CRE investment momentum building with signs of economic recovery ahead: Altus Group

The pandemic has not shown any signs of easing up this year, with new variants rapidly spreading and strict lockdown orders still being enforced across the country. But despite this, the first quarter of 2021 has brought forth strong investor confidence. Toronto’s commercial real estate market saw the largest first quarter on record, with Greater Toronto Area (GTA) investment totaling $6.3 billion, up 56 per cent compared to Q1 2020. This investment momentum carried over from the end of 2020 with the first quarter registering 663 transactions, a 24 per cent increase year over year. Much of this activity is accredited to investors repositioning their core and non-core assets through strategic acquisitions or dispositions. With the vaccine rollout underway, albeit slowly, people are becoming more optimistic about the future of the economy.

Unsurprisingly, as work from home continues to be a reality for most Canadians even after getting vaccinated, the GTA office vacancy rates have increased in the first quarter from 8.9 per cent to 14.2 per cent year over year. This has led to an 18 per cent decline in office sector activity, with investments totaling $348 million, as Investors and Sellers both reassessed their price and value expectations. On the other hand, investment in land sectors (residential land, ICI land and residential lots) continues to surge, with nearly $3.2 billion in investments and accounting for 50 per cent of the overall investment totals. Demand for future residential development continues to soar, and with many Canadian banks still offering record low interest rates, investors are quick to reap the benefits. Residential land saw the greatest amount of investment, with approximately $2 billion in sales and residential lots were up 70.5 per cent to $220 million.

Interest has also picked up in the industrial sector with an investment total of $1.4 billion and sales accounting for 23 per cent of the first quarter total – an 81 per cent increase year over year. Industrial investment has been especially popular in the eastern part of the GTA where there is more availability and pricing are more competitive compared to the west end of the GTA.

Despite ongoing uncertainty in the retail sector brought on by the pandemic, it has continued to gain momentum. The retail sector has seen a 35 per cent increase in sales year over year with total of $700 million in overall investment. This is largely due to many private investors strategically taking advantage of the weakness in the retail sector caused by the pandemic and acquiring quality land that has redevelopment potential or can be repurposed for a higher and better use. With bankruptcies and closures rampant across the retail landscape, investors are eager to capitalize on anything that is sure to bring future value with potential redevelopment and the expansion of current uses.

As for the rest of the year, there are no signs of Toronto’s commercial real estate investment slowing down. The first quarter of 2021 commenced strongly and apart from office activity, all other sectors remain robust. Confidence in the GTA market is on the rise, as investors recuperate from the initial economic fears brought on by COVID-19 and take advantage of the record low interest rates. The biggest challenge now for investors is the scarcity of assets up for purchase. The GTA market’s overall performance has been strong and continues to be Canada’s most sought-after market for real estate investment.

Ray Wong is Vice President of Data Operations at Altus Group.

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