Nearing a top?

September 29, 2014 admin

Toronto condo development

I was in Toronto this past June, and I remember standing at the corner of Adelaide Street and University Avenue. Waiting at the traffic light, I looked around and counted 12 construction cranes in different directions, which seemed like a lot from just one corner. Perhaps it is?

A recent Bloomberg article about the Toronto central business district included the thoughts of an influential local architect:

“The last time Toronto office developers were this exuberant, Carl Blanchaer remembers it ending badly, he said. Construction on the 57-story skyscraper his firm designed for the financial district halted after just six floors and stood abandoned for 15 years.”

Right now, vacancies in downtown Toronto are low at 6 percent. Going forward that could be a different story. You could see the vacancy rate rise to 10.5 percent in 2017. That would mark a big shift because the last time Toronto saw that level was 2003. The Bloomberg article notes, “The seven properties set to open by 2017 have 5.1 million square feet of space and are about 55 percent leased, according to brokerage Cushman & Wakefield Inc.”

Will demand continue to expand to off set increase space? One key question is the intermediate and long-term projections for the Canadian economy. At the moment, global growth remains low with a number of headwinds. Growth in Canada is starting to soften and Bank of Canada is starting to ratchet down growth projections. As noted in Bloomberg: “The Bank of Canada last month cut its forecasts for Canada’s growth, to 2.2 percent from 2.3 percent for this year and to 2.4 percent from 2.5 percent next year. [Bank of Canada Governor Stephen] Poloz has said growth in exports and business investment needs to pick up in order to have a self-sustaining recovery.” If that trend continues and increases, it could help create a turning point in the real estate cycle.

On a positive note, unlike past booms of the 1980s and 1990s where development was fueled by easy credit and leverage, this time it’s being driven by long-term investors such as pension funds, which would not be under pressure to sell on dips. However, if the economy slows and space expands, values will still fall even if there is not a lot of selling activity.

Regardless of where we are in the cycle, Toronto will always be a world class city.

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JohnHunt91x119John Hunt is conference program manager of Institutional Real Estate, Inc.

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