direction, you’ve got mid-bay space that is being leased up with velocity, you’ve got expansion of grocery-anchored retail, the grocers are taking in more space.

“It’s a growing asset class and as a result you’ve got more interest because relative to industrial, relative to some of the other asset classes, on a risk-adjusted returns basis, the returns are very attractive to all segments of the buyers’ market.”

Many large institutional investors are also reallocating funds and looking to divest a few strong grocery and needs-based retail assets to reinvest proceeds as part of their overall thesis.

“There was a heavy investment in enclosed shopping centres and enclosed shopping centres take a lot of capital,” Abergel said.

“The major pension funds are now selling away from the asset class not because the asset class isn’t performing but because they need to take those big tranches of capital that are tied up in enclosed malls and diversify either into alternatives or into (other) geographic locations.

“Generational opportunity” for private investors

“That has given a generational opportunity to private capital and syndicators to get access to enclosed shopping centres, that are exceptional shopping centres within their markets, that were never available to them because pension funds never made them available . . . because they cash-flowed well, because they were just dominant in their markets.”

Over the past 18 months, transactions included Vaughan Mills, Erin Mills Town Centre and Pickering Town Centre in the Toronto area, Conestoga Mall in Waterloo, Ont., Halifax Shopping Centre and Strawberry Hill Shopping Centre in Surrey, among others.

Just last week, an Anthem Properties joint venture acquired Carlingwood mall in Ottawa, a 632,700-sq.-ft. centre just outside the downtown anchored by Canada’s largest Canadian Tire store and a Loblaw grocery store.

Will Galeries de la Capitale be next? Reports cited $300 million as the price range to acquire the 1.3-million-square-foot property owned by Oxford Properties Group. Oxford declined to comment for this article.

Galeries also includes parking for 5,800 vehicles: leaving room for a lot of potential intensification.

Anchored by Hudson Bay, Simons, Sports Experts, Toys ‘R’ Us, Best Buy, RONA and others, it would provide steady holding income for a buyer. Galeries offers over 225 stores and services, including the Mega Parc indoor amusement park and an IMAX 3D theatre.

“Conestoga Mall in Waterloo I think is a pretty good analogy,” said Adam Jacobs, Colliers’ Canada head of research. “Good asset, (to be) sold by an institution, secondary market, priced in about the same range, $250 to $300 (million).

“I don’t think something like Capitale will be sold to be torn down and redeveloped. It has had a lot of money put in: gourmet food hall, celebrity chef restaurant . . . I look at it more as an in-place asset where you still have good tenants, good covenants; you’ve got some interest in the market.”

No new enclosed shopping centre development

Another attraction is that companies are not building major new enclosed shopping centres.

“If you own the best mall in Waterloo, Ont., that’s it,” Jacobs said. “It is not like someone is going to build another one down the road. You can look at this long-term and say ‘I own the best asset, or the second-best asset in the market, and I see a 10- to 20-year horizon where that is not going to change.’ ”

With institutional investors largely on the sidelines in terms of acquisitions, private capital has stepped in to fill the gap although Primaris REIT did make two of the largest shopping centre acquisitions in 2023 – Conestoga Mall and Halifax Shopping Centre for a combined $640 million.

Abergel said “foreign capital” is also interested, and Primaris CEO Alex Avery told RENX recently his firm is also still in the market.

“From a grocery-anchored shopping centre perspective I have not seen a demand-supply imbalance in 20 years like I am seeing right now,” Abergel said, considering the “scarcity of supply both on the individual-asset level and with portfolios of scale.”

Standing returns, plus future potential

Jacobs noted the interest involves more than just the standing retail assets – a well-situated, 30- to 50-acre parcel of land offers great future potential.

“Where else are you going to be able to buy that? How else are you ever going to be able to get a loan to purchase that? Yes, now it is locked into this asset but in the future who knows?”

In terms of financing, Abergel and Jacobs agree lenders see the flexibility of return options shopping centres offer – in-place revenue, intensification and potential future redevelopment among them.

“When you are buying any shopping centre . . . when you’ve got a running income return, it buys you the flexibility of time,” Abergel explained. “When you have a running carry on the land, you are able to make these decisions in a way that isn’t forced.

“It allows you to pipeline for development at the time when the cycle might be best for you.”

Abergel and Jacobs both expect more retail transactions. As Canada continues to experience “crazy record-high population growth,” Jacobs said the equation is simple: more people need more goods and services.

“For the balance of the year you’d love to see more grocery-anchored product trade because the demand is there,” Abergel said. “I think you are going to see some bigger assets continue to move throughout the balance of the year.”

Source Renx.ca. Click here to read a full story.

Allied Sees ‘Inflection Point’ in Office Market As Space Tours Increase

Some Analysts Take Wait-and-See Approach Despite REIT’s Leasing Optimism

Allied Properties Real Estate Investment Trust is seeing signs that could lead to a pickup in leasing activity in its portfolio, but even with that, one analyst following the REIT thinks Allied might be forced to cut its distribution next year.

The increase in touring activity at Allied’s nearly 15 million-square-foot office portfolio has been encouraging recently, Allied President and CEO Cecilia Williams said during an earnings conference call this week.

“Renewals were at healthy spreads to in-place rents,” said Williams. “I believe we are at an inflection point, and leasing momentum will continue through 2024.”

Allied said it conducted 300 lease tours in its rental portfolio in the first quarter and that its occupied and leased area at the end of the quarter was 85.9% and 87%, respectively. It would be difficult to pinpoint when the jump in interest in its office space would lead to increased occupancy, Williams said.

Allied, one of the country’s largest office landlords, reported its first-quarter earnings on Tuesday. The REIT said its operating income from continuing operations totaled $78 million in the first quarter, up 2% from the same quarter last year.

The REIT’s net loss during the quarter was approximately $19 million, primarily due to a fair value loss on investment properties from $31 million in declines in development property valuations in Toronto, Edmonton and Montreal and an $88 million decline in rental-property valuations in Toronto.

Moving forward, Allied said it has plans to sell less-strategic properties in its portfolio at international financial reporting standards, or IFRS value, for aggregate proceeds of up to $200 million.

Management has initiated the sale of properties in Montreal and Toronto in response to unsolicited offers, the REIT said.

Three properties in Montreal are expected to be sold early in the third quarter for aggregate closing proceeds of approximately $64 million, plus a potential residential density bonus of up to $16 million on the final rezoning of one of the properties.

Mark Rothschild, an analyst with Canaccord Genuity, said it was difficult to see any material improvement in occupancy in the near term despite management’s comments on increased tenant tours of vacant space.

“As we progress through 2024, the REIT is heading into two years that have significant debt maturities, which could put additional pressure on a payout ratio that is above 100% when considering the true cost of signing leases in the current environment,” the analyst said in a note. “In particular, the REIT has $1.5 billion of debt maturing through 2026 at an average rate of 3.2%, while the current market rate is likely closer to, if not above, 6%.”

Even as management remains committed to its distribution, Rothschild said that could prove too optimistic.

Brad Sturges, an analyst at Raymond James, also had doubts about the REIT’s optimism on leasing.

“Office lease negotiation timelines remain long,” Sturges said in a note. “We maintain our wait-and-see stance as it relates to how much of Allied’s positive leasing indicators will ultimately translate into stabilization and recovery in Allied’s average occupancy rates.”

Jonathan Kelcher of TD Securities noted that only 5% of the REIT’s leases are maturing in 2024, with another 10% in 2025. “We believe Allied is well positioned to ride out current weaker market fundamentals,” Kelcher said in a note.

Allied’s position on the office market comes after CBRE issued a report last month stating that office construction across Canada had dropped to its lowest level since 2011 in the first quarter, with no new projects breaking ground. This should give the market a chance to stabilize, the brokerage said.

“Canadian office markets had a promising start to the year, recording a total 439,000 square feet of positive net absorption of space in the first quarter,” CBRE said. “This represented the first quarter of positive net office leasing activity at the national level since the third quarter of 2022.”

Nevertheless, the national vacancy rate climbed to 18.4% in the first quarter, a 10 basis point jump from the previous quarter, CBRE said.

Source CoStar. Click here to read a full story.

How AI Is Affecting The Commercial Real Estate Sector

For commercial realtors hit by high interest rates and low office occupancy, artificial intelligence (AI) has promise as a potential gateway to greater productivity. Real estate agencies are betting that data science can come to the rescue with new efficiencies that could bolster the bottom line.

The rise of AI is also fuelling apprehension among brokers and support staff when it comes to the loss of the human touch and the impact on privacy and jobs, as well as possible copyright violations – prompting a push for technologies that can audit the origins of real estate data.

“Everybody is flagging this issue, not just in the real estate sector,” says intellectual-property lawyer Maya Medeiros. “Just because an image or video content is available on the internet doesn’t mean it’s permitted to be used in any way.”

Ms. Medeiros, a partner at Vancouver-based Norton Rose Fulbright, says the benefits of AI can outweigh liability risks, which are manageable if firms implement data-governance programs to single out inaccurate and restricted material.

AI vendors are increasingly offering liability insurance and legal indemnity, committing to defend clients sued for alleged improper use of computer-generated data, she adds.

Off-the-shelf, due-diligence software for data can cross-reference open-source codes against usage licensing agreements, she explains, but differentiating between protected and copyright-violating content in large image and data sets whose design is not publicly accessible is a far trickier proposition.

As such, she says, technology companies are working on real estate data audit software that can map the lineage of property information.

Against this backdrop, and as business investment skyrockets in generative AI – which can produce various forms of content – Stanford University’s AI Index 2024 Annual Report shows private funding for the technology was nearly multiplied by eight to US$25.2-billion last year compared with 2022. The imperative to understand the “life cycle” of data has become more pressing, Ms. Medeiros says.

Ottawa is to replace the current voluntary code of conduct with AI legislation focused on “high impact” scenarios – to shield emergency services data, for example – but the new laws are not expected until 2025 or 2026.

Beyond legal access, there is the issue of a lack of useful source content.

“There is no qualitative data in real estate,” says property tech expert Robin Rivaton, a shortfall he says is preventing widespread AI adoption, particularly in commercial real estate (CRE) where information can be guarded to keep it from competitors.

Mr. Rivaton, chief executive officer of Paris-based Stonal, an AI platform for commercial and residential real estate data management, says documents, commercial rental agreements and contracts have been digitized but underlying text has not. CRE “will be a laggard without further standardization or further automated extraction from documents.”

Despite the challenges, CRE agencies are raising funds to develop apps, including predictive analytics that track and anticipate trends such as property pricing in specific markets.

Realtors are looking to AI – which can help read, write, create and analyze – to generate text, images and video using tools that troll the internet to respond to user questions and prompts.

“People will be using these tools,” Mark Mandelbaum, co-founder and chairman of Toronto-based condominium developer Lanterra Developments, said at a recent industry panel discussion in Toronto hosted by his company. “If you use computers intelligently and harness the power, it can put you above the competition.”

Among other tasks, AI can generate three-dimensional virtual images of properties. Transactions, appraisals and estimates can be fashioned using AI-based algorithms. And volumes of documents such as lease agreements can be vetted by AI software.

For brokers and agents, AI can help service a greater number of clients simultaneously while reducing time spent on administrative tasks and incorporate automated customer interaction software, such as chatbots, into company systems.

Chatbot GPT is an AI system designed to communicate, using natural language, with consultants who are able to custom design programs for real estate applications. The system personalizes communication by tracking client search behaviours and preferences. Tools can be added to provide security, privacy protection and assure regulatory compliance.

John Asher, president of single-family rental investment service agency Konfidis, said at the recent industry panel that AI allows firms to scale up without huge investment in personnel and technology. “We used AI tools to take what would have taken a year to build and develop [a technology platform] down into weeks.”

An automated program can make complex material easy to understand, compose and record virtual voice narration for video content, he explained to the audience – and bid on 100 properties in a day.

“Three or four clicks to have an offer out the door,” he said. “You talk about the impact on jobs. I don’t need people to do that. I can do it on my own.”

While Mr. Asher said AI could potentially jettison entire real estate marketing teams, some experts, such as Victoria Lee Joly, a broker with Distinctive Real Estate Advisors in Toronto, stressed that human analysis and judgment will always be crucial.

“There isn’t a piece of software that can replace the compassion and care of a human.”

Source The Globe And Mail. Click here to read a full story.

Record Number of Industrial Leases Set To Expire in Canada in 2024

Nearly 33 Million Square Feet of Leased Industrial Space Expiring This Year

A record number of industrial leases totaling nearly 33 million square feet are set to expire in Canada this year. While most of the leases will likely be renewed, the wall of lease maturities could result in tenants seeking lower rates or renewing for a reduced amount of space in the short term, especially given the context of lacklustre economic growth coupled with a recent record amount of new space that delivered in 2022 and 2023.

This year’s tally of nearly 33 million square feet of expiring industrial leases is well above the annual average of 26.2 million square feet that expired – or is set to expire – between 2020 and 2025. This means that roughly 25% more space is set to expire than average.

A lower number of lease expirations in 2025 and a much-smaller supply pipeline should support higher industrial leasing rates next year.

In most cases, the market would be able to digest this amount given strong structural demand drivers, such as e-commerce-related demand. However, while CoStar expects most of this space to be renewed, current conditions may create a challenging lease environment for landlords and tenants alike.

Canadian markets are still recovering from the record amount of new industrial space added in 2022 and 2023. Most of this new supply consisted of speculatively developed, large-bay facilities designed to support distribution and logistics-related needs for very large occupiers. Demand, while strong, has not been able to keep up with the pace of new supply in recent quarters, and the national availability rate for industrial space has increased across the board, most notably for logistics space, which has a national availability rate of 6.7%.

Demand for industrial space peaked in late 2021 and early 2022, right before the recent interest rate hike cycle got underway. Since then, trailing 12-month net absorption for industrial space has been falling, in line with the country’s decelerating economy, with demand for industrial space at 2021 levels.

For these reasons, the record amount of industrial leases expiring this year suggests that industrial market conditions are likely to tilt somewhat more favourably for tenants – a first in recent years.

As more leases expire, some are likely not to be renewed – or to be renewed for a smaller footprint as companies seek to reduce overhead costs in a slow economy. This, in turn, is likely to lead to a continued uptick in vacancy and availability rates, trends already underway since net absorption started to slow in mid-2022.

However, conditions next year should offer some respite. The supply pipeline is set to add less new industrial space than in the recent past. At the same time, fewer leases are set to expire. These factors should support industrial space markets in 2025, even if the economy were to continue to grow at its current anemic clip.

Source CoStar. Click here to read a full story.

Federal Banking Regulator Takes Closer Look at Commercial Real Estate

Office of Superintendent of Financial Institutions Says Lower Quality Office Buildings Pose More Risk

Commercial real estate has drawn a red flag from the agency that regulates Canada’s financial industries, particularly the office sector.

The Office of the Superintendent of Financial Institutions said corporate credit and commercial real estate — particularly the construction, development and office sectors — continue to face stress and a high degree of uncertainty.

“While market-based and core funding liquidity sources are available, prior downturns and stress events have demonstrated that these conditions can change quickly,” the agency said in its annual risk outlook for the fiscal year 2024-2025

The independent federal government agency reporting to the Minister of Finance added that “wholesale credit risk, including risk from commercial real estate lending as well as corporate and commercial debt, remains a significant exposure for financial institutions. Economic uncertainties and changes in these markets are impacting the risk environment. Current interest rate levels have produced challenging refinancing conditions for some commercial and corporate borrowers, and the conditions could negatively affect wholesale credit markets in the coming year.”

It added that higher interest rates, inflation, and lower demand have put commercial real estate “markets under pressure. We expect these challenges to extend into 2024 and 2025.”

While new office construction has hit its lowest level since 2011, CBRE reported last month that the national downtown vacancy rate reached 19.5% as more supply was added to the market.

The Office of the Superintendent of Financial Institutions pointed to the office sub-segment of the commercial real estate market as facing additional changes as companies adopt hybrid work environments, leading to rising vacancies and declining asset values.

“Lower quality office buildings face more acute risks while higher quality older properties have also experienced pressure from reduced demand for office space,” the agency noted.

It added that other aspects of commercial real estate, including the construction market and industrial sector, face challenges from reduced demand.

The Bank of Canada has also said it is monitoring commercial real estate closely. Now the Office of the Superintendent of Financial Institutions plans to monitor lending activities to assess borrower and portfolio vulnerabilities, account management and underwriting practices and loan loss provisioning.

The regulator also monitors the residential housing market and notes that 76% of the mortgages that were outstanding as of February 2024 will be up for renewal by the end of 2026.

“Canadian homeowners who will renew their mortgages during this time period could potentially face a payment shock. This payment shock will be most significant for homeowners who took out mortgages when interest rates were lower in 2020 to 2022,” said the regulator.

Source CoStar. Click here to read a full story.

Canada Attracted More Overseas Real Estate Buyers Last Year, but Will It Continue?

GIC and Dream Industrial REIT’s Purchase of Summit Industrial Income REIT Provided Boost

In absolute terms, Canadian commercial real estate is still attracting a relatively small amount of foreign capital compared to the United States and United Kingdom. However, on a relative basis, Canada has been attracting more overseas investment than ever before — in a trend that may not last.

While Canada’s commercial real estate has been attracting greater foreign interest, recent moves to expand the capital gains inclusion amount, coupled with increasing levels of property taxes and fees, may weigh on foreign investor interest in the near future.

Canada’s share of total foreign buyer activity received a considerable boost in 2023 when the Government of Singapore Investment Corp. or GIC, a government-owned company assigned to manage Singapore’s sovereign wealth fund, teamed up with Dream Industrial REIT to acquire Summit Industrial Income REIT. The sizable deal closed in early 2023 for a price of CA$5.9 billion, or US$4.38 billion or £3.66 billion.

Foreign buyer activity continued with other real estate transactions occurring in a steady in-flow throughout the year, leading to robust levels in foreign buyer sales volumes. Most of these transactions focused on industrial purchases in the Greater Toronto Area.

On a relative basis, Canada accounted for nearly 1 out of 3 foreign-buyer transactions across the three countries in the first quarter of 2023, again largely thanks to GIC-Dream’s purchase of Summit. Yet even in following quarters, Canada accounted for 11% to 15% of all foreign-buyer transactions, considerably higher than in earlier quarters, where the country’s share tended to range between 1% and 5%.

 

There are several possible reasons for this increase. On a relative basis, Canadian property could be seen by investors as having more upside potential. For example, in Toronto, Canada’s largest industrial market, industrial rents are 21% less than those in Los Angeles, the largest industrial market in the U.S. This gives potential purchasers a longer runway to potentially increase rents.

Another reason could be the valuation of the Canadian dollar. Throughout most of 2023, for example, the Canadian currency was trading at over 1.34 per U.S. dollar, a rate that has historically been in the low 1.20s. This favourable exchange rate means Canadian assets were available to be purchased at a discount by foreign buyers.

In addition, Canada continues to be viewed as a relative island of stability in a global investment market increasingly beset by geopolitical strife and internal political problems. While not without its problems, Canada’s respect for the rule of law, contracts and property rights is higher than in many places.

However, it remains to be seen if this trend of higher foreign investment inflow will continue. Data in early 2024 shows that sales volumes — including purchases by foreign buyers — have gotten off to a slow start compared to the recent past. The government’s April 2024 decision to expand the capital gains inclusion from 50% to 66% may further dampen investor interest. Higher taxes and fees may also affect investment pro formas and could result in fewer deals getting done.

Chartwell’s 323-Unit Retirement Home in Mississauga Set To Become Apartments

Retirement Home Giant To Sell Property to Developer With Plans To Convert It Into Apartment Units

Canadian retirement home leader Chartwell plans to sell a large Ontario operation located near its head office in Mississauga that the buyer plans to convert into apartments, the company announced in its most recent quarterly earnings report.

Chartwell resolved to close its nine-floor, 323-unit Heritage Glen facility at the end of July. The property did not attract the same level of popularity as most of Chartwell’s operations, attaining under 60% occupancy over the last few years, according to a statement.

“The property wasn’t well-suited to continue as a retirement home and when you look at the vacancy rate in the region of retirement homes versus multi-res, it made a lot of sense for everyone for it to be repurposed as multi-residential,” said Jonathan Boulakia, Chartwell’s chief investment officer, on the earnings call. The complex is located about a 15-minute drive southwest of Chartwell’s head office in Mississauga, Ontario.

Chartwell plans to sell the property to an undisclosed developer with plans to convert it into apartment units, a strategy that has become increasingly common among Canadian retirement homes as profit margins have declined while apartment rents have soared. Details of the pending deal have not been finalized, Boulakia said on the call.

In a second deal, Chartwell said it will sell its 224-bed Ballycliffe project at 70 Station St. in Ajax, Ontario, for $64.5 million. The sale is part of a portfolio of 16 long-term care homes Chartwell sold to Axium and AgeCare Health Services in September for $442.2 million. The deal saw Chartwell part with 2,418 beds at the time while committing to sell the Ballycliffe property at a later date.

Chartwell is one of Canada’s largest retirement home chains with 175 properties in four provinces overseeing 25,000 residents. Chartwell is completing a significant portfolio split with U.S.-based Welltower that is expected to be made final sometime in the second quarter. Chartwell’s split with Welltower will see it close out 23 shared operations, while Chartwell emerges with 16 properties from the partnership, as well as a payment of $97.2 million.

Chartwell has a partnership agreement with Quebec-based builder Batimo that obliges Chartwell to purchase a Batimo-built property when it attains a certain occupancy level. The deal will result in Chartwell buying up one more retirement home facility that has yet to be identified. Chartwell also plans to dispose of another non-core property, it revealed during the call.

Many Canadian retirement home operations have hit rough waters in recent times as labour costs and other expenses have risen fast. Chartwell announced a $2 million loss in the first quarter of 2024, but the loss is far less dire than the $9.3 million hit it took in the same quarter one year earlier.

Chartwell credited lower labour expenses for the improved results, noting that management reduced staffing agency costs by 60% and also had success with a new bonus recruitment referral program, while also actively recruiting retired nurses and recent graduates and immigrants. The firm also credited a new electronic health record system for helping to lower its operating costs.

Source CoStar. Click here to read a full story.

What the Growing Spread Between Vacancy and Availability Rates in Toronto’s Office Market Tells Us

Increasing Office Availability an Indicator of Higher Vacancy Set To Come

Although often used interchangeably, there are key compositional differences between vacancy and availability rates, differences that can help shed light on where a market is heading.

The definition of vacancy is very straightforward, it’s the sum total of space that is currently unoccupied and available for lease. Availability is a bit more nuanced. It includes both vacant space and also space that will be coming to the market within a defined period, generally within 30, 60 or 90 days.

This may include upcoming lease terminations without intention to renew, space available for sublease and space in newly developed buildings that have not been pre-leased. This is generally why availability rates are higher than vacancy rates.

The spread between vacancy and availability rates will naturally fluctuate as tenants churn and reassess their requirements for space and as new offices are developed. This is nothing new, and part of the value brought by good asset managers as the spread can be converted into opportunity, particularly in a market with rising office demand.

However, in the current market where demand for office space is dwindling the increase in availability is being driven not so much by new building deliveries but rather by the large number of occupiers looking to exit their existing lease agreements.

In the first quarter of 2019, the vacancy/availability spread for the Toronto office market was 2%. Since then the spread has more than doubled and is currently at 5%. In 2019, the amount of space available through sublease accounted for 12% of availability. It has now grown to 18% as sublets are a material portion of the increase in available space.

Under these circumstance, the spread between the vacancy and availability rates can be used to predict upcoming vacancy and the increased costs that accompany it.

For landlords, there is one key difference between the two metrics. Vacancy comes with costs, like maintenance and insurance. Availability does not. A tenant’s attempt to sublet space does not void their obligation to cover the associated expenses. This being the case, vacancy is often the focal point for landlords.

As the above chart illustrating available square footage at various periods within the Greater Toronto office market clearly shows, the amount of available office space has been increasing across the region. Furthermore, the portion of space that is available through sublease is growing at a faster pace.

What is particularly noteworthy is how the spread patterns from previous timeframes play through to subsequent timeframes in forecasting future vacancies. The current metrics indicate office vacancy increasing in urban markets at a faster rate than in the central business district.

Availability is the doorway through which vacancy, and the higher costs that accompany it, arrive.

Source CoStar. Click here to read a full story.

Nation’s Oldest REIT Sees Increasingly Tight Market for Retail Space

RioCan, Rival First Capital Foresee Shortage Affecting Store Expansion Plans

RioCan Real Estate Investment Trust, Canada’s oldest property investment company, said available retail space is increasingly in short supply and its executives are betting that the nation’s biggest population growth in almost 70 years and other market conditions will play to its strengths.

Jonathan Gitlin, president and chief executive of RioCan, discussing the firm’s earnings with analysts on a conference call Wednesday, said that the dearth of new retail supply comes at a time of substantially increased immigration into Canada, especially in the country’s six largest markets where RioCan is focused.

“This has put us in a position to fuel long-term organic growth,” said Gitlin on the call.

The high-demand retail results for RioCan were echoed in comments from its rival First Capital REIT, after Statistics Canada reported the nation’s population grew 3.2% in 2023, the highest rate since 1957. That growth is expected to drive retail demand.

Gitlin said the REIT is focusing on necessity-based tenants such as grocery operators, a business type RioCan considers to be a more stable tenant base. The REIT said 87.9% of its 33 million-square-foot portfolio is rented to what it calls stable tenants.

RioCan said it has been able to bounce back quickly from recent bankruptcies by such retailers as Bad Boy and Rooms + Spaces, with only four of 10 stores vacated by those former retailers still to be leased.

Sam Damiani, an analyst with TD Securities, noted that retail occupancy hit turbulence in the quarter but said there are clear skies ahead for the REIT.

When it comes to the bankruptcies, “already, six of them are released, including to grocers, at significantly higher rents, and most others are under negotiation,” said the analyst in a note. “The 2024 guidance reiteration is encouraging.”

The REIT has also added a Costco through a land lease at its RioCan Centre Burloak in Oakville southwest of Toronto. That deal is subject to certain closing conditions.

“Obviously they didn’t have another property in that area that is viable,” said Gitlin. “For us, it was an opportunity to take an oversized power centre and bring in an exceptional tenant that will draw a tremendous of traffic to the centre. It takes away a significant amount of risk not having these medium and smaller boxes. Anytime you can have a Costco, it makes for a tremendous co-tenant.”

In an outlook for 2024, Marcus and Millichap noted tenants were quick to expand their space when given the opportunity last year.

“Supported by a healthy job market and record-high population growth, consumer spending in Canada continued to increase last year despite rising interest rates,” the real estate company said. “Leasing demand remained robust as a result, outpacing an increase in completions.”

First Capital, also pointed to a shortage of retail space during its own earnings conference call and said the shortage of suitable space could ultimately impact plans from some retailers.

“The reality is when you go down the list of retailers, looking for space in Canada and what their store expansion plans are, and you look at the available space, and what’s likely to be built, it’s very obvious not everyone’s going to achieve their store expansion plan. So that’s obvious to us. It’s obvious to retailers. So they’re coming to us earlier,” said Adam Paul, chief executive of the REIT, on a call with analysts.

“They’re being more flexible in the type of space that they’re looking to lease, whether it be size, dimensions, column spacing, the way loading works. It used to be certain retailers were very committed to finding space that fit one of several kinds of predetermined prototypes for themselves. We’re seeing those same retailers look at space that’s well outside those prototypes.”

Source CoStar. Click here to read a full story.

Canada Pension Plan Signs One of Largest Office Leases Since Pandemic Hit

Country’s Biggest Pension Fund Heads to New Toronto Building

The country’s largest pension fund has agreed to one of the biggest office leases since the pandemic hit, a deal that calls for the Canada Pension Plan Investment Board to relocate to a new Toronto tower.

People close to the deal confirmed to CoStar News an Avison Young report that CPPIB is leasing 330,000 square feet in the second tower in CIBC Square at 141 Bay Street. The 50-storey tower is a development project by Montreal-based Ivanhoé Cambridge and Houston-based Hines that broke ground in 2021 and is set to open in 2025.

Carl Gomez, chief economist and head of market analytics for Canada for CoStar, said in the current office market, more tenants appear to be more likely to consider newer, high-quality space.

“There is more nuance to” the so-called flight-to-quality trend often cited in real estate circles since the pandemic hit, he said. “While availability rates in top-rated towers have held up better than in lower-class buildings, a bigger shift has been from old to new,” he added. “This mammoth lease is a classic reflection of that.”

Officials with CPPIB, overseeing $590.8 billion in assets under management at year-end, wouldn’t comment on the deal. The pension fund has about 1,600 employees in Toronto, where its current head office is in a building it owns at 1 Queen Street East.

A boost for the office market could be coming at the right time for Toronto. Avison Young said the availability rate reached 19.5% in the first quarter, up from 19.3% in the fourth quarter.

“The lack of new project announcements in recent years has resulted in the supply pipeline tapering off as projects are completed,” the Avison Young report stated.

Of the 13 office buildings under construction across the Greater Toronto Area at the end of the first quarter, five were located in the suburbs, Avison Young said, two were in Toronto East, two in Toronto North and one in Toronto West, with these projects combined accounting for 20% of the total square footage under construction in the Greater Toronto Area.

That compares with just 6% in the first quarter of 2020, when the downtown market’s construction pipeline represented a much larger share, Avison Young’s report said.

The CPPIB deal was easily the largest office lease of the quarter in Canada’s largest city, with Invesco’s 66,800 lease renewal at 120 Bloor Street Street East second, according to Avison Young.

Canadian Natural Resources signed the biggest lease since the pandemic hit when it agreed to take 702,000 square feet at 400 4th Ave SW in Calgary in December 2023, according to CoStar data.

Ivanhoé Cambridge officials could not be reached for comment, but a previous release noted CIBC as the lead tenant for the 3 million-square-foot CIBC Square. The second tower is 1.5 million square feet.

JLL also noted the CPPIB transaction in its first-quarter report on the Toronto market. The real estate company termed the deal a relocation.

“As the office construction pipeline dwindles to near-zero by 2027, relief for landlords could be on the horizon. Meanwhile, the divergent fortunes of higher-quality buildings and commodity buildings will widen as declining occupancy and mounting financing costs weigh on the latter. As the city focuses on generating more housing, there may be a shift in zoning policy away from office and toward residential redevelopment to facilitate this transition,” JLL noted in its report.

Source CoStar. Click here to read a full story.