Toronto Commercial Real Estate Market UpdateAugust 11, 2020
August 11, 2020 – Marked by peaking rental rates and record-low vacancy amidst seemingly unappeasable demand, Toronto’s office market’s pre-pandemic outlook was robust and promising. And although it is largely insulated from the recessionary effects of a pandemic, the lockdown has muted leasing levels, led to an uptick in sublease space and forced occupiers to rethink how they use their office space. Nearly all firms postponed transactions that weren’t driven by lease expiry as large-scale leasing was essentially non-existent in Q2. Complexities associated with a lower density office environment and business continuity plans have taken center stage as tenants are now turning their attention to re-entering their spaces while factoring in social distancing, symptom monitoring, availability of PPE and strict adherence to regulations. The multi-year trend toward densification has reversed sharply while public health officials may amend building codes to limit the risk of future pandemics affecting standards for HVAC, square footage per person, and enclosed space ratios. With reduced tenant competition and more options on the market for potential occupiers down the road, it is likely that rent growth will level off this year and certain submarkets could potentially see negative growth by year-end. Reduced investment activity lends credence to this expectation with acquisition capital temporarily freezing and minimal foreign investment activity entering the market.
Toronto’s industrial sector seems poised for sustenance through the pandemic as well as potential late-year growth. Manufacturing, production, maintenance and supply chains are still among the most essential services and provide an opportunity for revenue during a time of uncertainty. E-commerce sales have spiked driven by demand for the delivery of essential items and groceries while there is renewed demand for dark kitchens and order fulfillment warehouses. Owners and tenants alike will need to coordinate closely with the public sector to forge plans that are essential to both public safety and the solvency of their workforce, while keeping the lights on in their operations. This will be particularly relevant to manufacturers of critically important components, parts and finished goods, especially those involved in critical infrastructures such as energy and power, transport, communications and food and agriculture.
The deterioration of Toronto’s retail sector has been swift and the true extent of the damage to the economy could be widespread. The shutdown of all but essential stores added further strain to several years of weak retail sales, rising property taxes and the shift to e-commerce. Even with the increases in May and June, Q2 2020 will go into the books as among the worst ever for retailers. The key consideration is whether the sharp rebound will be sustained in the coming months or the pace of spending growth will slow with millions of Canadians still out of work, government aid winding down, and restrictions on some businesses likely to linger. The retail industry might have effectively reached a tipping point with the pandemic, allowing e-commerce to emerge as the logical successor to traditional brick-and-mortar models. Due to the lockdown and warnings to avoid high-traffic indoor areas and places without proper ventilation, many shopping malls and underground pathways have seen a large reduction in shoppers. Depending on the governmental decrees, neighbourhood streetfront retailers may actually find their foot traffic not significantly reduced, as the perception of safety is higher within this retail subtype. Assets in retail nodes with necessity-based retailers, primarily grocery and pharmacy, will likely find that their consumer traffic remains relatively high. Notwithstanding that, tech giants like Amazon and Shopify continue digitalizing the industry and driving consumer behavior to e-commerce channels, further diminishing hope of a recovery for traditional retail performance.
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