Many stakeholders are grappling with questions around the macroeconomic conditions driving each asset class in the Greater Toronto Area’s (GTA) commercial property market, but the answers to those economic questions should arrive in the coming year.  

While some will take a wait-and-see approach given elevated interest rates and the impact of those rates on the investment market, it's important for CRE service providers to stay focused on the unique conditions of each asset class to provide creativity and solutions to those in the market that need to remain active.

There are many reasons to be positive:

• the GTA is Canada's fastest-growing market;
• it's diversified economically and demographically;
• the region continues to have one of North America's strongest office markets (despite office-use challenges); and
• it benefits perhaps most of any Canadian city from the country's dramatic population growth which is mostly arriving in the form of economic immigration.

However, let's be fair: 2024, like 2023, will carry some challenges.

Interest rates remain elevated and continue to tamp down transactions which makes it tough to value properties and set the market; companies continue to figure out their return-to-office requirements and working arrangements; and consumer spending is finally showing signs of slowing down, particularly for non-essential products and services. 

There are plenty of moving pieces in the market as we forecast where we will be in 2024, but let us take a look at each asset class in the GTA as we plan for the year ahead. 

Industrial stays strong as opportunity for movement emerges 

The GTA's industrial market feels like it has been changing and shifting week to week.

We are seeing vacancy on the rise and sublease space coming back into the market. Those are things we haven't seen in several years and that increase in overall availability of industrial space will likely put downward pressure on rental rates.  

The data tells us total available space grew by more than two million square feet in the third quarter of 2023, pushing industrial availability up to 1.8 per cent, according to our latest Toronto Industrial Market Report.

That represented five straight quarters of modest availability increases.  

Meanwhile, absorption of space has slowed, dropping from about 1.6 million square feet in Q2 to 800,000 square feet in Q3.

Rental rates have continued to rise slightly but now represent an 11 per cent year-over-year increase, down from the startling 43 per cent year-over-year increase measured in Q3 2022, according to our research.  

That all translates to opportunities for movement as we progress toward supply-demand balance.

Just a couple of years ago, there were few large-format industrial options for tenants looking to expand, relocate or establish a presence in the region. Now there are options.

Depending on what happens to absorption over the next few quarters, we could see a more balanced market with flatter rental rate growth which is helpful for occupiers in the region. 

These industrial buildings are essential job spaces which include manufacturing and distribution businesses that drive our regional and national economy. 

Office remains a hot topic  

Like with Canada's other largest office markets, the one of the hottest topics this year will be how offices in the GTA are used by organizations and their employees as market watchers keep an eye on the broader impacts of the return-to-office movement. 

By late 2023, the GTA office market was experiencing some stabilization, particularly in the downtown and midtown markets, where vacancy declined from a record high in the previous quarter to 10.9 per cent, according to Colliers' Toronto Office Market Report for Q3.

While the overall GTA vacancy rate is the highest it’s been since the mid-1990s, this region continues to boast one of the strongest office markets in North America. 

Overall, we are seeing more organizations stepping up and establishing clear return-to-office policies, including hybrid solutions.

Meanwhile, there has been a flight to quality in our office market as tenants are taking advantage of larger vacancy and moving into newer office buildings with top-shelf amenities in accessible locations. 

As more workers compete for jobs in a tighter labour market, more employees will likely feel the motivation to increase their presence in the office.

Necessity retail will continue to be strong despite challenges 

In retail, the GTA is experiencing the same trends we're seeing across Canada's major cities. All categories of retail are impacted by shifting economic outlooks and changing consumer spending patterns. 

Our latest survey data on national retail shows that open-air retail — meaning strip malls, neighbourhood centres and big box stores — are performing well and should see a vacancy decline of one to two per cent over the next two years at the national level.

That absorption will outperform overall retail vacancy rates. 

Meanwhile, necessity retail will continue to show strength through 2024 and beyond despite declining consumer confidence.

Canada’s larger population will mean more people spending more money on consumer products like groceries, home furnishings, clothing and entertainment. 

A strain on housing amid population growth

It comes as no surprise that multifamily investments have been sluggish given our elevated interest rates. Colliers’ latest data shows increased financing costs have pushed deal-making into the smaller transactions as the rate of rental increases has decelerated.

That said, rental rates continue to climb. In the GTA, a one-bedroom home has the average cost of $2,620 per month (a 10.5 per cent increase year-over-year) and a two-bedroom home has the average cost of $3,413, up 7.1 per cent year-over-year. 

On the investment side, sales volume for Q3 2023 was $91.1 million, a significant drop from $627.3 million in Q3 2022. The average price per suite dropped by 9.1 per cent year-over-year to $324,192.

On Sept. 14, the federal government removed the GST on new purpose-built rentals and on Nov. 1, the Ontario government announced it was doing likewise for the full provincial portion of the Harmonized Sales Tax, which is eight per cent.

This is expected to spark more apartment development in the GTA and other cities around the country. 

Overall, there appears to be a disconnect between what buyers are willing to pay and what sellers are valuing their properties at, resulting in a pens-down mentality.

But, we’re already hearing economists predicting interest rates could start falling this year and that would prompt a bounce-back in deal-making. 

The long-term prospects for multifamily in Canada's largest urban centre are strong. Canada's record-high population growth is planned to continue and many of those newcomers will settle in the GTA. 

Overall, there are plenty of reasons to remain positive about the big-picture GTA CRE market.

Economic fundamentals, stable government and strong population growth will continue to drive demand for industrial space, homes and necessity retail while tenants in the industrial and AAA office market will finally start to enjoy some additional opportunities to move into new spaces in desirable locations with first-class amenities in a flight to quality. 

Instead of generating new uncertainty and questions, 2024 at this point promises to uncover more answers.