COVID-19 impacts on Greater Toronto Area commercial real estate market

Period covered: May 9th to 15th, 2020

COVID-19 impacts on Greater Toronto Area commercial real estate market

As this unprecedented situation continues to rapidly evolve, Avison Young’s briefing notes are intended to provide an up-to-date assessment of the impact on the commercial real estate market.

General trends, news and market observations

• Ontario’s “Framework for Reopening our Province” has set the stage for many businesses to begin re-opening as soon as May 19th. Ontario's first stage of reopening will begin on Tuesday, May 19th, 2020 at 12:01 a.m. and will include:
  • Retail services that are not in shopping malls and have separate street-front entrances with measures in place that can enable physical distancing, such as limiting the number of customers in the store at any one time and booking appointments beforehand or on the spot
  • Seasonal businesses and recreational activities for individual or single competitors, including training and sport competitions conducted by a recognized national or provincial sport organization. This includes indoor and outdoor non-team sport competitions that can be played while maintaining physical distancing and without spectators, such as tennis, track and field and horse racing
  • Animal services, specifically pet care services, such as grooming and training, and regular veterinary appointments
  • Indoor and outdoor household services that can follow public health guidelines, such as housekeepers, cooks, cleaning and maintenance
  • Lifting essential workplace limits on construction
  • Allowing certain health and medical services to resume, such as in-person counselling; in-person services, in addition to virtual services, delivered by health professionals; and scheduled surgeries
• In the City of Toronto, no new development applications have been submitted since March 17th, 2020. The city has now gone almost seven weeks straight without any new submissions to report
• Ontario extends State of Emergency until June 2nd
• The City of Toronto is planning additional road repair construction while traffic is decreased by the pandemic
• TTC ridership has declined 80% since the lockdown began
• Metrolinx is assessing what to do with its under-utilized GO station commuter parking lots during this time. They are considering short term lease/license opportunities to occupy these sites for vehicle, trailer parking and other clean storage uses deemed acceptable
• The City of Vaughan is providing further relief on property tax payments. The deadline for interim and final installments has been extended from June 1st to July 1st
• The City of Vaughan has also moved its "InSpirit Festival" online. The annual celebration (in May) offers arts and cultural programming virtually this year – for example, online karaoke
• A favourite summertime tradition among Torontonians, the 142-year-old Canadian National Exhibition was cancelled due to COVID-19 – which has not occurred since the Second World War

Office market observations

• Tenants are developing plans to enable staff to return to the office when permitted – in some cases, these plans have as many as four to six phases, and they include plans to “re-onboard” employees to ensure they understand all the new procedures, as well as ways for the company to “re-exit” the office if necessary
• Some companies appear to be engaging in a “race to be last” returning to the office, to enable them to observe and benefit from the experience of others that return sooner
• As the work-from-home situation becomes more prolonged, new issues are emerging, such as how to effectively hire and manage new employees and impart a sense of belonging and company culture to those who have never physically worked in the company’s offices
• Even in physical offices, large gatherings won’t be permitted, so companies will look to create new rituals and opportunities for staff to connect digitally
• Discussions of tours are increasing – both on the tenant side, where demand is picking up, and on the landlord side, discussing protocols for conducting tours safely
• Tenants are working to find and arrange cleaning services sufficient for additional demand under new cleaning protocols that will be necessary – especially as there is the chance the office will need to be closed and deep-cleaned if an employee contracts COVID-19 and has been in the space
• Some tenant requirements are shifting under these new circumstances – some are now looking exclusively for full-floor opportunities on low floors with walk-up access, for privacy and control of their space as well as avoiding use of/waiting for elevators
• In addition, tenants are definitely looking for shorter terms: one to two years instead of five, for example
• A large accounting firm is aiming to re-open its GTA offices in July. IT considerations will require up to two weeks of preparation prior to that. The company expects 10% to 20% of staff to return initially, commuting by car only. Their plan is to restrict the number of floors in use to avoid having to close an entire location if an employee tests positive. The estimate is that spaces will be able to function at about 50% capacity due to social distancing. Any plans to reconfigure premises or lease new premises have been put on hold. The company plans to keep the same amount of space in the GTA despite growth in employees – and will wait at least a year before any discussion to reduce space

Industrial market observations

• Canada-based Novolex brand Polar Pak – a large industrial tenant in Brampton – will convert production to meet demand for four million face shields in the next two months. In addition to manufacturing personal protective equipment (PPE), Novolex has been converting certified food-grade packaging lines at more than seven locations in North America, including Polar Pak’s Brampton location, which employs more than 800 people
• Major landlords report that May rent collection for industrial is good (75%)
• April into May was quieter for rent deferrals – however, many small- and mid-bay tenants are still struggling to pay rents
• Landlords of class A industrial buildings are prepared to take space back from tenants if necessary
• Activity on listings in the 20,000-sf to 30,000-sf range has been good, while sub-10,000-sf listings have been slower, and expectations for rent have softened in some cases
• Cannabis requirements remain high, especially for freestanding buildings in the 20,000-sf range

Retail market observations

• Large landlords coordinating on re-opening of downtown Toronto's underground PATH network
• Retail deal activity has picked up lately, although deals are moving slowly. Most are deals with commencement dates in 2021, but landlords and tenants are happy to work on these deals nevertheless and that is encouraging
• A major landlord reports that independent retailers are struggling most – particularly food-court retailers
• Street-front restaurant owners are hopeful that the City of Toronto will allow the expansion of patios onto sidewalks and even roads during summer to help them earn more revenue

Investment market observations

• The land sale market is picking up and several off-market land purchases have occurred in Mississauga and Oakville recently
• Some investors are looking to buy in the next three to 12 months
• Investors are still waiting for the first few big sales to occur – this will set the benchmark for future deals