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.
A rejuvenation in Toronto’s downtown retail sector has led to a leasing milestone – availability has fallen below 10 per cent, according to JLL.
Toronto’s Q2 urban retail availability rate of 9.65 per cent was a 14-quarter low, while the average annual asking rent of $95.49 per square foot was a 14-quarter high, according to the latest report, from JLL, which covers 1,306 ground-floor street-front properties in 11 corridors.
The ending of pandemic lockdowns and the return of more people visiting, living and working in downtown Toronto is the biggest factor behind the street-front retail recovery.
Toronto Transit Commission ridership has experienced a significant rebound since the height of COVID-19, with overall ridership at approximately 74 per cent of pre-pandemic levels and weekend ridership reaching nearly 80 per cent.
Hotel occupancy and visitor spending have increased while the downtown Toronto office occupancy rate reached 52 per cent in July, up from 42 per cent in January.
Full-service restaurants performing well
The food service industry, particularly full-service restaurants, has performed exceptionally well. While sales have increased, however, the cost of goods and labour have increased at an even greater rate.
“What we’re hearing from full-service restaurants is that people are coming downtown three days a week, so Mondays and Fridays are totally dead,” Brandon Gorman, senior vice-president of JLL’s Agency Retail Group, told RENX.
“On Tuesday, Wednesday and Thursday it’s very active. The people who used to go out for lunch twice a week when they were coming to work five days a week are still going out twice a week, even though they’re only going to the office three times.”
Gorman said people coming downtown for sporting events, concerts, plays and other social activities has also been good for local restaurants and bars.
Trends and challenges
Retail sales have kept pace with inflation despite increasingly challenging times for local shoppers. The top-performing retail categories include footwear, personal-care products and convenience items.
Growth in specialty food and home improvement has slowed, suggesting consumers are focusing on essentials and buying fewer homes.
“Landlords are offering increased incentives by way of free rent or perhaps an increased tenant allowance,” Gorman said.
Another trend Gorman has seen is that leasing deals are taking longer to close.
Among the challenges still facing the urban retail market, realty taxes are one of the most formidable.
“The city has increased realty taxes, in some cases, by more than 300 per cent in the last few years,” said Gorman.
“Realty taxes ultimately get passed through in most leases to the tenant, so tenant occupancy costs are going up in large part due to the increase in realty taxes.”
Another challenge facing retailers is all of the construction and lane closures on downtown roads, which can make it inconvenient or unpleasant for both drivers and pedestrians to visit stores and restaurants in areas where the work is taking place.
Retail in mixed-use condominium projects
The City of Toronto has been mandating in the approvals process that many downtown condominiums incorporate ground-level retail and commercial space.
While not all developers have happily embraced this, Gorman believes they’re putting more thought and effort into the commercial aspect than they might have a few years ago in order to fill such spaces.
“There’s huge demand right now with the growing downtown population,” said Gorman.
“We’re seeing a lot of demand from food and beverage tenants, health and wellness, and professional services like medical and dental. There’s a lot of velocity in the market in those categories.”
Developers have demonstrated a cautious approach to building stand-alone retail in the current high-interest-rate environment, which may help maintain stability in the market.
The limited retail development pipeline suggests retailers will need to look to future supply to secure space.
Major mixed-use projects The Well and Sugar Wharf will be completed this year, but there are no major deliveries planned for 2025.
Leasing transaction details
Bloor Street (from Yonge Street to Avenue Road) had the highest percentage of available retail space at 18.75 per cent, while at the other end of the scale Ossington Avenue (between Queen Street West and Dundas Street West) had no retail availability at the end of June.
That same stretch of Bloor had the highest average asking rent at $222.73 per square foot per year.
It was followed by Yonge (from Queen to Gerrard Street) at $113.14 and Yorkville Avenue (between Yonge and Avenue Road) at $105.83.
Thirty-seven new leases totalling more than 64,000 square feet were transacted in the second quarter.
Yonge (from Gerrard to Bloor) and Queen West (between Spadina Avenue and Bathurst Street) had the most activity, with 11 and six new leases signed, respectively.
Food and beverage was the leading category in terms of number of new retail transactions at 17, as well as total square footage leased at nearly 37,000 square feet.
The largest Q2 lease signing was Greta Bar taking 13,200 square feet at 590 King St. W.
Optimism for the future
Gorman is optimistic about the prospects for Toronto street-front retail continuing to improve.
“I think we’re going to see increased occupancy rates in office buildings and that the population in the downtown core is going to continue to climb, and I think it’s going to be very positive,” he said.
“I think we’re going to continue to see lots of leasing velocity and strong demand for new retailers in the downtown core.”
Higher interest rates continue to dampen enthusiasm for commercial real estate, both CBRE and Colliers note in second-quarter reports exploring cap rates and market conditions for different asset classes and markets across Canada.
Cap rates continued to trend higher across most major asset classes, with the national average all properties yield rising 16 basis points quarter-over-quarter to 6.28 per cent in Q2, according to CBRE’s report.
While real estate spreads tightened quarter-over-quarter due to a rebound in bond yields, they’ve continued to widen and have risen 56 basis points over the past four quarters to 301 basis points, CBRE chairman Paul Morassutti wrote.
Overall Q2 commercial real estate investment activity was softer than expected.
Office, industrial and retail
Office investment remains muted due to uncertainty regarding people returning to offices and hesitancy from lenders, according to the Colliers report.
Class-AA, class-A and class-B office cap rates rose in the quarter, with downtown properties seeing a slightly larger increase than suburban product.
The cap rate spread between class-AA and class-A and class-B assets grew by a larger margin downtown than in the suburbs, where the spread held relatively steady.
While industrial leasing remains strong and it’s still a landlord’s market, the unprecedented leasing boom of the last few years — with 50 per cent-plus year-over-year rent growth in some markets — has tapered off.
Cap rates for both class-A and class-B industrial assets rose in the quarter, with class-A increasing at a higher rate.
Basic retail continues to perform extremely well despite inflationary pressures and interest rate hikes, with grocery-anchored retail attracting investors.
Retail redevelopment potential is becoming an increasingly important consideration for investors.
Intense pressure for more housing, combined with government decisions to loosen zoning in major markets, may introduce extra value for low-density assets such as suburban malls.
National retail cap rates across regional, power, neighbourhood, strip and urban street-front retail continued to rise, while strip (non-anchored) assets saw yields hold flat quarter-over-quarter.
Among the categories that saw cap rates rise, the yield expansion was relatively uniform with increases averaging 15 basis points quarter-over-quarter, according to CBRE.
Multifamily, seniors housing and hotels
Canada’s record-breaking population growth, combined with severely unaffordable home ownership, has buoyed the apartment investment market even in a high-interest-rate environment. Multifamily cap rates remain extremely low based on expectations of double-digit rent growth and strong investor demand.
Cap rates rose marginally, with yields holding steady across most markets. Relative to other asset classes, the national average cap rate for all multifamily categories rose at a much slower pace of four basis points quarter-over-quarter to 4.43 per cent, CBRE national apartment group vice-chairman David Montressor wrote.
Seniors housing investment activity in the quarter continued to be dominated by distressed assets and/or owners paired with buyers for whom the assets have strategic value. The sector continues to record meaningful rent growth that should minimize or eliminate interest rate effects on cap rates for well-positioned assets.
The lodging market is experiencing a surge, with many markets achieving new heights in average daily rates. Among the factors are the faster-than-expected return of leisure travellers and the utilization of hotels for refugees and social lodging.
Preliminary hotel investment volume in the first half of 2023 surpassed $900 million, significantly above the $550 million in the first half of 2022 and exceeding the $830 million in the first half of 2019.
Hotel cap rates held stable as upward pressure from underwriting higher debt costs is offset by hotel operating fundamentals outperforming annual budgets.
Vancouver and Victoria
Vancouver already has the lowest office vacancy rate in North America and the market is expected to improve further as more employees return to offices and the workforce continues to grow.
Vancouver’s industrial and retail sectors are performing well, with excellent fundamentals that will likely mitigate any further upward pressure on cap rates.
Industrial lease rates remain at record highs while the retail sector is experiencing average cap rates well below the national average of six to seven per cent.
Investor interest remains strong in apartment buildings, although cap rates continue to move upward on some deals.
While office investment activity in Victoria was non-existent, vacancy remained stable.
Industrial properties continue to record increases in asking rents.
Rental housing shortages, a scarcity of prime development sites and the lengthy land entitlement process are keeping investment activity strong in the new build/forward sale multifamily market despite heightened construction and financing costs.
Calgary, Edmonton and Winnipeg
Buildings that can be converted into multifamily comprised the bulk of the office transactions in Calgary’s downtown core, with the main catalyst being the city’s grant program.
Industrial and multifamily assets continue to be the most sought-after assets for investors as vacancy rates are at, or near, historically low levels.
Low industrial vacancy is driving lease rates higher while limited supply and rising construction costs contribute to a tight market for owner-user facilities.
Retail demand is mostly focused in the anchored sector, with small unanchored strip centres also seeing liquidity.
Edmonton office investment remains weak while strong tenant demand continues to fuel the industrial market.
While a healthy economy and consistent tenant demand have prevented increases to retail vacancy, there’s been little new construction.
Multifamily continues to strengthen due to strong employment and population growth. Private capital dominates the investor landscape; institutional investors are largely on the sidelines due to capital markets volatility.
Hotel investment activity has been brisk in expectation of rising net income. Financing remains difficult, however, although it continues to evolve and improve.
Momentum built in Winnipeg’s industrial market with a 10-basis points decrease in availability rates to 2.1 per cent in the quarter.
The city’s multifamily market continues to hold steady as the rental economy remains competitive.
Toronto, Kitchener-Waterloo and Ottawa
Industrial continues to be the most in-demand asset class in Toronto. Leasing remains strong, with rates supported by low vacancy. Investor and end-user demand for properties has provided good support for values.
Office continues to be the most challenging asset class, with less financing availability and limited investor interest.
Investor demand for multifamily remains strong, with limited new supply and rental growth driving performance in existing buildings.
Underlying office market fundamentals are strong in certain areas of Waterloo Region and weak in others, leaving more questions than answers for potential investors.
Several office buildings have been sold for conversion purposes.
While there’s demand for industrial space and the fundamentals remain strong, significant pricing gaps remain.
The retail market has been showing more signs of activity.
Sales volume is up in multifamily. Institutional buyers still aren’t active, however, as private purchasers drive the market.
The Ottawa office market continues to evolve in the face of increasing vacancy and downward trending rental rates.
Adaptive reuse strategies for obsolete federal government buildings that will be deemed surplus are expected to continue. Several residential conversion projects have been delivered.
Investors continue to seek out opportunities in the multifamily market to capitalize on increasing rental rates.
While retail rental rates in prime locations continue to rise, the downtown core is struggling with upwards of 35 per cent of all retail space currently vacant.
Montreal, Quebec City and Halifax
Investors continue to gravitate toward short-term leased industrial properties in Montreal, with increasing activity from private capital. Net rents have normalized with moderate growth versus the historic increases over the past two to three years.
Limited availability of debt capital continues to hamper office investment; active office buyers have predominantly been value-add investors and users. Rents have begun to soften, due mostly to the sub-lease market.
Demand for necessity-based retail assets continues to be strong, with interest from both institutional and private capital. Small strip centres are starting to trade, as are community and grocery-anchored investments.
Multifamily assets remain attractive, as a lack of supply exerts upward pressure on rents. Most deals are being done by private investors.
Developers, however, are putting multifamily projects on hold due to inflation and higher borrowing and labour costs.
In Quebec City, industrial rents are rising fast and vacancy rates remain low.
Although rents remain stable, office vacancy rates are increasing in many sectors. Suburban offices and anchored retail are garnering interest from private local investors.
Low vacancy and little availability are keeping upward pressure on multifamily rental rates.
Multifamily and land transactions made up the bulk of investment trade dollar volumes in Halifax for the first half of 2023. Both sectors continue to be in demand, especially newly constructed apartments.
Multifamily construction continues despite ongoing cost pressures, as demand outpaces supply and record-setting rents are being achieved.
The industrial market remains the strongest sector, with low vacancy rates and continued upward pressure on rental rates. Industrial trade activity is being driven by owner-occupiers.
While office vacancy rates remain challenging, there are some positive indications of absorption and market rents.
Retail investment remains muted, although vacancy is trending downwards and rents are rising.
Regency Centers Corp. on Friday completed its acquisition of Urstadt Biddle Properties in a $1.4B all-stock transaction.
The previously announced deal will merge the two REITs’ portfolios of shopping centers, which are largely grocery-anchored. The combined company has a pro forma market capitalization of more than $11B and a total enterprise value of $16B, according to Jacksonville, Florida-based Regency Centers.
Greenwich, Connecticut-based Urstadt Biddle had 75 properties as of March, primarily in the New York metropolitan area. That represents a small yet significant portion of the 56M SF and 480 properties Regency says it now owns.
The acquisition of Urstadt Biddle will help Regency grow its footprint of “high-quality, grocery-anchored shopping centers in premier suburban trade areas,” Regency said in a news release.
Urstadt Biddle’s properties are attractive to retailers given their affluent suburban locations, Dane Bowler, chief investment officer with 2nd Market Capital Advisory Corp., said in a March analysis on Seeking Alpha.
Regency’s shopping venues serve markets with a median household income of more than $125K across its portfolio, according to its website.
“The portfolio that Urstadt Biddle has carefully assembled over the more than 50 years offers a highly aligned demographic and merchandising profile to Regency,” Regency Centers CEO Lisa Palmer said in a statement.
Urstadt Biddle was founded in 1969 as an affiliate of Merrill Lynch then called Hubbard Real Estate Investments, CoStar reported. Charles J. Urstadt joined the company as a director in 1975 and became its CEO in 1989, eventually narrowing the REIT’s focus to grocery-anchored shopping centers in affluent New York neighborhoods, according to the article.
Regency operates open-air and neighborhood grocery-anchored centers across the U.S. coasts and its midsection. The REIT cited an increase in tenant demand for its spaces during a May earnings call, even as some retailers like Bed Bath & Beyond fell into bankruptcy and shuttered stores.
REIT mergers have been sparse this year compared to the $83B in REIT merger transactions last year, CoStar reported using data from REIT trade group Nareit.
Deals this year include affiliates of Centerbridge Partners and Singapore’s GIC Real Estate acquiring industrial REIT Indus Realty Trust in an $868M deal, as well as operational expense-focused REITs Global Net Lease and Necessity Retail REIT merging in a $4B all-stock transaction, per CoStar.
Even though high interest rates and economic uncertainty have slowed the flow of mergers and acquisitions, investors view grocery-anchored shopping centers as a safe bet, CoStar reported, citing more frequent visits and higher foot traffic for necessities like food than other types of shopping centers.
The largest mall in London, Ont., could undergo a transformation over the next few years after being acquired by local company Westdell Development Corporation in an off-market deal with BentallGreenOak.
JLL’s Nick Macoritto and Matthew Smith approached Westdell and brokered the transaction involving the 50-year-old, 700,000-square-foot White Oaks Mall. Financial details haven’t been disclosed.
The enclosed shopping centre sits on about 46 acres at 1105 Wellington Rd. near Highway 401 and offers nearly 180 stores and services and 3,350 parking spaces.
It’s anchored by several major retailers, including Walmart and The Bay.
“We’re hoping that we can add multiple uses to it and bring in office, retail and residential under some form,” Westdell president Iyman Meddoui told RENX.
White Oaks will become a transit hub
White Oaks will also become a transit hub for the local bus rapid transit system now under construction.
“Being a transit node, we think there’s a strong opportunity to take an already good and viable asset and make it better,” Meddoui said.
While plans for the White Oaks intensification are still in the early stages, Meddoui said Westdell likes to move quickly on such projects.
He also noted London and the other municipalities it has worked with have generally enabled the company to do that when it comes to development applications.
“We would anticipate that within 18 to 24 months we would have our first whatever-it’s-going-to-be and whatever-it’s-going-to-look-like approved and potentially in the ground.”
Westdell’s other activity
Westdell was formed in London as a residential developer in the 1990s and then quickly moved into commercial real estate.
It owns more than 30 properties and is most active in southwestern Ontario, with London and Windsor being its two primary markets.
Westdell also owns the 135,000-square-foot Arnprior Shopping Centre in the town of the same name northwest of Ottawa.
“We’re a multi-faceted corporation,” Meddoui said. “We have our own development team, acquisition team, leasing team and property management services.”
Westdell recently redeveloped London’s Wellington Gate Centre and is welcoming new tenants in addition to recent arrivals Wendy’s and Tahini’s at a location already occupied by Staples and Tim Hortons.
Westdell is actively seeking new opportunities in markets and neighbourhoods in need of commercial or mixed-use development as well as existing commercial properties with intensification potential, such as White Oaks.
A 142-unit apartment building called Aria is under construction at 420 Fanshawe Park Rd. E. in London, not far from the 185,000-square-foot Hyland Centre where Westdell is based along with several retailers, commercial and office tenants.
The company is seeking site plan approval to add 269 residential units to Hyland Centre.
Westdell owns a 20-acre, fully zoned development site at 1370 Fanshawe Park Rd. E. and a greenfield site at 952 Southdale Rd. where it’s proposing to build more than 130,000 square feet of retail and residential space.
There are plans to build three high-rise residential buildings with almost 500 units at 689 Oxford St. W. near Wonderland Road. The site is currently occupied by the 32,220-square-foot Oxford Capulete Centre retail plaza.
There are plans for an 18-storey, 188-unit apartment building called Oxbury Place on the 11-acre site of Oxbury Centre, a 170,000-square-foot retail plaza at 1299 Oxford St. E.
Westdell recently received approval to move forward with a 100-unit residential project in downtown London.
Meddoui is hoping some of these projects will move forward in 2024.
Westdell is also looking to intensify some of its Windsor retail properties that have land for additional development.
It will add 640 rental residences and 10,397 square feet of commercial retail space to a 9.53-acre property at 2700 Huron Church Rd. at the intersection of Tecumseh Road West.
More retail intensification proposed for London
Other London retail property owners are also looking to intensify their sites, according to Meddoui, who said it’s becoming “more and more common.”
These intensification projects include:
Cadillac Fairview’s CF Masonville Place, a 627,267-square-foot mall with more than 150 stores at 1680 Richmond St., where several residential buildings are proposed;
and KingSett Capital and Corpfin Capital Inc.’s Westmount Commons, a 530,000-square-foot-plus mall with 3,000 parking stalls occupying a 31-acre site at 785 Wonderland Rd. S., where the addition of six residential buildings with 898 units, as well as office and more retail space, has been proposed.
Meddoui said London has one of the lowest residential vacancy rates in the country and demand remains very strong, while there’s also a lot of activity in the condominium market.
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