In the second quarter of this year, total Canadian commercial real-estate sales surpassed the 10-year quarter average by $2-billion.Supplied
After one of the softest years on record, the Canadian commercial real estate market has roared back to life.
“We sort of hit bottom in the first quarter of this year,” when national investment activity tapped out at just $8.5-billion, says Scott Figler, director of Canada research at JLL.
The firm’s just-tallied transactions for the second quarter surpass $12-billion. “It’s a really positive story,” Mr. Figler says, adding the latest total beats the 10-year quarterly average by about $2-billion.
Some transactions were motivated by the federal government’s June 25 increase of the capital-gains inclusion rate to 66.7 per cent from 50 per cent. “A lot of people wanted to liquidate assets before that deadline hit,” Mr. Figler explains.
The Bank of Canada’s June 5 interest-rate reduction to 4.75 per cent from 5 per cent – the first cut in four years – “has also created more certainty on the investment side. We know that interest rates are not going up any more,” Mr. Figler says.
We went from a quiet market to an explosion. Multifamily is hot because of the supply/demand imbalance, which is not going anywhere.
— Mark Goodman, principal, Goodman Commercial Inc.
Most of the action focuses on commercial real estate’s four main asset classes. Interest in two of these property types – retail and office – may surprise some industry players.
Multifamily residential
Given Canada’s home-ownership affordability crisis, it should be expected that most investors are championing rental apartment buildings as the most promising of all real estate bets, according to Altus Group’s new CRE Industry Conditions and Sentiment Survey – Canada Q2.
In Metro Vancouver last quarter, Goodman Commercial Inc. sold six multifamily residential properties, valued at $88.5-million, in a single month.
“We went from a quiet market to an explosion,” says principal Mark Goodman. “Multifamily is hot because of the supply/demand imbalance, which is not going anywhere.”
According to Canada Mortgage and Housing Corp., the country needs about 3.5 million new housing units by 2030 to restore affordability. Of this much-needed housing, 2.2 million units should be purpose-built rentals, but in the past 30 years, Canada has built just 570,000 apartments.
Rental buildings, like Toronto’s newly constructed Elm-Ledbury by Fitzrovia, are the most promising investment bets in the current commercial real estate market.Hariri-Pontarini Architects
Mr. Goodman adds that the investment risk level “is virtually zero, since the vacancy rate is basically 0 per cent.” With average national rents increasing at “unprecedented rates”– reaching $2,185 a month in June – “it’s one of the few markets where landlords want tenants to leave,” Mr. Goodman says.
“People say rents can’t go much higher,” he says, “but look at Manhattan [where the median rent is US$4,695]. We’ve got a long way to go.”
Industrial
The coveted industrial asset class remains a best bet despite vacancy rates doubling in one year to 4.2 per cent, and a slight average rent decrease – the first in more than a decade – to $15.95 a square foot, according to the latest CBRE figures.
In a healthy market, “it’s exactly what should be happening,” says JLL’s Mr. Figler.
“Two years ago, we had extremely low industrial vacancy across the country,” he explains. “So, what happened? Developers started building like never before. The development pipeline grew almost three times larger than any time in Canadian history. A lot of that has just completed. Vacancy has increased and rents are now falling. This isn’t a negative narrative. It’s what we call equilibrium.
“Maybe there’s a window where you might get a deal because vacancies are on the rise. But it’s not going to last long.”
Retail
A somewhat unexpected addition to investor best-bets lists is the retail asset class, especially grocery-anchored strip malls.
Jon Buckley, senior managing director of investments at Marcus & Millichap, says that among investors he works with, “retail is the most preferred asset right now – and it’s the first time in a long time that’s been the case.”
Despite the huge e-commerce presence in markets across the country, Canada’s retail vacancy rate fell last year to 1.6 per cent, its lowest level on record, according to Marcus & Millichap’s recent Canadian Retail Report.
Meanwhile, lease rates are expected to jump 3.1 per cent this year. Strong population growth has propelled overall demand, Mr. Buckley says. Retail has also seen a shift in tenants in recent years, moving from more traditional retailers, such as clothing stores, to service-related retail.
'Multifamily is hot because of the supply/demand imbalance, which is not going anywhere,' says Mark Goodman, principal of Goodman Commercial, which is selling the 21-suite apartment building Rim Rock Manor in Vancouver, for $6.9-million.Goodman Commercial
Office
What’s the distressed office building asset doing on this list?
Mark Fieder, principal and president at Avison Young Canada, says he believes “there’s a tremendous opportunity with office investment.”
“The number of workers in offices is building every day,” he says. “It’s slow but super steady. Demand is going to start going up again.”
One opportunistic buyer is Montreal-based developer Groupe Mach, which recently became one of Ottawa’s biggest office landlords. The firm has acquired 16 properties in the city in the past 2½ years.
A Colliers report published July 16 notes office rental-rate jumps in eight out of 12 major cities, with the national average increasing quarter over quarter to $21.55 a square foot. The vacancy rate’s upward march has steadied at 14.5 per cent.
Specialty assets
Voracious demand and ever-increasing returns for specialty commercial real estate properties, such as data centres, hotels, senior and student housing, and farmland, would have many investors placing them far ahead on a list of 2024 growth assets, Mr. Figler says.
The challenge stems from the “serious operational expertise” required to succeed with these alternative assets, he notes.
“You’re not just buying a building and collecting a cheque. In pretty much every case, investors who get into alternative asset classes seek out strategic partnerships,” Mr. Figler says.
B.C.-based QuadReal, for example, acquired U.S. company CA Student Living to create its Article Student Living real estate arm, and Ontario’s Fengate Asset Management’s $1.8-billion purchase of Canada’s eStruxture Data Centers will enable the expansion of eStruxture’s portfolio of 15 facilities.
“Probably not a lot of investors have a lot of experience running a farm,” Mr. Figler says. “So you need to partner with an operator.”