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'Illogical obstacles': Residential development held back by legacy rules, says RioCan CEO

TORONTO, ON - OCTOBER 1: Jonathan Gitlin is the president and COO of RioCan. He is seen at their Yonge and Eglinton office.        (Richard Lautens/Toronto Star via Getty Images)
RioCan REIT CEO Jonathan Gitlin says the company sees opportunity to expand its residential portfolio, but there are often "illogical obstacles." (Richard Lautens/Toronto Star via Getty Images) (Richard Lautens via Getty Images)

The head of one of Canada’s largest real estate trusts (REITs) says developers face “illogical obstacles” when it comes to residential development, as the company continues to hold off on new projects due to unfavourable economic conditions.

RioCan REIT (REI-UN.TO) CEO Jonathan Gitlin says the company – which operates mainly retail properties but also has residential developments – sees opportunity to expand its residential portfolio. Currently, residential accounts for just four per cent of RioCan’s annual contractual rent. But Gitlin says developers still face challenges when it comes to municipal regulations in cities like Toronto.

For example, he points to a seven-storey office building in the city that has been rezoned for residential use. But Gitlin says that because of existing regulations, RioCan must include an office space below the residential space.

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“To me, that’s illogical because the one thing the city does not need right now is more office space,” Gitlin said in an interview with Yahoo Finance Canada, adding that the company has several Toronto properties in its portfolio where it is currently required to build a replacement office in buildings that have been rezoned for residential development.

“I understand why they had put that rule in place early on, when the city was being built up. But now we know one thing for sure – we need more housing in the city, we need it desperately and we need it quickly. I think there has to be a quick process to overcome those kinds of illogical obstacles.”

Higher interest rates, strained housing supply and surging population growth have resulted in a housing affordability crisis in Canada with stubbornly high home prices as well as rising rents. Governments have started to focus on ways to boost housing, and Gitlin says some of the efforts – including the elimination of GST on new purpose-built rentals – are great steps, but more needs to be done.

At the same time, economic conditions also have to be in place in order for development to proceed. RioCan has paused new construction projects in 2024 as it grapples with higher interest rates and construction costs. Gitlin says RioCan will instead allocate capital to paying down debt or acquiring assets, and will restart development when there is “a bit more predictability.”

“If interest rates go lower, if construction costs come down a bit, and I'd say equally importantly, if there's a little more predictability in the municipal process where it doesn't take as long to get something built, then it's absolutely going to be something we'll push forward on,” Gitlin said.

“We have so much tremendously located density in our portfolio that we've created, and it would be a shame not to utilize that. We will definitely do that over time.”

While RioCan is awaiting more favourable economic conditions for new developments, Gitlin says current macroeconomic uncertainty in Canada is not going to have a significant impact on its business. He says RioCan has “very stable tenants” with strong balance sheets and isn’t worried if the economy worsens.

“Because of the absolute limited amount of good retail space in this country right now, even if there is some fallout from existing tenants where they either don’t elect to take the space or leave the existing space, we have enough demand from a significant number of categories of tenants that would take the space, and typically at higher rents,” Gitlin said. RioCan currently has a 98.4 per cent occupancy rate when it comes to retail.

“That is a very full situation. If there is some pullback or retrenchment from certain tenants because of the economy, we would fully capitalize on those opportunities.”

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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