Commercial real estate in Toronto is proving to be resilient as demand for industrial and retail space booms despite office space vacancies and higher interest rates, according to a recent report.
The Re/Max report found that the four commercial sectors — industrial, retail, office, and multi-family residential — are historically hot commodities for investors but office space continues to struggle as workers move to a hybrid work environment.
The other three sectors are weathering the rate hike environment, the report found.
“Although activity has come off peak levels reported in the first quarter of 2022, demand for commercial real estate remains relatively healthy in most major centres,” said Christopher Alexander, president of RE/MAX Canada. “On the retail side, consumer gravitation back to bricks and mortar stores after some post-pandemic online fatigue will bode well for business, while industrial will remain the sweetheart investment, drawing suitors from both a local and global audience.”
The report says that “large transactions,” such as a recent $70-million sale, continue to occur in industrial real estate as demand for warehouses and distribution centres soars amid low real estate inventory.
And retail has shown “remarkable resilience” as people continue to spend in the wake of the pandemic, especially along major arterial roads.
According to the report, industrial is the strongest sector in Toronto with vacancy rates under one per cent.
The rush to online spending during the pandemic led to a boom in logistics, distribution and manufacturing centres, said Sal Guatieri, a senior economist with BMO Capital Markets.
“We still have a relatively healthy economy and people are continuing to spend and exports remain generally positive,” said Guatieri “There’s resilience in the global economy, especially in the U.S. and Canada.”
Scarce supply of industrial buildings and a growing GTA population will mean a continued demand for warehouses and manufacturing centres, said Carl Gomez, chief economist at CoStar Group Canada, a commercial real estate database.
“We can’t build industrial fast enough right now, and tenants are paying higher rents because they need the space,” Gomez said. “Rents in the GTA have averaged $5 per square foot and now it’s $17. If you need the space, you’ll pay for it.”
Rent on industrial buildings has shot up 20 per cent year over year which beats the current rate of inflation, making it a valuable asset for investors, he added.
In addition, malls around the GTA remain robust due to revitalization, and development of condominium units, the report said.
Retail also benefitted from a strong post-pandemic recovery due to pent up demand and substantial household savings, Guatieri said. However, he added, many economists are forecasting a mild recession which would impact retail spending.
Currently, the office space sector in the GTA is struggling the most as many employees continue to work remotely, with vacancy rates forecast by some to spike as high as 46 per cent in the years ahead.
“The return-to-office rate is plateauing at half the rate of pre-pandemic times,” Guatieri said. “It will be a long struggle for the office segment as interest rates won’t fall this year and vacancy rates are likely to keep rising for a while.”
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