Canada's largest real estate investment trust is pushing ahead with a development plan focused on industrial property as it deals with a dearth of transactions around the country.

Toronto-based Choice Properties REIT, which is almost 62% controlled by George Weston Ltd. with businesses that include retail giant Loblaw Cos., has a sprawling portfolio across the country of 702 properties with 63.8 million square feet and envisions much of its future growth coming from development.

Rael Diamond, president and chief executive of Choice Properties, said during a conference call with analysts the trend of fewer transactions continued in the second quarter, driven by uncertainty in financing.

"We continue to see a slowdown in transactions with wide bid/ask spreads persisting," said Diamond.

The REIT completed $103.1 million of transactions in the second quarter with $101.2 million of those deals being dispositions, according to a statement.

"We are taking advantage of strong fundamentals in assets we consider non-core and improving the quality of our retail portfolio," said Diamond on the call.

The REIT has exited all office assets in Atlantic Canada and is now actively marketing its remaining office asset in Calgary. Additionally, the REIT sold a data centre adjacent to Loblaw's head office in Brampton in the second quarter for net proceeds of $74.2 million, according to the statement.

Diamond said the REIT will complete 1.6 million square feet of industrial space development and two residential projects in 2023.

"We are also advancing Choice Caledon Business Park, our largest industrial development site located in the [Greater Toronto Area], where site work has started, and the first lease was executed," said Diamond.

With Loblaw as its largest tenant, Choice Properties is still largely a retail REIT, with 80% of its net operating income from retail. However, industrial has increased to 15% of the REIT's portfolio, with mixed-use and residential making up the rest of the mix, according to its second-quarter earnings report.

"We also continue to advance our development program, with a focus on industrial opportunities, which provides us with the best opportunity to add high-quality real estate to our portfolio at a reasonable cost and drive net asset value appreciation over time," the REIT said in its outlook for the recent quarter.

Industrial net operating income was up 6.7% in the second quarter from a year ago, while retail net operating income climbed 3.4% during the same period.

Choice Properties' industrial portfolio is focused around extensive, purpose-built distribution facilities for Loblaw but said it also targets generic industrial assets for a diverse group of tenants.

The REIT puts the fair market value of its industrial holdings comprising 116 properties and 17.5 million square feet at $3.6 billion.

Ana Radic, chief operating officer of the REIT, said on the analyst call that overall industrial leasing activity moderated in the second quarter of 2023 but said industrial demand remains strong with a national vacancy rate of 1.9%.

"Net rental rates continue to rise," said Radic. "We have significant embedded rental rate growth in our industrial portfolio."

A surge in new industrial supply drove a temporary increase in vacancy in the second quarter across Canada but long-term demand is expected to be healthy, Marcus & Millichap said in a quarterly report.

"The need for a better logistics and transportation network will continue to drive industrial demand in Canada, as companies are putting greater importance on nearshoring amid changing consumer behaviour and rising global geopolitical risks," said the real estate company in its report.

"With demand expected to remain robust, coupled with almost 50% of the construction pipeline pre-leased, upward pressure on vacancy will be limited, keeping long-term fundamentals healthy," Marcus & Millichap said in the report.

Mark Rothschild, an analyst with Canaccord Genuity, noted development is a key component of Choice Properties' growth strategy.

"The REIT owns a number of large and well-located sites in Canada's largest markets," said the analyst in a note. "We continue to utilize a cap rate of 6.5% to value the REIT's portfolio, and our net asset estimate is now $13.19 per unit, from $13.11 previously."