(Toronto) It will take more than the policy rate cut for RioCan to launch major new real estate projects, company president and CEO Jonathan Gitlin said.
High interest rates have been a major obstacle to new housing construction, but while the Bank of Canada has already cut its key rate twice this summer and more cuts are expected, other factors are at play, he said.
“It’s really a question of how we decide to allocate capital. Lower interest rates, lower development costs and lower construction costs, all of that is positive and will ultimately create a better return on the properties that are being developed,” Gitlin said in an interview.
“But what we have to consider with that is the return that our unit owners would get from other capital allocation decisions, like paying down debt, buying back shares or just acquiring assets.”
The hesitation to build comes as the condo market, particularly in the Greater Toronto Area, has slowed significantly with a wave of offerings hitting the market.
RioCan hasn’t had much trouble with buyers taking possession of condos, but it has about $100 million in unsold condos in pre-sale, concentrated mainly in a development on the northern edge of Oshawa, Ont., that is expected to be completed late next year.
“The market has changed,” Gitlin acknowledged, noting that development was caught off guard when the music stopped. “It’s kind of like a game of musical chairs where, you know, not everything was fully sold.”
New condo sales in the Greater Toronto and Hamilton Area hit a 20-year low for the second quarter outside of the initial year of the pandemic, according to Urbanation.
This trend, combined with completed construction, has led to a record inventory of unsold condos. Builders have responded by reducing the construction of new housing.
RioCan has largely halted new projects and estimates it will cost about $294 million to complete its current projects.
The bulk of that spending will come this year and next, falling to $33 million in 2026, Chief Financial Officer Dennis Blasutti said on an earnings call Friday.
“This amount will drop to zero in 2027 and beyond,” he said.
However, he said the shortage of new construction, combined with lower interest rates, should help clear unsold inventory.
RioCan is already benefiting from the lack of new construction on the retail side. The company signed new leases at 52.5% above previous rates during the quarter, which it says is a record.
And while the company saw weakness in some segments like small restaurants and home furnishings, it recorded a 98.3% occupancy engagement rate in retail during the quarter.
The retail market helped RioCan achieve a profit of $122.4 million in the second quarter, up from $112 million last year.
Revenue totaled $292.2 million, up from $276.1 million the previous year.
The tenant stability reflects the focus on essential retailers like grocers and pharmacies, which is helping RioCan weather economic challenges, Gitlin said.
“We’ve set ourselves up to have a portfolio that will really absorb economic conditions, whether they’re exceptionally strong or exceptionally weak.”