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Today we present another guest post from Dean Macaskill, Senior Vice President at Lennard Commercial Realty. Dean has worked as a commercial realtor since 1980 and has years of industry insight into the Toronto real estate market. Having been through three cycles in the business, he has seen the highs and lows. He shared some of his insider information and insights with UrbanToronto on a semi-regular basis.
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Although in my quarterly Q Investment Report I don’t report on commercial and industrial land sales, I was in a meeting with a client recently and we discussed a property they had purchased and sold that caught my attention.
This company had acquired 30 acres of land in Peel Region that was zoned industrial. The location, on a major arterial road, appeared to have greater value for redevelopment for shopping centre uses. So they undertook a rezoning to permit just over 300,000 square feet of commercial development.
During the course of the rezoning, a major, large box retailer came forward with an interest in buying half of the land and being a shadow anchor for the remainder of the site. Sounds like a dream come true. Actually, it became a bit of a nightmare. Given the financial sway that this user group had, they began to dictate the type of tenancies they would not allow in the lands retained by the owner. These restrictions would have severely affected their ability to lease space in their proposed development. Further, the big box user was paying them less per acre than what they had acquired the land for two years earlier.
As most of us know, retail land should carry with it a much higher value than industrial, until now. Peel Region has effected changes in their zoning, making it far more difficult to have outside storage on site. Peel Region is also resident to a high proportion of trucking companies that need land to park their trucks and 52’ trailers. So, through a combination of dwindling supply and a change of zoning, land for outside parking is at a premium.
So during the conditional period of the land sale to the big box user, an unsolicited offer came forward from a trucking company to purchase the whole site of 32 acres at just over $1 million per acre, double what the investor paid two years prior.
Given the difficulties in coming to terms with the big box retailer, it became a no-brainer for the owner to switch horses and complete a firm deal for a company that will do nothing more than park trucks and trailers on the site.
This is an interesting case. There are so many investors out there seeking to add value opportunities and, as an agent and looking at the prices being paid these days, I wonder how you can make a dollar out of the deal. The story described above is not too dissimilar to many other transactions that have occurred over the past 5 years. Far too often I have seen a doubling in value of a property in a two-year hold even though nothing was done to improve its value. So does this make every commercial property an add-value opportunity? In some sense yes but only until we have a black swan moment, i.e. an event that no one saw coming that just changes everything. It has been discussed that there are many within our industry that have never seen down times. So trying to convey that things could go south often leads to you getting laughed in your face because, I guess, MBA schools dropped the course on “How to Look Strong When Sh_ _ Hits the Fan”.
So not to sound like the grim reaper but there is much afoot these days to question whether we keep chugging along at the current pace. Turning to the residential market, you have the city doubling development charges, inclusionary zoning, a new Ontario Government form of residential lease, rent controls on new construction buildings along with a purchaser mortgage stress test, higher interest rates and a 15% tax on foreign buyers. Have I named them all? How much longer can we go before both developer and buyers/renters raise the white flag? I think we are reaching the tipping point and investment decisions based on the doubling of your money for a short-term hold may not be your best investment strategy moving forward.
