2018 Greater Toronto Area Economic Outlook

Transcription

1 2018 Greater Toronto Area Economic Outlook

2 1 HIGHLIGHTS Although the Canadian economy performed exceptionally well in the first half of, posting GDP growth of approximately 4.0%, it has slowed since then with estimated GDP growth for as a whole expected to come at 3.0%. Looking forward to 2018, the Canadian economy is expected to grow by only 2.0% after accounting for anticipated increases in the Bank of Canada s overnight lending rate and the slowdown in the housing market. The Greater Toronto Area (GTA) is the growth engine for the province, and despite the housing market slowdown that followed the introduction of the province s Fair Housing Plan in early, the economy continues to perform well. Expect GDP growth for Toronto to come in at 3.7% for and 2.5% in 2018, well above the growth expected in Ontario and Canada. Ontario s GDP growth is expected to come in on par with national GDP growth in, at 3.0%, and at 2.3% in 2018, just above the expected 2.2% for Canada as a whole. With consumers and households in general stretched thin due to high debt levels, expect the slowdown in the housing market as well as retail spending to continue. The housing market is expected to remain slower in 2018 as a result of tighter mortgage rules but also the anticipated continuation of the Bank of Canada s overnight rate hiking. Higher interest rates will increase debt servicing costs, thereby reducing disposable income and putting a drag on retail spending. Interest Rates Interest Rates 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% Bank of Canada Overnight Rate Bank of Canada 10-Yr Bond Yield % %

3 2 The biggest change for 2018 will be Ontario s minimum wage hike, which jumps from $11.60 to $14.00 per hour. Many small businesses have already begun increasing prices to account for the increase in the cost of labour, but what has not transpired yet are job losses. An increased minimum wage should increase retail sales. However, this increase may be a washout if unemployment increases or number of hours worked decrease. The Bank of Canada estimates that the hike in minimum wage will result in approximately 60,000 job losses in 2018, with approximately 30,000 of these losses expected in the GTA. Employment growth is expected to come in around 1.7% for Ontario, or just below the national rate of 1.8%. Minimum Wage vs Cost of Living Minimum Wage vs Cost of Living Index: 2005 = Housing Costs (GTA) Minimum Wage (Actual) Minimum Wage (Adjusted for CPI) Employment Growth Employment Growth Employment Growth (Index: 2001 = 100) Canada Ontario Toronto

4 3 MAJOR TRENDS AND OUTLOOKS Technology is a major trend impacting all commercial real estate assets. High-tech employers continue to drive demand for office commercial real estate, while e-commerce will continue to change the face of both retail and distribution industrial commercial real estate. The largest risk to economic growth in Ontario comes in the formof the wildcard that is the ongoing NAFTA renegotiations, with the failure to successfully renegotiate potentially impacting all commercial real estate asset types across Canada. Immediately, manufacturers would be impacted due to increased tariffs, resulting in a strain on the industrial commercial real estate market. However, industries such as professional services, high-tech and film production will also be impacted, resulting in a slowdown of demand for office and industrial commercial real estate utilized by these sectors. The resulting increase in costs of goods sold could also contribute to a slowdown in sales, impacting retailers and both retail and distribution commercial real estate. The land market has been performing exceptionally well due to the housing market and redevelopment plays. Although the housing market has slowed slightly, this has not resulted in measurable diminished demand for both greenfield and redevelopment land, however, pricing per acre has dropped slightly at the end of. The pending potential changes to the planning regime in Ontario, specifically changes to the Ontario Municipal Board (OMB) has resulted in many question marks for developers, adding a greater measure of risk to any development proforma analysis. OFFICE Technology is a significant demand driver for most office markets across the country as high-tech tenants look for space and employees. However, not all markets will benefit to the same extent. Some markets will experience a net increase in demand from tech tenants, some markets will experience a net decrease in demand due to tenants using technology to decrease their space needs. Toronto and Vancouver are experiencing incredibly low vacancy and limited or no new supply expected in the short term. Although the overall GTA vacancy rate is unchanged at 6.5% year-over-year, it has fluctuated between 6.3% and 6.6% over that period, whereas the downtown vacancy is at its all-time low, at 3.7%, down 80 basis points (BPs) year-over-year. The suburban vacancy rate has moved

5 4 in the opposite direction, up 40 BPs year-over-year to 8.0%. The delta between downtown and suburban vacancy is at 430 BPs, which is 10 BPs shy of the five-year high of 440 BPs experienced in Q3. The downtown Toronto office market is currently very landlordcontrolled, with some of the lowest vacancy conditions in North America. With limited new supply anticipated until 2020, only 675,000 square feet of new supply is projected downtown in Vacancy Rate Vacancy Rate 9% 8% 7% 6% 5% 4% 3% GTA Downtown Suburban Expect vacancy rates to remain exceptionally tight until at least 2020 when both CIBC Square 81 Bay St. (1.6 million square feet) and 16 York St. (829,000 square feet) are likely to come to market. This limited new supply and strong demand for space will put strong upward pressure on rents. The 2.4 million square feet of new supply expected between now and 2020 represents only 3.8% of the existing inventory. Notwithstanding any specific tenants in the market, the GTA s economy is expected to grow at or above 2.0% annually for the next three to five years. This equates to at least 6.15% compounded growth over the period, almost doubling the pace of new supply. With strong economic growth in the region, demand should outpace new supply. The wildcard on the demand side is the potential of Amazon deciding on Toronto as the location of its H.

6 5 Construction Activity Construction Activity 4,000 New Supply SF (000) 3,500 3,000 2,500 2,000 1,500 1, Downtown 2018 F 2019 F 2020 F Suburban Net asking rents continue on their upward trajectory, with downtown rents up $1.02 year-over-year to end at $26.58 per square foot (PSF). Similarly, suburban rents are up $0.63 PSF yearover-year to $ The delta between downtown and suburban net rents, which ended at $9.50 PSF, is near a five-year cycle high. It has fluctuated between $8.03 PSF in and $9.64 PSF in. With the downtown market seeing exceptionally low vacancy, expect some of the strong demand downtown to spill over into the suburban markets as tenants look for options. Net AskingRents Rents Net Asking $27.50 $/SF/Annum $25.00 $22.50 $20.00 $17.50 $15.00 Downtown Suburban

7 6 INDUSTRIAL Technology continues to change the industrial market, with continued focus by retailers to either rationalize or establish their e-commerce platforms. As a result, there is strong demand for large distribution centres as well as smaller more urbanized locations to serve same day and next day delivery, and this is expected to remain in place beyond The lower Canadian dollar will continue to benefit manufacturers. However, this does not and will not result in a wholesale return to manufacturing in Canada. Overall employment in Canada has increased by 422,500 year-over-year, or 2.3%, whereas manufacturing employment is up 85,700 or 5.1%, growing at a pace that is more than twice as fast as overall employment. A large amount of this growth in manufacturing employment occurred in Southern Ontario, benefiting industrial commercial real estate there. Even though manufacturing is doing well it is important to note that this sector remains well off the most recent peak seen in 2003, when the Canadian dollar was worth only USD $ Manufacturing Employment Growth Index: 2000 = Total Employment Manufacturing The GTA industrial market has been performing exceptionally well, with vacancy ending at 3.3% and net asking rent coming in at $6.50 PSF per annum. Although vacancy actually increased by 30 BPs year-over-year, the GTA is the fourth largest industrial market in North America and has one of the lowest vacancy rates. Due to these tight market conditions and strong demand, there has been upward pressure on rental rates, with net asking rents up $0.48 PSF per annum year-over year, or 8.0%. With only 4.5 million square feet of new supply expected in 2018, expect these dynamics to stay in place.

8 7 Vacancy Rate vs. Net Asking Rent Vacancy Rate 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% $6.50 $6.25 $6.00 $5.75 $5.50 $5.25 $5.00 Net Asking Rent (psf/annum) Net Asking Rent ( R ) Vacancy Rate ( L ) The wild card for the industrial market in Canada is the ongoing renegotiations of NAFTA. Immediately, manufacturers would be impacted due to increased tariffs, resulting in a strain on the industrial commercial real estate market. Furthermore, the resulting increase in costs of goods sold could result in a slowdown to sales, impacting retailers and both retail and distribution commercial real estate. RETAIL The GTA retail market has recently seen significant entry of new retailers to Canada. Many of these retailers have become anchor tenants in recent high profile regional mall expansions. Furthermore, experiential retail continues to gain strength, driving the importance of the mall over online shopping. Restaurants and the like continue to drive demand for space. However, there has also been increased demand for retail space within malls from several automotive dealerships. Increased lending costs resulting from high household debt levels, and the Bank of Canada s increase of overnight lending rates in the summer of, will continue to put a damper on retail sales. Furthermore, the Bank of Canada is expected to continue increasing its overnight lending rate in 2018, as early as January, which will further impact retail sales and discretionary spending. The GTA retail market continues to perform exceptionally well, with vacancy ending at 3.2%, down 10 BPs year-over-year. Net asking rents ended at $24.27 PSF, down only slightly from $24.29 PSF at year-end. However, rents throughout increased to

9 8 $25.58 PSF in Q3, and are likely on the way down in anticipation of the glut of space coming to the market as Sears Canada finally closes its doors in January of Vacancy Rate vs. Net Asking Rent Vacancy Rate 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% $26 $25 $24 $23 $22 $21 $20 Net Asking Rent (psf/annum) Net Asking Rent ( R ) Vacancy Rate ( L ) Similar to when Target left Canada in, the departure of Sears Canada will leave a 15 million square foot hole in the national retail market, resulting in a jump in vacancy of approximately 1.0% during the first half of For the GTA, vacancy will likely crest the 4.0% market rate by mid When Target left the market, many landlords found that there are only so many tenants who can fill these large 100,000 square foot holes, and as a result landlords had to reconfigure there Target sized holes. They will have to do this once again with their Sears sized holes in order to make the space more palatable for tenants in the 20,000 square foot range, and even then, tenants in this size range are limited as well. The failure to renegotiate the NAFTA will result in higher import tariffs and a lower valued Canadian dollar. This will increase costs for retailers and result in higher costs of goods and services to consumers. Price inflation without economic growth/wage increases will only hurt the consumer and the economy, resulting in decreased retail sales, particularly discretionary spending.

10 9 LAND The land market, both greenfield and redevelopment, has been performing exceptionally well. One of the main drivers for the land market continues to be housing, with the pricing for redevelopment playing at a premium. Although the housing market has slowed slightly, this has not resulted in measurable diminished demand for land, however, the average price per acre did slow towards the end of, from approximately $1.7 million per acre to $1.5 million per acre. Land Land Pricing Pricing Avg. Price per Acre ($ MM) Rolling 4 QTR $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $ Overall Avg. Avg. Land Avg. Redevelopment The pending potential changes to the planning regime in Ontario, specifically changes to the Ontario Municipal Board (OMB) has resulted in many question marks for developers and would be land buyers. If the OMB is disbanded or replaced by a less powerful tribunal, developers will have less appeal power or options when dealing with politicized decisions made by municipal councils, which adds a greater measure of risk to any development proforma analysis. Author: Roelof Van Dijk About the Author: Roelof van Dijk is a commercial real estate research professional, with over 10 years of experience covering the Canadian commercial real estate market. Prior to his career in commercial real estate, he worked as a project manager and urban planner in the Greater Toronto Area. He is currently CoStar Canada s Senior Research Manager for Eastern Canada.

11 10 About CoStar: These insights are made possible through CoStar, the largest commercial real estate source for property listings for sale or lease in Canada. CoStar enables users to gain insight into the 88,000 properties currently tracked in the Greater Toronto Area, which include 2,636 properties for sale and 13,481 spaces for lease, to make the best deals and decisions with confidence. CoStar conducts constant, proactive research with a team of 60+ researchers making over 12,000 database updates each day. Learn how CoStar can help accelerate your business. costar.com sales@costar.com 2018 CoStar Realty Information, Inc.