Avison Young: GTA commercial market activity remains robust

However, interest rate hikes have left their mark

Avison Young: GTA commercial market activity remains robust

Investment in the Greater Toronto Area’s commercial real estate market amounted to $22.3 billion for the whole of 2022, down just 5% from 2021’s record-breaking volume, according to Avison Young’s latest analysis.

However, the report registered a “marked difference” in the market’s dollar volumes during the first half of 2022 ($14 billion) and the second half ($8.3 billion).

“Strong momentum from 2021 carried through the first half of 2022, but repeated interest-rate hikes and the shifting economic landscape put a damper on activity later in the year as buyers and sellers adjusted their pricing expectations given increased capital costs and an uncertain outlook,” Avison Young explained.

The effects were particularly apparent during Q4 2022, which saw commercial activity fall by 17% quarterly and by 51% annually.

“After a decade of consistent declines, the average GTA-wide cap rate rose 50 basis points year-over-year to end 2022 at 4.5% – the highest average rate since 2016,” Avison Young said. “All asset types posted rising rates.”

Still, capital remains plentiful in the market, and robust deal activity persists.

“Moving into 2023, stakeholders appear to be adjusting to the new market landscape, with confidence beginning to gain momentum,” Avison Young said.

And while large deals have yet to materialize amid investors’ cautious stance, “activity is expected to ramp up through the first half of the year as the market stabilizes.”

Avison Young pointed to a specific asset class that bears watching in the current environment.

“Although not a significant factor to date, there is the potential for an uptick in distressed-asset sales as some owners whose strategies relied on low interest rates may feel the pinch of higher rates,” Avison Young said.