GTA commercial real estate market experiences pause in second quarter
The second quarter saw the resulting impact from the rapid spread of COVID-19 and mandatory lockdowns that began in mid-March. Working from home became the new normal, streets were quiet during what would have been rush hour, and real estate sales hit the pause button. In the first half of 2020, total investment volume dropped to $7.9 billion, down by 22% compared to the first half of 2019. Total investment volume in Q2 2020 totalled $3.8 billion, down by 37% compared to Q2 2019, and was the first time that quarterly totals fell below the $4 billion mark since Q1 2016. Transaction volume also decreased in the first quarter of 2020 to 403 transactions, down by 29% in comparison to the same quarter last year. Impacts from the pandemic were reflected in the market most significantly in the month of May – registering only 106 transactions and an investment total of $471 million, which was a drop of 68% from May 2019.
The most active investments were in the industrial sector at nearly $1.7 billion. Although the industrial sector outperformed the other asset classes, this was largely due to the sizeable industrial portfolio acquired by Ontario Power Generation (OPG). The GTA component of the OPG portfolio represented 78% of the total industrial investment recorded in the second quarter. Likewise, the apartment sector was strong in comparison to other improved asset classes, with a Q2 investment total of nearly $310 million, largely attributed to the Flagship Property Ventures to Timbercreek portfolio which represented 46% of the total apartment investment in the second quarter. The land sectors (residential land, ICI land and residential lots) continued to be prominent amidst market uncertainty for a combined total of $1.3 billion, accounting for 34% of total investment volume. The sector that saw the biggest decrease in investment in the first half of 2020 was the office sector, falling 68% compared to the same period last year. The office sector also declined by 83% in Q2 2020 compared to Q2 2019. According to Q2 2020 results from Altus Group’s Investment Trends Survey, Toronto is still one of the top markets preferred by investors both domestically and on a global basis. Still, Q2 2020 saw the industrial and multi-residential asset classes gain momentum in the Toronto market compared to the previous quarter. Cap rates have risen slightly across asset classes except for industrial, as investors respond to pandemic-induced changes and continue to assess new risks in the market.
With ongoing changes in the market due to the global pandemic, investment expectations for the time being have been myopic, creating a disconnect between vendors and purchasers regarding pricing. As seen in previous quarters, investors are still confident in the multi-residential and industrial sectors, as these two asset classes have been affected less by the current market conditions. Overall, demand for quality GTA real estate assets remains strong amid all of the uncertainty. With restrictions gradually lifting, and the construction industry recommencing, the third quarter could witness some return to normalcy in the GTA market.
Source: Altus Group
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