By Erika Siegert, Senior Analyst, National Research Insights | August 7, 2020

GTA commercial real estate market experiences pause in second quarter

The second quarter saw the resulting impact from the rapid spread of COVID-19 and mandatory lockdowns that began in mid-March. Working from home became the new normal, streets were quiet during what would have been rush hour, and real estate sales hit the pause button. In the first half of 2020, total investment volume dropped to $7.9 billion, down by 22% compared to the first half of 2019. Total investment volume in Q2 2020 totalled $3.8 billion, down by 37% compared to Q2 2019, and was the first time that quarterly totals fell below the $4 billion mark since Q1 2016. Transaction volume also decreased in the first quarter of 2020 to 403 transactions, down by 29% in comparison to the same quarter last year.  Impacts from the pandemic were reflected in the market most significantly in the month of May – registering only 106 transactions and an investment total of $471 million, which was a drop of 68% from May 2019.

The most active investments were in the industrial sector at nearly $1.7 billion. Although the industrial sector outperformed the other asset classes, this was largely due to the sizeable industrial portfolio acquired by Ontario Power Generation (OPG). The GTA component of the OPG portfolio represented 78% of the total industrial investment recorded in the second quarter. Likewise, the apartment sector was strong in comparison to other improved asset classes, with a Q2 investment total of nearly $310 million, largely attributed to the Flagship Property Ventures to Timbercreek portfolio which represented 46% of the total apartment investment in the second quarter. The land sectors (residential land, ICI land and residential lots) continued to be prominent amidst market uncertainty for a combined total of $1.3 billion, accounting for 34% of total investment volume. The sector that saw the biggest decrease in investment in the first half of 2020 was the office sector, falling 68% compared to the same period last year. The office sector also declined by 83% in Q2 2020 compared to Q2 2019. According to Q2 2020 results from Altus Group’s Investment Trends Survey, Toronto is still one of the top markets preferred by investors both domestically and on a global basis. Still, Q2 2020 saw the industrial and multi-residential asset classes gain momentum in the Toronto market compared to the previous quarter. Cap rates have risen slightly across asset classes except for industrial, as investors respond to pandemic-induced changes and continue to assess new risks in the market.

GTA Q2 2020 overall cap rates

Notable transactions:

Halton Hills Generating Station, Halton Hills – Industrial
Not your typical industrial property, this 683-megawatt natural gas powered generating station is the largest transaction by sale price closing in the first half of 2020. Acquired by the Ontario Power Generation (OPG) for just over $750 million, this infrastructure asset was part of a 3-property power plant portfolio that was sold by TC Energy to OPG. Along with the Portlands Energy transaction in the City of Toronto ($578 million for a 50% interest) and a property in Napanee, this 3-asset portfolio sold for approximately $2.87 billion.

Flagship Property Ventures to Timbercreek Portfolio, City of Toronto – Apartment
This 9-property multi-residential portfolio spread across the City of Toronto was acquired by Timbercreek Asset Management for approximately $143.4 million. With properties among the portfolio ranging from 16 units all the way to 108 units, the sale price of this acquisition by Timbercreek makes up approximately 46% of the total investments made in the multi-residential asset class this quarter.

230 & 240 Richmond Street West, Old Toronto – Office
The largest office transaction seen in the second quarter was the 50% interest sale of 230 & 240 Richmond Street West acquired by Sun Life for $39.4 million. This 119,442 square foot multi-tenant property was fully occupied by WeWork as well as Ontario College of Art & Design (OCAD), the vendor in this transaction. With this acquisition, Sun Life now co-owns this property together with Hullmark who acquired their 50% interest in this asset in May 2015 for $17.5 million.

5040-5060 Spectrum Way, Mississauga – Office
This 5-storey multi-tenant building was the second largest office transaction from this quarter. The property was sold by GWL Realty Advisors and acquired by foreign investors for $33.8 million. The 114,505 square foot office complex was fully occupied by eight tenants at the time of sale with a weighted average lease term of approximately six years. The property offers re-development potential on the excess lands as the site is comprised of nearly 10 acres.

365 Queen Street West, Old Toronto – Retail
This 4-storey mixed-use building located in the heart of the trendy Queen West neighbourhood was the largest retail property sold in the second quarter. The building was acquired by Ergo Properties for $25 million. Built in 2015, the building contains approximately 15,000 square feet of above grade space. The vendor in this transaction originally assembled the lands between 2010 and 2011 for a total consideration of $7.8M prior to constructing the current property. At the time of sale, the building was fully occupied by Canopy Growth.

63-91 Montclair Avenue, Old Toronto – Residential Land
This $52 million acquisition by Parallax was the largest residential land transaction seen this quarter. The 0.809-acre site is currently comprised of 14 single-family detached homes and is located in the Forest Hill neighbourhood. Prior to this transaction, the purchaser acquired an adjacent parcel in 2019 for $2 million. The completed assembly by Parallax totals just over $54 million for approximately 0.857 acres of land. A re-zoning application was submitted at the end of June by the purchaser who seeks to construct a 23-storey, 634-unit residential condominium development. The development would have a total gross floor area of approximately 420,000 square feet.

GTA property transactions by asset class H12019 vs H12020

With ongoing changes in the market due to the global pandemic, investment expectations for the time being have been myopic, creating a disconnect between vendors and purchasers regarding pricing. As seen in previous quarters, investors are still confident in the multi-residential and industrial sectors, as these two asset classes have been affected less by the current market conditions. Overall, demand for quality GTA real estate assets remains strong amid all of the uncertainty. With restrictions gradually lifting, and the construction industry recommencing, the third quarter could witness some return to normalcy in the GTA market.

 

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