TORONTO — A drop in interest rates alone is not enough for RioCan Real Estate Investment Trust to embark on major new projects, said managing director Jonathan Gitlin.
High interest rates are a major obstacle to new home construction. The Bank of Canada has already cut its key interest rate twice this summer and further cuts are expected, but other factors are also at play, he said.
“It’s really a question of how we allocate capital. If interest rates go down, maybe development fees go down, construction costs go down, that’s all positive and will ultimately lead to a better return on development properties,” Gitlin said in an interview.
“But we have to balance that against the return our shareholders would receive from other capital allocation decisions, such as paying down debt, buying back shares or simply acquiring assets.”
The reluctance to build comes as the condominium market, particularly in the Greater Toronto Area, has slowed significantly and a wave of supply is entering the market.
RioCan has not had much trouble getting buyers to purchase condos, but it has about $100 million in unsold pre-sales, mostly focused on a development on the northern edge of Oshawa, Ontario, that is scheduled for completion late next year.
“The market has turned around,” Gitlin said, noting that the development came as a surprise from one moment to the next.
“It’s kind of like a musical chairs where, you know, it wasn’t quite sold out.”
According to Urbanation Inc., new condo sales in the Greater Toronto and Hamilton Area hit a 20-year low in the second quarter, outside of the first year of the pandemic. Combined with completed construction, this trend has caused the inventory of unsold units to reach a record high.
Construction companies responded by reducing their new construction activities.
RioCan has largely halted new projects and estimates that projects already underway will cost approximately $294 million to complete.
The majority of these expenses will be incurred this year and next, falling to $33 million in 2026, Chief Financial Officer Dennis Blasutti said in a conference call on quarterly results.
“This figure will drop to zero in 2027 and beyond,” he said.
However, he said the lack of new construction combined with lower interest rates should help reduce inventories.
RioCan is already benefiting from the lack of new retail construction. The company signed new leases in the quarter at prices 52.5 percent higher than before, which it said was a record high.
And although the company is experiencing weakness in some segments, such as small catering and residential furnishings, store occupancy in the quarter was 98.3 percent.
The tight retail market helped RioCan post a profit of $122.4 million in the second quarter, up from $112 million a year earlier.
Total revenues were $292.2 million, up from $276.1 million in the previous year.
Tenant stability reflects a focus on non-discretionary retailers such as grocery stores and pharmacies and helps RioCan weather economic downturns, Gitlin said.
“We have positioned ourselves so that we really have a portfolio that can absorb economic conditions, whether they are exceptionally strong or exceptionally weak.”
©2024 The Canadian Press
