February was pretty polar, and the Leafs are a laughingstock, again. But buck up—a new season is dawning, and Morguard research director Keith Reading gives us a few reasons to feel good about Toronto real estate.
1. Our Industrial Market Is Awesome
A big part of our industrial strength is tied to the U.S. economic recovery, propelled further by a low Canadian dollar. But it’s also due to the fact that Torontonians are gainfully employed and spending money. “It has a knock-on effect for industrial,” says Keith. We’ve been used to seeing Alberta and Saskatchewan outperform the rest of Canada since the financial crisis, “but I think this year you’ll see Ontario lead the pack in economic growth, which usually translates favourably into real estate markets.”
2. Target Can’t Hurt Our Robust Retail
Economic growth also translates into a prosperous retail sector. Having a big name like Target fail in Canada was “an eyebrow raiser for a lot of people," says Keith. And it didn’t look good that a handful of other retailers closed up shop in the last year. But Ontario retail is still “quite healthy,” Keith insists. Institutional investors are spending heavily on upgrades and expansions at major malls (like Square One Shopping Centre, above), luring new tenants and shoppers. With few "truly new malls" being built, there's lots of investment in existing ones, "and that speaks to the confidence.”
3. Office Tenants Are Winning
In the office sector, the flight of tenants from older towers to shiny new efficient ones has put downward pressure on rents. Lots of new supply is coming on, but there's only “moderately positive demand,” Keith says. “So you’re going to see vacancy increase and some erosion of rents," as landlords of older buildings "try and keep them full.” Conditions will soften, with newer buildings doing well while the next tier or two down will struggle. Eventually the system will right itself, Keith says. “It always has. It just means we’ll see a bit of turbulence in the next year or two.”
4. Rental Apartments Are So Hot Right Now
Immigration, soaring home ownership costs, and a cooling condo market are driving demand for rental apartment buildings, leading to a rebirth in a sector that was moribund for decades, notes Keith. Dozens of projects are under development, including The Selby, planned as a condo but sold by Cityzen Development Group and Diamond Corp to an institutional investor who's making it a rental instead. Makes good sense, with vacancy rates hovering near 1% in Toronto, and apartment REITs like Timbercreek and Canadian Apartments Properties proving to be top TSX performers.
