Amid a fire season that has seen a record number of blazes, wildfires and poor air quality are top-of-mind concerns for commercial property developers, industry insiders say.
The fires have burned an unprecedented amount of land from coast to coast in Canada, entering communities not typically in harm’s way, such as the outskirts of Halifax, and triggering air quality warnings as far away as Europe.
“It’s been a major point of discussion for some time now and landlords have taken measures such as putting in a number of air exchanges and upgrading to more advanced air filtration systems,” says Samantha Sannella, managing director, consulting services, Canada at Cushman & Wakefield. “It’s something occupiers ask for.”
Ms. Sannella says the growing fire threats are forcing innovation in design and development that could include the use of fire-resistant building materials and Internet of Things technology to oversee sensors and fire suppression systems.
Business disruption
Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR), a disaster-prevention research centre established by Canada’s insurance industry, says with the wildfire trend moving in the wrong direction as urban boundaries expand, it’s more than likely wildfires will reach urban areas.
“The more fire we see, the more it’s going to get into communities and the more businesses are going to be affected. We’re going to see businesses directly hit by wildfires and operations interrupted,” he says.
Against this backdrop, “there is a huge regulatory gap that needs to be addressed,” Mr. McGillivray says, adding that there are no specific provisions in residential or commercial building codes relating to wildfires.
“There isn’t even any guidance on how small businesses can reduce the risk of wildfires,” he says, though the building code does require that engineers attest that a building designed by an engineer or architect conforms to design standards, and that all potential hazards, such as tornadoes, floods or fires, have been considered.
In Ontario, municipal bylaws and the site-control process that examines design and technical aspects of a proposed development can address wildfire threats at the planning stage of construction, says Victoria Podbielski, press secretary for Ontario Municipal Affairs and Housing Minister Steve Clark.
Municipalities in the province are required to conduct a community risk assessment every five years to identify threats to fire safety, including from wildfires, she says.
“If any new provisions are brought into the National Building Code to address wildfire management, including additional requirements for indoor air quality controls, Ontario would consider the same for analysis and potential inclusion in its building and fire codes,” she says.
FireSmart Canada, a national program that aims to help neighbourhoods increase wildfire resistance, offers resilience guidance for the oil and gas industry that could be adapted to other commercial sectors, Mr. McGillivray says.
Wildland-urban interface
ICLR executive director Paul Kovacs says oil sands operators prepared well for the wildfires that ravaged the Northern Alberta community of Fort McMurray in 2016, relying on firebreaks and other protective measures. The flames came very close to their installations but ultimately caused no major damage or injuries.
Mr. Kovacs says industries operating in the so-called wildland-urban interface have a business case for investing in wildfire mitigation.
B.C.-based fire ecologist and consultant Robert Gray says most of the land in the interface in the province is owned by the Crown, limiting private developments in fire-prone areas.
The more fire we see the more it’s going to get into communities and the more businesses are going to be affected.
— Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction
The wildfire in the Wood Buffalo region that includes Fort McMurray remains the most damaging in Canadian history, with property and casualty insurance claims of more than $3.6-billion to date. Public Safety Canada estimates that more than 2,400 homes and businesses burned down in the region in 2016, with another 530 structures damaged.
The event skews data published by Catastrophe Indices and Quantification (CatIQ), which show that Canada’s insurance companies reported 82,692 wildfire damage claims totalling $4.1-billion for the 10 years through 2022.
This included 50,000 residential damage claims worth $2.4-billion; 7,000 small business claims of $500-million; and 474 claims from large companies for $1.1-billion. Residential and small business damage account for $2.9-billion or almost three-quarters of the total.
The 2022 total insured catastrophic loss of $3.1-billion lands the year in the top three loss years for the country.
According to a June, 2023, report by DBRS Morningstar, Canadian property and casualty insurance companies bear the weight of an above-average wildfire season.
Fire occurrence ‘off the charts’
Marcos Alvarez, global head of insurance at DBRS Morningstar, says while financial results are likely to come under pressure this year, “we expect those insured losses will remain manageable for most companies.”
He added in an e-mail that insurance companies “usually pause underwriting new policies in areas affected by wildfire.” An existing policy for a property in those areas “would need to be revised to make these protections a requirement, (probably at its annual renewal process),” he said.
Michael Norton, director general of the Canadian Forest Service’s Northern Forestry Centre, said in a wildfire update posted on YouTube in early July that the total area burned in 2023 exceeds any year on record in Canada, with the 150,000 people displaced the highest in the four decades of record-keeping.
“The occurrence from coast to coast is unprecedented,” Mr. Norton said, calling the total of hectares burned versus the 10-year average of 805,196 hectares “literally off the charts.”
The Canadian Interagency Forest Fire Centre reported on July 19 that more than 11 million hectares have been consumed to date, with most of the wildfires burning in B.C. According to Natural Resources Canada data, 2023 is already the worst fire season in Canada’s history, topping the previous record of 7.6 million hectares burned in 1989 and with several weeks of fire season still to go.
Cheryl Evans, director of flood and wildfire resilience at the Intact Centre on Climate Adaptation at the University of Waterloo, says small businesses and homeowners can do simple and inexpensive things to mitigate against fire risk such as clearing debris from properties and changing furnace filters.
At the same time, she says, they can “nudge local, provincial and federal government to start moving things further along to provide wider protection.”
As Canada’s construction sector faces a shortage of skilled workers and tradespeople, some insiders predict that digital technology will fill the gap – but a new report shows that worksites have been slow to adapt.
A survey of 275 companies by KPMG Canada found that while Canadian property developers are keen on new digital construction technology, known as con-tech, many are not making it an investment priority.
“Nearly nine in 10 construction companies say that … digital technology can help make their labour force more effective,” says the June, 2023, report
. “Yet Canada’s construction industry, which spans residential and commercial real estate, industrial, institutional, civil and infrastructure, has been slow to adopt new digital technologies.”
The exceptions can be dramatic. For example, one Canadian project that stands out for its use of con-tech is Canada Post’s new $470-million Albert Jackson Processing Centre in east Toronto.
“The biggest challenge to adoption is adaptation. Technology is changing so fast that the industry has to play a constant game of catch-up.
— Benjamin Shinewald, president and chief executive officer of BOMA Canada
The designers and developers created a digital “twin” replica to solve construction issues and update plans – a process called building information modeling (BIM).
“BIM was critical to the project’s success,” says Peter Armstrong, vice-president of the project leaders’ Southern Ontario team for Colliers Canada.
Another noteworthy deployment of con-tech took place in November, 2021, when Spot the Robo-dog made an appearance at Cadillac Fairview’s 47-storey, 1.2-million-square-foot project at 160 Front. St. W in Toronto.
Spot was put to work at the site by PCL Construction Company and Pomerleau Construction. The companies equipped the techno-pooch with 360-degree cameras, a laser scanner, and air quality and GPS sensors to feed data into a smart construction tech platform.
The robot’s digital sniffing helps designers and project managers in off-site offices to work seamlessly with workers on site. It can also perform tasks in spaces where it’s too dangerous for workers to go.
“Everybody loves that robot dog,” says Jordan Thomson, a senior manager with KPMG’s global infrastructure advisory group. “It doesn’t mean humans are going to be replaced. Spending $100,000 on a robot dog can free up an engineer to do other value-added work.” (Spot sells for a reported US$74,500.)
Notably, while Spot may be the way of the future, the 160 Front St. W. project used human ironworkers to put a giant steel dome on the roof in early April, 2023.
Much of the technology on the massive site, which spans the equivalent of six Canadian Football League fields, focuses on reducing the building’s environmental footprint, for example, by covering 60 per cent of its roof with solar panels.
Tom Rothfischer, audit partner and national industry leader of building, construction and real estate at KPMG Canada, says the survey reflects the discrepancy between tentative use of con-tech in Canada and immense interest in trying it.
“We’re seeing a definite recalibration taking place in the construction sector,” says Mr. Rothfischer. “While many companies are still just at the beginning of their digital build, leaders see the power of technology to reshape the way they work and they plan to invest heavily.”
KPMG found that while 73 per cent of firms it surveyed think the Canadian construction industry lags behind other countries in adopting con-tech, 80 per cent or more are excited about its possibilities and believe that technology will make them more competitive. Yet only 46 per cent say they plan to spend more than 11 per cent of their corporate operating budgets on technology and digital transformation in the near future.
“Canada is lagging behind,” says Mr. Armstrong. “A lot of new technology in Canada is being used to draw and design projects, often in 3D, but then extending this tech, for example by using computer-aided fabrication of materials, is not happening widely here.”
Canadians in the construction sector are relatively slow to invest in con-tech for several reasons, says Benjamin Shinewald, president and chief executive officer of BOMA Canada, umbrella group for building owners and managers.
“The biggest challenge to adoption is adaptation. Technology is changing so fast that the industry has to play a constant game of catch-up,” he says.
The survey found that 80 per cent of the firms that responded are excited about the possibilities offered by con-tech, yet only 46 per cent say they plan to spend more than 11 per cent of their corporate operating budgets on technology and digital transformation.FRED LUM/THE GLOBE AND MAIL
Another challenge is making sure the con-tech investment brings the right kind of change, Mr. Shinewald adds.
“Buildings may seem to be incredibly static, but in fact they are extraordinarily complex, technology-driven ecosystems. Software, hardware and innovation have an enormous impact on occupant wellness, carbon emissions, profitability and more,” he says.
An additional challenge is cost, says Mary Van Buren, president of the Canadian Construction Association. “There is a cost to investing in digitization that isn’t necessarily shared among all parties in the procurement process. Margins are slim in construction, especially for small- and medium-sized contractors, making it increasingly difficult for them to adopt these types of innovations,” she says.
Mr. Armstrong says Canadians may be slow to bring in more con-tech because skilled tradespeople in Canada are still relatively affordable, compared with other countries.
“This may change in Canada as our workforce ages and the technology is necessary to get the work done,” he says.
“The efficient allocation of trades is one of the industry’s most-pressing challenges and opportunities,” KPMG’s Mr. Thomson says. Already, 86 per cent of companies in Canada are finding that shortages of skilled tradespeople affect their ability to bid on projects and meet deadlines, he says.
There’s hardly any limit to what con-tech might be able to achieve, Mr. Rothfischer says.
“3D printing technologies have been adapted to lay concrete and build complex steel shapes. Robots can lay bricks and tie steel reinforcement bars,” he explains. “Drone-based surveying can help contractors quickly and accurately lay out work, measure quantities and monitor progress.”
Technology can also make jobs safer for workers, Mr. Armstrong adds. “For example, there are already tech-laden exoskeletons available that fit onto workers’ shoulders, to do overhead work rather than keeping their own arms above their heads for hours,” he says.
“The trick is to integrate these things into construction so that people and technology work together.”
As the market softens, tenants may have an opportunity to negotiate lower rents
Canada’s national industrial real estate vacancy rate rose for the third consecutive quarter to 1.9 per cent, according to JLL’s Canada industrial insights, and rents have started to stabilize.
That doesn’t mean the industrial market is in trouble, but moderating demand from historic highs and strong expected deliveries over the next 12 to 15 months are expected to create more balanced conditions in the coming quarters.
“With inflationary winds and interest rate hikes, there’s just a little bit more uncertainty in the market,” JLL (JLL-N) executive vice-president and managing director for national industrial Marshall Toner told RENX.
Toner also believes demand for e-commerce and retail warehousing, which took off early in the pandemic, is starting to lessen.
“It’s a market that’s just normalizing,” Avison Young president Mark Fieder told RENX. “It’s been a market on steroids for a couple of years now with tremendous increases in rental rates and tremendous uptake in absorption right across the board.”
Tenants could get better terms
As the market softens slightly from its frenzied peak and tenants start to have a little more choice as the more than 50 million square feet of industrial space under construction starts becoming available, tenants may be able to start negotiating slightly lower rental rates to stay in a building.
“If it goes vacant it costs the landlords as they have lost income during lease-up, so they’re willing to negotiate a little bit more than they have in the past,” Fieder said.
Tenants in small- to medium-sized industrial buildings that may have seen their rents triple after long-term leases expired and may have been forced to leave to find more affordable options may be able to negotiate deals to stay in place now, Fieder added.
A higher-interest-rate environment over the past 16 months has kept the number of tenants offering to purchase buildings from owners to avoid big rent increases to a relatively low number.
Lenders reducing loan coverage from 75 to 80 per cent of value down to 65 per cent has also played a role in keeping these types of transactions to a minimum.
Vancouver is a bit of an outlier
Vancouver has a scarcity of land for new development and rents have continued to increase due to constrained industrial supply, as JLL reports the city’s Q2 rents rose 18.4 per cent year-over-year to $22.14 per square foot. That’s the highest in the country, while Vancouver’s one per cent vacancy rate was the lowest.
“All markets, with the exception of Vancouver, have reasonable amounts of new build coming online, but nothing that is going to change the dynamic and negotiations between tenant and landlord very much,” Fieder said.
Vancouver also remains the national driving force behind new industrial condominiums – known as strata developments in British Columbia – though there’s a healthy amount under construction in Calgary and demand is increasing in Toronto.
“We’re still seeing pretty active demand on that stuff, believe it or not,” Toner said. “I thought rising interest rates might affect that market, but it hasn’t up until this point.
“There’s strong demand in Vancouver, strong pricing in Vancouver and strong demand in Calgary. And the developers have not had to move on their asking prices.”
Small vacancy rate increases
Montreal’s industrial vacancy rate increased marginally to 2.1 per cent and Toronto’s crept up to 1.4 per cent in Q2, according to Toner.
Calgary’s rate dropped slightly to 1.6 per cent while Edmonton’s rose a bit to 3.3 per cent, he added.
Toner believes industrial vacancy rates will continue to marginally increase through 2024, but Canada will remain a landlord-friendly market.
“To get it into a competitive market for both landlord and tenant, you’d like to see it in that five per cent range,” Toner said.
While Edmonton, Calgary, Toronto and Montreal seem to be slowly moving toward more balanced markets between landlords and tenants, absorption of new supply is expected to remain healthy.
The Greater Toronto Area accounts for about half of the Canadian industrial real estate market, with diverse industries and a large number of locals and immigrants who can provide a labour force for new developments.
“That’s part of why a lot of companies see Canada as a great place to invest in this type of project,” Fieder said.
Industrial remains the asset class of choice for private, institutional and foreign investors, and that’s not expected to change anytime soon.
Small amount of sublease space
A bit of sublease space has come back to the market, but Fieder said the situation in Canada is nothing like south of the border in the United States, where Amazon has been shedding millions of square feet of space from its industrial portfolio.
“Canadian developers tend not to get into trouble like in the U.S., where they overbuild,” Fieder said. “They have more discipline and they always have an eye on demand.
“And right now I think the supply that’s coming to market is not out of line to the demand that we see taking it up over the next 12 to 24 months.”
There’s been a tempering in the amount of speculative industrial development across Canada, with the exception of Vancouver, however.
“I think spec developers will not be so bullish to be throwing up product right now,” Toner said. “They’ll take a careful look at the specific markets that they’re in to determine whether they should be building or not.”
Plenty of industrial land has been purchased over the past two years and Toner thinks that activity will also slow somewhat.
Buttonville Municipal Airport in Markham, Ont., will close at the end of November and a recent proposal from owner Cadillac Fairview plans to replace it with a 2.78-million-square-foot industrial development.
A 2011 submission for a 10-million-square-foot mixed-use development including office, retail, hotel, entertainment, public use and residential space that would have accommodated up to 7,000 residents and created thousands of jobs was shelved in 2020. This new proposal is the first indication of what Cadillac Fairview plans for the 169-acre site north of Toronto at the junction of Highway 404 and 16th Avenue.
Cadillac Fairview declined RENX’s interview request regarding its plans for the property, which is zoned as an employment area.
Cadillac Fairview, which paid almost $193 million to Armadale Properties Ltd. to acquire the 50 per cent interest in the property it didn’t already own two years ago, is proposing a multi-phased industrial development.
Cadillac Fairview’s plans for airport site
The first phase would include two buildings, one of 247,721 square feet and the other of 335,673 square feet, as well as 90 loading spaces, 407 vehicle parking spaces and 80 bicycle parking spaces.
Subsequent phases would add another nine buildings ranging in size from 37,887 to 816,378 square feet as well as 2,556 vehicle parking spaces. The number of loading and bicycle parking spaces have yet to be determined.
The proposal submitted to the City of Markham also calls for two development blocks, a stormwater management block, the widening of Highway 404 and a network of public and private roads, including an extension of Allstate Parkway north through the site to 16th Avenue.
The entirely industrial plan is being put forward at a time when the Ontario government is pushing for 1.5 million houses to be built in the province and Markham is at just 59 per cent of the pace needed to meet the province’s target of 44,000 new homes in the city by 2031.
Industrial market cooling a bit
This decision also comes at a time when the red hot industrial real estate market seems to be cooling a bit as rents have started to moderate somewhat after large and rapid increases over the past few years.
“You’re not seeing the built-in rental increases that we’ve seen in the past on a yearly basis,” Avison Young president Mark Fieder told RENX.
“We were seeing deals in the GTA where if it was a 10-year lease, Years 2, 3, 4, 5 and 6 had five per cent built-in rental increases.”
The Q2 industrial availability rate in the Greater Toronto Area (GTA) rose by 30 basis points to 1.9 per cent, and by 20 basis points to 1.3 per cent in the GTA North, according to Avison Young’s new Greater Toronto industrial market report.
Cadillac Fairview also redeveloping CF Markville Mall site
The airport site isn’t Cadillac Fairview’s only planned major redevelopment for Markham.
The real estate owner and manager for the Ontario Teachers’ Pension Plan is looking to intensify an almost 70-acre property at the northeast corner of Highway 7 and McCowan Road currently occupied by CF Markville Mall.
While the 979,344-square-foot, 180-store mall will be retained as part of Cadillac Fairview’s recent proposal, the developer is looking to add 14 new buildings ranging from six to 45 storeys that would offer approximately 4,340 residential units, two above-grade parking structures, public parks and privately owned public spaces over four phases.
Cadillac Fairview manages in excess of $40 billion of assets across the Americas, Europe and Asia.
The company’s 35-million-square foot Canadian portfolio is comprised of 68 properties and it has a 50-million-square-foot land bank.
In a decision from Ontario’s highest court, it was held that a landlord cannot arbitrarily refuse to allow a commercial tenant to assign its lease.
In coming to its ruling, the court looked at the applicable facts and information provided to the landlord at the time of refusal to determine whether a landlord’s refusal to consent to lease assignment is unreasonable and what constitutes “consent” in lease assignment.
The court also examined what a tenant’s waiver of reasonable performance looks like.
The case and lower court ruling
In Rabin v. 2490918 Ontario Inc. (Rabin), a 70-year-old dentist ran his practice in the same building in Toronto for over 40 years. The landlord acquired the building in 2017 with the view of redeveloping the property.
The lease between the landlord and tenant, set to expire at the end of 2025, contained a clause which provided that the tenant could not assign the lease without consent from the landlord, whose consent should not be unreasonably withheld.
The lease also provided that the landlord was required to grant or refuse consent within 15 days of the request to assign.
In late 2020, the tenant advised the landlord that he wanted to sell his practice and assign the lease to two young dentists who would run a similar dental practice.
In early 2021, the tenant gave the requisite formal notice of the assignment to the landlord, along with additional financial information about the assignees.
The landlord did not provide a response within the 15-day deadline.
Twenty-two days after the initial formal notice, the landlord responded, stating that consent would be provided, subject to a demolition clause upon 24 months’ notice being incorporated into the lease.
The tenant refused this proposal and brought a court application seeking an order to affect the transfer.
The application judge noted that, in the past, the law greatly favoured tenants, limiting landlords’ power over lease transfers. But the legal landscape has significantly shifted recently, giving landlords more control.
Now, landlords’ decisions on lease transfers can be informed by various factors, including the lease’s context, building conditions, market realities and prospective tenant’s financial status.
However, it was also noted that landlords cannot indiscriminately deny transfers or manipulate for selfish gains. If tenants feel their transfer request is being unfairly rejected, they must prove this.
In Rabin, the court found the landlord’s demand for extensive financial data from the new tenant unreasonable. Still, it also ruled the tenant hadn’t acted in good faith by not supplying any information.
Ultimately, the court didn’t approve the tenant’s application due to its lack of cooperation. But the tenant was granted an opportunity to fulfill the landlord’s information request.
If denied a transfer, the tenant could revisit the court to reapply.
The Ontario Court of Appeal decision
The tenant appealed the decision and the Ontario Court of Appeal reversed the lower court ruling and held that the landlord provided no reasonable excuse for their failure to provide consent and respond within the 15-day lease-prescribed deadline.
In coming to its ruling, the court looked at the following principles which are used to help determine whether a landlord acted reasonably in withholding consent:
The burden is on the tenant to satisfy the court that the refusal to consent was unreasonable.
A probability that the proposed assignee will default in its obligations under the lease may, depending upon the circumstances, be a reasonable ground for withholding consent.
The financial position of the assignee may be a relevant consideration.
Reasonableness is a fact-based question, to be determined based on the case-specific circumstances, including commercial realities of the marketplace and economic impacts of the lease assignment.
In this case, the court noted at the time of the renewal request, the landlord did not require additional information from the tenant, and its response 22 days later did not mention anything other than the insertion of a demolition clause.
Further, the reasons provided for withholding consent were not adequate, especially given that the landlord was notified early that the tenant would be requesting consent for lease assignment.
It was also held that the application judge made several legal errors, such as applying the doctrine of waiver even though it had not been raised by the parties, and then erred in the application of the doctrine.
Rather, it was noted that the judge should have determined whether the landlord neglected or refused to provide consent, and if so, whether it was unreasonably withheld.
In analyzing this principle, the court looked to section 23 of the Commercial Tenancies Act (the “Act”), which provides that consent to assign a lease shall not be unreasonably withheld by a landlord.
If a landlord refuses or neglects to provide consent to a lease assignment, the Court may make an order to determine whether or not the consent is unreasonably withheld.
As such, it was held that neither the consent provision in the lease, nor the tenant’s efforts to appease the landlord and the landlord’s failure to respond, constituted a waiver of section 23 of the Act.
Waiver is only found where the waiving party has full knowledge of their rights and an “unequivocal and conscious intention to abandon them.” Waiver must therefore be explicitly expressed in the lease to constitute an exception under section 23 of the Act.
Also, the Act does not define what constitutes a refusal or neglect to consent, nor an unreasonable withholding of consent. Therefore, ordinary meaning of the terms is presumed. Notably, the court emphasized that a conditional consent (in this case consent hinging on a demolition clause) is not a consent to assign a lease.
In the end, the court ruled that the landlord unreasonably withheld consent for the tenant to assign the lease.
This decision affirms that, while landlords often have wide latitude in enforcing the provisions of a lease, when it comes to consent to the assignment of a lease the landlord must act reasonably and cannot arbitrarily withhold its consent.
The federally regulated carbon tax is slated to reach $170 per tonne in 2030
Canada’s carbon tax could force some office owners to sell assets rather than undertake costly retrofits that could affect the financial viability of their buildings.
“The question owners ask themselves, and not just for retrofits but with any kind of capital work that needs to be done, is ‘Is this worth it? And, what kind of return will I get out of it?’ ” Keith Reading, senior director of research at Morguard, told RENX.
The federally regulated carbon tax is slated to reach $170 per tonne in 2030, necessitating asset owners to invest in green retrofits or face considerably higher tax bills for energy and fuel over the next few years.
The tax is $65 per tonne this year, after rising approximately 30 per cent on April 1, from the 2022 rate of $50 per tonne.
There can be a strong economic case for retrofits in addition to the environmental benefits.
One reason retrofits make sense, Reading said, is because tenants pay the building’s net rent and a proportion of real estate taxes, utilities and operating costs, thereby lowering the cost of doing business in that building.
The prospect becomes even more attractive if the building is in a prime location.
Assessing the financial impacts of a retrofit
Reading added some five- or six-decade-old buildings might not take to retrofits as well as others, either because they don’t adapt well to new technologies or they can’t provide tenants the flexibility demanded by their ESG scores.
“And the building may not be in a prime location so you might look at the retrofit – and because everybody else has to get one – ask yourself if your building will still be inferior to some other buildings in this market,” Reading said.
In such instances, it might make more economic sense to demolish the old structure and construct a new, decarbonized building, he added.
However, that could require more capital than some private investors typically have on hand.
“If I think I can get ‘X’ dollars per square foot, am I certain, or reasonably certain, I can get that kind of rent on the building?” Reading said.
“If not, maybe that’s a risk I don’t want to take as a private investor because if you make a mistake on an investment and you’re a small, private investor, you may not have the funds or a diverse enough portfolio to offset that mistake.
“But if you’re an institutional investor, you’ve generally got a large portfolio and you can offset any losses you might incur. REITs and other institutional investors would be the ones to step in.”
Ongoing uncertainty in the office market could also dissuade some private investors, who dislike risk in their portfolios, from investing in expensive retrofits.
A “perfect storm” for office owners
CBRE reported Canada’s office vacancy rate hit a 29-year high of 18.1 per cent last quarter — it was 15.8 per cent in Toronto, 17 per cent in Montreal, and 11.5 per cent in Vancouver.
“Canadian office markets are grappling with a perfect storm of a recession threat, interest rate hikes, tech sector weakness, tenants right-sizing and new supply of office space,” a CBRE news release states.
However, according to Jean-Philipe Picard, CBRE’s managing director of project management in Western Canada, the benefits of green retrofits outweigh potential pitfalls.
“There’s a net positive value with investments going into those buildings,” Picard said. “The business case gets stronger and better the larger the asset. The biggest challenge is looking at it strategically, not piecemeal. Looking at it strategically gives you the biggest bang for your buck.”
Picard conceded some private and single-property or portfolio owners might face challenges. However, he pointed to the early years of LEED certification when municipalities and institutional investors led the way.
He expects they, too, will be among the first to decarbonize buildings en masse. The trend is already gaining momentum.
“You’re going to have the larger institutional owners that will go to market first, you’ll have municipal government going to market first, and that will drive technology and drive volume,” Picard said.
“It will drive expertise in construction and in the market in implementing these strategies and that will drive down costs because you’re not the first movers anymore.”
Although the 2030 deadline looms large, Picard said some asset owners will still opt to wait before investing in the retrofits.
“Maybe those smaller owners will wait a little bit and benefit from the investments that have been made in that industry from the first movers who can afford it and build a business case for it to make sense,” he said.
Properties span over 362,000 square feet in Brampton, Burlington in GTA region
BMO Life Assurance has acquired a three-building industrial portfolio in Brampton and Burlington from Morguard, its latest move into acquiring real estate assets which it will wholly own.
Winton Realty Advisors president Keith Jameson advised BMO on the transaction, which was brokered by TD Cornerstone Commercial Realty Inc. The price of the all-cash transaction wasn’t disclosed.
“BMO has numerous investments through joint ventures and has . . . now made direct acquisitions, which includes an industrial asset in Quebec and now the Morguard portfolio,” Jameson told RENX.
Toronto-based Winton is a subsidiary of Winton Holdings.
The private investment and realty advisory business provides property acquisition, due diligence, strategic advisory, and asset and portfolio management services, as well as debt and equity strategies, to institutional and private high-net-worth clients across all commercial property asset classes.
Jameson said Winton sourced the Morguard portfolio – which went to market in March – underwrote it and bid on it on behalf of BMO. The company then brought in Kipling Group to complete the underwriting.
Winton is the new portfolio’s asset manager on behalf of its client, while Kipling Group was also engaged as the property manager.
The portfolio’s elements
The 7.47-acre Burlington property at 1205 Corporate Dr. has a 200,342-square-foot warehouse and light manufacturing facility fully occupied by cosmetic and personal care product manufacturer Hunter Amenities.
It has a weighted average lease term of 7.6 years and estimated 88 per cent gap to market rents.
The 10.45-acre property at 200 Westcreek Blvd. in Brampton has an 86,026-square-foot cross-dock facility fully occupied by transportation, warehousing and logistics company Simard.
It has a weighted average lease term of 13.1 years and estimated 8.8 per cent gap to market rents. Its recently negotiated lease has annual two per cent escalations.
“Cross-docks are very hard to replicate and (are) expensive,” Jameson said. “They definitely require a large piece of land so that there’s sufficient room to move trucks in and out from both sides.
“The coverage is smaller and therefore the overall cost is more, which means there’s upside both in the building and also in the land.”
The 4.87-acre property at 55 Walker Dr. in Brampton has a 75,949-square-foot warehouse and light manufacturing facility fully occupied by Jones Healthcare Group, which provides packaging and medication dispensing solutions.
It has a weighted average lease term of 4.6 years and estimated 110 per cent gap to market rents.
“They’re good, quality assets with good, stable tenants and a good mix of lease terms,” Jameson said of the three properties.
Morguard had spent more than $1.7 million on improvements to the portfolio since 2015, including to the roofing and heating, ventilation and air conditioning systems.
The buildings have been well-maintained and will require minimal capital expenditures for the foreseeable future.
Each of the three properties are within a one-kilometre radius of major 400-series highway access, while both Brampton properties are also in close proximity to Toronto Pearson Airport and a CN intermodal yard.
BMO’s past and future real estate acquisitions
1205 Corporate Dr. in Burlington, Ont. (Courtesy Winton Realty Advisors)
Winton and Kipling Group played similar roles in BMO’s $120-million acquisition of a new 512,070-square-foot warehouse and distribution facility on 20.6 acres at 4145 St-Elzear Blvd. W. in Laval, Que.
The class-A building, which has a 39-foot clear height, was under construction when it was acquired from Pure Industrial last October, but has since been completed.
Dollarama signed a 20-year lease for the entire facility, which is in close proximity to major traffic routes, rail hubs, sea ports and airports.
“We’re happy with what we’ve acquired and they fit the profile of our investment strategy,” Jameson said on behalf of BMO.
“But having said that, we’re going to take a bit of a breather and watch the market for the next while. I think pricing is reasonable but I also realize that, with debt where it is, most groups in the market cannot rationalize deals where financing has become expensive.”
Winton, meanwhile, has also been involved with:
acquiring and asset-managing three industrial buildings in Phoenix totalling 335,000 square feet on behalf of a high net worth investor;
acquiring a 492,363-square-foot single-tenant industrial property in Cornwall, Ont., in a sale-leaseback deal on behalf of an institutional investor; and
owning and asset-managing a portfolio of high street retail properties in Dublin, Ireland.
Joint venture with Harlo Capital is Toronto developer’s fourth project in neighbourhood
Gairloch Developments just unveiled its fourth condominium project in Leaside, a Toronto neighbourhood the company’s founder and president told RENX is the city’s next real estate hotspot.
The lynchpin is the coming Leaside LRT Station, part of an under-construction light rail transit corridor that connects to the city’s subway system.
“The new LRT opens up a new realm for us with a mass transit option 300 yards to our north,” Bill Gairdner said of the station’s proximity to Gairloch’s new project, 1802 Bayview.
“It’s so encouraging for equity partners and condo investors, and everyone else involved in a project, when you have all three levels of government investing in rapid transit all outside your front door.
“Leaside is awesome with its nice tree-lined streets, nice schools, easy access to the Don Valley Expressway to get you downtown or to Midtown and the LRT has added a whole other dimension.
“It’s not up and running yet, but when it is the option to live in Leaside without owning a car will be a game-changer.”
Still undecided if project will be rentals or condos
Gairloch hasn’t yet decided if the planned 46-storey, 419-unit tower at Bayview and Roehampton Avenues will remain a condo as originally envisioned or if it will become a rental building.
The building, designed by architects-Alliance, will offer a range of suite options ranging up to four bedrooms to attract families. Its podium is wrapped in alternating glass ribbons and recessed terra cotta panels.
A rendering of Gairloch’s planned multiresidential tower at 1802 Bayview Ave. in Toronto. (Courtesy Gairloch Developments)
1802 Bayview also marks the third partnership between Gairloch and Harlo Capital, a Toronto-based private equity firm that identifies and invests in real estate developments Canada-wide. The other two, Leaside Common and 29-39 Pleasant Blvd., aren’t far from this latest venture
The partnership can be traced back to Freed Developments, where Gairdner and Andrew Lepper, Freed’s then-CFO, worked alongside each other. Lepper now serves as the CFO at Harlo.
Even with lenders and investors tightening their purse strings amid persistent headwinds, Gairdner said capital hasn’t been especially difficult to syndicate “as long as it’s a good site with a strong business plan and there’s a robust track record.”
The Gairloch-Harlo duo has yielded two successes and they’re betting on a third.
“We kept bumping into each other,” Gairdner recalled of the partnership’s genesis.
“Harlo are specialists in fundraising on the capital side, so it’s great to have them have our back. They bring a wealth of experience and back office, and they’re a great team, so it’s always great to have more smart people with eyes on each individual project.”
Leaside is an emergent neighbourhood
Leaside is an affluent area code, its makeup composed primarily of single-family homes, but the recent run of new condo development has introduced entry-level housing and made one of Toronto’s most established neighbourhoods accessible.
According to Henry Byres, coordinator of the Bayview Leaside BIA, the array of housing options has already diversified the neighbourhood demographically.
The 33-year Leaside resident recalled his daughter being one of the few children in their neighbourhood in the 1990s, a stark contrast to the droves of young families who now window shop on Bayview Avenue on any given day.
“The average age in the area has gone down quite a bit and we see a lot of families with kids, a lot of young children,” Byres said, adding that Bayview Avenue was sleepy 20 years ago.
“In terms of the street’s overall vitality, it’s increased and improved,” he said. “It’s a street where you can get everything you need for daily life.”
Today, Bayview Avenue is lined with boutique retail stores, restaurants serving a range of international foods, cafes and other “very unique, very one-off” and independently owned, stores.
The neighbourhood isn’t a nightlife destination, Byres, added, a seeming reflection of Leaside’s residential character.
“We’ve been able to maintain this independent streak we have here, but the fact that we’re not part of a larger commercial strip gives people in the area more ownership,” Byres said.
“I think, more than anything else, that’s what keeps people coming back.”
Investors set sights on Leaside
That investors who typically favour downtown and midtown condos have begun scooping up units in Leaside is a telltale sign it’s an emergent submarket.
Gairdner took notice in the fall of 2021 when Gairloch launched Leaside Common, a nine-storey, 198-unit mid-rise just south of 1802 Bayview, and investors and brokers became regular fixtures at its sales centre.
“It helped us sell about $160 million worth of condos in 60 days,” Gairdner said.
“The investor community realized it wasn’t a downtown condo or that it wasn’t Yonge and Eglinton, but there was a unique angle to get a better return and better value from a more end user-friendly investment.
“That was a bit of an eye-opener for the city and savvy, early condo investors showed up in droves for that particular launch.”
Toronto’s 33 Yonge St., home to firm’s head office, to get new lobby, add 5 new restaurants
Toronto’s downtown office vacancy rate exceeds 15 per cent for the first time since 1995, which is pushing building owners to come up with fresh ideas and concepts to retain existing tenants and attract new ones.
GWL Realty Advisors Inc. (GWLRA) is one such landlord that’s being proactive with its buildings, including the one that’s home to its head office at 33 Yonge St.
“We need to invest in our A-class office product to stay relevant and attract tenants,” GWLRA leasing vice-president Devan Sloan told RENX. “So we’re doing that across the portfolio.”
Landlords have to earn commutes from their tenants – and their employees – Sloan added, which is why GWLRA is trying to provide more amenities.
The company is investing in new lobbies at 151 Yonge St., 1 Adelaide St. E. and 33 Yonge, which recently saw its office vacancy rate rise to almost 40 per cent after CIBC moved its operations out of the building. Commercial real estate services firm Altus Group remains a key tenant in the property.
33 Yonge
Five new restaurants will open over the next 18 months in 33 Yonge, a LEED Platinum-certified 13-storey building sitting on about two acres that was built in 1982 and acquired by GWLRA in 2003.
It includes 481,024 square feet of office space, 34,212 square feet of retail space, a 307-stall underground parking garage and an atrium that provides natural light to every floor.
The building hasn’t been significantly renovated since opening, so GWLRA has also added an end-of-trip facility at the P1 level that offers bicycle storage, lockers and showers. It’s also working on adding fitness and conference facilities.
“Amenitizing buildings has never been more important,” Sloan said.
“This includes activating lobbies, spending capital, investing in assets, adding items that people are interested in like end-of-trip facilities, fitness and those sorts of box checks, and of course a heavy focus on environmental sustainability.”
Filling street-level retail space
The additions that should have the biggest impact, not just at 33 Yonge but also for the surrounding area, are the restaurants.
The building had four restaurants heading into 2020 (prior to the pandemic), including two on the south side which Sloan said had reached their “best-before date” and space on the north side that was vacated by Pick 6ix after its lease was terminated for unpaid rent.
Looking to start fresh, GWLRA considered a variety of options to fill its street-level retail space.
“We looked at everything from a golf use to a pet store to clothing retail to a pharmacy,” Sloan said.
Since 33 Yonge straddles the financial district to the west and the St. Lawrence Market neighbourhood to the east, it was decided new food options would offer the most appeal.
It’s believed that providing each operator with patios — on Yonge, Wellington, Front and Scott streets — should further entice customers to check them out.
New restaurant details
Deals were finalized with the restaurant operators over the past couple of months to take up approximately 28,000 square feet of the street-front retail space.
Café Landwer, a Mediterranean-style restaurant chain that began in Israel and offers three meals per day, will open its seventh Greater Toronto Area location on the southeast side of the building with a wrap-around patio facing Berczy Park.
The owners of Giulietta on College Street and the Michelin-starred Osteria Giulia on Avenue Road, including chef Rob Rossi, will open a uniquely branded Italian steakhouse in the current location of Biff’s Bistro on Front Street just east of Yonge.
Biff’s, a French restaurant that’s been in the building for about 15 years, will open a revamped location next door and take half of the space occupied by Oliver & Bonacini Café Grill.
The balance of that Oliver & Bonacini-occupied space will become a still unnamed new Latin-themed restaurant.
The northwest corner of the building, fronting Yonge and Wellington, will become a yet-to-be-named Oliver & Bonacini-operated mid-century modern American-themed restaurant.
Work will begin on the restaurants in the next month or two, according to Sloan. Café Landwer and one of the Oliver & Bonacini concept restaurants are expected to open in the first half of 2024, with the remainder to follow before the end of the year.
Casual restaurant Green Box and Tim Hortons will continue to occupy smaller locations in the building, while GWLRA is looking to fill other small street-front spaces on Wellington Street and facing Berczy Park.
“I really think that 33 Yonge will become a destination retail location for food,” said Sloan.
“We think it will service the neighbourhood and we think it will be a tremendous driver of traffic to the building for not only our own tenants but for office tenants in the neighbourhood.”
Belief that more traffic will return to core
After office occupancy levels fell to less than 10 per cent through the first 18 months of the COVID-19 pandemic, the Strategic Regional Research Alliance downtown Toronto office occupancy index was up to 51 per cent on June 15.
There’s optimism it will continue to rise.
“The traffic downtown versus pre-COVID, from an office occupancy perspective, is down,” Sloan conceded. “But we’re seeing a lot of people coming back for more than just office.
“It’s entertainment uses, it’s before a sports game, it’s before a concert. It’s all the rest of it.”
Sloan added there’s more certainty among employers regarding their return-to-office strategies and how often each week they expect people to be there, which should also benefit the downtown core.
“If you know you’re bringing your people back three days a week, then you can execute on that plan,” Sloan said. “But until you know, you do nothing.
“Doing nothing is the worst in our business because it leads to people making decisions at the last minute and short-term deals.”
Groupe Mach and Sarees Investments have acquired the 922,000-square-foot Atria Complex in North York, at a purchase price that is a fraction of its replacement value, says Mach president Vincent Chiara.
“It’s a great asset and great location in North York,” he told RENX, of the buildings at 2225, 2235 and 2255 Sheppard Ave. E. in North York. The property has “long- and medium- term leases with strong credit tenants.”
Citing confidentiality agreements, Chiara would not divulge the purchase price, but he noted that Atria’s replacement cost would be about $700 to $800 per square foot “and I can assure you we paid less than 25 per cent of that. It’s a huge comfort level for us to pay a fraction of the replacement value.”
Built in 1989 and renovated last year, Atria was owned by AIMCo (Alberta Investment Management Corporation), Dorsay Development Corp. and Ontari Holdings. JLL handled the sale.
Atria’s key tenants, and Mach’s strategy
Major tenants Rogers, American Express, Sun Life, Sony, Belair Insurance and GoodLife Fitness represent almost 50 per cent of the space in the three buildings that comprise Atria.
Atria has a vacancy rate of around 15 per cent, which is “relatively strong” for the area, Chiara said. Average lease terms are five to six years and leases run as long as until 2032.
Chiara says Mach continues to believe in its acquisition strategy: that office work from home is not going to have a long life.
The consequences of working from home are being seen with a decline in the quality of work, he said. “We’re starting to see that employers are trying to get employees back to the office. We definitely believe that office is not disappearing.”
However, Chiara noted “we’re not investing on hope. Hope is not a strategy.”
Despite being bullish on office, Chiara says Mach’s strategy is to also have a Plan B, in which the land value of the assets is greater than the purchase price. “If we can’t check that box on potential land value, then we won’t do the acquisition.”
Residential zoning is permitted on part of the Atria site. If the office market collapsed, the strategy would be to eliminate one of the three Atria buildings in phases, move the tenants to one of the remaining buildings and redevelop the initial site, he told RENX.
“Our investment strategy is based on the fact that our Plan B is as good or better than our Plan A,” he said. “This is not a contrarian play. Ours is basically a land-bank play.”
Atria “best in class” in North York area
However, Chiara believes the status quo of Plan A will work for Atria. He noted there were many renewals and new leases signed during the several months of due diligence on the property.
“It’s probably best in class in that neighbourhood of North York. I think it will get a lot of traction. Part of what’s going on in the office world is a flight to quality, so people in that neighbourhood will move from their C buildings and D buildings and come into the class-A buildings.”
Groupe Mach touts Atria as one of the largest office complexes on the outskirts of downtown Toronto.
The Atria Complex office buildings in Toronto. (Courtesy Groupe Mach)
It comprises: the four-storey Atria I at 2255 Sheppard Ave. with 250,292 square feet of space; the 18-storey Atria II at 2235 Sheppard Ave. E., with 342,781 square feet of space; and the 18-storey Atria lll at 2225 Sheppard Ave. E. with 328,761 square feet of space.
Certified as LEED Gold, the complex includes 45,000 square feet of retail space and 2,050 parking spaces.
“The guts of the building is first-class,” Chiara said. The site has a campus feel but “the landscaping deserves some upgrading. We intend to give that a facelift.”
Atria will be managed by Mach’s Toronto office. It was previously managed by Epic Investment Services.
Mach and Sarees Investments have partnered 50-50 to acquire Atria. Based originally in the Middle East but with an office in Montreal, family-run Sarees has partnered with Mach in several transactions over the last 10 years, Chiara said.
“They’re real estate investors globally. We’re proud to be alongside them.”
Groupe Mach still seeking Toronto acquisitions
In addition to Atria, Mach owns three other properties in the GTA: the 577,214-square-foot Allstate Corporate Centre in Markham, the 113,274-square-foot 175 Commerce Valley in Markham and the 52,000-square-foot 5875 Explorer Drive in Mississauga.
“We’d like to increase our footprint in Toronto,” he said, noting the company is looking at several other potential transactions in the city.
Toronto “previously had a barrier to entry because of pricing,” but the real estate ownership landscape has shifted. Institutional owners, such as REITs and pension funds, have decided to move away from office and retail ownership to multi-res and industrial, he said.
They “have exited office in a big way,” Chiara said, and “when you eliminate the institutional investors, it doesn’t leave many players.”
Since the beginning of the year, Montreal-based Mach has concluded 12 major acquisitions totalling four million square feet, ranging from the Intercontinental Hotel in Old Montreal to 1801 Hollis Street in Halifax.
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