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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 shares some of his insider information and insights with UrbanToronto on a semi-regular basis.
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Inasmuch as I write a quarterly report on the commercial and high rise land real estate sectors, I rarely look back on the year to see how we made out. Thankfully, companies like Urbanation and Altus provide year-end reports that put it all out there.
So I was reading their respective reports and, of course, their conclusions were similar, as they should be. What was interesting was that 2018 ended at almost the same sales dollars as they had in 2017, just down by just 3%. It was the allocation of those $21.3 billion spent on commercial real estate and land that was the real story.
For example, residential lot sales showed a 157% sales gain over 2017 while apartment buildings saw a 60% increase in sales volumes over the past 12 months. So if these sectors soared and the dollar value of sales was down by 3%, who were the losers? It turns out that it wasn’t a great year for commercial land, which saw a drop of 13% and high rise land sites saw investors spend 8% less than they did in 2017. Meanwhile, office building sales and industrial buildings saw similar sales volumes, trading at slightly higher dollar values while retail properties were down $5 million from the year before, a drop in the bucket.
My takeaways – apartments are hot, we have no vacancy in this sector and, despite a rash of new product under construction, they can’t arrive soon enough. Even when they do start dotting our skyline, they won’t make a dent in the vacancy rates so you’re safe in buying existing product. In addition, the apartment sector, with the exception of a few major players, has been in the control of many mom and pop owners. These owners have hit a perfect storm as they enter their retirement years. They have pension funds, REITs and large private corporations lined up for every morsel that falls off the table. And these buyers are paying sub 3% cap rates for the opportunity to get a pat on the head from the vendor. Given the expected immigration growth, these people will need a place to live so how can you go wrong buying this product?
What also props the numbers up has been the rapid growth in overall values. So the real takeaway from the year should be lower sales volumes. I don’t have the numbers but I reported many times in 2018 how an office building that sold in, say, 2017 for $30 million ended up trading in 2018 for $60 million. These were not anomalies; there is no shortage of similar transactions that I could pull up on my computer to prove the point. It is this rapid appreciation in values that market participants should be watching. There has to be a ceiling at which point investors say it’s too rich for their blood. In fact, that’s the response that I get with most of the off-market properties that I find for my clients. But what is overpriced for one is in the sweet spot for another.
What keeps this market humming is the creativity that investors have used to make a dollar. If you look at some of the projects presented on this site, you will see the resourcefulness that developers have used to put 50 storeys on a postage stamp sized site or to take an assembly populated with heritage properties and to skillfully integrate them into mixed-use developments. This creativity continues as all levels of government continue to put a stick in the wheel with such requirements as replacement of rental apartments and office space in new developments, increased development fees, replacing the OMB with LPAT, mortgage stress tests and one of the longest approval processes in the world. It’s as if developers are taunting municipalities to keep trying to shut them down. How we haven’t had a complete implosion in our real estate market given the stresses that developers and investors are under is beyond me. Thankfully an influx of new Torontonians and a job market that doesn’t abate has, I believe, stemmed the fall of our market.
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