2018 GREATER TORONTO AREA ECONOMIC OUTLOOK - COSTAR
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2018 Greater Toronto Area Economic Outlook
1
HIGHLIGHTS
Although the Canadian economy performed exceptionally well in the
first half of 2017, posting GDP growth of approximately 4.0%, it has
slowed since then with estimated GDP growth for 2017 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 2017, the
economy continues to perform well. Expect GDP growth for Toronto
to come in at 3.7% for 2017 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 2017, 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%
0.50%
0.00%
2016
2016
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
2017
2017
2018
2018
2019
2019
Bank of Canada Overnight Rate Bank of Canada 10-Yr Bond Yield
Source: CoStar Group, January 2018
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
275
250
225
Index: 2005 = 100
200
175
150
125
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Housing Costs (GTA) Minimum Wage (Actual) Minimum Wage (Adjusted for CPI)
Source: CoStar Group, January 2018
Employment Growth
Employment Growth
130
Employment Growth (Index: 2001 = 100)
125
120
115
110
105
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Canada Ontario Toronto
Source: CoStar Group, January 2018
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 2017. 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
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 2015 Q3.
The downtown Toronto office market is currently very landlord-
controlled, 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 2018.
Vacancy Rate
Vacancy Rate
9%
8%
7%
6%
5%
4%
3%
2013 2014 2014 2015 2015 2016 2016 2017 2017
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
GTA Downtown Suburban
Source: CoStar Group, January 2018
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 2018-
2020 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 HQ2.
5
Construction Activity
Construction Activity
4,000
3,500
New Supply SF (000)
3,000
2,500
2,000
1,500
1,000
500
0
2014 2015 2016 2017 2018 F 2019 F 2020 F
Downtown Suburban
Source: CoStar Group, January 2018
Net asking rents continue on their upward trajectory, with
downtown rents up $1.02 year-over-year to end 2017 at $26.58 per
square foot (PSF). Similarly, suburban rents are up $0.63 PSF year-
over-year to $17.08. The delta between downtown and suburban net
rents, which ended 2017 at $9.50 PSF, is near a five-year cycle high. It
has fluctuated between $8.03 PSF in 2013 Q4 and $9.64 PSF in 2017
Q2. 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
Net Asking Rents
$27.50
$25.00
$/SF/Annum
$22.50
$20.00
$17.50
$15.00
2013 2014 2014 2015 2015 2016 2016 2017 2017
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Downtown Suburban
Source: CoStar Group, January 2018
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 2018.
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 $0.60.
Manufacturing EmploymentGrowth
Manufacturing Employment Growth
130
120
Index: 2000 = 100
110
100
90
80
70
2003
2013
2000
2001
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
2014
2015
2016
2017
Total Employment Manufacturing
Source: CoStar Group, January 2018
The GTA industrial market has been performing exceptionally well,
with vacancy ending 2017 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.
7
Vacancy
Vacancy Rate vs. Net
Rate vs. NetAsking
AskingRent
Rent
7.0% $6.50
Net Asking Rent (psf/Annum)
6.0% $6.25
5.0%
Vacancy Rate
$6.00
4.0%
$5.75
3.0%
$5.50
2.0%
1.0% $5.25
0.0% $5.00
2013 2014 2014 2015 2015 2016 2016 2017 2017
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Net Asking Rent ( R ) Vacancy Rate ( L )
Source: CoStar Group, January 2018
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 2017, 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 2017 at 3.2%, down 10 BPs year-over-year. Net
asking rents ended 2017 at $24.27 PSF, down only slightly from $24.29
PSF at year-end 2016. However, rents throughout 2017 increased to
8
$25.58 PSF in 2017 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 2018.
Vacancy
Vacancy Rate vs. Net
Rate vs. NetAsking
AskingRent
Rent
6.0% $26
Net Asking Rent (psf/Annum)
5.0% $25
4.0%
Vacancy Rate
$24
3.0% $23
2.0% $22
1.0% $21
0.0% $20
2013 2014 2014 2015 2015 2016 2016 2017 2017
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Net Asking Rent ( R ) Vacancy Rate ( L )
Source: CoStar Group, January 2018
Similar to when Target left Canada in 2015, 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 2018. For the GTA, vacancy will likely crest the 4.0%
market rate by mid-2018.
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.
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
2017, from approximately $1.7 million per acre to $1.5 million per acre.
Land
Land Pricing
Pricing
$3.5
$3.0
Avg. Price per Acre ($ MM)
$2 .5
Rolling 4 QTR
$2 .0
$1.5
$1.0
$0.5
$0.0
2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Overall Avg. Avg. Land Avg. Redevelopment
Source: CoStar Group, January 2018
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.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 888.226.7404 sales@costar.com ©2018 CoStar Realty Information, Inc.
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