Toronto commercial real estate market update - Q2 2024

The Greater Toronto Area market conditions have been slow to recover, with investment volume down by 19% year-over-year

The Greater Toronto Area (GTA) reported $9.3 billion in dollar volume transacted for the first half of 2024, down 19% year-over-year (YoY). The Bank of Canada’s decision to lower the overnight interest rates by 25 basis points to 4.75% on June 5th will have boosted sentiment for some investors. However, further rate cuts would be required for all asset classes to see a more significant increase in transaction activity. Altus Group’s latest Canadian CRE Investment Trends Survey (ITS) ranked Toronto third on the location barometer, with food-anchored retail strips and suburban multi-tenant industrial as the preferred product types, respectively. 

Figure 1 - Property transactions – All sectors by year

In the first half of 2024, the industrial sector eased to balanced conditions after the record-breaking delivery of industrial completions in the fourth quarter of 2023. Coupled with economic headwinds, industrial demand slowed with nearly $3 billion in dollar volume transacted, a 30% decrease YoY. The GTA registered negative absorption in Q2 2024, the first since Q1 2020, due to the surge of new supply and high vacancy rates upon completion. According to Altus Group’s most recent Canadian industrial market update, Toronto’s industrial availability rate climbed by 40 basis points to 4.6% from the previous quarter. The GTA also saw 764,958 square feet of new supply enter the market, with 98% pre-leased. In addition, nearly 13.2 million square feet are under construction, with 26% pre-leased.

Trading in office assets continued on a downward trend, with $735 million in dollar volume transacted, a 23% decrease YoY. This trend was primarily driven by companies’ approach to balancing both hybrid work models and return-to-work mandates, as well as the bifurcation of the market. As companies continued to favour Class-A office buildings, outdated Class-B and -C buildings have struggled to maintain occupancy, forcing landlords to invest in their older buildings to remain competitive. To this effect, Altus Group’s latest Canadian office market update revealed that Toronto’s availability rate climbed by 50 basis points to 18.8%. The market recorded three new office completions totaling 231,180 square feet, with 25% pre-leased. Furthermore, the GTA has 3.8 million square feet under construction, with half of the space pre-leased.

Activity in the multi-family sector slumped in the first half of 2024, with $692 million in dollar volume transacted, a 22% decrease YoY. Despite two consecutive interest rate cuts, market activity is not expected to lift until additional rate cuts can be translated into lower mortgage rates, as housing affordability remains a primary concern amongst Canadians. Furthermore, high construction and financing costs have also resulted in a moderation in housing starts, which only served to tighten market conditions.

Retail leasing activity in the GTA concentrated on select retail formats, such as neighbourhood and regional shopping centres, primarily centres with grocery anchors or redevelopment opportunities. In the short term, the low availability of retail space, unfavourable economic conditions, and reduced discretionary spending have constrained the retail sector, with $1.3 billion in dollar volume transacted as of H1 2024, an 11% increase YoY. The outlook for the GTA’s retail sector has remained positive, supported by strong population growth and interest.

The hotel sector reported $519 million in dollar volume in the first half of 2024, a dramatic increase compared to the $163 million recorded in the same period last year. This increase was primarily driven by InnVest Hotels’ acquisition of a hotel portfolio from Morguard in January 2024, who sold two properties to Manga Hotels shortly after. In the second quarter of 2024, the sector has moderated, with a 94% decrease YoY.

The land (residential and ICI land) sector recorded nearly $3.1 billion in dollar volume transacted, a 25% drop compared to a year ago. The residential land and lots sector recorded $1.2 billion in dollar volume transacted and the ICI land sector recorded $740 million transacted, a 34% decrease and a 4% increase YoY, respectively. Transaction volume remained below historical standards as challenges with securing financing persisted and developers continued to be more strategic with their acquisitions.

Figure 2 - Property transactions by asset class (Q2 2023 vs. Q2 2024)

Notable transactions for Q2 2024

25 Dockside Drive – Office

The largest office transaction of the second quarter was the sale of 25 Dockside Drive, a ten-storey building acquired by George Brown College in partnership with Halmont Properties for $232.5 million. Spanning approximately 484,477 square feet, this waterfront property was purchased for $480 per square foot. The purchasers intend to honour existing leases, including the main tenant, Corus Entertainment, whose lease extends for another decade. George Brown College plans to gradually incorporate academic functions into the space adding to its three downtown campuses.

2600 North Park Drive – Industrial

A private investor acquired this 331,027 square foot Brampton warehouse from Oxford Properties Group for $110 million. The property is located on approximately 30 acres, containing significant excess land and providing an opportunity for future expansion. At the time of sale, the property was completely vacant with the purchaser actively marketing the vacant space for lease.

2000 - 2012 Sheppard Avenue West – Apartment

QMW Corp. acquired this multi-family property for $101 million, representing the quarter's largest apartment transaction. This complex, which consists of a 19-storey, 266-unit high-rise residential tower and 54 townhomes on an 8.34-acre site, was purchased for a price per unit of $315,625. QMW Corp. owns and operates over 30 residential, mixed-use and industrial properties across the GTA. This transaction marks QMW Corp’s largest multi-family purchase, having acquired the four-building, 115-unit complex at 31 Clearview Heights from Marlin Spring in 2021.

12561 Centreville Creek Road – Residential Land

Representing the largest residential land transaction of the second quarter, Solmar Development Corp. purchased this approximately 98.2 acre site for $125 million. This acquisition adds to Solmar’s significant Caledon area holdings, having acquired an adjacent 98.8 acre site at 12494 The Gore Road for $16.5 million in 2018 and a 26.7-acre site for $9 million in 2020. Currently, there are no development applications in place.

Figure 3 - OCR trends across 4 benchmark asset classes

Conclusion

Looking ahead, the GTA is expected to gradually rebound with the anticipation of further interest rate cuts. As the market stabilizes and long-term fundamentals remain strong, the industrial sector in the GTA continued to be a favourite amongst investors, comprising a third of the total dollar volume in the first half of 2024. Furthermore, the retail sector has shown a significant rebound compared to the same period in the previous year, with the multi-family sector likely to follow as financial conditions ease with the anticipated rate cuts.

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