Federal Government Announces Over $230 Million In Financing For New Rental Homes In Toronto

Five-Star Office Space Outperforms Other Classes in Downtown Toronto

Office vacancy rates in Toronto’s downtown show that all office has been affected by the rise in hybrid-work policies.

However, five-star office buildings, with the amenities and accoutrements that make their spaces stand out, are faring significantly better than somewhat older, but still high-quality four-star buildings. The divergence in performance has accelerated since the start of the year. This suggests that some occupiers are choosing to take new space in the highest quality of buildings while reducing or exiting their footprint in older, or lower-quality space. In short, occupiers are increasingly “fleeing to quality.”

Downtown Toronto is Canada’s most important office market, accounting for nearly 100 million square feet or roughly 10% of the nation’s office space. Nearly two-thirds of office space in downtown Toronto submarkets is four- or five-star quality and represents some of the best quality space in North America. Yet, downtown Toronto, like other important office nodes, has been affected by the rise of hybrid work since the pandemic, which have caused many occupiers to rethink their space needs.

In fact, at the beginning of the pandemic, five-star office space was affected more than other classes. Vacancy jumped from 0.7% in the first quarter of 2020 to 4.5% a year later. This increase of 380 basis points in vacancy compares to an increase of 320 basis points for the market overall. The relative underperformance of five-star space was likely affected by the addition of over 2.5 million square feet of new five-star office space in 2020, which proved difficult to lease up during the public health crisis. Yet still, the overall vacancy rate in five-star space remained less than other classes.

Between 2021 and early 2023, the vacancy rate continued to rise across all classes of downtown Toronto office. However, in 2023 a new trend emerged: Vacancy started to decline in five-star offices while continuing to increase across other classes. This likely had something to do with the fact that 2023 — and to a lesser extent 2024 — are years in which a large wave of office lease expiries transpire. This has provided more opportunities for owners of five-star offices to find potential occupiers who may be looking to upgrade their space.

The picture is bleaker for four-star space. Occupiers of this quality Class A space often have the financial means, if desired, to upgrade to five-star space even in the context of a cooling economy. Yet three-star occupiers, who might aspire to four-star space, are more likely to be financially constrained given the slowing economy. In other words, four-star offices risk losing more occupiers to five-star offices than they are likely to gain from three-star offices.

Because of this, at least in the short term, four-star office space is likely to underperform relative to the other categories, especially versus five-star. This suggests that Toronto’s downtown office sector is likely to see a bifurcation in leasing performance in the future, with the best-in-class buildings outperforming the rest.

Source CoStar Click here to read a full story

Property Professionals Prepare for More of the Same in 2024

The real estate business in 2024 is likely to look familiar to those dealing with the dearth of deals in 2023, property professionals say.

PwC’s “Emerging Trends in Canadian Real Estate,” released this month at the Urban Land Institute’s annual trends program, paints a picture of uncertainty still driving the market.

“This was a very notable trend in last year’s report that reflected a wide gap in valuation expectations between buyers and sellers of real estate assets as rising interest rates began to increase financing costs and put a damper on deal activity,” said PwC in its report.

Flash forward a year later, and little has changed in the sector as price discovery continues.

“Most interviewees believed overall uncertainty about asset prices would remain a key factor in holding back transactions for the time being, while those deals that do proceed will likely be smaller as large investors pull back from the market and the amount of capital available for real estate declines,” according to the report which was based on interviews with 600 executives. The conclusions are also based on 1,200 individuals who responded to a survey.

Frank Magliocco, national real estate leader of PwC Canada, told the Urban Land Institute event, many are gloomy about their near-term prospects.

“The idea the industry is going back to a new normal after the pandemic is about as gone as the optimism we had in 2022. Inflation is settled somewhat but still much higher than we are used to. Many (of those) interviewed wonder if we are on the brink of a recession,” said Magliocco.

Despite the prospect of a recession, the survey found those hoping for bargains may be disappointed. as interviewees tended to believe that opportunistic or distressed deals would remain hard to find.

PwC’s survey found that 57% of those surveyed believe capital will be undersupplied in 2024, a significant increase from 27% in 2023. Only 16% of respondents expect an oversupply of money, with the rest saying the market will be in balance.

“This challenge is compounded by uncertainty about whether investors can count on asset values going up. In struggling asset classes such as offices, interviewees note difficulties securing refinancing because banks are unwilling to renew mortgages without additional equity infusions for some of these properties,” said PwC in the report.

The top economic and financial issue in 2024 is interest rates and the cost of capital. On a scale of one to five, interest rates and cost of capital received a 4.63. Capital availability was second at 4.2. Qualified labour availability was third at 4.1.

“Ultimately, all of these factors are impacting the investment activity outlook for 2024 but also equally impacting the prospects for development in 2024,” Magliocco told the audience.

Respondents rated Toronto as the number one market in the country for investment prospects, but even Canada’s largest city only scored 3.29 out of 5. Vancouver was second at 3.15, and Calgary third at 3.04.

But asset class, the neighbourhood community shopping centre was cited by 65% as a buying opportunity, making it the number one recommended investment subsector. Another 35% had neighbourhood community centres as a hold.

Workplace apartments finished second for a buying opportunity, cited by 58% of respondents. Another 40% had that asset class as a hold, with 2% calling for a sale.

The third was data centres, which 57% had as a buy and 29% had as a hold. Only 14% had the asset class a sell.

“Some of the core assets in funds are being replaced with other assets such as data centres, student housing and medical offices,” said Magliocco.

However, he emphasized that liquidity may be the most critical investment issue in 2024.

“One individual told me he’s investing in the new L Class. He responded liquidity is the most important investment in the coming year,” he said.

Source CoStar Click here to read a full story

Toronto REIT Announces Major Mall Deal in One of Canada’s Fastest-Growing Markets

Toronto-based Primaris Real Estate Investment Trust has agreed to acquire two Halifax shopping facilities in a $370 million deal, the second major announced transaction of 2023.

The REIT, which started publicly trading just under two years ago, will have a proforma portfolio of 37 properties, or 12.5 million square feet, valued at approximately $3.9 billion, with deals for the Halifax Shopping Centre and the Annex in Nova Scotia.

“Halifax Shopping Centre and the Annex exemplify the quality and market leading nature of Primaris REIT’s target acquisition profile. The shopping complex is extremely well located in central Halifax, adjacent to Halifax Transit’s Mumford Terminal and at the gateway to the Halifax peninsula, with a market leading position in one of Canada’s fastest-growing mid-sized population centres,” said Patrick Sullivan, president and chief operating officer of Primaris, in a statement.

Halifax is experiencing significant population growth, and has been one of Canada’s top five fastest-growing areas for the past four years. The region’s population is expected to grow 18.4% by 2033, outpacing the national average of 13.6% during that time, according to the statement from Primaris.

The deal is the second major transaction for Primaris to announce in 2023 after the REIT paid $270 million to buy Conestoga Mall in Waterloo from the real estate arm of the Caisse de dépôt et placement du Québec.

“Closing this second significant acquisition in 2023 while maintaining industry-leading credit metrics is a testament to the strategic advantages provided by Primaris REIT’s differentiated financial model, including very low leverage, a low payout ratio and significant retained free cash flow,” said Rags Davloor, chief financial officer of the REIT, in the statement.

The Halifax Shopping Centre is the top enclosed mall in Halifax, with 562,000 square feet on 20.9 acres. The mall had $1,012 per square foot of same-store sales and annual all-store sales volume of $260.8 million as of Sept. 30, Primaris said in the statement.

The mall has 69% in-place occupancy and 96.2% committed occupancy, including executed leases commencing over the next few months as part of the Sears redevelopment, including with tenants such as Simons, Winners, Dollarama and PetSmart, according to the statement.

The Annex property is a 412,000-square-foot open-air facility next to the Halifax Shopping Centre, almost 100% currently leased. The site is home to the Halifax Transit Mumford Bus Terminal, one of the city’s busiest terminals. It is designated as a future growth node by the city, with an application for approximately 1,800 residential units with mixed-use components and future phases of roughly 5,500 residential units.

“Primaris is uniquely positioned as a buyer, with institutional scale, as the second largest owner-operator of enclosed shopping centres in Canada,” said Alex Avery, chief executive of Primaris, in a statement on the deal.

The deal, expected to close on Nov. 30, is being funded with $200 million in cash. Another $45 million of units of the trust and $125 million of 6% exchangeable preferred units are being issued.

Brad Sturges, an analyst with Raymond James, said as the dominant mall in one of Canada’s fastest-growing cities, the deal leaves room for future growth and value creation.

“The REIT’s Halifax Shopping Centre and The Annex purchase hits several key investment metrics for Primaris, including strong competitive positioning as the local market dominant mall, significant net operating income growth potential, other avenues available to create value and recent capital improvements completed that reduce near-term, future maintenance expenditure requirements,” said Sturges in a note to investors.

Sturges said the going-in capitalization rate of the deal is expected to be in the low 6% range, while future net operating growth in the next three to five years may push the stabilized yield to over 7%.

Desjardins Capital Markets, TD Securities and CBRE Canada acted as advisers to Primaris REIT on the deal.

Source CoStar Click here to read a full story

Why Toronto’s Office Sector May Be Less at Risk Than New York City’s

Hybrid work has negatively affected the office leasing business across North America, including in Toronto and New York, the largest office markets in both Canada and the U.S., respectively.

However, Toronto is dominated by well-capitalized institutional owners who are better able to withstand market corrections relative to other property owner types, such as developers, who are prominent in New York. This difference in ownership composition is one reason why capitalization rate movements tend to be less pronounced in Toronto. While certainly not immune from the effects of hybrid work, Toronto’s institutionalized office market is better able to withstand the current market turbulence, making it a less risky market than New York.

The North American office market has been affected by the adoption of hybrid work policies as well as slowing office-using employment growth. In both Toronto and New York, the average office vacancy has climbed by roughly 500 basis points compared to pre-pandemic levels. Moreover, major Class A office nodes, such as Downtown New York City and the Financial Core in Toronto, have witnessed weaker leasing fundamentals relative to their respective markets.

Despite these similar trajectories in leasing fundamentals, the ownership composition in both markets for large office assets differs in a meaningful way. In Toronto, a quarter of all downtown office assets that are three-star-rated or higher and with a rentable building area of greater than 200,000 square feet, are partially or fully owned by institutional entities, such as insurance companies, pension funds or sovereign wealth funds. This contrasts with downtown and midtown New York, where partial or full institutional ownership is less than 5%. Also, while developer-owners are important in both cities, they are more prominent in New York.

Institutional owners tend to be well-capitalized and better able to weather risks related to rising interest rates. Developers tend to be more exposed to risks related to leverage and debt. Although Toronto is not immune from development or construction loan risks, the office sector is less exposed than New York. In downtown Toronto, developer-owners account for one in three partial or full owners of large mid-to-high-quality office assets, as opposed to over 50% in downtown and midtown New York. Given the current macroeconomic environment, this suggests that the Toronto office market is less exposed to risks associated with higher interest rates.

This difference in ownership types helps explain why, despite similar fundamentals, office cap rate movements in Toronto are less volatile compared to New York. In fact, despite witnessing a similar increase in vacancy levels since early 2020, office market cap rates in Toronto currently are 50 basis points less than in New York.

The higher number of developer-owners in New York and the low number of institutional owners suggest that the New York office market is at greater risk of seeing more assets repriced in the event of a significant downturn. The Toronto office market, with fewer developer-owners and more institutional owners, is likely better positioned to ride out any future market turbulence. The prominence of developers as owners in New York suggests that this city could offer more future distressed office opportunities than Toronto if market conditions in both cities continue to deteriorate.

Source Renx.ca Click here to read a full story

Slate Office REIT Cuts Distribution To Improve Liquidity

Toronto-based Slate Office REIT, which has holdings in Canada and Chicago, has become the latest publicly traded real estate investment trust to ditch its distribution to improve liquidity issues.

The REIT, which is dealing with an occupancy level of 78.6% across its portfolio, said the decision to eliminate the distribution gives Slate an additional CA$10.2 million of cash annually, which will be used to pay debt and fund ongoing business operations.

“We have made steady progress over the last quarter toward shoring up the REIT’s balance sheet, completing over CA$577 million of refinancings and loan amendments to preserve liquidity and financial flexibility for the REIT,” said Brady Welch, interim chief executive of Slate Office REIT, in a statement. “We have also maintained stable portfolio occupancy, supported by our positive leasing momentum at longer lease terms. Through the portfolio realignment plan we are introducing this quarter, we believe we can improve the REIT’s liquidity, strengthen its balance sheet through reduced debt, and improve portfolio composition to position the REIT for long-term stability and performance.”

Earlier this month, a different Toronto-based REIT, True North Commercial, said it would cut its distribution completely.

Slate has identified non-core assets in specific Canadian markets it plans to sell to use the cash to repay debt and provide general liquidity for the REIT. The assets make up 40% of the REIT’s total gross leasable area.

CoStar News first reported that the REIT was selling three assets in New Brunswick in early November.

The REIT said that as of Oct. 31, approximately two-thirds of the planned dispositions are either listed for sale, under discussions, or at varying contract negotiation stages. Depending on local market conditions, the remainder of the disposition assets will be put on the market in 2024.

Slate Asset Management, an external manager to the REIT, said it had expanded its investment in Slate Office to 10% to reflect its confidence in capital allocation decisions and strategy.

The moves did little to appease investors following the distribution cut as shares dipped to 77 cents this week, well below their 52-week high of $4.67.

Jonathan Kelcher, an analyst at TD Securities, expressed concern about Slate Office’s high financial leverage in the current interest rate and transaction market environment.

“Although we expect improvements in leverage as dispositions are completed, we see potential challenges on timing, coming from a more difficult financing environment and overall slower transaction market,” said Kelcher in a note to investors.

Source CoStar Click here to read a full story

Canadian Office Trends Suggest Some Difficulties in 2024

Like its southern neighbour, Canada’s office sector is confronted with several trends that are likely to shape occupancy patterns in 2024 and beyond.

These trends include the staying power of hybrid workplace strategies and weakening office sector employment growth, which are both combining to weigh on leasing fundamentals already. In addition, Canada’s office buildings under construction as a percent of existing inventory is at 2.8% — over double that of the U.S. at 1.3% — and much of this construction is concentrated in downtown centres that were hit hard from hybrid work.

This new supply risks further aggravating leasing fundamentals in the near term, especially in the context of a slowing economy.

The first trend facing Canada’s office sector, like in the U.S., is the staying power of hybrid workplace strategies. Many companies had adopted these policies that allowed office workers to telecommute during the pandemic. Yet six months after the World Health Organization declared an end to the pandemic health emergency, many employees are still working remotely several days a week. In fact, the latest office occupancy and mobility data for downtown Toronto shows that the new hybrid workplace is here to stay for many office workers, who likely prefer commuting less.

Even for the overall Toronto Census Metropolitan Area, or CMA, mobility remains well below where it was pre-pandemic. This indicates that suburban office submarkets, which often employ more people locally, have also been affected by the growth in hybrid workplace trends, although less so than their downtown counterparts. Although the below data is for Toronto, Canada’s largest office market, similar trends exist in other Canadian cities.

The second structural trend affecting the country’s office market is the slowdown in office employment growth. Office employment growth in Canada averaged 2.35% per year between 2001 and 2022. Excluding the volatility around 2020 through 2022, in which employment growth cratered and then rocketed to recovery, the country’s most robust office employment growth appeared between 2001 and 2008. During this period, Canada’s office employment growth regularly exceeded the long-term average of 2.35%.

In the years following the Great Recession, office employment growth tended to be spotty, with a brief outperformance occurring between 2017 and 2019. Moreover, Oxford Economics forecasts that office employment growth will decelerate over the coming decade.

These twin trends of greater workplace flexibility and a downshift in office employment growth already appear to be taking a toll on the country’s office leasing sector. Occupiers are signing fewer new office leases and taking less space when they do sign. In fact, nearly a third fewer new office leases deals were signed in the first 10 months of 2023 compared to the first 10 months of 2019.

When occupiers are signing new leases, it is for 20% less space. This combination of fewer leases being signed coupled with smaller lease sizes translates into a total leasing volume that is nearly 45% below pre-pandemic levels.

At the same time, Canada’s office sector is building more stock relative to its inventory than the U.S. Although in pre-pandemic times, this construction pipeline was seen to help restore some balance in Canada’s office market given tight conditions, in the context of hybrid work and structurally lower office unemployment growth, the delivery of new space is likely to add to current leasing headwinds. This is especially so for older office stock, which will be competing with new buildings, as certain occupiers will likely be inclined to take space in newly delivered Class A product as opposed to staying in their existing older space.

The structural rise of hybrid work, coupled with a decline in office employment, are weighing on Canadian office leasing fundamentals. New office deliveries over the coming quarters will further weigh on leasing fundamentals, especially for older office stock. Overlaid across all these trends is a weakening economic outlook for the country, which is likely to slow the office sector’s recovery even further as businesses increasingly cut back on investment and trim expansion plans. Taken together, these trends suggest that next year is likely to be a another difficult one for Canada’s office sector.

Source CoStar Click here to read a full story

Top Sales and Leases Recognized in Canada

The $1.35 billion sale of three urban data centres in Toronto by publicly traded Allied Properties Real Estate Investment Trust was Canada’s largest real estate transaction during the third quarter, making it one of the top deals recognized in the latest CoStar Power Broker quarterly awards.

The Toronto-based landlord said the sale of the locations at 151 Front St. W, 250 Front St. W and 905 King St. W to a subsidiary of Japanese telecommunications giant KDDI allowed it to focus on its core business of “distinct urban workspace” and pursue continued growth in net operating income and creating value for its properties.

The REIT used $755 million of the proceeds from the sale to repay all amounts drawn on its unsecured credit facility, set aside $200 million of the proceeds to repay a secured promissory note payable on December 31, 2023, and another $49 million to repay its remaining first mortgages on fully owned properties next year. Allied will use the rest of the proceeds to fund its development and upgrade activity over the remainder of 2023 and into 2024.

The Japanese company created a new subsidiary for the deal called KDDI Canada.

“The global data business is accelerating, and the need for data centers is increasing,” said the Japanese company when it first announced a deal in June.

The deal closed on Aug. 16. Peter Senst of CBRE and, Justin Bosa and Peter Zorbas of Scotiabank were the listing agents.

There was no buying agent.

Here’s a look at other top deals during the third quarter:

Learningwise Education Signs Lease in Vancouver

The quarter’s top office lease was in British Columbia’s largest city, where Learningwise Education Inc. signed a 90,000-square-foot lease in Vancouver.

The educational company subleased a 90,000-square-foot location at 1090 W Pender Street in BentallGreenOak’s downtown Vancouver office building.

Learningwise Education Inc., the parent company of University Canada West, will occupy floors from the third to seventh under the lease signed Sept. 6. The company plans to move in on April 1, 2024.

Jeffrey Lin, vice-president of leasing, acted for BentallGreenOak, which is known as BGO.

No tenant representative was listed.

Home Société Signs Largest Lease of the Quarter.

The largest retail lease of the quarter space was in the Toronto submarket of Moss Park/Regent Park.

Home Société signed a lease on July 1 for the first and second floors of a residential project by Great Gulf and Hullmark at 48 Power Street. The deal is for the retailer’s MUST division, which describes itself as selling “distinctive decor elements” including armchairs for your living room and rustic wood headboards for the bedroom.

The lease for 43,000 square feet is for 10 years. Jonathan Weinberg of First Gulf was the leasing representative on the deal. The tenant contact is Home Société.

Lactalis Canada Inks Lease for Environmentally Friendly Industrial Space

A proposed property at 1680 Thornton Road North in Oshawa, about 60 kilometres east of Toronto, is the largest industrial lease of the quarter.

Leased by Lactalis Canada, the 379,000-square-foot facility would be located in the growing Northwood Business Park. The building would be able to store up to 60,000 pallets in both cooler and freezer environments while being zero-carbon ready, potentially being zero-carbon building certified.

The energy source would be entirely on the Ontario power grid with no additional reliance on non-renewable energy sources. The heat created from refrigeration systems is being designed to be reclaimed so it can heat the facility’s offices and warm the truck apron to melt snow.

A white roof would help would help reflect heat from the sun. Solar panels on the top in a future phase would provide renewable power to partially or wholly offset reliance on the power grid under certain conditions.

Kyle Hanna and Fraser McKenna of CBRE were the tenant representatives on the deal signed on September 19, which kicks in on January 1, 2024. Tenants are expected to move on October 1.

Source CoStar Click here to read a full story

Top Retail Leases Recognized for Toronto

Prominent retail leases signed by SportChek, Home Société and A Plus Sport negotiated by top dealmakers from SmartCentres Real Estate Investment Trust, First Gulf, CBRE and MQ Real Estate Team are among the third-quarter retail leases recognized by CoStar.

As big-ticket items involving sizable investments, commercial property transactions often have a wider impact within the community. CoStar will recognize the largest leases completed each quarter and the dealmakers who made them happen in their respective markets.

Here are the Toronto retail leases selected as the third-quarter 2023 winners of the CoStar Power Broker Quarterly Deal Awards:

Space Leased: 45,000 SF

Deal Type: New Lease

Size: 87,977 SF

Tenant: SportsChek

Brokers Involved: Luke Moore of SmartCentres Real Estate Investment Trust represented the landlord.

Deal Commentary: SportsChek struck a deal in the third quarter to occupy half of this former department store building, which is part of the Walmart-anchored SmartCentres Etobicoke Index at 162 Queen St N. The former Sail location will be occupied by SportChek along with an updated and expanded Mark’s, both of which are part of the Canadian Tire Corp. retail group. SmartCentres Etobicoke and SmartCentres Etobicoke Index shopping centres consist of approximately 624,000 square feet of open-air retail space across 54 acres. The centres straddle North Queen St. at Highway 427 and The Queensway beside Sherway Gardens within Toronto West’s southern Etobicoke retail node. Both retail properties are owned and managed by SmartCentres Real Estate Investment Trust.

Space Leased: 43,500 SF

Deal Type: New Lease

Size: 460,620 SF

Tenant: Home Société

Brokers Involved: Jonathan Weinberg of First Gulf represented the landlord.

Deal Commentary: Home Société’s lease for a large block of retail space on the first and second floors of this Toronto office building for its MUST furniture division qualified as a top retail deal of the third quarter. The furniture design company’s new store space in downtown Toronto is part of a new condominium complex in the Moss Park/Regent Park neighbourhood known as Home Power and Adelaide managed by Great Gulf Group.

Space Leased: 30,311 SF

Deal Type: New Lease

Size: 537,085 SF

Tenant: A Plus Sport

Brokers Involved: Phillip Cheung and Evan S. White of CBRE represented the landlord. Mya Qi of MQthe Real Estate Team represented the tenant.

Deal Commentary: In one of the quarter’s largest retail leases signed in an enclosed mall, A Plus Sport committed to opening a new location spanning over 30,000 square feet at the Sheridan Centre in Mississauga. The new facility will be a hybrid recreational centre, featuring badminton and volleyball courts, golf simulators and general recreational facilities for children, as well as retail space dedicated to sporting goods. The lease marks the first retail concept for A Plus Sport in the Toronto market. The mall is owned by Dunpar Homes, which focuses on master-planning commercial and industrial sites in prime areas in the Greater Toronto Area into vibrant, livable communities.

Space Leased: 25,000 SF

Deal Type: New Lease

Size: 87,977 SF

Tenant: Mark’s Work Wearhouse

Brokers Involved: Luke Moore of SmartCentres Real Estate Investment Trust represented the landlord.

Deal Commentary: In a second top third-quarter deal for SmartCentres Etobicoke retail complex, an updated and expanded Mark’s Work Wearhouse will join SportsChek in reactivating this former department store building.

Space Leased: 13,200 SF

Deal Type: New Lease

Size: 90,000 SF

Tenant: Greta Bar

Brokers Involved: Brandon Gorman, Graham Smith and Matthew Marshall of JLL represented the tenant.

Deal Commentary: Greta, which has locations in Calgary, Edmonton and Vancouver, is bringing its arcade bar street food concept to Toronto after signing a lease in the third quarter at 590 King Street West in Toronto. Located in the King West and Bathurst area, the office building is owned by YAD Investments, a private Canadian-owned company headquartered in Toronto.

Source CoStar Click here to read a full story

Two of Canada’s Largest Retail REITs Report Supply Crunch Amid Rising Construction Costs

Higher interest rates are top of mind for two of Canada’s largest retail REITs reporting earnings this month, with both RioCan and First Capital saying they expect those costs will keep the supply of available retail space tight.

Toronto-based RioCan, Canada’s oldest real estate investment trust with a portfolio of 200 buildings across the country, told analysts it does not expect retail vacancy to change much in the coming years.

“All indicators are that the type of space RioCan offers will continue to be in short supply and high demand. But our operating results are rooted in factors far more deep-seated than favourable supply-demand dynamics,” said Jonathan Gitlin, chief executive of RioCan, in a conference call with analysts last week.

For the third quarter that ended Sept. 30, the REIT reported a net loss of $73.5 million compared to a profit of $3.2 million last year.

The decrease was mainly attributed to fair value losses of $199.5 million on investment properties in the third quarter compared to $118.8 million in the third quarter of 2022, primarily from increasing capitalization rates to reflect current market conditions resulting from higher interest rates.

“Who knows if interest rates will move up, down or stabilize? What I do know is that at times like these, RioCan is fortunate to be operating a best-in-class retail portfolio in the major markets of this great country,” said Gitlin.

Retail committed occupancy for RioCan reached an all-time high of 98.3%, and the REIT’s average rent per square foot for new deals was $27.02, more than the average net rent for the portfolio at $21.39.

However the reality of present market conditions and construction costs has RioCan opting to slow down on new projects.

“Just to clarify, we’re pulling back on construction, not development, which means that we continue to move the needle forward on getting properties entitled, getting them free of tenant obligations and things of that nature so that they are shovel-ready. So it’s construction that we’re pulling back on,” said Gitlin.

At rival First Capital REIT, which has property interests in 143 Canadian neighbourhoods with 22.3 million square feet of gross leasable space, Chief Executive Adam Paul had the same type of message.

“Starting with inflation, concerning replacement costs as well as tenant sales, replacement costs have escalated significantly over the past few years,” said Paul on a call with analysts.

He said replacement costs for the retail space the REIT owns are almost 50% higher than the market value of the properties today. “This dynamic will continue to keep new supply effectively muted as has been the case for several years,” said Paul.

For the third quarter, First Capital recorded a loss of $327.5 million compared to a loss of $204.7 million a year earlier. Included in that loss was a $434.1 million writedown on the value of its properties compared to a $271 million writedown a year earlier.

Mark Rothschild, an analyst with Canaccord Genuity, the global capital markets division of Canaccord Genuity Group Inc., issued a report this week saying he agreed that demand for retail space should remain strong, resulting in continued low availability rates.

“We do note, however, that potential slowing economic growth could moderate rent growth. Tight availability for retail space in Canada has led to upward pressure on market rents,” Rothschild said in the note.

JLL Canada’s fall retail report noted that the continued demand for physical space and a shortage of new space is keeping the Canadian retail market tight with availability at historically low levels.

“After the surge in e-commerce during the pandemic, Canadians have returned to brick-and-mortar stores, shopping centres, restaurants, and airports. Demand for retail space continues to outpace supply this year, although this demand is now easing and expected to align with supply in the coming quarters,” said the real estate company.

The company added a slowdown in housing construction could also affect demand for retail.

“The slowdown in housing construction is impacting the retail sector, especially now that retail is increasingly built with residential. The decline in investment in building construction, including both commercial and residential projects, creates a challenging environment for retailers and will have implications for the growth and expansion of retail spaces in coming years,” said JLL.

Source CoStar Click here to read a full story