Commercial real estate was booming in 2017 and office-vacancy rates in downtown Toronto were near historic lows. A strengthening economy supported employment and demand for work space, and property deals were propelled by central-bank assurances that a decade of low, low interest rates might easily extend for 10 years more.
That's when the government-backed agency that runs Toronto's major international airport rolled the dice, betting almost half a billion dollars in 2017 and 2018 on commercial real estate, largely office space, on the perimeter of Canada's busiest airfield. At the time, planning for a new regional transit hub at the airport, dubbed "Union Station West," appeared to be intensifying.
Less than two years later, Covid-19 engulfed China and then spread. Office workers holed up at home during the pandemic found they liked it there, upending a century of work patterns and shrinking companies’ office-space needs, perhaps forever.
Today the Greater Toronto Airports Authority (the "GTAA") faces a bit of a reckoning on its 1.3-million-square-foot investment portfolio near Pearson International Airport, which served 44.8 million passengers in 2023 and ranked among the world's 40 busiest airports. The agency has recorded almost $50 million (US$36.6 million) in write-downs on the properties over the past two years, and the balance-sheet value of the portfolio has fallen almost 16% since 2021. The buildings, including a flight-simulator facility, made up 6% of the GTAA's $6.77 billion of assets at the end of 2023.
A Global Problem
The write-downs reflect a deterioration in the outlook for office properties in Toronto and around the world. Paper losses on the GTAA's untimely investments, which required the approval of Canada's minister of transport, could raise questions for a quasi-public agency that charges passengers and airlines some of the highest fees in the world.
"Government agencies shouldn't be taking risky gambles like this on the taxpayer dime," Jay Goldberg, Ontario director of the Canadian Taxpayers Federation, a politically right-leaning advocacy group, said via email. "It's even more concerning when an agency like the airport authority takes a gamble on something it knows little about, in this case real estate."
Transport Canada said in a statement that the acquisition of 16 properties was approved in 2017 and 2018 by then-Minister of Transport Marc Garneau, who resigned his seat in Parliament last year. Under terms of the lease agreement with the Canadian government, "airport authorities or their subsidiaries may acquire and hold land not required for airport operations provided they obtain the advance consent of the Minister of Transport," the statement said.
"In requesting consent to acquire the properties, the GTAA emphasized the strategic importance of the properties to be acquired to its future development plans and regional transit initiatives," the statement said. "The GTAA intends to retain title to the commercial properties, continuing with their current use until such time as the lands are required for airport operational purposes."
The properties are situated mainly along Airport Road, which forms most of Pearson's eastern boundary. Several of the buildings sit close to the proposed transit hub, and almost all appear to be within three kilometers of the site. The GTAA has identified the airport as hosting the metro area's second-largest concentration of jobs after downtown Toronto and, before the pandemic, had committed tens of millions additional dollars toward developing a rail link to the transit hub.
The GTAA's real estate setback parallels those of other investors. Canada Pension Plan Investment Board, the country's largest manager of retirement funds and holder of $41 billion in real estate, earlier this year offloaded property for effectively nothing, and Caisse de Depot et Placement du Quebec, Canada's No. 2 pension fund, recorded a 6.2% loss on its $46 billion real estate portfolio. Ontario Teachers' Pension Plan hasn't fared much better.
The vacancy rate near Pearson airport rose to 15.7% in the first quarter of 2024 from 13.7% at the beginning of 2019, according to research by Avison Young, a Toronto-based provider of commercial real-estate services. The area around the airport actually fared much better in terms of the size of the increase than the Greater Toronto Area, where the vacancy rate rose to 13.7% from 5.6%.
Airport Road
The GTAA says in its financial filings that it acquired the commercial real estate through Airway Centre Inc., which is wholly owned by another GTAA unit, Malton Gateway Inc.
The investments, totaling $467 million over the two-year period, included the May 2017 purchase, for $120.2 million, of 5915 Airport Road and 5935 Airport Road, according to property records provided to HBB. Other significant deals were the $69.5 million buys in May 2018 of 6655, 6695, 6715 and 6725 Airport Road and, the same month, the $54.5 million acquisition of 6299 Airport Road and 6303 Airport Road, based on the records. Leasing is handled by the GTAA, which employs an external manager for the properties.
"The GTAA’s diverse business model includes acres of various sized buildings and lands for multi-purpose usage such as commercial and industrial development," the agency says on its website. "These properties are available for lease and are situated in close proximity to the 400-series highways and to the Malton rail station, offering convenience and unlimited opportunities for businesses looking to be in the heart of the airport zone. "
The GTAA did not respond to a list of questions emailed on April 23.
The non-profit GTAA was formed in 1996 when the federal government transferred operating responsibility for Pearson to the airport authority, which runs the facility under a lease that paid Ottawa $212.5 million in 2023.
The agency's chief executive is Deborah Flint, who arrived in Toronto in April 2020 following a stint in Los Angeles as CEO of that city's airport authority. Flint's predecessor, Howard Eng, was in charge of the GTAA during the period when the property investments took place. The GTAA and Air Canada, the country's largest airline, came under fire in 2022 after Pearson ranked dead last in on-time performance globally as the travel industry emerged from the pandemic.
Value Reductions
The GTAA began recognizing the reduction in the value of the property portfolio after applying more stringent valuation measures in 2022, as it became clear that post-pandemic work patterns and higher interest rates had lowered the portfolio's potential long-term returns. Lower prices were reflected in higher capitalization and discount rates, which are key measures determining what income real estate should cost.
The estimate of the portfolio's fair value - what the commercial properties could reasonably be expected to sell for on the open market - decreased 12.9% to $502.5 million at the end of 2023 from as high as $577.0 million at the end of 2021, according to the GTAA's financial reports.
But the authority also noted that the value of certain buildings in the portfolio was "determined to be impaired," leading to a write-down of $23.0 million in 2022 and another of $26.3 million in 2023. Due significantly to the write-downs, the book value of the portfolio - the cost of property minus amortization and write-downs - dropped 15.7% to $406.9 million at the end of 2023 from $482.6 million in December 2020.
Last year, the commercial properties produced $34.6 million in rental revenue, up from $34.1 million in 2022. Operating expenses associated with the properties rose to $27.7 million from $27.4 million. HBB wasn't able to find any disclosure on how the GTAA financed the investment properties.
The GTAA's net income in 2023 more than tripled from a year earlier to $265 million on revenue of $1.89 billion, due mostly to the resurgence in travel, but also helped by an additional $33 million in interest income and slightly lower debt expense.
Could Work Out
The GTAA's wager on its environs may well work out over the long run. The Toronto Star reported in 2017 that the federal government might be open to changing the ownership structure of the airport to accommodate private investments, although a plan released by the airport early that year doesn't appear to have gone anywhere. Office demand is rebounding as employers start forcing workers back to their cubicles, and the GTAA has since 2017 added three directors with varied real estate expertise to its 15-member board.
Even assuming an eventual rebound in property prices, the write-downs could be somewhat dismaying news for long-suffering travelers shelling out to use Pearson. The write-downs equate to 8% of the revenue that the airport generated in 2023 from airport-improvement fees charged on tickets of departing passengers. Airport-improvement fees made up one-third of Pearson's revenue last year, and the property losses came on capital that might have instead been used to provide a tad of fare relief.
--HBB
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