The back-to-office trend has not yet boosted the fortunes of Allied Properties Real Estate Investment Trust, as the company reported that increased interest costs and slow leasing activity in downtown Toronto led to a net loss of $113.4 million in the third quarter.
While the REIT said it is seeing "strong interest" in office leasing in Montreal and Vancouver, deal activity in Toronto is taking longer to recover as tenants delay expansion and relocation decisions. This is happening despite return-to-office mandates handed down at major firms such as RBC, TD and Rogers Communications and the Ontario government.
Toronto’s overall office vacancy rate has increased to 11.2%, well above the national average vacancy of 10%, according to CoStar data.
“Although urban office fundamentals are improving in Canada’s major cities, our occupied and leased areas didn’t increase at the pace we expected in the quarter," Allied CEO Cecilia Williams said in a statement. "Along with elevated interest expense, the slower pace of lease finalization put downward pressure on our results.”
Allied said it gave fewer tours to potential tenants in the third quarter and that many deals took longer to close. Occupancy held steady at 84%, with 87.4% of its space leased. The renewal rate at its properties dropped to 62%, below the company’s usual range of 70%–75%, Allied REIT said.
The leasing challenges come at a time when many potential office tenants prefer newer buildings with more amenities, a trend known as a flight to quality. Allied’s portfolio includes older heritage properties that face tougher competition.
Allied REIT's property holdings are primarily comprised of office space, which makes up 89% of its portfolio, with the remainder consisting of urban industrial and a small amount of residential properties. Its biggest markets are Toronto, Montreal, Vancouver, Calgary and Kitchener. Allied REIT said its Toronto properties generate the most revenue.
REIT looking to sell more properties
Allied REIT said it sold three properties for a total of $46 million last quarter. The sales consisted of a small office building in Edmonton, a retail site in Vancouver and a mixed-use building in Montreal. The company said it has four more deals under contract worth a total of $55 million and expects to close three additional Montreal sales in December for $85 million.
Allied is also trying to sell its interest in Toronto House, a 57-storey tower at 19 Duncan St. that contains offices, residences and retail space. Allied owns the commercial portion that is fully leased. The REIT is also seeking to sell Calgary House, a downtown office building that has also leased faster than expected, according to the REIT's third-quarter earnings report.
The initiative to sell Toronto House and Calgary House appears to be a change of course. The REIT recently stated that it sought to hold onto the two properties. “We are proud of how quickly these buildings leased up,” said Williams. “But we have to be disciplined. These are great assets, just not ones we plan to hold for the long term.”
Meanwhile, Allied also said it has increased its stake in 400 West Georgia in Vancouver and finished leasing King Toronto, its high-profile residential-office project.
Allied was founded in 2003 by Michael Emory, who led the company until 2021. Williams served as the chief financial officer before being elevated to CEO in March 2022.
Looking ahead for the rest of the year, Allied REIT said it expects its "occupied and leased area at year-end to be in-line with the third quarter" and its funds from operations and adjusted funds from operations per unit and "to contract by approximately 10% in the year." FFO is a key measure of a REIT's financial performance.