First-time homebuyers aren't the only ones struggling due to the recent run-up in Toronto property prices – a new study shows that commercial property prices have experienced similar gains, putting small businesses sensitive to lease rate hikes at risk.
A recent City of Toronto study provided to The Globe and Mail looks at the assessed value of non-residential properties from 2012 to 2016 in the 84 business improvement areas (BIAs) across Toronto.
On average, the value of non-residential properties in the 84 BIAs increased during the four years by 40.9 per cent. That's almost as high as the 42 per cent price increase in City of Toronto homes between 2012 and 2016, according to Toronto Real Estate Board data.
Ten per cent of the BIAs had increases greater than 60 per cent, including Dovercourt, College Promenade (College and Ossington), and Queen Street East. Church and Wellesley experienced the highest increase, at 91.4 per cent.
As commercial property values increase, small business owners are feeling the effects spill over into their rents. Landlords who have paid high prices for properties often charge more to recoup their investments, and have more incentive to replace low-paying leaseholders in favour of more lucrative retail leases or development opportunities.
While a previous generation of shopkeepers tended to own their buildings, retailers today are more likely to lease. Many of these leaseholders are directly responsible for paying property taxes, which can go up if nearby properties increase in value more than the city average.
There's a strong correlation between the increase in property value and the increase that businesses pay in rents, says John Kiru, the executive director of the Toronto Association of Business Improvement Areas.
"[The assessment numbers] have a significant impact on the taxes, which could effectively impact the rents. The fear is that once these taxes start translating to rents … it's going to be almost impossible," he says.
"For many landlords, the increase in property taxes has gone from $33,000 to $44,000. Those increases are then passed on," he says. "At the end of the day, it's the small business that suffers."
For Sultana Odishou, who owns Romeo and Juliet Hair Studio on Bayview Avenue, rent is a constant concern.
"I've seen it go up $800 a month this year," says Ms. Odishou, who now pays $4,800 per month for 800 square feet of storefront space. That doesn't account for the additional costs of taxes, electricity and other expenses in running the business she's had for 19 years.
"It's becoming too much," she says. "I have a family, other obligations. I can't stay open seven days a week. It's tough."
Rising rent is a concern that's shared by many small businesses on Bayview, where it's common for monthly rent to be in the $7,000 to $10,000 range.
For some areas, such as Bloor Street's BIA, which saw an 88.5 per cent increase in value, the increases are expected and businesses are generally able to adapt. "The area commands some of the highest commercial rents in the city, which makes it very difficult for a small independent retailer," said Briar de Lange, executive director of the Bloor-Yorkville BIA.
"Tenant spaces turn over, but new tenants are ready and able to come in. It is a high demand area."
But in other areas, such as Bayview Leaside, which has seen a 67.6-per-cent-increase, business owners are finding it more difficult.
Dino Carella and Enzo Salvaggio are owners of Hollywood Gelato, a 750-square-foot ice cream shop that has been on Bayview Avenue since 1998. They say that increased road traffic and congestion, decreased foot traffic and parking, more chain stores and the increase in construction in the area have all had a negative effect on business in the area.
"Just on my block we have 15 vacant storefronts," Mr. Carella says. "Brick and mortar isn't what it used to be. You can't pay $7,000 to $8,000 a month. It's just way too much and entrepreneurs are dying out."
He's currently in the midst of talks with his landlord. "We've been battling with the landlord back and forth," says Mr. Salvaggio. "We're always negotiating, but we pay a lot compared to everyone else."
Mr. Kiru says retail has been "under siege" over the last few years, through "the Wal-Marts of the world, and most recently online shopping." Those issues, coupled with rising property values, are making it harder and harder for small businesses to turn a profit.
Dan Kelly, president of the Canadian Federation of Independent Business, says the hot residential real estate market puts pressure on commercial property.
"There's no question that the condominium boom is a large part of it. Every little strip of commercial area is being re-evaluated," he says. And while condos are needed, Mr. Kelly says that "unbridled pressure" is causing rents to rise because of the alternative uses and potential for the space.
"You have to sell a lot of olive oil or a lot of tennis rackets or a lot of paninis to make rent," he says. "We have to worry that we're pricing out local independent businesses from Toronto communities."