RioCan REIT has postponed new construction projects indefinitely amid rising construction costs and a strategic shift toward optimizing existing assets.

Toronto-based RioCan, one of Canada’s largest REITs, said the decision is part of a broader cost-saving initiative to navigate a challenging economic landscape.

“We’ve halted the start of new construction and we don’t intend to commence physical construction on mixed-use properties any time soon,” said CEO Jonathan Gitlin during a quarterly earnings call this week.

While RioCan has paused new builds, it plans to maximize the value of its current land holdings through up-zoning and other improvements.

“The restructuring that RioCan went through was really just a result of the changing business environment … and our broader cost-saving strategy, which includes a bunch of things like construction spending slowdown,” Gitlin added.

In tandem with the construction pause, RioCan reduced its workforce by nearly 10% in October, resulting in about 50 job cuts. The layoffs are expected to lead to $9 million in restructuring charges but should generate $8 million in annualized cash savings, the REIT said.

Gitlin stressed that the workforce reduction was not in response to real estate market conditions but was part of the company’s ongoing efficiency efforts.

The high construction costs have also had an impact on the retail sector, which forms the core of RioCan’s business.

“You don’t see a lot of retail being constructed,” Gitlin noted. “You haven’t seen that over the last decade, and I really don’t think those conditions will change very much going forward, simply because the cost to construct is very high and the rent that you’d need to justify building new retail is far higher than what is currently [available on the] market.”

Despite the pause on new developments, RioCan reported a record-high 97.8% occupancy rate for the latest quarter, with committed retail occupancy at 98.6%. The improvement came after the REIT leased out the last of 10 locations previously vacated by Bad Boy Furniture and Rooms + Spaces. Although occupancy gaps have impacted same-store income this year, RioCan expects future increases, as new leases on those sites were 23.9% higher than previous rates. This trend aligns with a new leasing spread of 24.2% for the quarter and a lease renewal spread of 12.6%.

RioCan’s residential rental segment also performed well, with a 96.3% occupancy rate for the quarter. While the federal government’s plans to reduce immigration targets have raised concerns in the rental market, Gitlin downplayed any significant impact on RioCan’s residential portfolio.

“It does cast a bit of a pall over the entire residential space or the multi-res space,” he said. “But I think again, the types of units that we were curating, and the type of experience we were curating wasn’t significantly geared toward the same people who would be impacted by that legislation.”

For the third quarter, RioCan posted net income of $96.9 million, a substantial recovery from a $73.5-million loss in the same period in 2023. The REIT attributed the gains to a $159-million boost from favourable changes in the fair value of its investment properties.

Quarterly revenue also rose to $286.3 million, up from $271.4 million in the previous year.

RioCan had stated earlier this year that it would not start any new projects in the near future. But Gitlin’s comments during the conference call suggested the halt will last longer than market watchers might have expected.

RioCan completed construction of its FourFifty the Well multi-family rental project in downtown Toronto during the summer.

It was among the last projects that the REIT will complete for some time.

Photo: RioCan REIT