Outlook 2017: What CRE Pros Will Be Watching For This Year

As 2016 draws to a close, Bisnow asked CRE pros to peer into their crystal balls and tell us what we might expect from Toronto real estate in 2017. Here’s what they told us.

Office

Ongoing downtown migration and tech sector growth could put “significant upward pressure” on rental rates and continue fuelling the Class-B fringe market, said Cushman & Wakefield Canada’s festively attired CEO Chuck Scott. The push to use workspace as an “enabler to attract and retain clients and the workforce of tomorrow” will mean more repurposing of older assets to keep up with high-performing new product. CBRE Toronto managing director Werner Dietl said downtown market tightening, with limited options and higher pricing, means a better year for suburban markets in 2017, as more tenants opt to stay put.

Projects to watch in 2017 include the LCBO waterfront site, 20 York, The Well and Bay Park Centre (above). “A lot of major users are actively looking at these sites,” said Scott, so expect a deal by Q2. He’ll also be monitoring the impact of the recent Fed interest rate hike. “It will certainly put a squeeze on debt holders in Canada. Highly leveraged operations will feel impacted.” The new year brings delivery of the last of the major 2014-17 cycle projects (EY Tower, Globe and Mail Centre and One York St), said Avison Young’s Bill Argeropoulos. “And decisions made in 2017 will form the next big development wave at the start of the next decade.”

Industrial

Newmark Knight Frank Devencore managing principal Rob Renaud told us GTA West will continue to thrive as the region’s busiest industrial market in 2017, with 2.5M SF being built on spec. Projects he’ll be watching include 2994 Peddie Road (675k SF) in Milton; 11400 Steeles Ave (640k SF) in Brampton; and 7845-7855 Heritage Road (two buildings, 369k SF, above, also in Brampton). One Properties, formerly WAM, will unveil plans for redevelopment of the 1M SF Eaton’s warehouse site at Sheppard Avenue and Highway 400. “If they get approvals and pull the trigger the market would see it as a positive.”

JLL Canada president Brett Miller said GTA industrial’s record-low 3.1% vacancy, “which is very tight,” has developers and industrial owners feeling bullish, “and they’d like to invest, but opportunities are scarce.” Expect to see more infill development and conversion of old manufacturing sites into distribution centres, Miller said, pointing to the old Unilever property in Brampton, slated for a 340k SF facility. Renaud said that industrial land constraints open up the possibility of two-storey warehouses coming to the GTA, like what Prologis plans in Seattle. “I wouldn’t be surprised if that happened in Toronto within the next few years.”

Retail

Avison Young research head Bill Argeropoulos sees healthy sales continuing for GTA retailers in 2017. “But it’s such a dynamic sector, it’s still regarded as the most volatile,” he said, pointing to rising consumer debt and rapidly evolving tech as major threats. But people always need to buy stuff, and ongoing urban intensification will keep retailers humming. And demand for retail assets will stay strong. One major asset, Promenade Mall, remains on the block. “It will be a noteworthy sale in terms of size and price when it happens,” Argeropoulos said, pointing to the possibility of a residential-focused redevelopment.

Werner Dietl at CBRE says we can expect institutional capital to be a stronger force in the Toronto retail sector in 2017. “We’ve seen some big-money-backed acquisitions in 2016,” where traditionally most retail deals are private. He points to Hullmark’s transferred ownership of two properties (619 Queen St W and 545 King St W) to a Hullmark-Sun Life JV this summer. And Northam Realty purchased much of Woodcliffe Landmark Properties’ Market Street eatery row. These don’t fit the typical investment profile for institutional investors, Dietl said, “but they’ve got a lot of capital and need to diversify to maximize returns.”

Capital Markets

Colliers senior managing director Daniel Holmes, full of Christmas-sweater spirit, sees big things for investment markets in 2017. “That’s why we launched a Private Capital division” to help private owners—80% of the market—maximize their CRE holdings’ value. They are “the ma’s and pa’s who own buildings.” JLL chief Brett Miller also expects a busy year ahead for capital markets, provided debt levels stay low. And Asian capital is “more aggressive in Toronto than it’s ever been.” Cushman’s Chuck Scott said higher interest rates may slow owner-occupied industrial acquisitions, but won’t prevent sub-four cap rates on premium assets.

Canadian CRE investment transactions in 2016 are on track to beat last year’s figures, propelled by the sale of stakes in Scotia Plaza and Richmond-Adelaide Centre (above). And JLL chief Brett Miller said he’s got his eye on a number of big asset sales expected to close by year’s end or early 2017, including 777 Bay and 700 University Ave. “I think whatever comes to market will trade,” he said. “I’m not at all concerned about buyer appetite.” JLL brokered one of the top hotel sales of 2016—the Four Seasons, for $225M—and in Q1 2017, Miller said, we should see a “fairly blockbuster deal” for a portfolio with a “significant Toronto presence.”