In not-so-long-ago pre-COVID-19 times, investment properties traded robustly in the Greater Toronto Area (GTA) in the first quarter of 2020 despite the hints of a looming pandemic. Altus Group reports $4 billion worth of transactions in the first three months of the year, a slip of just 3 per cent from Q1 2019. Meanwhile, deal volume jumped 5 per cent from the same period last year, totaling 530 sales.
Arguably, too, that more accurately reflects first quintile GTA investment activity since COVID-19 skittishness set in in earnest about the second week of March. “With the implementation of social distancing and stay-at-home measures, the investment market has temporarily paused in March and April,” Altus analysts conclude in their recently released Q1 GTA investment transaction overview.
Avison Young analysts, Bill Argeropoulos and Steven Preston, tally several uncertainties underpinning that pause — everything from a risk premium on debt as underwriters struggle to gauge the impact of rent deferrals on operating income to social distancing protocol inhibiting property tours — but maintain buyers and lenders are open to getting back into the game.
“There is strong interest from buyers generally, although difficulty in closing the bid-ask spread will remain for the short term. Many investors with capital are looking for opportunistic acquisitions,” they submit in Avison Young’s recent COVID-19 Impacts on Canadian Commercial Real Estate report. “Sentiment among lenders is that they are still hungry to place capital and fill their pipelines with new deals.”
Looking back to Q1, investors most actively acquired land, retail and industrial properties. Land accounted for 47 per cent of deal value, or $1.7 billion, with residential land standing out as the only asset class to surpass $1 billion in investment for the quarter.
“Although Toronto remained one of the top markets preferred by investors this quarter, buyer momentum declined from the previous quarter and from the same quarter last year,” Altus analysts note. “With transactions typically negotiated months prior to closing, we will likely not see the significant effects of this global pandemic until the second quarter of this year.”
Together, 137 retail transactions and 119 industrial transactions accounted for 48 per cent of deal volume. Sales values also nudged up slightly compared to Q1 2019 for both asset classes, albeit remaining well off the $1 billion mark. The apartment sector saw the steepest climb in sales value, up 164 per cent from Q1 2019, while office sales value experienced the steepest drop, down 43 per cent from Q1 last year.
Just three of the 503 deals hit or surpassed $100 million, all for development land. That includes residential land in close proximity to the Crosstown LRT, currently under construction along a 19-kilometre stretch of Eglinton Avenue, residential land on the downtown waterfront, and the City of Toronto’s purchase of a 0.65-acre downtown surface parking lot, which it intends to convert to parkland.
The $96.3 million acquisition of the Erindale Corporate Centre in Mississauga was the quarter’s most lucrative office trade. “This 342,606 square foot Class-A office complex was approximately 93% occupied at the time of sale with a weighted average lease term of approximately seven years,” Altus reports.
Q Residential’s $93 million purchase of an 18-storey, 325-unit apartment tower in northwest Toronto was the top multifamily trade. “The vendor (Minto Properties) had originally acquired this property in June 2017 for $55 million and subsequently made significant upgrades and renovations,” Altus reports.
Summit Industrial Income REIT purchased the six-building Cochrane Industrial Park in Markham from Public Sector Investment Pension Board, which was the top industrial property sale at $42.5 million. Altus analysts now predict industrial will be a preferably placed asset class as COVID-19 accelerates e-commerce market share and hits bricks-and-mortar retail hard.
“Investors are looking to put more money into industrial assets,” Argeropoulos and Preston concur.
“Canada still remains one of the most sought-after markets for investors that are seeking safe returns,” the Altus report contends. “During these challenging times, wary investors are carefully adapting to market changes by reassessing their strategies and reconsidering their capital flows and overall risk tolerance.”