February 10, 2021 | 11:59
Toronto Economy: Not 6ix Feet Under
Ontario’s economy contracted an estimated 5.6% in 2020, similar to the 5.4% decline expected nationally. The province’s high COVID case count is actually lower than the national average in per capita terms, with almost 1,900 cumulative cases per 100k people (vs. a national average of over 2,100). Nevertheless, broad-based and lingering restrictions have affected the provincial economy, particularly in Toronto and surrounding areas.
Due to its high concentration of cases, the Greater Toronto Area lagged most of the rest of the province’s summertime reopening and was among the first regions to return to stronger restrictions in the fall. This is a major reason why we judge the city’s economic decline to be deeper than the province's overall for the year. At the same time, a population outflow is underway to less dense and more rural locations, given the nature of the pandemic. As the pandemic passes, some of this shift will likely remain permanent, but we believe that Toronto will re-emerge as an attractive destination, even if there is some necessary repurposing and repricing of commercial real estate.
Toronto’s labour market has also been slower to recover—the city’s unemployment rate averaged 10.7% in the three months ending in December, significantly higher than the provincial (9.5%) and national (8.8%) averages. The good news is that the city ended the year with 80% of the jobs lost at the worst point of the pandemic recovered, but prolonged lockdowns likely eroded some of those gains in the new year.
As Canada’s largest city, Toronto’s economy has a relatively high concentration in sectors more severely impacted by the pandemic. The labour market is heavily service-oriented (over 80% of jobs), with wholesale and retail trade (16%) and professional, technological, and scientific services (13%) among key employment drivers. That said, these services are relatively isolated from the effects of the pandemic; in fact, both sectors combined to add a net 45k jobs since February. Plus, the concentration of high-skilled technological jobs in Toronto and surrounding areas will continue to benefit the regional economy as working from home becomes more common beyond the pandemic. Still, pandemic-related weakness in some sectors, such as transportation and warehousing, accommodation, food services, culture and recreation (combining for 15% of jobs), means the city is still vulnerable to the restrictions that will remain to some degree until vaccines are more widely distributed. Looking ahead through early 2021, we expect Toronto’s economic recovery to lag the rest of the country, largely because of the city’s concentration of COVID cases and associated restrictions. However, the city should eventually reassert itself as a key driver of Canadian economic growth beyond the pandemic, and we could see a very strong wave of pent-up demand in areas that Toronto is best suited—think restaurants, bars, entertainment and travel. Investments in research and development (e.g. in sustainability and technology) can help drive the city’s growth beyond the recovery.
Toronto’s housing market has sailed through the pandemic, recovering quickly from the spring-2020 lockdown, and subsequently setting records for sales and prices. Existing home sales rose 8.3% in 2020, which is a feat considering the spring void. By the second half of the year, sales were at record levels, with January's tally up 52% from year-ago levels. Part of the strength reflects pent-up demand after the normally-busy spring selling season was effectively canceled. But, it also comes as the result of record-low mortgage rates, a swift job recovery in higher-paying industries, and a sudden shift in preferences toward larger homes outside the city core. The latter represents an affordability valve for many buyers, aided by remote work.
Limited new listings have also kept the broad market tight. As a result, prices have jumped, with the MLS benchmark rising 12% y/y in January to a record high. But, the real story lies below the surface, where the sudden shift in preferences, along with limited supply, has lifted single-detached home prices almost 17% y/y, or nearly 30% annualized since the second half of 2020. Condo prices, on the other hand, are up just 1.7% y/y and down slightly from mid-year levels. While the former have been bid up on demand for more space, the latter have struggled for the same reason, while also seeing investment fundamentals deteriorate alongside lower rents and a limited short-term accommodation market, as well as a falloff in immigration. The condo market has also accounted for the vast majority of new supply over the past decade. Homebuilding has held remarkably steady in Toronto over the past year, with the sector only marginally impacted by pandemic measures.
In the commercial real estate sector, downtown office vacancy rates have jumped to 7.2%, according to CBRE, from around 3% a year ago. The shift to remote work is clearly having an impact on the market that was extremely tight before the pandemic. Meantime, commercial rent relief has helped keep tenants in place, but there will likely be some long-term scarring in the Main Street commercial segment.
Others, such and industrial and warehousing, appear to be coping well. In general, rents could see long-term pressure, and cap rates could remain wider than pre-COVID levels, especially relatively to government bond yields.
Population growth ebbed in 2020, with growth in the 15+ demographic running at 1.8% in December. While that still marks a solid pace, it is down from a recent high of 2.7% y/y. A dramatic falloff in immigration during the pandemic has weighed on growth. In particular, a collapse in nonpermanent resident inflows (students, temporary workers, etc.) has taken pressure off of rental housing, which was previously extremely stretched. Canada is sticking to high immigration targets, which bodes well for demand in Toronto, but it remains to be seen how quickly these flows return after the pandemic.
The Bottom Line: Canada’s largest urban centre has faced one of the toughest challenges during the pandemic. It’s helpful that the city was sitting in a position of historic strength pre-COVID, and we judge that Toronto will ultimately remain a driver of Canadian economic activity, even if some pockets take time to fully heal.