constrained Toronto market

Constrained Toronto market curbs Q2 investment

Tuesday, August 7, 2018

Land deals accounted for half the value of real estate investment in the Greater Toronto Area (GTA) during the second quarter of 2018, including the largest single transaction. The Public Sector Pension Investment Board’s $825-million purchase of Bombardier’s 365-acre Downsview site far surpassed the priciest office deal. That was Tigra Vista Inc’s acquisition of the 865,000-square-foot Parkway Place complex from Agellan Commercial REIT for $265.3 million.

Altus Group tallies 574 investment transactions in excess of $1 million across all asset classes, amounting to $5.6 billion during the months of April, May and June. Residential and ICI land sales each represent roughly a quarter of that value.

Office activity dipped considerably with total investment value at $728 million, down 59 per cent from the previous quarter. Analysts attribute this primarily to the constrained Toronto market, which simply lacks product for sale. That’s keeping institutional investors on the sidelines even though vacancy rates remain tight and rents are climbing.

Marcus & Millichap reports a 6.1 per cent vacancy rate across nine GTA submarkets, but that drops to 3.4 to 3.5 per cent in Toronto’s downtown and midtown districts. Midtown is enjoying a 5 per cent increase in asking rents since midyear 2017, taking the average to $40.50 per square foot. The downtown average also moved up 1.3 per cent over the past 12 months, to hit $46.60 per square foot.

Outlying markets are likewise improving. GTA-wide, average asking rents are up 3.4 per cent, to $32.60. The Class C office market has made the greatest gains as average asking rents rose nearly 11 per cent since June 2017, to reach $28.94 per square foot. Class B rents have picked up 5.1 per cent in the same period, with the average asking rate now at $32.43 per square foot.

“Robust rent growth and low vacancies in areas such as Peel, York and Midtown will keep investors active through the remainder of the year, though some buyers may find a lack of suitable listings on the market,” Marcus & Millichap analysts project. “Strong Class A demand and years of supply growth will keep institutional investors active in the downtown and financial core areas, while yield-driven buyers will extend searches beyond the urban core.”

Retail and multifamily transactions accounted for a similar share of overall investment value during the second quarter, at nine and 10 per cent respectively — indicative of a dip in one sector overlapping with a pickup in the other. Altus reports the volume of retail property transactions hit a four-year high, but 80 per cent were worth less than $5 million. Retail sales collectively amounted to $504 million, while $560 million worth of multifamily deals nearly doubled the previous quarter’s tally and ranks Q2 2018 as the strongest quarter in five years.

“Private investors are entering the market and acquiring smaller assets. As we’ve seen in the office sector, constrained market conditions have resulted in the lack of institutional purchases of prominent retail assets this quarter,” Altus analysts observe. “Although cap rates continue to compress, the apartment sector remains one of the most in-demand assets and has proven to be one of the more stable investments in the GTA market.”

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