With today’s climate of sky-high interest rates, pricey lease costs and lingering pandemic recovery, being a Toronto bar or restaurant owner isn’t for the financially faint of heart.
Running a restaurant in Toronto is no easy feat – it never has been. Add today’s climate of sky-high interest rates, pricey lease costs and lingering pandemic recovery to the mix, and being a Toronto bar or restaurant owner isn’t for the financially faint of heart.
With the city bustling back to life post-pandemic, however, a healthy handful of buzzed-about new restaurants open their doors each month throughout the Greater Toronto Area (GTA). And many – from Dundas West to King Street and Yorkville – are packed with patrons. Some older spots, however, are still feeling the pinch of the pandemic.
Rob Eklove, Vice President of Urban Retail at The Behar Group Realty Inc., owned a handful of popular former Toronto bars (Supermarket, Tempo, and Lava) and now specializes in helping chefs and owners find real estate for restaurants. He says the general consensus is that Toronto’s restaurant sales are down 30% compared to pre-pandemic levels.
“But that’s dependent on the market you’re looking at,” explains Eklove. “In the Financial District’s core, they may be suffering more than that because office attendance is nowhere near where it was prior to the pandemic. The suburban markets may fare better because people are working from home and staying there.”
In the years rife with pandemic-inspired lockdowns and restrictions, Toronto’s beloved bars and restaurants took a major beating, resulting in the fight of their lives for countless owners. Of course, some didn’t survive. So, the reawakening of Toronto’s restaurant scene – complete with this slew of new additions – is cause for celebration. But that doesn’t mean life’s any easier for the city’s restaurant and bar owners.
A High Price With Little Wiggle Room
Rents for commercial real estate – especially in the downtown core – remain costly. According to the most recent figures from the Toronto Regional Real Estate Board, the average commercial/retail lease rate in Toronto is $26.32 per sq. ft.
Eklove lays out the math with a real estate acronym: GROC (Gross rent occupancy cost). “In a restaurant setting, you want your gross rent to be 10% or less of your sales, in terms of a business model,” says Eklove. “If you’re paying $100K in gross rent annually, you need to be doing $1M+ in sales. So, if you signed a lease where you were paying $300K in gross rent annually, but pre-pandemic, you thought, ‘No problem, I can do $5M in sales,’ then you’ve got it made in the shade. But, post-pandemic, your sales are $2.5M, then you’re getting squeezed.”
As he highlights, some Toronto restaurant owners locked into leases made pre-pandemic may indeed be in a particularly vulnerable spot. “I think that some restaurant groups downtown that did deals at premium rates pre-pandemic are feeling the pressure,” says Eklove. A handful of restaurants throughout the city have subsequently made headlines as of late for their closures due to their inability to afford rent.
For those entering the bar and restaurant market, while rent costs may be down in some cases, Eklove says that deals are harder to come by these days.
“There has been an uptick in activity; there has been an uptick in people engaging landlords and figuring out if deals are possible,” he says. “But, with borrowing costs up and construction costs up, deals are very hard to come by — that’s the bottom line. People have to have a very sharp pencil when it comes to figuring out whether deals make sense. You’d assume that landlords would be more flexible with lease rates rather than continuing to have vacancies, but that’s not always the case. There are other metrics involved that have an impact on the valuation of particular properties. So, landlords are reluctant to do deals because it could adversely impact the valuation of their property.”
Chef Roberto Marotta, who owns downtown Toronto restaurants ARDO and DOVA with his wife, Jacqueline Nicosia, says that something shifted with the pandemic and its devastation on the city’s food and beverage industry when it comes to commercial real estate. “Following COVID, more than ever, the restaurant industry is seen as high-risk,” says Marotta. “It’s extremely challenging to secure a new location because property owners and managers are looking for significant collateral. If you are new to the industry, it can be an extreme challenge to negotiate and secure the property you are interested in.”
The pair have experienced opening a restaurant both pre and post-pandemic. They opened ARDO in 2015, and DOVA in 2021. “Prior to the pandemic there were far less vacancies, so landlords were more willing to negotiate with you on the terms of the lease,” adds Nicosia. “The real estate market took a huge hit during the pandemic so landlords became incredibly strict on their terms for restaurants. Interestingly, despite the pandemic, rental costs have remained high and insurance costs continue to mount. We recently secured the space for our fourth business and third restaurant and these challenges continue.”
Location, Location, Location
For what would become DOVA, Nicosia says she and Marotta were drawn to the private patio of the real estate at 229 Carleton Street, as well as the opportunity it offered to have a unique private dining room. “They were both features our first restaurant, ARDO, didn’t have,” says Nicosia. “We could see the potential in each space and picture what it could become. We took our time looking as it had to feel right and tick all of the boxes.”
The spot is located in the city’s rapidly up-and-coming Cabbagetown neighbourhood. “We wanted to bring something new to the Cabbagetown area that was missing,” says Marotta. “We love the east end of Toronto and wanted to stay in that neighbourhood. We saw DOVA’s current location a few years prior and when it came on the market again the timing was right.”
Local entrepreneur and beverage expert Evelyn Chick, on the other hand, wasn’t looking for bar space at all when she stumbled upon the Parkdale spot that would later become Simpl Things Cocktail & Snack Bar. “I was actually looking for a secondary event space, but Simpl Things came along and it was such a unique space and my vision was so clear as to what I can do with it – to span across two different addresses, with a massive footprint for a patio that will double the size of the restaurant,” says Chick. “The area is difficult because it’s Parkdale, which to some can be rough around the edges, but with the right aesthetics, unique concept, and good hospitality it can be a destination spot. It is a bit tucked away from the chaos of Queen Street, so often people refer to it as a ‘hidden gem.’”
Securing a place to call home is just the first of many challenges for restaurant and bar owners. “It’s challenging in terms of everything being extremely expensive to maintain, including labour, maintenance, insurance…even if the base rent is ‘cheaper,’” says Chick. “New restaurant owners may find a property that they like, but once they get into the build-out stage, budgets are tight as the cost of materials start to increase rapidly and it’s much harder to make your investment back.”
Preparing For An Ever-Changing Market
Eklove calls it “a wash” when asked whether the GTA is gaining or losing wining and dining spaces. “We are losing some spaces downtown, and gaining some spaces in the suburban markets,” says Eklove. “I think we’re in the middle of some uncertainty, but in the long term, there’s no doubt that we’re going to gain more food and beverage spaces.”
Along with this, commercial rents and property values will continue to rise, says Eklove. “It may not be in the foreseeable future, but long-term, I’m confident this is the case.” For those currently in the market for restaurant or bar space, available supply varies throughout the GTA, says Eklove.
“Supply is limited, especially in the suburban markets, because construction costs and borrowing costs have increased significantly, so builders are not building new plazas,” says Eklove. “So, there’s certainly a shortage of supply in the suburban markets, where landlords are getting multiple offers for 1,200-sq.-ft USR space. In the downtown core, there are more options, but people are still quite nervous. The population in the downtown core is nowhere where it was pre-pandemic. People are being careful; they don’t know if a recession is going to hit, and lending and construction costs have increased, so people are being judicious.”
For those looking to secure bar or restaurant real estate, doing the research is key. “Do your homework, research the market, have a solid concept and stick with it, even if small parts of it need to be flexible,” says Chick. “Think about variables and costs involved, as it’s often much more than anticipated. Go through the proper channels, cover your bases, and don’t be frugal with things that have to be done properly – like licensing, plumbing, electrical etc. It will save you a lot of headache in the long run.”
Hiring an in-the-know professional or two also doesn’t hurt. “Hire a seasoned lawyer who is an industry expert and don’t be afraid to push back to secure terms that make sense for you and your business,” says Nicosia. “Know what terms you are willing to negotiate and ones that are off the table because they will directly affect your business. The terms you are able to negotiate will make or break your success.”
Marotta also stresses the importance of finding a strong real estate agent that you trust completely and who has dealt with restaurant locations and negotiations before. “You need to find the right person you can count on,” says Marotta. “We are so grateful we have found the right fit. Finally, don’t be afraid to reach out to industry peers. It will surprise you how much anyone in the hospitality field wants to see fellow restaurateurs thrive.”
For diners, today’s uncertain culture may mean higher food prices – something patrons are just going to have to accept (or stay home). But at the end of the day, most of the city’s restaurant owners are driven by passion over profit. And, if we have to dish out a few more dollars to experience their culinary creations, so be it.
“Despite the uncertainty, I’m very bullish about Toronto,” says Eklove. “It’s a great city. I think with all the immigration that the government is promising, the city is going to continue to explode. So, although there are some short-term growing pains in the food and beverage industry, I’m very optimistic about the city in the long term.”
The joint venture partners unveiled the initial roster of retail on Friday, and said that retail tenants from Structube to Sephora are expected to “physically open in phases” through 2023 and into 2024.
Ten years after construction kicked off at The Well — a 7.75-acre mixed-use development coming to Toronto’s King West district — RioCan and Allied Properties have unveiled the initial roster of retail tenants set to open up in the space.
The joint venture partners announced the roster on Friday and said that retail tenants are expected to “physically open in phases” through 2023 and into 2024.
In the coming months, The Well will welcome recognizable brands like Adidas, Indigo, Structube, The Bone & Biscuit, Bailey Nelson, Le Creuset, Sephora, Frank & Oak, and Shoppers Drug Mart.
Meanwhile, boutique retailers like Black Rooster Décor, Design Republic, Giotelli, Gotstyle, Groovy Shoes, and Suetables will lean into the area’s “King West character.”
As well, three new Oliver & Bonacini restaurants will open doors at The Well, including Aera restaurant, La Plume, and The Dorset.
The Wellington Market (with a diverse assortment of 55 vendors), National (a beer market “inspired by North American tastes”), and a variety of “new concept” restaurants and bars (including Bridgette Bar, Mandy’s Gourmet Salads, L’Avenue, and LuLu Bar) will also be joining the dining mix.
In the health and wellness niche, The Well will welcome fitness and wellness boutique Sweat and Tonic and a full-service medical clinic HealthOne Medical & Wellness.
Finally, a number of cafés (De Mello Coffee, Fix Coffee + Bikes, and Quantum Coffee), bank branches (Bank of Montreal, Royal Bank, and Scotiabank), and beauty and salon services (Etiket, Room1six, Vie Nail & Beauty Salon) — as well as a fully automated, cashier-less grocery store, known as Aisle 24 — will help establish The Well as something of a one-stop shop.
“As we finalize additional lease deals, more announcements of exciting retailers opening at The Well are forthcoming,” said Friday’s announcement. “To celebrate the openings, a ribbon cutting event is scheduled for November 17, 2023 at The Well.”
RioCan and Allied also gave an update on the office and residential components of The Well on Friday, saying that 98% of the 38-storey, 1.2-million-sq.-ft office space is presently leased.
FourFifty The Well — one of three residential rental buildings in the development — commenced pre-leasing in March 2023 and is currently 21% occupied and 30% leased. The remaining rental buildings have achieved 65% leased in aggregate.
Occupancy also commenced for two of the three condominium buildings that will be encompassed in The Well.
Eight properties spread across the Greater Toronto Area being marketed by RBC, CBRE
CanFirst Capital Management has put eight Ontario logistics and industrial assets totalling 1.05 million square feet on the market through RBC Capital Markets Real Estate Group and CBRE.
The properties are in key transportation corridors near 400-series highways, and in close proximity to good labour pools in Burlington, Mississauga, Scarborough, Etobicoke, Markham and Cambridge.
There are four single- and four multi-tenanted properties and 89 per cent of the warehouse space is mid- and large-bay.
The properties have extensive shipping and receiving capabilities, clear heights providing ample warehousing capacity, and varying unit configurations to accommodate a variety of occupier types.
Good income growth opportunities
The portfolio is 99 per cent leased to a high-quality and diverse tenant roster representing the energy, transportation and logistics, construction and building materials, and chemical technology sectors, among other industries.
Average in-place minimum rents across the portfolio are $12.51 per square foot, approximately 55 per cent below market rates.
The properties have a relatively short weighted average lease term (WALT) of 2.5 years, allowing a future owner to drive meaningful net operating income growth in the near term as leases expire and rents are rolled to market.
The Greater Toronto Area’s industrial leasing market continues to experience historically high average net rents and had a vacancy rate of just 0.8 per cent in the second quarter.
These factors are expected to spur strong interest in the properties from different types of investors. The preference is to sell the portfolio in its entirety, but consideration may be given to the right offers for either individual properties or clusters.
No bid deadline has been announced for the properties.
The eight properties
Here’s a rundown of the eight properties:
71 Maybrook Dr. in Scarborough is a 44-year-old, 136,340-square-foot building on a 7.19-acre site that’s fully occupied by one tenant with a WALT of 4.5 years. Its clear height ranges from 18 to 60 feet and it has three truck-loading dock doors and eight drive-in doors.
81 Maybrook Dr. in Scarborough is a 37-year-old, 72,721-square-foot building on a 3.66-acre site that’s fully occupied by two tenants with a WALT of 1.5 years. It has a 22-foot clear height, six truck-loading dock doors and two drive-in doors.
400 Cochrane Dr. in Markham is a 39-year-old, 187,204-square-foot building on a 7.5-acre site that’s fully occupied by two tenants. Its clear height ranges from 18 to 25 feet and it has 12 truck-loading dock doors and two drive-in doors.
71, 81 and 91 Kelfield St. in Etobicoke is a 63-year-old, 113,178-square-foot complex on a 6.84-acre site that’s 96 per cent occupied by 10 tenants with a WALT of 2.2 years. It has a 14-foot clear height, 22 truck-loading dock doors and five drive-in doors.
6811 Goreway Dr. in Mississauga is a 48-year-old, 107,000-square-foot building on a 4.85-acre site that’s fully occupied by one tenant with a WALT of 0.9 years. It has an 18-foot clear height, 12 truck-loading dock doors and two drive-in doors.
1180 Corporate Dr. in Burlington is a 36-year-old, 70,639-square-foot building on a 4.35-acre site that’s fully occupied by one tenant with a WALT of four years. It has a 20-foot clear height, four truck-loading dock doors and one drive-in door.
1121 Walkers Line in Burlington is a 65-year-old, 288,161-square-foot building on a 14.87-acre site that’s fully occupied by two tenants with a WALT of two years. Its clear height ranges from 24 to 36 feet and it has 17 truck-loading dock doors and six drive-in doors.
400 Jamieson Parkway in Cambridge is a 20-year-old, 75,072-square-foot building on a 5.02-acre site that’s fully occupied by one tenant with a WALT of 1.1 years. Its clear height ranges from 22 to 40 feet and it has eight truck-loading dock doors and one drive-in door.
CanFirst and its funds
Toronto-based CanFirst, founded in 2002, is a commercial real estate private equity company that co-invests with institutional and private high-net-worth investors in industrial and office properties that have growth potential.
It’s involved with development, redevelopment, asset and property management, financing, leasing and construction.
The properties in the Ontario industrial portfolio that’s on the market were acquired through CanFirst’s closed-ended CanFirst Industrial Realty Fund (CIRF) program.
Seven CIRF funds have closed and CanFirst has recently been fundraising for CIRF VIII.
Broccolini will develop, build, own and property manage a 379,000-square-foot distribution centre for Lactalis Canada Inc. in Oshawa.
The project at 1680 Thornton Rd. N., part of the growing Northwood Business Park, has broken ground and is scheduled to open in late 2024.
Lactalis Canada is a subsidiary of France-based Lactalis Group and is behind such dairy brands as Cracker Barrel, Black Diamond, Balderson, Astro and Lactantia. The company has signed a long-term lease for the new facility, which will become Lactalis Group’s largest distribution centre in the world.
“We are seeing a lot of demand from users who, more so than in the past, are actively in the market early on in the process,” Broccolini director of real estate development Toni Wodzicki told RENX.
“They’ve learned in the last five years with the rate that some rents have escalated that if they can get in the market early enough, and they have specialized needs, they can work with a group like ours to find a solution that’s more specialized and not just spec.”
The Oshawa building will consolidate multiple shipping locations used to service Lactalis Canada’s cheese and tablespreads category, including an internally operated Belleville, Ont., distribution centre, into a central, modern facility to accommodate the company’s long-term growth while increasing capacity and efficiency.
The lease agreement for the GKC Architecture and Design-designed building was facilitated by CBRE.
The centre is expected to create approximately 80 jobs and will be able to store up to 60,000 pallets in both cooler and freezer environments.
Building will have several green features
Environmental, social and governance considerations are currently playing a bigger role in industrial real estate development, especially among institutional investors and users with specialized needs.
The Oshawa facility will be zero-carbon ready, with the potential to be Zero Carbon Building certified, as are all new Broccolini industrial developments. It will also incorporate a number of other environmentally friendly features.
The use of energy-efficient lighting controls, equipment and high insulation values will reduce the power load imposed on the refrigeration system.
Heat generated from the refrigeration system will be fully reclaimed and used to heat the facility’s offices and melt snow on the truck apron.
A white roof will reduce the heat island effect and solar panels that can be installed on the roof in a future phase would provide renewable power to partially or completely offset reliance on the power grid.
Broccolini has a large industrial pipeline
The Oshawa distribution centre for Lactalis Canada is just one of several industrial developments Montreal-headquartered Broccolini has underway or has future capacity for in Quebec and Ontario.
Other projects scheduled for completion next year include: a million-square-foot Amazon distribution centre in Cambridge, Ont.; and a 140,000-square-foot commercial warehouse and CAT remanufacturing facility in Bradford, Ont.
The 74-year-old, third-generation family-owned business has a pipeline of more than 2,300 acres of land with the potential to develop more than 20 million square feet of industrial space.
“Given our expertise in development and construction, and some of the relationships we’ve built with some leading global companies, we’ve been quite tactical about finding near-term, large-scale development sites in secondary and tertiary Ontario markets,” Wodzicki noted.
“We don’t have plans to develop on spec on those sites, but to be patient and find the right partners for them.”
Speculative and design-build developments
Broccolini is speculatively developing about 700,000 square feet of industrial space and also has numerous design-build projects totalling a few million square feet under development.
“We’re generally a little bit more cautious on spec development right now, but it is case by case,” Wodzicki said. “It’s dependent on the market and the site.
“In Montreal we currently have one project under development on spec and in Toronto we have two. We do not have any in what I would consider secondary and tertiary markets.”
Wodzicki said there’s a growing appetite from companies to have buildings designed specifically for their needs which they can acquire and own.
Broccolini’s position as a privately owned builder, developer, fund manager and property manager gives it flexibility on how it approaches the market and the ways it can accommodate the needs of occupiers.
“We own and manage over 21 million square feet of real estate between Quebec and Ontario, but we’ve built over 50 million square feet of industrial space,” Wodzicki said.
“Some of that is third-party construction because that is also an element of our business.
“But from our development side, we can certainly be nimble and flexible in terms of the solutions we can provide our clients.”
Industrial real estate outlook
Wodzicki said there has been a resurgence in manufacturing in Ontario and Quebec, particularly in the automotive and food sectors, so it’s not just distribution and logistics centres driving industrial real estate demand.
High immigration numbers, especially to major Canadian cities, should ensure continued demand for industrial space as more people will need more goods in a timely manner.
The slow municipal approval process in many Ontario markets has delayed development applications and, in turn, constrained supply.
There’s been significant industrial rent escalation over the past five years as demand far outstripped supply, but the market seems to be moderating.
“As the market begins to stabilize and get to a more natural demand and supply balance, you will see a flight to quality if the tenants have choice, which for the past five years many tenants haven’t, so they were forced into renewal scenarios,” Wodzicki said.
“I think what you might start seeing, and why we remain bullish on our ability to deliver new projects, is that higher A-class rents will hold.
“But what you might start to see is a higher rental spread between A-class and older-generation product.”
Mazyar Mortazavi loves to quote urban theorist Jane Jacobs, who in her landmark book The Death and Life of Great American Cities remarked: “Old ideas can sometimes use new buildings. New ideas must use old buildings.”
As chief executive officer of Toronto-based real estate developer TAS, these eight words, penned more than 60 years ago, guide Mr. Mortazavi whenever he considers a new project or investment.
Repositioning and retrofitting commercial properties for adaptive mixed reuse is TAS’s raison d’être and what led Mr. Mortazavi to invest in the historic Coppley building in Hamilton.
The neglected 167-year-old pair of attached buildings, on the corner of York Boulevard and MacNab Street in the downtown core, had sat empty since the former textile factory, which produced made-to-measure men’s wear, moved its operations three years ago four blocks away to 107 MacNab St. N.
Constructed by Scottish stonemasons, the building is one of the few surviving pre-Confederation commercial structures in the city. Thanks to TAS, which purchased the building in November, 2021 – along with minority owner the Hamilton Community Foundation (HCF) – the site is being reimagined into a sustainable social and economic hub.
A second-generation development company, TAS uses real estate not just for profit, but also for a social purpose. This is TAS’s first Steeltown project. What attracted them was the site’s potential to bring new ideas to an old building and protect one of Hamilton’s oldest structures from the wrecking ball.
“There is a deep culture and context to the Coppley,” Mr. Mortazavi explains. “I’m a big believer in maintaining the cultural fabric of a city and its cultural foundation. To paraphrase Jacobs, ‘old buildings give new ideas.’ I see lots of that in Hamilton.”
“Our aim is to retain as much of the existing building’s character while creating updated spaces that are functional and highly accessible,” he adds.
This is a local landmark that needs preserving. Collaboration and connectedness are keys in designing the space, along with affordability and access-for-all to shared amenities.
— Mazyar Mortazavi, chief executive officer, TAS
The HCF drives positive change by connecting diverse people, ideas and resources to create an inclusive city; it makes sense that they are a founding minority investor – and the anchor tenant – of the reimagined Coppley building.
“This landmark has meant so much to the vibrancy of our city’s core and the lives of many Hamiltonians who once worked here,” says Terry Cooke, CEO of HCF. “[The building] is going to be fabulous when it’s finished. We look forward to working and partnering with TAS to deliver a new hub for commercial and social activity in downtown Hamilton.”
TAS looks not just for historic buildings, but locales with a rich history already well on the renewal path. Gentrification it is not. Rather, TAS’s goal is the integration and revitalization of unloved pockets of cities. One of its core objectives, Mr. Mortazavi says, is to use social capital to create neighbourhoods – and ultimately cities – where people can thrive and belong.
This is the case with the Coppley, which is another piece of the continuing urban renewal of Ward 2 (Hamilton’s downtown core), which is once again becoming a vibrant community hub.
Across the street from the former luxury clothier is the historic Farmers’ Market at 35 York Blvd., which, along with the Central Hamilton Public Library that shares the space, has been in this location since 1980. Nearby is another heritage building – the global headquarters of G.S. Dunn Ltd., the world’s largest dry mustard miller, founded in Hamilton in 1867.
The redevelopment of commercial spaces in Hamilton’s core also includes the planned $500-million new entertainment hub that incorporates FirstOntario Concert Hall, the FirstOntario Centre, the Hamilton Convention Centre and the Art Gallery of Hamilton.
The Coppley building will house the new HCF office, along with a mix of other community-centred businesses, not-for-profits and retailers on the ground floor that might include a microbrewery and an independent coffee shop.
The Coppley is another piece of the ongoing urban renewal of Hamilton’s downtown core that already includes a farmers’ market, library and a planned $500-million new entertainment hub.INDUSTRYOUS PHOTOGRAPHY
Another feature of the historic building is a pair of interior courtyards, originally designed for horse-drawn carriages to bring in supplies. TAS plans to reimagine these spaces as a year-round covered community gathering spot for art crawls, public events, lectures and live music.
“It’s a unique project,” says Cameron Kroetsch, councillor of Ward 2. “I’ve toured the building and talked to others about TAS’s vision and how they want to make it an inclusive space, not just by housing the Hamilton Community Foundation, but they also have plans to include BIPOC groups as tenants.”
Before blueprints were drafted, TAS solicited feedback from more than a dozen local community organizations. Themes that emerged from these meetings included several conclusions that TAS is taking to heart as it begins design.
“Heritage is important,” Mr. Mortazavi explains. “This is a local landmark that needs preserving. Collaboration and connectedness are keys in designing the space, along with affordability and access for all to shared amenities. This fits our community hub strategy, which we’ve used to lead the adaptive reuse, lease-up and operations of underutilized warehouse spaces across the GTA.”
Mr. Kroetsch says he’s happy the Coppley is being preserved “as almost every other building around there is being demolished.”
“We went through a similar redevelopment 50 years ago when the entire downtown core around city hall was demolished to make way for Hamilton Place and the convention centre and it did not go well if you read the history; there was a lot of acrimony, construction delays and problems with the developer,” he explains. “There is so much construction planned for the downtown over the next five years. I’m glad they are staggering these projects and taking their time.”
Originally set to reopen as part of Phase 1 in 2023, the pandemic and a few other delays lengthened the project’s timeline. With the removal of the old textile equipment, the interior demolition work is now complete, and the new target for completion of Phase 1 (mostly office space designed to promote interaction between tenants with some ground-floor retail) is mid-to-late 2024.
“We see ourselves as just a piece of the puzzle, not the solution,” Mr. Mortazavi says.
The Canadian retail landscape experienced positive but mixed results in the first half of the year, with stronger performance being reported in select formats or nodes, according to the CBRE’s H1 2023 Retail Rent Survey.
“The current economic climate, inflation and elevated interest rates have paused leasing activity amongst some retailers, but not all. The most active category groups vary by market and are most frequently led by QSR and personal services. As has been the case, good real estate continues to be leased quickly, resulting in limited vacancy amongst the most in-demand formats, particularly those that are unenclosed,” said the report.
“This is expected to continue, and when paired with a softening supply pipeline – a byproduct of higher construction costs – could result in further rental appreciation over the next six months.
Bloor Yorkville at Bay Street (Image: Dustin Fuhs)
“Select cities have noted challenges with downtown areas, citing slower foot traffic from reduced office occupancy. This sentiment and its subsequent impact on urban retail formats are not uniform across the country; however, this category represents the greatest share of rent increases reported in this survey. In fact, five of 11 markets saw rental appreciation in two or more key urban nodes. High streets in Toronto, namely Bloor-Yorkville, remain a top destination for high profile retailers. Meanwhile, Sainte Catherine Street West in Montreal has seen an uptick in activity with initial phases of construction of the street revitalization nearing completion.
“More upward market movements were reported in H1 in comparison to prior editions of this report with 29 noted increases and only one reduction in benchmark rent prices. Geographically, Montreal and Calgary reported the highest number of rental rate increases, respectively up in eight and six formats or key urban areas.”
Key findings of the report:
Open-air centres are reigning supreme with community (unenclosed), neighbourhood and convenience centres noting increased rental rate ranges in three of 11 markets. Demand remains strong for space in these formats, especially if grocery or food anchored;
Key urban areas face various headwinds, however demand remains strong for the most desirable nodes: 30 per cent of high streets or streetfronts included in this report saw rental rate appreciation;
Mixed-use, both urban and suburban, is gaining traction with each noting rental rate increases in three of 11 markets;
Montreal and Calgary reported the highest number of rental rate increases, respectively up in eight and six formats or key urban areas. This was followed by Halifax (+5) and Toronto (+4); and
Sentiment remains optimistic across markets despite economic conditions. Activity remains positive, with best- in-class locations leasing quickly.
“We’re back in retail,” said Kate Camenzuli, Vice President of CBRE and Practice Lead, Occupier for Retail, Canada and Cross-Border. “Good real estate is moving quickly. We’re seeing growth in the retail sector. High streets are continuing to grow.
“We’re excited to see how it continues to be a very tight market. The difficulty is that when it’s not a tight market it’s usually not super active. So it’s a very active market and across all metropolitan markets.
“I think we are seeing really good growth back into the cores of the city. I think we are seeing continued growth in community-based areas and suburban malls and streets.
“Overall high tides rise all ships and that’s one of the stories for this quarter that we are definitely seeing.”
Camenzuli said one trend that the retail industry is experiencing is groups that are traditionally street and new innovative street retailers are now coming back to the market.
“So we might see high street, suburban high street and sort of the out of enclosed malls outperform enclosed malls only because those are the new retailers right now that are coming into the market,” she said. “But the enclosed mall landlords have done a great job at attracting those traditional street retailers into the malls.”
She said moving quickly on good real estate is going to continue to be important.
Estes Express Lines has agreed to acquire the real estate of bankrupt trucking company Yellow for at least $1.3B. The portfolio includes more than 160 truck terminals, a kind of property that is rarely traded, according to The Wall Street Journal.
Since Yellow is currently in Chapter 11 bankruptcy, which will result in its ultimate liquidation in an effort to pay off its roughly $2.5B in debt, the sale to rival trucking line Estes will be subject to the court’s approval. It could be superseded by a better offer.
“You are going to have a tremendous amount of interest in this portfolio,” Wofford Advisors partner Chris Wofford told the WSJ.
Virginia-based Estes currently owns about 155 U.S. industrial and office properties.
The last time there was a truck terminal sale of this magnitude was in 2002, after the bankruptcy of Consolidated Freightways, CoStar reports.
Yellow will also sell its roughly 12,000 trucks. The company was the fifth-largest transporter of goods in the United States — and at one time, the largest — but went bankrupt in July after refinancing its debt proved impossible.
A large part of the debt was due to a $700M federal government loan that the company took early in the pandemic period, CBS reports. At the time of its closing, Yellow had about 10% of market share in the long-distance trucking business.
Walmart and Home Depot, which were among Yellow’s larger clients, halted shipments ahead of the bankruptcy to prevent goods from being lost or abandoned, Reuters reports.
Management blamed the Teamsters union for the company’s demise, while the Teamsters blamed management.
The initial development at the 20-acre campus features an eight-megawatt data centre with 48 megawatts of planned expansion capacity.
The campus is located at 3950 Danforth Ave. on a site formerly owned and occupied for decades by pharmaceutical company Eli Lilly.
“In a market that continues to see a high absorption rate for data centre capacity, STACK is proud to deliver the first phase of our Toronto campus,” Brian Cox, STACK Americas CEO, said in a statement. “We look forward to deploying the next phase of this flagship campus to address our clients’ needs while vitalizing the local economy.”
STACK, headquartered in Denver, now has 2.5 gigawatts built or under development, and over four gigawatts of expansion and potential capacity.
About half of the current 8MW capacity in Toronto remains available, a company spokesperson told RENX.
“STACK is open to exploring requests from clients interested in securing highly scalable capacity options at its 56MW Toronto flagship campus,” the spokesperson wrote in an email reply to questions from RENX. “Among the options of build-to-suit, powered shell, and commissioned capacity, 4MW of powered shell are immediately available with an additional 48MW available in the future phases.”
STACK’s Toronto campus
STACK partnered with Toronto-based developer First Gulf Corporation to deliver the first phase via the renovation of an existing building.
First Gulf has developed over $5 billion worth of office, industrial, mixed-use and retail properties since its founding in 1987.
The developer had acquired the Danforth property in December 2020 for $24.6 million, according to data from Avison Young. STACK came onboard as the tenant when the companies were introduced via a broker.
“Toronto, with its incredible economic growth, access to power and connectivity, is one of North America’s most exciting data centre expansion opportunities,” Cox said in a media release from the campus’ May 2021 announcement.
The next 24-megawatt phase of development, with planned delivery in Q2 2026, will use 100 per cent renewable energy. The STACK spokesperson told RENX site preparation work is underway for the expansion.
A release notes the campus is six miles from 151 Front Street, Toronto’s largest carrier hotel and the primary internet exchange point in the city. That property was recently sold by Allied Properties REIT to KDDI Corp. of Japan as part of a $1.35 billion data centre portfolio transaction which closed in August.
It also has facilities in Atlanta, Chicago, Dallas–Forth Worth, New Albany, Northern Virginia, Phoenix, Portland, the Silicon Valley and in Calgary. It is considering additional expansion in Canada.
“STACK is exploring additional key locations in Canada while its initial focus is on Toronto, due to its offerings as a top commercial, financial, and industrial hub and central location with contracted access to power and robust connectivity,” the spokesperson wrote. “Home to the Toronto Stock Exchange, this market continues to see a high absorption rate for data centre capacity, and STACK’s campus provides right-sized capacity for cloud service providers.”
The company is also building an 84-megawatt campus in Frankfurt, a 72-megawatt campus in Osaka and a 72-megawatt campus in Melbourne.
According to a March report from Arizton, the Canadian data centre market will experience a compound annual growth rate of 8.70 per cent from 2022 to 2028, reaching approximately $7.38 billion in investments by that time.
New development and intensification, focus on needs-based anchor tenants key to growth strategies
Bricks-and-mortar retail has performed better than many expected after lockdowns, increased online shopping and other challenges brought on in recent years by the pandemic and ensuing economic uncertainty.
A panel discussion moderated by National Bank Financial director and real estate research analyst Tal Woolley at the Sept. 12 RealREIT conference at the Metro Toronto Convention Centre examined how retail real estate owners have adapted and what they’re planning as they move forward.
Panel members also talked about redeveloping and intensifying their properties by adding residential components to create mixed-use communities.
First Capital REIT
Toronto-headquartered First Capital (FCR-UN-T) owns, operates and develops grocery-anchored open air centres in Ontario, Quebec, Alberta and British Columbia, and has $9.6 billion in assets under management.
It has a 22-million-square-foot portfolio and a density pipeline of more than 24 million square feet.
Executive vice-president and chief operations officer Jordan Robins said most of First Capital’s retail tenants provide essential services and its grocery stores, pharmacies, liquor and beer stores largely remained open during the worst of the pandemic, then ramped up their programs as the effects waned.
First Capital is about halfway through an enhanced capital allocation and optimization program that will see it sell off $1 billion of assets over a two-year period.
“We’ve had tremendous success crystallizing or monetizing the value that we created through our entitlement program that started several years ago,” Robins said.
While historically First Capital has done more portfolio sales, the current plan largely revolves around individual properties. Robins said most purchasers have been individuals, family offices and, to a lesser extent, institutions.
While there’s a strong demand for grocery-anchored assets, First Capital won’t be selling any as part of its optimization program – it is actually looking to acquire more.
However, there’s a wide bid-ask spread between buyers and sellers of retail properties which Robins feels has slowed transaction activity.
Given cost escalations and lengthy municipal approval processes, Robins said the cost of building new retail space significantly exceeds the value of existing space. The opportunity costs of tenants looking to move into new space have also risen.
“Renewal rents for those tenants who decide to stay have also escalated,” said Robins. “We’re seeing meaningful organic growth out of our portfolio because it is so time-consuming for tenants to find alternate space and so expensive for them to find alternate space.”
First Capital has looked at every property in its portfolio to identify which ones can be intensified and if the value of the density is greater than the income in place. For those that pass the test, it creates master plans that can be submitted for entitlements to extract that value.
Those properties could then be sold or intensified either by First Capital on its own or with partners.
Oxford Properties
Toronto-based Oxford Properties is a real estate investor, developer and manager that, along with its platform companies, manages $87 billion of assets on four continents.
That represents more than 158 million square feet of commercial space, more than 3,400 hotel rooms, nearly 10,000 residential units and a substantial credit portfolio.
Oxford’s Canadian portfolio is comprised of 52 assets in seven cities encompassing 30 million square feet and valued at $18 billion. The Canadian retail portfolio includes eight properties representing 10 million square feet and valued at $7 billion.
“There was a pleasant surprise with tenant demand very quickly after our doors started to reopen,” vice-president of operational strategy Claire Santamaria said.
“That went back to our strategy around the densification of our retail sites and also on the strategic leasing that we’ve had, particularly at Square One, Yorkdale and Scarborough Town Centre.”
There’s been a shift in the tenant mix away from fashion and increases in electronics and specialty retail. A bigger focus has been placed on experiential retail and educational spaces, according to Santamaria.
E-commerce has stabilized and isn’t growing exponentially as it did during the height of the pandemic, and retailers are realizing the value of physical spaces in their growth plans.
Since 2015, Oxford has been moving through the master-planning process with local municipalities for properties where it has excess land that can be intensified. These 20-year plans might previously have incorporated a large office component, but are now focused on adding housing.
“Our strategy around destination resilience and around our retail assets still remains at the forefront for us,” said Santamaria. “We’re certainly taking advantage of the tailwinds that the residential market offers.
“Those are capital-intensive, but our development team and the pro formas associated with the building of that residential is still something that we’re looking to zone and execute on.”
Plaza Retail REIT
Fredericton-based Plaza Retail REIT (PMZ-UN-T) is a value-add-focused owner, developer and redeveloper of retail assets responsible for 240 properties totalling almost nine million square feet in six provinces from Ontario to Newfoundland and Labrador.
“We own open-air, central needs, value, convenience-style assets occupied by national retailers,” chief executive officer and president Michael Zakuta said.
“We’ve grown through development and redevelopment, whether it’s a new development based on tenant demand, converting an enclosed mall into an open-air strip or converting an empty box into a multi-tenant strip.”
Tenant demand picked up pretty quickly after lockdowns ended and it remains robust, particularly for quick service restaurants, according to Zakuta.
Plaza’s grocery and pharmacy-anchored strip malls aren’t for sale despite plenty of offers coming in.
Plaza has been actively selling small, non-core assets, which Zakuta said has been very rewarding as many of the purchasers have used low leverage or all-cash while paying a premium price.
“We’re taking that capital and we’re investing in land or land assemblies,” Zakuta explained. “We’ve been very active buying land for new developments and some of it gets sold off at a profit to residential developers for horizontal development, not vertical.”
Primaris REIT
Toronto-headquartered Primaris REIT (PMZ-UN-T) owns and manages 35 retail properties across Canada valued at approximately $3.5 billion.
This includes 22 enclosed shopping centres totalling approximately 9.8 million square feet and 13 unenclosed shopping centres and mixed-use properties encompassing approximately 1.6 million square feet.
Primaris is the only Canadian REIT specializing in the acquisition, ownership and management of enclosed shopping centres in Canada.
“One of the big drivers of the return of appetite for retailers to expand was resolving e-commerce and getting it integrated into their omni-channel offering,” chief executive officer Alex Avery said of the post-pandemic period.
“I think that that has clearly happened and we’ve got demand from grocery, drugs, pets, athletic clothing, cosmetics and footwear. It’s pretty much across the board.”
The closure of Sears and Target stores over the past eight years prompted Primaris to invest a large amount of capital in repositioning malls where those retailers were located.
Avery remains optimistic and Primaris is in acquisition mode, recently purchasing the 585,000-square-foot Conestoga Mall in Waterloo from Ivanhoe Cambridge for $270 million.
“I think what we’re going to see over the next couple of years is a much more normal operating environment than we’ve seen in seven or eight years,” he said. “What has happened over that intervening period of time is that the inventory of mall space per capita in Canada has declined by 20 per cent.
“That’s a function of both the demolition and redevelopment of some malls, but also the absence of any new construction or competition. So we feel like we’re pretty well-positioned.”
Primaris is in a unique place as a public company with a mandate to acquire enclosed malls, large assets with price tags at least as large as Conestoga Mall.
“It’s a platform type of investment where having one mall isn’t a terribly good business strategy,” Avery said. “You need to have multiple locations and relevance to retailers to build the platform to manage the assets.”
Primaris won’t develop anything more than two storeys as it sticks to its core asset class of enclosed shopping centres to maximize returns.
Primaris owns about 1,000 acres of land, with most properties in the 40- to 70-acre range, that it will consider selling. It’s currently selling three parcels and will use the proceeds for acquisitions or buying back stock at a discount to NAV.
In the latter half of 2023, the narrative around Canada’s office market has continued to evolve. Trends emerging in this dynamic landscape are influenced by stronger-than-expected labour statistics, remote work proof-of-concept, inflation and increasing interest rates, and the Great Resignation of 2021.
These are among several factors shaping the trajectory of office tenancy.
Shifting lease dynamics and changing demands
The national office vacancy is on track to peak at roughly 15 per cent by the end of next year before giving way to a recovery, the data in Colliers’ Intent to Decision Making in Office Real Estate report suggests.
Over the past few months, we’ve seen that leasing interest and activity have picked up momentum, signalling resilience in the face of uncertainties, while the cadence of sublease space hitting the market is gradually waning across Canada.
These are encouraging signs that suggest we could be approaching equilibrium in the market.
However, persistently high interest rates and inflationary pressures continue to impact companies’ abilities to channel investments into their core operations which casts a shadow over the demand and absorption of office space.
We are witnessing clients express a sustained demand for newer, class-A buildings as tenants prioritize holistic work environments that encourage collaboration, provide elevated amenities and address the wants and needs of employees.
It has become a competition between the comforts of working from home versus the conveniences of life with an amenity-rich, well-located office space.
Adapting to the post-pandemic hybrid workspace
Post-pandemic, we have seen a paradigm shift in office space strategies as organizations strive for a delicate balance between remote work and on-site presence.
Organizations are proceeding with office occupancy decisions based on a combination of cautious optimism and pragmatic considerations.
While major office occupancy decisions are being deferred by some, others are embracing a right-sizing approach that aligns with hybrid operating models.
Employee office attendance is a key predictor in lease renewals, Colliers’ office real estate report said.
For every additional day a majority of employees work at the office, companies are 10 percentage points more likely to renew their lease. Furthermore, companies are most likely to keep their current square footage of space should employees work at the office four days per week.
The crux lies in cultivating workplaces that are efficient and foster talent retention and attraction.
Although C-suite leaders yearn for a return to full-time in-office work, a gradual return to pre-pandemic work norms is emerging as the most plausible long-term approach as employees value flexible work arrangements and compelling compensation structures.
Leveraging the tight labour market
An unexpected scarcity of skilled labour is reshaping the outlook on office spaces.
Managers are shifting their focus to upskilling current employees to retain talent and bridge the skills gap within their companies.
Upskilling approaches such as internal training, shadowing and mentorship require a more dynamic work environment featuring flexible layouts, collaborative workspaces and tailored building amenities.
The link among workspace design, corporate culture and talent goals is becoming increasingly evident.
Innovations propelled by tenant demands
Smart Building technology and the integration of environmental, social and governance (ESG) initiatives, such as wellness accreditation, are commanding attention during procurement processes.
With the rising demand for benefits such as remote collaboration, exercise classes and gym access, organizations are looking for office buildings that offer the latest technology to enable them to deliver high-quality experiences.
Efforts to strike the perfect balance between the convenience of remote work and access to well-located office space with the latest amenities are appearing to lead the trend of flight-to-quality in new office space leases.
It’s also important to assess the data.
This summer, Colliers released the findings of a survey that polled approximately 500 Canadian office workers regarding the factors that influenced an employee’s decision to work at the office. The survey included a diverse representation across income levels, gender, age, size of company and geographic location.
The top three factors significantly correlated to office presence were: company-mandated days, the type of workspace and the time and cost of the commute.
Diversity, equity and inclusion has also rightfully become top-of-mind when designing and redesigning spaces. Careful thought and planning are going into innovative solutions that make office spaces accessible.
The benefits extend beyond creating spaces that are more physically accessible – they include an employee-first approach like the right to light and ergonomic design.
Inclusive spaces cultivate a positive culture that gives all employees access to the various levels of the organization, drives recruitment and ensures retention.
Dispelling myths and misconceptions
In the early days of pandemic recovery, a reductionist narrative emerged in the media that suggested the office market is obsolete. This simply isn’t true.
Out of disruption comes innovation and we are seeing more organizations searching for workplace advisory services or taking a more serious in-house look at their future office.
Collaborative work environments that foster human contact also foster knowledge transfer, productivity and mentorship, underscoring the enduring relevance of physical office spaces.
Meanwhile, the belief that aging office buildings can be seamlessly converted into residential spaces is proving impractical. Aging buildings generally lack fundamental electrical, plumbing and air-circulation infrastructure required to support residential units.
Most conversions are financially unrealistic for those reasons.
In addition, conversions require proper municipal infrastructure and amenities that support residential living such as park space, grocery stores and retail hours that accommodate access beyond Monday to Friday, nine to five.
Advantages of securing office space now
The present office market offers a strategic window of opportunity.
Elevated vacancy and availability rates correspond with reduced net effective rents. Businesses adopting a wait-and-see approach could be forfeiting favourable long-term rates.
Across the country, medium to large organizations are locking in long-lease agreements with confidence knowing a unified location and office footprint will always be a requirement of their business.
The advantage of doing so often outweighs the cost and disruption of future innovations required to keep progress with employee and technological needs.
As the economy regains stability, inflation normalizes and organizations crystallize their hybrid/flex workplace strategies, the confidence to invest in businesses will surge, potentially leading to heightened demand and escalating costs in the office market.
The Canadian office market continues to ebb and flow, with shifts driven by numerous factors, from subleases, to hybrid working models, to labour market dynamics.
Organizations deciding the corporate culture they wish to cultivate against the backdrop of these influences and ever-changing economic conditions require proactive leadership and a clear vision.
:format(jpeg)/cloudfront-us-east-1.images.arcpublishing.com/tgam/TDSQFMTRFFF5ROJILCZAAOADRA.jpg)
