1. Compression of Space (high density)
As we see pressure from Europe and our US neighbours still facing hard economic times with companies looking to right size and create consistent standards to conform to the new workplace, the Greater Toronto Area (GTA) is also feeling the same pressures to scale down for the most effective use of space. Companies are taking into consideration the “new worker” who utilizes the benefits of technology and the ability to work from home for increased efficiencies in the workplace. The world of 300 sq. ft. per employee and offices large enough for personal washrooms are being replaced with more stringent metrics per employee and shared hotelling-type environments. Of course, this doesn’t apply to every industry, but the questions are being asked, pressure is building, and companies are exploring their options.
Compression of space can be a great way to reduce overall occupancy costs, but there are challenges that exist, and one major issue we are seeing in the GTA is sourcing assets with adequate parking requirements to support a higher density space needs or locating near major transit hubs in cost effective locations.
2. Competing with the REITs
As discussed in previous blog posts, our high-yield, low interest environment has allowed Canadian REITs to own the market chatter and create some buzz south of the border. They are also occupying large portfolios in the GTA and dominating the capital markets for quality product. The following is a sample of Canadian REITs that have dominated the media and stolen the show in Canada:
- Artis REIT (office / industrial)
- Chartwell REIT (retirement assisted living)
- Dundee REIT (office / industrial)
- PIRET (industrial)
- Riocan REIT (retail)
- Skyline REIT (multi res-apartment)
REITs in the GTA dominated in 2012 and we anticipate seeing not only aggressive acquisitions in 2013, but also non-core real estate companies like Loblaw adopting a REIT model to be competitive and add value to their real estate portfolio. Growth of REITs will be dependent on higher rental income and operational optimization, so it will be interesting to see how this will impact tenants’ motivation with trends of their own like right sizing and cost-cutting due to a lack of confidence in the global markets. When you combine tenant motivations for efficiencies, healthy competitive options for relocations and the returns a new REIT will expect, it will make for an interesting 2013. We suspect relocations and consolidations strategies will be a trend that makes an impact in the later part of the year due to the REITs aggressive expansion in the last 2 years and high expectations on returns.
3. Development by Major Transit
With vacancy so tight in the central downtown area and employers looking to attract talent at a lower cost, the development success of the south core of Toronto, “south of the tracks”, has developers looking across the entire GTA for prime development sites close to major transit. With space density and securing talent with the “new worker”, companies are being strategic with their corporate real estate strategy and looking for the next best area to stay competitive. These trends have a direct impact on the corporate real estate world for owners and developers. First Gulf, Menkes and GWL are landlord owner/developers that carved the path for new office development by Union Station, which created a lot of buzz in the media. First Gulf is leading the way across the entire GTA from the South Don Lands (east end) to Oakville and Meadowvale (west end), with major redevelopment sites along Go Transit to offer an easier commute and access to large talent pool in central Toronto. Even though the occupancy costs are greater than 2ndand 3rd generation office, big corporations are now able to justify higher occupancy costs because of transit amenities and talent recruitment.
4. Condo Boom / Doom
In the global downturn, our low interest rate environment, strong dollar and well-backed Canadian banks put Canada on the map as a leader that was able to weather the storm. As a result, Canada saw a boom in the condo high-rise market. This clearly piqued the interest of the corporate real estate market – after all, commercial real estate is dependent on employment and where talent wants to nest. Some of the strong factors that contributed to success of condo development were:
1.) Affordability especially for first time home buyers and young adults;
2.) Investors having more confidence in condo development vs. the volatility in the stock market;
4.) Lifestyle of the empty nester;
5.) International investors; and
6.) Increased attention on Canada and the GTA as destinations for business success.
Every boom has a beginning and an end and we are now seeing evidence of an impending slow-down in this market which will have an impact on the corporate real estate side and office development.
5. US Retail moving North to Canada
US retail has definitely capitalized on a major trend in 2012 that we are now seeing slowing down in 2013. Discount retailer Target led the charge after signing a $1.83 billion acquisition of the Zellers leases from The Hudson’s Bay Company, and the much anticipated opening of the first store comes this year. Last year, Target leased the speculative development by HOOPP in the Airport area with a 200,000 sq. ft. head office opening with a complement of industrial supply chain locations in the GTA north of one million sq. ft. Other major US retail corporations are following Target Corp. as they feel the Canadian market is driving up rents and prompting new development. Winners (TJX Company) was one of those recent followers with a 300,000 sq. ft. head office consolidation that had every major developer lined up to win the business. Other US firms rumoured to be sniffing around are Macy’s, Dicks Sporting Goods, J.Crew, and Kohl’s. Target’s move has been flagged as the largest expansion into Canada since Walmart and Home Depot in the early 90s. On the retail grocery front, Sobey’s has kick-started 2013 as the major player to consolidate their Toronto area operations while competitor Loblaw Co. is taking advantage of the REIT structure and launching their real estate portfolio. There is no doubt the Canadian retail market has performed strong in the tough global market. With strong housing conditions and consumer confidence it will be interesting to see if this trend will persist with multiple bids, creating intense negotiations and a highly competitive environment for assets.