Buyers face other opportunities but need a right-sized strategy, Colliers experts say
Like most Canadian cities, the GTA’s commercial property market has faced its share of challenges during its retreat from peak demand and values over the last couple of years.
Inflation, slow permitting and sharp interest rate increases represent a few of those challenges. Then came the federal foreign buyers ban on residential properties. That policy was meant to cool off the housing market but had the side effect of sweeping up many important mixed-use development sites involving foreign stakeholders. Also, most of the publicly traded REITs and large private equity firms with more than 3% foreign ownership were unable to trade in domestic real estate as a result.
The ban was amended in March, increasing the foreign control threshold to 10% and allowing non-Canadians to buy residential or mixed-use property if the property is vacant or for redevelopment, among other changes.
That adjusted policy represents a step in the right direction. The broader GTA market is moving forward amid current challenges with plenty of opportunities for property investors and developers, Colliers experts say. They point to examples of zoned and un-zoned sites for mixed-use redevelopment, as well as a healthy market for necessity-based retail in the region as promising options for investors and developers.
But opportunity is in the eye of the beholder, and buyers — foreign or not —need to closely assess their development timelines, desired project scale and locations to succeed within market conditions and find a path to profitability. Ultimately, the GTA’s long-term economic prospects are too bright to ignore.
Many buyers in the region are eager to purchase land that is not yet up-zoned and has plenty of scalability, said Steve Keyzer, executive vice president with Colliers’ Brokerage operations in Toronto, who specializes in high-rise mixed-use development land in the GTA. They are comfortable taking on zoning risk given the Ontario provincial government’s announcement of multiple bills to accelerate housing approvals and density around transit.
Developers can start the zoning process, which will likely push them past the current risk window of slow absorption of pre-construction condos. Currently, some developers who own zoned sites are being pressured into the slow absorption pre-construction sales market and are having to provide hefty incentives to meet their pro forma expectations.
“Unzoned sites push out your risk window by a couple years at least, so you can structure a development land acquisition deal now to get to a good future valuation, once zoned," Keyzer said.
Today, we’re generally seeing cap rates escalate across the various asset classes due to increasing bond yields and overall market volatility, rising interest rates and global issues.
However, buyers today are finding opportunities in proven GTA locations. That typically means sites well-connected to rapid transit, near major highways and other successful mixed-use projects. It also applies to large-scale redevelopment opportunities that are expected to eventually provide profitability, even if that means waiting out this high interest cycle.
Keyzer is supportive of the adjustments to the foreign buyer ban but notes most of his redevelopment sites require localized expertise anyway to navigate the complicated and sluggish rezoning process. "Many larger foreign investors are attracted to zoned sites because they don't know the local political system or don't want to deal with it," he said.
Zoned projects can make sense at the right scale for certain foreign buyers
There are a lot of unknowns in the market right now but there are opportunities for foreign or local buyers who have a clear vision and strategy, said Tim Bristow, senior vice president and sales representative with Colliers Toronto’s Brokerage practice.
Bristow applauds the updates to the foreign buyers ban. He says the changes unlock certain redevelopment sites that are already rezoned and provide an attractive scale for medium-sized offshore — or local — buyers. These are projects that are not too big or too small and located near amenities and transit.
Bristow points to a site in Corktown. The Upper Berkeley at 301-311 Queen Street East is located next to the heritage-designated Berkeley Church event and media venue, which is also for sale. The 19-storey mixed-use development is in the final stages of approval with interim LPAT support. It's designed for 144 1-3 bedroom luxury condos with roughly 17,000 square feet of retail and commercial space on the first two floors.
"It's what I call a manageable development. It doesn't need institutional investors to do it and it's a decent size without being overwhelming. It's nearly shovel-ready,” Bristow said. "In a market like this, pre-selling 144 units can be a more attractive undertaking than something more massive."
Bristow said Canada's economy is too reliant on international investors and economic immigrants to let something like the foreign buyer ban strangle much-needed development. "There are people coming here with significant wealth and now they can, once again, invest in development projects that include housing,” he said. "It's expanding the buyer pool."
Opportunities also present for the right kind of retail
David Williams, also a senior vice president and sales representative with Colliers’ Brokerage group in Toronto, specializes in selling retail investment properties across Ontario. The appetite remains high for retail properties that feature grocery anchors, liquor stores, drug stores and other providers of everyday consumer products, Williams said. Those properties with “daily needs” tenants are in strong demand from most categories of buyers seeking commercial real estate investment opportunities.
“There's still a lot of private capital demand and money out there," Williams said. "That's coming from domestic private capital, but there's also plenty of foreign capital involved."
Williams said sellers need to realize, however, that the capital chasing assets is much more price-sensitive these days, and assets need to be realistically priced and reflect appropriate returns within current market conditions.
Despite the challenges, there isn't much "distress" in the retail market, Williams added. “This is a period in which we should be patient and apply sensible strategies as buyers and sellers rationalize where cap rates have landed since the dramatic increases in interest rates.”
Keyzer, Williams and Bristow all agree that interest rates will eventually come back down.
While borrowing costs likely won’t touch the “emergency levels” we saw during the pandemic, they will settle somewhere more manageable, reigniting a market already benefitting from some record-high population growth spurred by economic immigration.
Indeed, Canada welcomed more than a million newcomers last year, making Canada the fastest-growing country in the G7. The GTA attracts the largest portion of those new residents.
"There's a lot of uncertainty going on in the world, including south of the border,” Bristow said. “Canada and the GTA will continue to be a safe haven for capital.”