Ontario Scenario Looking Good
In the province of Ontario—home to Canada’s largest city, Toronto, and the nation’s capital, Ottawa—many commercial property segments are expanding.
"The Ontario economy appears to be on an extended period of growth with very low inflation," says Brian Hoskins, CCIM, of Torcom Realty Corp. in Toronto. Like many U.S. markets, Ontario’s economy is rebounding from recession earlier in the decade.
In the look at Ontario’s real estate sectors that follows, note that dollars are Canadian.
Last year, the region saw the first increase in private-sector office rent since 1991, according to Building Owners and Managers Association International—and the sector’s good fortune continues.
"The economy in the Toronto region is very strong relative to the early ’90s [and] late ’80s," says Clark McLeod, CCIM, of Royal LePage Commercial, Inc., in Toronto. "The office market is very healthy—lots of activity, although vacancies are very low and demand is high. Net effective rental rates are steadily increasing."
For instance, "AAA" office space was 98 percent occupied at the end of the first quarter, he says, and class A was 94 percent occupied. Class AAA rents ran $25 psf to $30 psf net effective at that time and class A space was $20 psf net effective.
Ottawa’s largest office tenants historically have been federal government departments, explains James Palmer, CCIM, of Re/Max Metro-City Realty, Ltd., in Ottawa. "Downsizing of the federal public service changed all that, however, and the office market suffered, particularly in the downtown core. Now, the office market—after a severe downturn lasting nearly seven years—is coming back strongly."
Vacancy rates are about 5 percent for class A office space and 10 percent for class B. Sales prices "are definitely moving upward, with competition lively for quality product because of the involvement of REITs [real estate investment trusts], pension funds, [and] insurance companies," Palmer says.
A significant development in the Ottawa market is its reputation as "Silicon Valley North," Palmer says, especially in suburban Kanata. "High-tech in Kanata is building to meet the demand," he says. "Space is easier to find in the east end of the city and rates are lower, but there is activity in that market and all the suburbs, which will drive prices there higher. Tenants who do not require high-tech proximity will find a good assortment of quality office space in the east and southeast."
Ontario’s upward economy means that "the demand for industrial product should continue on an upward trend for the foreseeable future," Hoskins says. "The general economy is booming, which is causing an influx of new businesses as well as rapid expansion of existing businesses."
Industrial properties are "very active, with limited product available and rental rates moving higher," Hoskins says. Occupancies are at about 95 percent, and typical industrial lease rates range between $4 psf to $6 psf per year.
The availability of product is limiting industrial sales transactions, Hoskins says. "But when they are occurring, their prices are in the $60 psf range and have moved gradually up over the past two years." Construction primarily is build-to-suit, with little spec, he says.
In the London area—which is halfway between Detroit and Toronto and is automotive-oriented like both of those cities—David Southen, CCIM, of Sutton Group-Select Realty, Inc., foresees continued auto-sector development. "We expect a good market for the next year," he says, although, "We don’t anticipate anything to be ‘hot’ in London."
Amid the "good activity after four or five quite slow years," industrial occupancy rates have risen, Southen says. "Space that has been vacant for a year or two has been leased." Lease rates also are up, he says, averaging $3.25 psf to $3.50 psf net. Few sales have occurred, he says, and construction has been limited to build-to-suit.
Changing Multifamily Rent Control
Ontario’s multifamily sector is experiencing a significant change, says Tony Di Carlo, CCIM, of Incompro Ltd., Realtor, in Toronto. "Rent controls, which we have had since 1975, have virtually eliminated new construction of multifamily complexes." However, "The Ontario government has passed a new act...that will allow landlords to get market rents once the [current] tenants move out—a de-control, re-control scenario." But, he says, it’s "not enough to stimulate new construction and satisfy demand."
Toronto multifamily occupancies average 98 percent, with surrounding areas at around 95 percent. Area lease rates run about $650 to $111 per month for one-bedroom apartments, $720 to $750 for two bedrooms, and $750 to $800 for three bedrooms—or about $1.25 psf to $1.50 psf, he says.
"Activity has increased substantially in the last couple of years, especially because of purchases by life insurance companies and REITs," Di Carlo says. Prices range from $40,000 to $75,000 per suite (roughly $50 psf to $90 psf) with cap rates around 8 percent to 9 percent, he reports.
In Kingston, Ontario, "Many landlords took such a kicking from the government and the rights of tenants that [they] started thinking of investing their money in the stock market and mutual funds," says Bob McKean, CCIM, of Prudential Realty Concepts in Kingston. He says that the new tenant act will make properties more attractive for landlords. "With our...rent controls, we could only increase the rents by varying amounts each year. Now, as a rental unit becomes available, the landlord can increase the rent to whatever level he feels the market will bear. If the tenant decides to stay, the rents will only increase by a small amount or percent."
In Kingston, "Sales are running around $30,000 per door for the larger units and $30,000 to $50,000 per door for the smaller units depending on the size, location, and condition."
There has been "no new multifamily construction in the last four years," McKean says.
Canada will gain as many as 1,800 retail stores in the next three years, stretching the country’s already saturated industry to the breaking point, according to a Retail Council of Canada study.
In Toronto, it’s "getting harder and harder to find retail space to lease 1,000 sf to 3,000 sf and more," says Gary Nusca, CCIM, of the Market ICI World Real Estate Network in Toronto. Cap rates are 8 percent for good centers with anchors, and about 10 percent otherwise, he says. "People who sold in 1989 have lots of money [and] are now loosening up to invest."
A slow economy after several years of recession "exacerbated by federal government downsizing" has affected Ottawa’s retail market, says Gordon Taylor, CCIM, of Royal LePage Commercial, Inc., in Ottawa, as has "the fact that there has been no real increase in take-home pay for a number of years."
Retail vacancy rates average 5.6 percent, he says. Neighborhood malls lease for $10 psf to $15 psf; community malls for $12 psf to $18 psf; and regional malls for $20 psf to $40 psf. Rates are starting to rise slowly, Taylor says.
In sales, "Big-box and regional malls account for the largest percentage of sales, which run $150 to $250 psf." Big-box development still is taking place, but there’s been no regional shopping center development, he says.
"Retail is going through the same revolution here as in the U.S. but we are several years behind the U.S. market," Taylor says. Looking ahead, he foresees that "Initially, there will be a fallout of some of the mom-and-pop shops. Beyond that, I believe there will be a shakeout of the big-box and power centers as aging Baby Boomers seek more specialized merchandise at the higher end of the market."
Delaware has focused on being a business- and resident-friendly state, having no personal property, sales, or inventory taxes, according to the Delaware Economic Development Office. It also has reduced its personal income and business tax rates in recent years. Below is a look at how the state’s office and retail markets are performing.
"Our market has been built on the Consumer Credit Bank Act and the Financial Center Development Act of 1981," says Pete Davisson, CCIM, of Jackson-Cross-Oncor International in Wilmington. "As long as the economy stays strong, our office market should do the same. The economy drives the credit card industry, which represents the bulk of our office market. The economy is good...and unemployment is very low (3.4 percent)."
In the office segment, "1997 was the strongest year since 1989 for leasing activity and the vacancy—except for 1996—is the lowest it has been since 1985," Davisson says. "What we are seeing is searching and planning for larger projects while the available smaller blocks of space are being absorbed by modest activity of small to intermediate-size deals."
Class A and B vacancies downtown have a combined rate of 14.5 percent—the lowest in 10 years, he reports. Gross annual lease rates are $20.10 psf for CBD class A office and $15.94 psf for class B.
Sales transactions "are up everywhere," he says, with prices ranging from "10 to 30 percent over what we might consider a ‘good’ price. One of our class A CBD properties sold in December 1995 for $98 psf and in March of 1998 for $136 psf. A suburban class A property (composed of three buildings) sold in May of 1996 for $109 psf and April of 1997 for $129 psf."
Looking ahead, "I am concerned about sparse available opportunities, rising rents, and nothing in the pipeline," Davisson says. "The ones that should be concerned are the tenants in buildings recently purchased by a [real estate investment trust] that bought the property fully expecting strong upside from the income stream of rent increases."
Delaware’s retail segment is "a growing marketplace with above-normal commercial activity," as residents have "high disposable incomes," says Samuel S. Tuttle, CCIM, of Tuttle & Associates in Middletown.
Retail occupancies are about 98 percent, "nearing full absorption," he says. Construction largely is build-to-suit, except for some speculative strip centers, Tuttle says. Lease rates generally are up 5 percent to 10 percent, averaging the following psf triple-net rates: $12.50 in Wilmington; $11.50 in Dover; $9.50 in Seaford; $9 in Milford; and $10.50 in Middletown.