TORONTO – It will take more than just interest rates dipping lower for RioCan Real Estate Investment Trust to start new major developments, said chief executive Jonathan Gitlin.
High rates have been a major barrier to new housing construction, but while the Bank of Canada has already cut its benchmark rate twice this summer with more expected ahead, there are other factors at play, he said.
“It’s really a question of how we decide to allocate capital. Interest rates coming down, and development charges perhaps coming down, and construction costs coming down, that’s all positive, and it will ultimately create a better return in development properties,” said Gitlin in an interview.
“But what we have to weigh that against is the return that our unit holders would see through other capital allocation decisions, like paying down debt or buying back shares or just acquiring assets.”
The hesitation to build comes as the condo market, especially in the Greater Toronto Area, has softened considerably with a wave of supply coming on the market.
RioCan hasn’t had much trouble with buyers taking possession of condos, but it does have about $100 million in unsold pre-sales, concentrated mostly in a development at the northern edge of Oshawa, Ont., that’s due to be complete late next year.
“The market has turned,” said Gitlin, noting the development was caught out when the music stopped.
“It’s sort of like a game of musical chairs where, you know, it wasn’t fully sold out.”
Sales of new condos in the Greater Toronto and Hamilton area hit a 20-year low for the second quarter, outside the initial pandemic year, according to Urbanation Inc. The trend, combined with finished builds, has led to unsold inventory hitting a record high.
Builders have responded by pulling back on new construction.
RioCan has mostly halted new projects and estimates it will cost about $294 million to finish projects already underway.
The bulk of that spending will happen this year and next, dwindling to $33 million in 2026, said chief financial officer Dennis Blasutti on an earnings call Friday.
“This drops to zero in 2027 and beyond,” he said.
He said however that the dearth of new construction, combined with lower interest rates, should help clear inventory.
RioCan is already benefiting from the lack of new construction on the retail side. The company signed new leases at 52.5 per cent above previous rates in the quarter in what it says was a record.
And while the company is seeing softness in some segments like small restaurants and home furnishings, it had a retail committed occupancy of 98.3 per cent in the quarter.
The tight retail market helped lead RioCan to a second-quarter profit of $122.4 million, up from $112 million last year.
Revenues totalled $292.2 million, up from $276.1 million a year earlier.
The steadiness of tenants reflects a focus on non-discretionary retailers like grocers and pharmacies, helping RioCan ride out bumps in the economy, said Gitlin.
“We’ve set ourselves up to really have a portfolio that is going to absorb economic conditions, regardless of whether they’re exceptionally strong, or exceptionally weak.”
This report by The Canadian Press was first published Aug. 9, 2024.
Companies in this story: (TSX:REI.UN)
