Toronto commercial real estate market update

Continuing the momentum from a recording setting 2021 year, the Greater Toronto Area (GTA) commercial real estate market started 2022 extremely strong. Momentum tapered off in the second half though, recording an annual investment total of $30 billion. This marked the second highest yearly investment total ever recorded in the GTA. Despite the pause seen in investor activity in the second half of the year, the GTA market continued to show strong market fundamentals.

Overall investment recorded just a 10% year-over-year decline, compared to 2021’s record performance. The market slowdown during the second half of the year was driven by interest rate increases and uncertainty surrounding a potential recession. A total of seven interest rate increases throughout 2022 led to significant changes in the borrowing environment, and as a result, total investment in the fourth quarter of 2022 was only $4.9 billion (a 53% decrease from Q4 2021).

Industrial properties led the way as the top performing asset, with $7.5 billion in total investment, down slightly from 2021. With high demand for industrial space and availability rates continuing to hover at 1.2%, it was no surprise that this asset class was an investor favourite. While industrial demand remained strong, we saw a pause in other improved assets and land sectors throughout the GTA.

Land sectors (residential, ICI and residential lots) continued to be prominent in the GTA market as new construction to satisfy the demand for residential and commercial space persisted. Residential land was the second most popular sector, closing out 2022 with $7.2 billion in total investment. Despite this strong yearly total, we saw a sharp decline towards the end of the year with investment tapering from $4.6 billion in the first half, to only $2.6 billion in the second half.

The third and fourth most invested assets in 2022 were ICI land and office assets which registered $5.2 billion and $3.8 billion, respectively. Despite the increasing vacancy rates and uncertainty surrounding hybrid work, the office market continues to attract buyers. Uncertainty around the office asset class persisted, but with multiple significant office transactions in 2022, investors continue to show optimism for this asset class as people slowly start heading back into office. With investment activity slowing, cap rates for Q4 2022 have continued to trend upward across all major asset classes in response to the evolving economic uncertainty. The overall cap rate for the GTA market as of Q4 2022 sits at 4.53%, a jump from Q3 2022 and Q4 2021.

The pause in market activity towards the end of 2022 was also mirrored with only 187 new development applications submitted to the City of Toronto. This represents a 7.5% decrease in new applications year-over-year between 2021 and 2022. Most applications were submitted in the first half of the year, with a large drop off in applications in Q4, resulting from developers tightening their development pipelines in response to the volatile economic environment.

Notable Q4 2022 transactions

The following are the notable transactions for Q4 2022 Toronto commercial real estate market update:

Pure Industrial Portfolio, Peel & Halton – Industrial

With nearly 1.5 million square feet of gross leasable area, this six-property industrial portfolio located in the City of Brampton and Town of Milton was purchased by Pure Industrial for a total consideration of $428 million. This was their final acquisition in the GTA market for 2022 - where they had invested nearly $700 million in industrial assets.

123 Bellamy Road North, Scarborough – Apartment

This 250-unit, 12-storey rental apartment building was acquired by Hazelview Investments for $94.5 million. Located within walking distance of the Eglinton GO station, the property sits on nearly 4.7 acres, which provides the new owners with future development opportunities. This acquisition was the fourth City of Toronto multi-family residential property acquired by Hazelview Investments in 2022. In February, Hazelview Investments acquired a 3-building multi-family portfolio containing 382 units for a total consideration of $154.8 million.

2075 Kennedy Road, 26 & 50 Village Green Square, Scarborough – Residential Land

Acquired by Vancouver based developer Landa Global Properties for $81.8 million, this 6.5-acre site is currently improved with a multi-tenanted, 13-storey office building which contains a gross leasable area of approximately 216,000 square feet. The seller of this property was KingSett Capital who originally acquired the property as part of a national $1.4 billion dollar portfolio in September 2017. This purchase by Landa Global Properties represents their first Ontario acquisition and re-development project.

Applications have already been submitted to the City of Toronto which propose a residential development containing a total of 920 residential units within three condominium towers with heights of 31, 34 and 36-storeys.

Despite the challenges faced during the second half of the year, investors proceeded with caution navigating the current economic uncertainties, but the GTA commercial real estate market remained resilient and continues to be a favourite amongst investors.

According to the Altus Group Investment Trends Survey for Q4 2022, respondents ranked the GTA market as the most preferred Canadian market with Vancouver and Ottawa as the second and third most preferred market. As the new year begins, we await more clarity on how the commercial real estate space will navigate the new set of challenges it faces.