Northern exposure – December 2005

Real estate investors are eyeing Canada's largest market.

The recent start of the 2006 NHL season was met with eager anticipation in Canada—and muted ignorance almost everywhere else. Yet after the ignominy of losing an entire season to labor disputes—and some controversial rule changes designed to improve the flow of the game—hockey has once again resumed its place at the center of Canadian society.

Similar trends are taking shape in Toronto, a city often overlooked by real estate investors despite its status as the fifth largest metropolitan area in North America. Two years ago, the specter of SARS and a rising Canadian dollar dealt a severe blow to the city’s economy; but like the national pastime, Toronto has since rebounded. This year, the city’s gross domestic product is expected to increase by a respectable 2.2 percent and unemployment levels, which have declined for three consecutive years, look set to drop further in 2006.

All these factors are having a beneficial impact on the city’s real estate market, particularly the office sector, which is seeing strong demand drive down overall vacancy rates. The current market dynamics have also led to upward pressure on rents, which had been in decline since 2002.

Real estate players have taken notice. While the most significant deal activity has recently involved Canadian pension funds—in the year’s largest transaction, the CPP Investment Board acquired a 50 percent interest in 11 office properties, three of which were in Toronto, for $1 billion—private equity real estate firms have also been eyeing the country’s most populous city. Earlier this year, for example, The Blackstone Group acquired six office buildings in the city’s central business district for approximately $92 million. And in August, Boston-based opportunity fund operator Halcyon Ventures took part in a C$325 million deal to develop a new luxury hotel that will be managed by the Four Seasons.

Two other high-end hotels are also expected to break ground in 2006, including a Ritz-Carlton and the Trump International Hotel & Tower. Is there any better indicator of a vibrant real estate market than the debut of The Donald?

Perhaps so. Next year may also herald the development of three new “AAA” office towers in the city’s central business district, the first such construction project in almost a decade according to real estate consultant Jones Lang LaSalle.