Shifting demand in Canadian commercial real estate market driven by housing crisis, population growth and the need for greater density, says RE/MAX

Incentivized builders and developers respond to the call for multi-family purpose-built rentals

Toronto, ON – (June 6, 2024) — Strong population growth and housing supply issues have prompted a significant shift in the Canadian commercial real estate market as builders and developers adopt an “all-hands-on deck” approach to solving Canada’s housing shortage, according to a report released by RE/MAX Canada.

RE/MAX Canada’s 2024 Commercial Real Estate Report examined 12 markets across the country and found the push for intensification in the first quarter of 2024 has gained greater momentum as builders and developers from coast to coast turn their attention to purpose-built rental construction—some at the expense of new residential condominiums, and to a lesser extent, commercial builds. All 12 markets surveyed identified multi-family and industrial real estate as the top-performing asset classes in their market, followed by retail, with eight out of 12 markets (66.7 per cent) reporting strength. Farmland in Saskatchewan also topped the list of high-performing asset classes, with one of the strongest years on record, while demand for hotels and strip plazas also proved popular.

“The overwhelming need for shelter, combined with the Canada Mortgage and Housing Corporation’s (CMHC) Apartment Loan Program that has incentivized builders and developers with low interest rates, favourable terms, and 50-year amortization periods, have created the perfect storm in today’s high interest rate environment,” says RE/MAX Canada President Christopher Alexander. “Unfortunately, with Canada’s population surpassing 40 million people this year, even the current upswing in residential construction continues to fall short of the thousands of units required in most major markets.”

According to Statistics Canada’s Quarterly demographic estimates, provinces, and territories; Interactive dashboard, the country’s population reached 40,769,890 as of January 1, 2024, with net international migrations in 2023 topping 1.2 million (1,240,769).

Commercial Real Estate Trends:

• Multi-family construction continues unabated across Canada. Purpose-built rentals are the primary focus in every major urban centre analyzed, with student housing and seniors’ residences following in lockstep, thanks to the CMHC and the federal government’s decision to cancel the GST on new residential builds. Seven markets including Vancouver, Calgary, Regina, Winnipeg, London, Ottawa and Halifax had vacancy rates at or below 1.8 per cent in 2023, according to CMHC’s Rental Market Report released in January 2024.
• High-density & mixed-use development. With land being a finite product and continued population growth in major urban centres, many mall/strip plaza landlords have come to realize that the best use of their properties means increasing density. As a result, a greater number of malls and shopping centres are exploring a residential component, with a clear trend toward future mixed-use developments.
• Capital gains tax—the government giveth and taketh away. Smaller investors are particularly hard hit by the increase in the capital gains tax inclusion rate, from 50 per cent to just over 66 per cent, as outlined in the 2024 Budget announcement. While a handful of investors were scrambling to get their properties sold prior to the June 25 deadline, most pulled back on listing their properties for sale.
• Industrial real estate continues to experience strong demand across Canada, with tight inventory impacting several markets across the country (including Hamilton and the region spanning Halton to Niagara, Newfoundland-Labrador, Halifax Regional Municipality.) Despite an uptick in availability in many areas of the country due to an influx of new space, demand remains steady. End users are most active in the market, with warehousing, manufacturing and flex space most sought after. Affordability is a growing factor, especially in larger urban centres, prompting some businesses to consider industrial property on the outskirts of the city. In Vancouver, where large tracts of available industrial land are almost non-existent, some business owners are looking east to Alberta (rail access) and south to the US seaboard (access to ports).
• Bricks and mortar retail stores still hold their appeal, despite the huge e-commerce presence in markets across the country. Neighbourhood retail is performing well, with busy retail avenues experiencing a shift from more traditional retailers selling goods such as clothing or jewellery to service-related retail, especially within the health and wellness industries and storefront medical offices. Many malls continue to expand and redevelop in an effort to perfect the tenant mix. Several markets are experiencing increased demand for daycare facilities, given significant population growth.
• Luxury retail brands continue to expand their presence in major Canadian markets – Yorkville, the Bloor Street ‘Mink Mile,’ and Yorkdale Shopping Centre in Toronto, as well as Vancouver’s Alberni Corridor and Oak Ridges Mall continue to attract global luxury retailers.
• Record commodity prices have contributed to an expansion in Saskatchewan, with many farmers sitting on pent-up-cash reserves. Farmland throughout Saskatchewan is being gobbled up by large farming corporations, sending values skyrocketing to new heights. The province led the country in terms of percentage increase in the price per acre of farmland in 2023, according to the FCC Farmland Values Report released in March 2024, with a 15.7-per-cent gain year over year. Percentage increases were even higher in Saskatchewan’s East Central region, where values rose by 20.8 per cent. Supply of farmland remains exceptionally tight in areas outside Regina and Saskatoon, with the lowest number of properties listed for sale in years. In fact, few farms make it to the Multiple Listing Service (MLS) because most are selling through word of mouth. The vast majority of deals are cash purchases and are not dependent on financing.
• The hospitality industry has roared back to life in many parts of the country. In Halifax, room rates have tripled, existing hotels are expanding, and a growing number of prominent hotel chains are entering the market, including Moxy Halifax Downtown, part of Marriot Bonvoy’s portfolio. Interprovincial investors are now vying for hotel properties in markets such as Saskatoon.
• Real Estate Investment Trusts are re-examining existing portfolios with an eye to changing the mix. As a result, there has been an increase in divestment of certain assets – usually older office or residential buildings, while purchases of other assets are occurring, typically newer construction in office and retail.
• Established businesses have experienced strong activity in Saskatoon this year. The market, which has experienced a significant influx of interprovincial investors over recent years, as well as increased population growth, has noted unprecedented demand for existing businesses such as grocery stores, gas stations and restaurants.
• The office sector in the downtown core continues to struggle as availability rates climb in almost all markets across the country, with B and C class buildings most impacted. Conversions are helping to take excess space off the market, but it’s not a fix-all solution. Conversions are complex and most buildings are not suited to the process. Business Improvement Areas (BIA) and municipal plans to revitalize downtown areas and attract foot traffic will play a role in reviving core areas. Residential development is certainly helping and improving demand for retail/services as a result.
• Adaptive reuse is gaining momentum nationwide. Calgary—with the highest rate in the country, is lowering its availability rate through the adaptive re-use of commercial office buildings. Seventeen residential conversions are either completed, underway or planned in the city to date. Winnipeg has several conversions completed and another four planned. Halifax Regional Municipality and Ottawa are making headway with five and seven converts underway respectively. While Edmonton, Toronto and Vancouver have been slow on the uptake, the first downtown conversions are now planned. Lower downtown office vacancy rates in the Greater Vancouver Area are likely behind the lack of conversion projects to date. The need for density has not only bolstered office conversions, but adaptive re-use of other types of buildings as well, including hotels and underutilized schools. Municipalities are getting more creative in finding solutions to the housing crisis and as such, re-zoning is occurring and likely to intensify.
• Vendor take-back financing is the key to some land development deals. While elevated interest rates have impacted land development in many markets, some sellers in the Greater Toronto Area and Halifax Regional Municipality are offering buyers vendor take-back mortgages on land purchases to close the deal.

“Density, population growth and the housing crisis remain significant factors influencing market activity, but a variety of drivers will have an ongoing impact on the Canadian commercial real estate market moving forward,” says Alexander. “This includes economic performance; interest rates; incentives and development policies, processes and fees; tax policies; construction costs, land costs and servicing; labour shortages; housing affordability and availability; revitalization efforts and hybrid/remote work policies; social issues and more. Diverse market dynamics exist, but overall improvement is expected to characterize conditions and demand as 2024 progresses.” 

Commercial real estate markets in Western Canada are expected to remain strong, with Alberta, Saskatchewan and Manitoba bolstered by a positive economic outlook in 2024. The energy and mining sectors have also contributed to strong activity in Newfoundland and Labrador, while interprovincial migration, immigration, and travel and tourism have buoyed economic prospects in the Halifax Regional Municipality. While cost-prohibitive major urban centres such as Toronto and Vancouver have experienced some moderation in demand, more affordable markets in surrounding areas have picked up the slack, particularly in the industrial segment. Case in point would be strong industrial activity outside of the Greater Toronto Area, including Halton to Niagara Regions and London, while Calgary and Edmonton continue to draw activity from the Greater Vancouver Area.

“Cautious optimism is growing with the likely end to quantitative tightening expected in the latter half of the year,” says Alexander. “Confidence levels are expected to rise, sparking renewed activity in the market. Supply issues are expected to persist for the most sought-after segments as purchasers view to strengthen their investment portfolios with an evolving mix of assets. In the longer term, the underpinning of the Canadian commercial real estate market appears positive. Residential housing needs and a swelling population are anticipated to be the root and catalysts of growth in most commercial segments. Inevitably, as communities expand, so too does the need for all types of services, prompting greater business development and increasing requirements of operations and infrastructure. Simply put, growth begets growth, and the ripple effect is already evident.”

Market-by-Market Overview

Greater Vancouver Area, Squamish to Chilliwack

Despite hesitation among some commercial real estate investors amid growing concerns over how current conditions will play out, cautious optimism exists. Recovery has been slow from last year’s pull back, but tides are expected to turn in the Greater Vancouver Area, including Squamish to Chilliwack, with the Bank of Canada’s first rate cut.

Last year was one of the softest years on record in terms of commercial real estate in the Greater Vancouver Area and industry leaders had hoped for a return to more normal levels of activity in 2024. There was a slight uptick in the number of investors looking at available properties in the first quarter, but the swell was quashed by the federal government’s April announcement raising capital gains taxes to 66 per cent. Sellers immediately pulled back on listings.

Cap rates are up on industrial, retail and office product as a result, while multi-family has remained relatively stable due to low vacancy rates in the city. The multi-family asset class has proven to be a safe and secure investment, but some investors avoid multi-family because of the provinces’ Residential Tenancies Act that makes it more difficult for landlords to keep up with inflation.

The asset class has been bolstered by the Canada Housing and Mortgage Corporation’s (CMHC) Apartment Construction Loan Program, which promises builders and developers preferred rates and longer amortization periods. The program was topped up by another $15 billion in April as part of the government Canada Builds program. The federal government has also cancelled Goods and Services Taxes (GST) on purpose-built rentals.

Vacancy rates in Vancouver hovered at just under one per cent in October 2023, according to the CMHC’s Rental Market Report, with the rental rate of an average two-bedroom apartment up almost nine per cent year over year. Purpose-built rental apartment inventory rose by 3,144 new units in 2023, with most of the available rentals located in the City of Vancouver and Surrey. There is a greater percentage of rentals coming into market now than in years past, with Southeast Vancouver, the Tri-Cities, and Surrey expected to see the largest growth in rental supply in the near future.

In the coveted industrial asset class, availability sat at 4.2 per cent in the first quarter of 2024, up two full percentage points from the same period one year ago, according to Altus Group. Leasing is getting tougher, with industrial in the downtown core particularly hard hit, as tenant pools wane and absorption moderates. Vacancy rates are expected to climb as more space opens up in coming months. Landlords need to be more cognizant of lease rate price adjustments in the market to be competitive.

Little new industrial product is expected to come to market as a lack of developable industrial land and residential intensification takes precedence. Movement of B.C. businesses to industrial markets in Alberta is climbing, especially if the client is looking for large tracts of development land. It’s easier to find 40-to-60-acre properties ideal for manufacturing facilities and distribution centres in Alberta than it is in Vancouver, where the cost would be extraordinary. Those leaving the province are typically looking for the availability of space and rail access, typically choosing either Calgary (where cost savings are greater for those seeking rail access) or Edmonton. Some BC businesses that need to be close to ports are looking at US markets such as Seattle and Portland.

Availability rates in the office sector are amongst the lowest in the country at 12.4 per cent, according to Q1 2024 statistics compiled by Altus Group. Most tenants are content to remain in their current premises. Some are downsizing, but most landlords are willing to work with existing tenants rather than search an increasingly narrow tenant pool. Landlords that are selling their properties tend to be looking to diversify their portfolios while those that are looking at product are interested in the lower cap rates. While downtown office performance is soft, an interesting dynamic is emerging in the suburbs. Strata buildings are holding their price per sq. ft. Fully tenanted buildings offered lower cap rates than those buildings with vacant units. Owner-investors are particularly interested in these properties for their own use and are willing to pay a higher dollar value for a property that has an existing vacancy they can assume, allowing the tenants to help subsidize their purchase.

Retail has seen a shift in tenants in recent years, moving from more traditional retailers such as clothing or jewellery stores to service-based offices and restaurants. Vacancy rates have remained steady at 2.3 per cent, with scant new retail development coming to markets. Smaller mixed-use commercial is an attractive option well-suited to medical consulting firms, therapeutic offices, and daycare facilities. However, a chronic shortage of daycare space in the lower mainland has created upward pressure on values. Commercially zoned daycares require parking requirements that allow for the creation of a playground or, alternatively, a rooftop playground, which are increasingly hard to find. The demand has only increased as more daycares are needed as the population in the lower mainland continues to grow.

Several malls within the Greater Vancouver area, including Squamish to Chilliwack, are considering the addition of a residential component, including purpose-built rentals, condominiums, retail and offices. Perhaps one of the best examples is the first phase of the redevelopment of Oakridge Park, which is scheduled to open in Spring 2025. The 650,000 sq. ft. mall includes a strong tenant mix, including stand-alone shops for luxury retailers such as Prada, Louis Vuitton, MaxMara and Moncler and an abundance of dining options within a mixed-use residential/office/retail community. In Langley, Willowbrook Shopping Centre recently completed its expansion/renovation, adding another 140,000 sq. ft. of space including food precinct, outdoor pedestrian shopping, and gathering spaces. Applications have been submitted for seven new residential high-rise towers on adjacent properties by two different developers.

Those in the development business tend to hold onto assets that bring in income and tend to move when the timing is right, given how large and costly redevelopment can be. Land is finite in the lower mainland and as such, regardless of how successful the retail business is, the community need for higher densification trumps all. For all shopping developments moving forward, there will likely be residential component included. While strip plazas may be targeted for residential conversion in other areas of the country, the high cost of land coupled with today’s interest rates make the prospect less appealing. Older strip malls not generating enough rent could be a better target.

Downtown retail has had its challenges, especially in high-rent districts, including Granville and Robson. Given an increase in vandalism in the area, there’s been an exodus by some businesses to shut down or relocate to other neighbourhoods.

Real Estate Investment Trusts (REITs) and institutional investors remain cautious, although are prepared to move if the deal makes sense. No one is overleveraging their portfolio at present, especially given tight lending policies currently in place for commercial real estate, with some lenders asking for 40 to 60 per cent down. Deals are increasingly difficult to keep together in a business environment that is not conducive to growth, but the promise of an end to quantitative financing down the road and lower interest rates have investors keeping their eyes open.

Calgary

With population growth rising by just over 200,000 in the province in 2023, the demand for housing has never been greater in Calgary. Multi-family purpose-built rentals in the city are the top-performing asset, with vacancy rates sitting at a tight 1.4 per cent in October of 2023, according to the Canada Mortgage and Housing Corporation (CMHC).

The influx of interprovincial migration and immigrants is challenging the city’s housing stock, with vacancy rates at the lowest level in a decade. More than 3,000 new units came on stream in the city in 2023, with newly completed units available the Beltline, Downtown and the North Hill areas. Purpose-built rental apartment starts have overtaken condo starts for the first time in 2023. The CMHC was instrumental in the shift, offering low interest rates, nominal down payments, and long amortization periods to builders and developers who answered the call in abundance, especially after the federal government cancelled the Goods and Services Tax (GST) on new builds.

In fact, Calgary leads the country in conversion projects in the downtown core, with 17 former offices converting to residential rentals. Several of the projects have already been completed and the result in terms of foot traffic has sparked some renewed interest in retail space in the downtown core. Some of the other considerations for excess office space include hotels and colleges with built-in residence options. By 2026, more than 11,000 people are expected to be living in the downtown core. As such, Calgary is one of few markets in the country that has registered a decline in office availability, sitting at 23.2 per cent in the first quarter of 2024, according to Altus Group. While still impacted by hybrid work schedules, the office sector in the core has seen some downward momentum in vacancy rates, in large part due to conversion efforts and incentives offered by the municipal government. Suburban office space has remained relatively stable year over year, with staffing less impacted by the hybrid work model.

Calgary’s retail sector is doing well, with few vacancies reported in the city. The segment has experienced an uptick in demand for medical space, as well as health and wellness businesses. Demand for daycare centres continue to be strong, but given the necessary requirements, a limited supply of product is available. The tenant mix is changing at many of the city’s malls, with some adding new restaurants to draw additional shoppers. Some landlords are looking at converting underutilized parking lots to purpose-built residential. RioCan recently acquired land adjacent to its Glenmore Landing Shopping Centre to create a mixed-use development that calls for greater densification through purpose-built rentals.

Strip plazas continue to thrive in Calgary, with little to no retail availability. Investors are particularly interested in this product, given its mixed-use potential for retail and multi-family.  Development land is also sought after, with properties within proximity to the city’s core especially desirable. In an effort to target affordability, the city is also investigating the conversion of the Franklin LRT parking lot to as many as 300 purpose-built affordable rentals.

Industrial remains strong, despite an uptick in availability rates to 5.8 per cent in the first quarter of 2024, compared to the same period one year earlier, according to Altus Group. More balanced conditions have emerged with the influx of new inventory into the market, dominated by warehousing and distribution facilities. An additional 3.6 million sq. ft. is expected to come on-stream in the year ahead, placing additional upward pressure on the overall vacancy rates. More specialized product is experiencing tighter market conditions, with fewer listings available for sale/lease. Owner-occupiers are most actively seeking smaller commercial buildings, while larger tenants appear to be more comfortable with renting.

Real Estate Investment Trusts (REITs) and institutional investors continue to be active in both the industrial and multi-family segments, given the high rate of return on multi-family and industrial in the city. According to the Business Council of Alberta in its Spring 2024 Report, business expectations and intentions are strong, and the province is attracting a larger share of venture capital dollars, now at 11 per cent in 2023 from seven per cent in 2022, despite a national dip in overall investment. With population growth, business expansion and overall economic prosperity, the outlook is bright for Calgary’s commercial market.

Edmonton

Unprecedented immigration and interprovincial migration into the province have contributed to a strong economic performance over the past year, underpinning vigorous commercial expansion in both the multi-family and industrial asset classes throughout Edmonton and the surrounding areas.

Demand for rental housing is front and centre given the city’s current supply crunch. Multi-family apartment construction is gaining ground after a soft 2023, when apartment starts declined significantly as developers grappled with increased costs, labour shortages and supply chain issues. Housing starts in Alberta hit a new record in April 2024 at 1,636 units, with Edmonton up 64 per cent compared to year-ago levels for the same period. Preferred rates, higher loan-to-value ratios and extended amortization periods offered by the Canada Mortgage and Housing Corporation’s (CMHC) Apartment Construction Loan Program are behind the push for purpose-built rentals that may not have otherwise moved forward. Vacancy rates dropped to 2.4 per cent in October of 2023 (4.3 per cent in 2022), despite close to 3,000 rental units coming on stream in the Edmonton CMA last year, with most located in the downtown core, West, and Mill Woods, according to the CMHC’s Rental Market Report.

CMHC’s mortgage loan insurance for multi-unit student housing has also attracted capital investment from outside the province, with several large student housing projects underway near the University of Alberta, MacEwan University, Concordia University and NorQuest College.

Construction in Edmonton’s industrial sector continues unabated with new developments going up in peripheral areas such as Acheson, Parkland, Leduc/Nisku, and St. Albert where tax obligations are significantly lower. Vacancy rates remain low –hovering at 2.5 to three per cent—and new product is absorbed quickly. The city continues to attract national tenants in large part due to higher cap rates. The most sought-after buildings at present are those that offer storefront showrooms with distribution and warehousing in the rear.

Retail is on the upswing as prosperity grows in the city, with more people venturing out to shops and restaurants. Development land zoned retail is increasingly difficult to find, and buyers are willing to pay a premium for suitable land. Private developers will pick up good locations if attached to a viable project. Grocery sites are highly desirable. Lease rates for new retail product –approaching $45 per sq. ft.— reflect the higher costs of land and construction.

Malls continue to perform well, attracting big-name retailers such as Nike, which recently opened its largest store in Canada at West Edmonton Mall, as well as American fast-food chains Chick-fil-A and Krispy Kreme. Renovations and upgrades are underway as landlords continuously seek to improve the shopping experience. The recent completion of the Mill Woods Transit Centre, a future stop on the LRT’s Valley line, has created future possibilities for the mall to enhance its value, while at the same time, helping to ease the city’s housing shortage. A masterplan created by the Mill Woods Town Centre includes a mixed-use development for the site featuring three high-rise residential towers.

Strip malls and retail centres remain popular in the city and peripheral areas. There has been a shift away from more traditional retail operations to more service-oriented retailers including medical and dental offices, health and wellness clinics, and hair and nail salons, just to name a few.

The weakest asset class in Edmonton is its office sector. Despite a report from Altus Group that found availability rates have edged slightly downward to 19.9 per cent in Q1 2024, compared to the previous quarter, the downtown core continues to struggle. Tenant flight to quality Class A buildings and the suburbs is still occurring, with net lease rates on the upswing, rising just over 10 per cent year over year, now priced between $25 to $27 per sq. ft. While rates have climbed, some of the older buildings in the downtown core are selling at close to land value as demand has essentially evaporated and REITs divest existing office portfolios.

Efforts underway to improve the downtown business district have resulted in some success, best illustrated by the increase in foot traffic. Restaurants are reaping the rewards as more people are drawn to the core in large part due to greater safety and security measures, hybrid work models and large-scale events including concerts and hockey games. New purpose-built rentals complement existing condominium developments in the core, with some office spaces transitioning to residential. The Phipps McKinnon Building, sold in March of this year, is the most recent project with the new owners planning a $22-million partial redevelopment including 90 residential units on the fourth to tenth floors.

Edmonton’s commercial market is expected to flourish in the future, as the population surges ahead. GDP growth in the city is expected to outperform the national average, with positive business sentiment driving investment this year. The stage is set for tremendous growth in the city’s bourgeoning tech sectors, specializing in nanotechnology, microelectromechanical systems, big data and analytics, and machine intelligence (AI), all of which will fuel increased demand for office, industrial, retail, and multi-family construction in the years ahead.

Regina

An optimistic local and provincial outlook has underpinned strong commercial activity in Regina and the surrounding areas in the first four months of 2024, with a 50 per cent uptick in sales over year-ago levels for the same period. Twenty-four commercial properties have been sold year to date on the city’s Multiple Listing Service (MLS), with larger sales contributing to a 68 per cent increase in average price year over year.

Economic expansion is underway in the Queen’s City, with its labour market “firing on all cylinders.” Approximately 10,000 more people are working in the region yet demand for skilled workers is ever growing. International and interprovincial migrants continue to accelerate population growth and drive demand for housing. According to Regina’s recent economic report card, the unemployment rate hovered at 3.4 per cent in March of this year, while non-residential building permits soared 18 per cent as of February year to date, compared to year-ago levels.

Recent investment in the city includes the first phase of SaskPower’s new logistics warehouse, which was completed earlier this year, with the second phase expected to open by 2026. The company has also wrapped up its head office refurbishment and the purchase and renovation of a nearby building, which would bring its overall investment in Regina to more than $400 million. The case is also building for a biomass cluster in the Greater Regina Area (GRA), with Economic Development Regina (EDR) joining public and private sector leaders in support of the project, which could generate as much as $1.8 billion in economic activity by 2027. According to a recent press release from Economic Development Regina, “the GRA’s biomass play primarily focuses on the agriculture sector, and includes crops and crop residue, including canola, wheat, and flax. Those products can be transformed into bioenergy or other biomaterials.”

Growing global demand for clean energy is elevating the province’s uranium giant Cameco on the world stage, creating job opportunities in the northern parts of the province, while Saskatchewan’s potash producers, supplying a third of the world’s potash, continue to create a windfall for the province.

Against a vibrant economic backdrop, interprovincial investors, primarily from Ontario, continue to filter into the commercial market, vying for the city’s top-performing asset class –industrial—with the local business community. Vacancy rates at 1.1 per cent for industrial product have frustrated many potential buyers, especially given scarce inventory of warehousing and distribution space in sought-after industrial parks such as Parker Industrial, Ross Industrial, Tuxedo Park and the Warehouse district.

New industrial development within Regina usually involves the demolition of existing industrial facilities or building on the limited serviced land available in areas such as Ross Industrial Park. Businesses not requiring a location in Regina Proper may choose to exit the city in favor of surrounding communities where land is less expensive to buy, services are less expensive to complete, and of course, much less tax.

Higher servicing costs in the city proper have deterred developers from bringing on more serviced land in recent years, as higher costs and levy fees cannot be recouped at current market values. Neighbouring areas such as Pilot Butte and White City offer land priced at approximately $200,000 per acre for industrial projects. The cost of construction, however, can add to lease rates being a bit higher for new buildings versus existing but there are a lot of positive offsets for the new versus used.

Activity has been greatest in the $500,000 to $750,000 price range, with commercial properties listed in this sweet spot moving quickly, some in multiple-offer situations. When an owner-occupier is involved, properties will typically move above market value. Limited availability of industrial and existing multi-family within the city of Regina has influenced the uptick in values.

Vacancy rates for purpose-built rentals hovered at 1.4 per cent in late 2023, according to the Canada Mortgage and Housing Corporation (CMHC), with apartments near the University posting the lowest vacancy rates at 0.3 per cent. Just 176 units were added to Regina’s purpose-built rental stock in 2023, an increase of 1.3 per cent over the previous year Little multi-family product is available for investors, particularly in Regina’s coveted northwest corner. Properties that do make it to market are selling quickly. Cap rates on existing multi-family typically run between 5.5 per cent and six per cent.

Prior to the Federal Budget, affordable townhouse clusters with a minimum of five attached units could be found in smaller numbers in residential communities to larger projects in higher density areas. The concept is now growing in popularity with investors due to attractive financing rates and longer amortization periods as promoted and approved by CMHC, coupled with incentives including the cancellation of the Goods and Services Tax (GST) up to $1 million, and relaxed provincial sales tax (PST) for new builds. Widespread development of townhomes is expected to continue given the current housing crisis—especially in higher-volumes—but investors will now be forced to take a hard look at their long-term investment strategy given the introduction of the new capital gains tax effective in late June. There has been a slight pullback in recent weeks as investors weigh their options, with one commercial landlord taking 15 properties off the market, given the inability to sell within the deadline.

Real Estate Investment Trusts (REITs) and institutional investors are always active in Regina, but few large deals have been announced this year. Most tend to focus on purpose-built rentals and are typically prepared for a long-term hold. Several large projects are in the planning stages, with a quick glance at applications to amend zoning bylaws at the city showing a variety of proposals, including a mixed-use high rise, a townhouse-style development with 166 units and a medium-density residential townhome development for 162 units currently in the queue. The city has also taken advantage of federal government incentives to create additional housing by removing neighbourhood restrictions and allowing construction of up to six-storey apartments throughout Regina proper.

Retail has seen some exodus from the downtown core, with The Bay announcing the closure of its Cornwall Centre location next spring. Social issues in the area continue to impact retail in downtown, an area that is already seeing a reduction in foot traffic post-pandemic due to hybrid work schedules. Enclosed malls are also struggling as consumers continue their relationship with e-commerce. Most retail activity is occurring in suburban markets with strip plazas and big-box retail doing relatively well. Demand for lease space is relatively healthy, with a new mix of tenants coming to the forefront.  Increase in demand for storefront from dental and medical offices –both for sale and for lease– is evident yet little existing product is available. Lease rates are running high for relatively new retail construction in sought-after neighbourhoods, especially for start-ups.

Given the current healthy economic climate, both locally and provincially, multi-family, small strip malls, and industrial properties will continue to be the premier asset classes. Farmland will continue to perform well as strong demand exists from local farming operations, supported by the increase in commodity values. As a result, farmland values are rising with upward pressure on the price per acre.

Saskatoon

Saskatoon’s commercial market continued to experience strong demand for multiple asset classes in the first quarter of the year, with transaction volume for existing businesses, hotels and farmland on the upswing as local and interprovincial investors enter the market. More conventional multi-family, industrial and retail categories remain solid year over year, with some upward pressure on values.

Positive economic growth in key sectors of the provincial economy have set the stage for a vibrant commercial real estate market in 2024. The province is growing at rates not seen for more than a century, and the economy continues to accelerate with record private capital investment and GDP growth, according to a May 7th press release from the provincial government. The latest GDP numbers for Saskatchewan show GDP reached an all-time high of $77.9 billion in 2023, surpassing year-ago levels by 1.6 per cent–well above the national average of 1.2 per cent. Private capital investment is projected to reach $14.1 billion this year, an increase of 14.4 per cent over 2023.

Business sales and acquisitions for well-established retail franchises, convenience and grocery stores, restaurants and gas stations have soared this year, despite incredibly tight lending practices. Limited inventory levels have hampered sales to date, especially for gas stations, but buyers continue to wait patiently in the background.

Hotels are now a preferred access class with many investors. Four hotels changed hands so far this year in Saskatoon and the surrounding areas, with large investors from Ontario leading the charge. For example, a 40-room hotel with net net income of $260,000 per year generated six competitive offers, all coming from the same province. Supply is also limited in this segment of the market, due in part to many hotel owners who are holding off on sales until their books reflect a full year of post-pandemic reservation activity.

Demand remains solid for warehousing and distribution space in the industrial market, with lease rates climbing to $12 to $15 per sq. ft. Investors and owner-occupiers are seeking older industrial buildings within Saskatoon for demolition and rebuilding or repurposing. While there is pressure to build new developments on the outskirts of town where land costs are lower, the price of construction has dramatically increased in recent years, given labour shortages, the high costs of financing and servicing the land.

Developers are more likely to focus their attention on the multi-family segment in Saskatoon due to the current housing shortage, with most sitting on pre-purchased land at present in a build-to-hold pattern until they bring in partners. Real Estate Investment Trusts (REITs) and institutional investors are exceptionally active in this segment, given the two per cent vacancy rate (October 2024) and an average monthly rental rate for a two-bedroom apartment up by nine per cent, according to the Canada Mortgage and Housing Corporation (CMHC). While condominium construction has also been affected by higher overall costs, the potential for higher monthly rental rates has investors lining up, particularly for townhomes and row housing.

Demand for retail has been consistent, given the current rate of residential construction throughout Saskatoon. Strip plazas and stand-alone buildings are most sought after by eager tenants, with lease rates ranging from $25 to $35 per sq. ft. plus common areas. However, investor interest in strip plazas has subsided somewhat in 2024, compared to levels reported in years past, with inventory climbing as a result. Malls are also under pressure, with three currently listed for sale.

Saskatoon’s downtown office market is struggling in large part due to the addition of several new office buildings, which created a vacuum in B and C-class buildings. There is some divestment occurring this year, with Dream Investment Fund recently listing a large portfolio of nine office buildings (three of which are in Saskatoon and six are located in Regina), representing more than half a million sq. ft. of office and retail space. Hybrid work schedules combined with post pandemic social issues are having an impact, resulting in a significant reduction of foot traffic in the core.

Farmland remains a coveted asset class in the province, with large corporate farms gobbling up acres of land this year. Saskatchewan led the country with the highest percentage increase recorded in cultivated farmland in 2023, according to the FCC Farmland Values Report released in March 2024. The price per acre rose 15.7 per cent last year, with the strongest uptick reported in the East Central region where values surpassed the overall average at 20.8 per cent. Values were highest for irrigated land in the West Central and South West regions, fetching an average of $6,500 per acre.

Supply of farmland remains exceptionally tight, with the lowest number of properties listed for sale in years. In fact, few farms make it to the Multiple Listing Service (MLS) because most are selling through word of mouth. Multiple offers are occurring with increasing frequency, especially on properties that are adjacent to existing farm operations. Record commodity prices in the past year have contributed to the expansion boom, with many farmers sitting on pent-up cash reserves. The vast majority of deals are cash purchases and not dependent on financing.

Winnipeg

While the high cost of construction continues to impede development of Winnipeg’s top-performing asset class, the influx of just over 400,000 sq. ft. of industrial space over the past two quarters has brought some-much needed inventory to this exceptionally tight market. Vacancy rates for industrial have edged slightly higher as a result, now sitting at 3.1 per cent, but space is expected to be absorbed as demand from national tenants continues unabated.

Notwithstanding the recently completed inventory, limited availability remains. Additional construction is underway in Winnipeg’s Northwest and Southwest quadrants. Lease rates for industrial space are relatively stable at present, despite the increase in supply.

Winnipeg’s “post-pandemic hangover” continues to impact the city’s downtown office segment. A vibrant redevelopment plan for the former Hudson’s Bay building and Portage Place, combined with the conversion of under-utilized office space to residential apartments and hotels will reduce office inventory and should breathe new life into the urban centre in coming years. To date, several offices have been converted to residential, including the top 10-floors of 433 Main St. and the retrofit of 175/85 Carlton St. Hyatt Hotels announced late last year that the six-storey empty office space at 325 Broadway will be converted to a Hyatt Centric, a 140-room boutique hotel. The True North Real Estate Development Plan and the Southern Chiefs’ Economic Development Organization’s vision for Portage Place and the Bay moving forward would be a boon for the city.

Flight to quality Class A space continues its trend in Winnipeg, with the completion of the True North development, pushing up vacancy rates in B and C class buildings in the core. Wawanesa officially moved from their 191 Broadway offices to the third True North Square building recently, adding approximately 120,000 sq. ft. of vacant space to an already over-saturated market. Altus Group recently pegged availability rates in the city at 15.8 per cent in the first quarter of the year, up significantly from year-ago levels. Shadow vacancies are also a reality as hybrid work schedules take hold. Employers are dealing with diminished requirements for office space; however, often the under-utilized space is not large enough to sublet, and there’s no demand, thus creating a problem for employers and landlords alike. ARTIS REIT is leading the way in divestment of their office holdings in the city.

While conversion to residential is no easy feat, given electrical, mechanical and plumbing restrictions, offices that have a smaller floor plates (typically 10,000 sq. ft. or less), and large windows generally have the best chance for residential conversion. The selection and planning process takes time, including concrete x-rays of each floor, and continual revisions to original plans as new details emerge. While conversion is an expensive undertaking, it can provide landlords with a good return on investment if their properties work.

Winnipeg’s suburban offices are holding their own, with a vacancy rate well below the core. More quality space is needed in this segment, but few commercial developers (and lenders) are interested at this juncture in time.

Builders and developers have been focused on the creation of additional housing units, given the city’s housing shortage, with construction cranes dotting the city’s skyline. The Canada Mortgage and Housing Corporation (CMHC) continues to incentivize builders with attractive interest rates and long amortization periods. Coupled with the federal government’s cancellation of the Good and Services Tax (GST) on new residential construction announced last year, this segment of the commercial market continues to rattle and hum. According to the CMHC, more than 1,600 units were added to the housing pool in 2023, with vacancy rates hovering at 1.8 per cent for purpose-built rentals in October 2023. Demand for rental units were greatest in suburban areas, with vacancy rates outside the core hovering at a tight 1.3 per cent.

Winnipeg is also one of the cities that has taken advantage of the federal governments new housing initiative, receiving $12.5 million to loosen existing zoning restriction on new development in residential neighbourhoods. The move will allow investors to buy and demolish a single-family home in any community to build multi-family infill without approval from the city.

Polo Park Mall is in the planning stages of a substantial mixed-used development the vacant land surrounding the mall, including several high-rise apartment buildings ranging between six and 12 storeys. The development will take more than 20 years to complete, once approved.

Retail throughout the city has been exceptionally strong with low vacancy rates. Limited construction activity has occurred in the retail sector as of late, which has strengthened demand for existing product. Bricks and mortar stores remain as relevant as ever, despite strong e-commerce transactions. The city hasn’t seen a lot of big-box development in recent years, with most large format brands looking for turnkey deals at present.

Malls are doing well, with an influx of new restaurants, entertainment facilities and gyms complementing the existing tenant mix. Retail in the core has struggled due to the reduction in foot traffic and social issues. The long-term objective for the core is the development of more residential apartments and hotels to increase foot traffic.

The prospect of lower or even predictable interest rates combined with solid business investment intentions in the province bodes well for the commercial real estate market in 2024. Unemployment rates remain below the national average, sitting at 4.8 per cent as of April 2024. Health care, wholesale and retail trade and manufacturing remain the greatest economic drivers, which combined with increased immigration to the province, should further bolster commercial activity.

London 

London’s commercial market remains relatively unchanged from year-ago levels, but activity is expected to gain momentum later this year as interest rates move downward. The city’s rapid growth and close proximity to major transportation routes and the US border have bolstered demand for commercial real estate in recent years. Industrial, multi-unit residential purpose-built rentals, and retail remain the strongest asset classes, while office leasing continues to struggle in the city’s core.

Demand for industrial properties has remained consistent with year-ago levels, although a lack of available product has hampered sales. Demand is largely driven by end users, many in the fabrication, distribution, warehousing and construction industries, looking for product ranging in size from 5,000 sq. ft. to 20,000 sq. ft. Leasing is also a popular option but space is limited, which has contributed to upward pressure on the price per square foot. Industrial space now rents out for between $10 to $12 per sq. ft., almost triple prices paid seven to eight years ago. With few serviced lots expected to come on stream in the near future, continued upward pressure on prices and lease rates will likely persist.

While the retail segment continues to show strength and with scant availability in the city’s strip plazas, malls in the area continue to evolve. Cadillac Fairview’s Masonville Place has plans to build several residential towers, up to 22 storeys in height, in its under-utilized parking lot in an effort to complement their retail presence. Other malls, such as the Galleria, are changing up their tenant mix, adding more service providers, health and fitness facilities, and a library. White Oaks, at one time one of the largest and most profitable malls in the London area, continues to struggle with growing vacancies and diminishing foot traffic. Future redevelopment plans include increased residential density on the property that will ultimately link with the BRT Wellington Gateway line that is current under construction. With land values exceeding strip plazas values in today’s market, there have been several noteworthy sales. Many of those properties have since been rezoned for mixed-use residential development as the city moves to high-density to accommodate its growing population base. At present, estimates from the city place current residential supply about 50,000 units short of demand.

Suburban office sales and leasing remain stable, with vacancies rates that are substantially lower than those in the downtown core. The downtown office segment continues to grapple with the work from home phenomenon, reflected by with the highest vacancy rates in the country (28 per cent) and an oversupply of available product characterizing the market at present. The city’s first office conversion is underway at the corner of Richmond and Dufferin where the existing 10-storey building will be converted into 94 residential units in a partnership effort between the Anglican diocese, a housing non-profit, and the Sifton Group. While not all buildings in the core are conducive to conversion, at least 25 per cent are candidates for the future development. The City of London has set $10 million aside to encourage office conversion, given the housing crisis that exists within the city. Vacant development sites in the downtown core once zoned commercial have now been rezoned residential or mixed-use residential.

Institutional investors and Real Estate Investment Trusts (REITs) have been a growing presence in the London market in recent years as immigration and in-migration level rise in the city. Population estimates for London now hover at 447,225, up almost 13 per cent from the Statistics Canada 2021 Census count of 422,324. London’s vacancy rate for purpose-built rentals remained unchanged at 1.7 per cent in October 2023, according to the CMHC Rental Market Report, but tight market conditions are placing upward pressure on average rental rates (up 6.4 per cent to $1,479 for a two-bedroom in October 2023, compared to year-ago levels reported in 2022). The vacancy rate for condominium rental apartments was even tighter in October 2023, dropping to an all-time low of 0.1 per cent, despite an increase in supply. With little rental product available in the city, London remains an ideal location for investment. Many investors are now land banking for future development, targeting areas on the city’s periphery. While a combination of high interest rates and a two-year development process have impacted building activity since mid-2023, this segment is expected to pick up steam as the Bank of Canada eases quantitative tightening. Smaller investors are still active in the market, although the latest budget introducing higher taxes for capital gains effective June 25, 2024, may stifle investment in the short term.

Hamilton (Halton to Niagara)

Beds and sheds continued to dominate commercial activity on the north shore of Lake Ontario, between Halton and Niagara Regions in the first quarter of 2024. Multi-family, purpose-built rentals have been the top-performing asset class so far this year, with transactions up 25 per cent across the regions in the first quarter, compared to year-ago levels for the same period.

Despite the delta between construction/financing costs and returns, CMHC incentives including 50-year amortization periods and the federal government’s elimination of the Good and Services Tax (GST) have created a more hospitable environment for developers. Many builders have shelved their plans for condominiums, turning to purpose-built rentals to accommodate rapid population growth in the region. Vacancy rates hovered at 2.1 per cent for purpose-built rentals in Hamilton in October of 2023, remaining near historical low levels, according to the CHMC Rental Market Report. In St. Catharines-Niagara, vacancy rates sat at 2.8 per cent, with “the increase in supply helping to offset some of the impacts of increased demand from prospective homebuyers delaying purchases” in today’s high interest environment.

While demand is still strong for industrial properties, lack of inventory was responsible for a 22 per cent downturn in sales in Q1 2024. Sellers remain steadfast in their desire to hold on to their properties, especially given consistent increases in industrial rental rates – up 9.3 per cent so far this year, compared to the first quarter of 2023. Vacancy rates currently hover at 1.6 per cent, with warehousing and fulfillment space most sought after. The absence of serviced land continues to hamper sales, with new construction at least three to five years out. REITs and institutional investors have been exceptionally active in this segment, with Slate Asset Management leading the way. The company recently announced new details for the Hamilton Steelport, an industrial park with more than 800 acres on Hamilton’s waterfront that is expected to generate $3.8 billion in economic value over the next several decades.

Office leasing in the downtown cores of communities lining Lake Ontario continue to struggle with leasing challenges but have managed to outperform larger markets with a vacancy rate of 4.8 per cent. Office construction dating back to the 70s and 80s in the Hamilton core is an unlikely candidate for residential conversion as a result of the floor plates. The best bet for conversion would be any turn of the century office buildings, but those are few and far between. Suburban office markets, on the other hand, continue to experience growth, particularly in Oakville and the Niagara Region.

The retail sector in Halton to Niagara region is shifting from urban to suburban communities where foot traffic is on the upswing. Trendy shops and restaurants as well as service operations including health and wellness, hair and nail salons, laser clinics and Pilates studios are thriving as buyers choose to shop local throughout these smaller communities including Oakville, Burlington, Ancaster, and Font Hill in St. Catharines. Retail rental rates have climbed in tandem, up 2.3 per cent in Q1 2024, compared to the same period in 2023.

Local malls and shopping centres are also changing up their retail mix, adding restaurants and service providers, while submitting applications for a residential component to local municipalities. Lime Ridge Mall will soon be anchored by the largest Tesla dealership in the country, with over 60,000 sq. ft., while the site of the former Sears store will be refurbished for new commercial tenants and restaurants. Two mid-rise residential buildings consisting of 320 rental units are planned for the site, which has already received approval on the conditional site plan. Progress has also been made at Stoney Creek’s Eastgate Square Mall where the redevelopment of the southern portion of the 45-acre property is currently underway.  The first of several phases includes eight mid-rise buildings and eight blocks of three-storey townhomes.

While malls and strip plazas continue to investigate best-use options for their properties, overall vacant land sales are faltering. Elevated interest rates, high construction costs, labour shortages, and an excess of provincial and municipal development costs have stifled residential construction, particularly on greenfield developments leading to a 50 per cent decline in land sales this year, compared to year-ago levels for the same period. Given that the current supply of housing in the region falls well short of demand, residential construction has never been more necessary.

Greater Toronto Area

While growing optimism has nudged some long-term developers off the sidelines in the Greater Toronto Area (GTA) with regards to land sales, there continues to be an overall impasse between commercial buyers and sellers. Price remains the primary sticking point in negotiations, with seller expectations more in line with 2021/2022 values and buyers underestimating current values. That said, several larger asset sales have occurred in the first quarter of the year, with multi-family and industrial the most favoured asset classes, followed by retail plazas with an upside for development.

Multi-family continues to resonate with investors given incentive programs offered by Canada Mortgage and Housing Corporation (CMHC) that include more favourable financing rates and longer amortization periods. Rising immigration levels and the current supply crunch ensure that multi-family and apartments remain a solid long-term strategy for both larger institutional investors and Real Estate Investment Trusts (REITs). According to Urbanation’s Q1-2024 Rental Market Results, rental construction starts over the past 12 months were up 174 per cent from 2022 lows. While vacancy rates edged higher for purpose-built rentals, sitting at 2.6 per cent in Q1, the figure is still representative of an undersupplied market. Smaller investors have been active in the market, scooping up four and six-plex apartments throughout the GTA. However, the 16 per cent increase in capital gains tax effective June 25, that will bring tax on gains over $250,000 to 66 per cent may have an impact on the smaller investors moving forward. Several have already listed their investment properties, hoping to sell before the new tax kicks in.

Despite an increase in availability in the GTA, industrial remains a coveted asset class characterized by strong demand. Availability rates rose to 4.2 per cent in the first quarter of 2024, up from two per cent during the same period one year ago, according to Altus Group. Leasing rates continue to climb, regardless of growing competition in the tight GTA market. There have been some tenants that have moved to industrial parks within the fastest-growing residential communities where space with no improvements can be leased for less, including Pickering, Barrie, and Milton. Single tenants are behind the push for small and medium-sized industrial properties as they invest their capital into buying their locations.

Retail strip plazas and malls are experiencing solid demand, with those that have approvals in place for mixed-use residential most sought after. Yorkdale continues to expand, showing strong revenues and boasting the highest price per square foot in the country, as confirmed yet again by the International Council of Shopping Centres (ICSC). The mall recorded an annual sales performance of $2,226 per sq. ft (2022) –12^th in the world. A development application has been submitted to allow Yorkdale to expand its footprint to include retail, office, hotel, and residential usages. Similar applications exist for malls including Bayview Village; Bridlewood; Centerpoint; Cloverdale; Dufferin Mall; Eglinton Square; Fairview; Golden Mile; Humbertown; Jane-Finch Mall; Malvern Town Centre; Scarborough Town Centre; Sherway Gardens; Woodside Square; and Yorkgate Mall.

Small retail and service storefront operations on major arteries are facing several challenges, including but not limited to the amount of construction on city streets in Toronto. Although leasing rates have remained relatively stable, new taxes introduced by the city are adding to operating costs. Foot traffic in the downtown core has yet to return to pre-pandemic levels as the hybrid work model, which continues to impact retail stores and restaurants in the area. There are some positive signs as some retail/service businesses make their foray into the marketplace. Shake Shack, for example, recently announced its entrance into the Canadian fast-food landscape. The high-end continues to prove lucrative. In Yorkville, major luxury retailers continue flock to the area, including the recent additions of Kith, Sadelle’s, Veronica Beard and VRAI. This continues to underscore the old adage – location, location, location –which would apply to Bloor Street from the Mink Mile and west to the Kingsway and Bloor West Village.

Toronto’s office segment continues to be a drag on the commercial market, with landlords in Class B and C buildings in the downtown core, mid-town and the suburbs bearing the brunt of vacancies. Availability rates edged up marginally, sitting at 18.3 per cent in the first quarter of 2024, according to Altus Group, compared to year-ago levels for the same period. A number of factors continue to compound conditions, including the flight-to-quality, hybrid work model and on-going construction along critical transportation routes and high-density nodes. Tenants continue to alter their footprint by reducing their square footage. The outlier in the marketplace appears to be office condominiums, with end users behind the push for units. The trend has gained momentum over the past year and is expected to become more mainstream in the future.

New A-Class commercial space continues to come to market. One of the latest mixed-use commercial, residential, and retail projects to hit the streets is The Well, an eight-acre development at King and Spadina that blends into the historic industrial aesthetic of the King West District. The interconnected design, conducive to a live-work-play lifestyle, consists of six condominium and rental buildings with 1,700 available units (under various stages of construction) and a 36-storey office tower boasting 1.2 million sq. ft. in office space. Leasing is underway in the office tower, which is the new home of the Toronto Star. Portland Commons is another commercial development nearing completion at Front and Portland.

While applications for residential conversion have been received by the city, only one has received the go-ahead to date–the Canadian Pacific Railway (CP) offices at 69 Yonge St. and 3 King St. The application included the addition of six new storeys to the existing 15-storey footprint, and a 4,500-sq.-ft. lower level for retail/restaurant space. Several more development applications have been received by the city, with most looking to convert to residential or demolish entirely. The viability of conversions may also include purpose-built space in the future, including hotels, life sciences buildings, medical offices, seniors living, and student housing.

Real Estate Investment Trusts (REITS) and institutional investors have largely remained on the sidelines in recent years, but there has been a modest uptick in activity this year, with some offloading portfolios and others picking up portfolios.

Commercial investors continue to look for long-term value in the Greater Toronto Area. With current values somewhat depressed, some buyers are cautiously re-entering the market. Land banking is occurring, especially in areas such as Milton, Durham, and Markham-Stouffville, despite an overall shortage of development land within the GTA. Deals are coming together, but typically involve some maneuvering to get to the finish line. The promise of lower rates down the road is just one aspect of the total equation. The market will need to see some relief in terms of construction costs and a solution to labour shortages, as well as better co-ordination for parties who want to build and provide inventory to meet the growing demand for homes and businesses.

Ottawa

While stability characterized first-quarter activity in Ottawa’s commercial real estate market this year, improvement has been noted in the second quarter as investor appetite for commercial properties grows. Industrial continues to be the city’s top-performing asset class, with demand outpacing supply in key areas of the city. Rapid growth is underway in Ottawa and surrounding areas as the region transitions into a distribution hub for Eastern Canada and, to a smaller extent, the Eastern US seaboard.

Availability rates for industrial in Ottawa were the lowest of all major Canadian centres in the first quarter of the year, sitting at 3.8 per cent, just slightly ahead of year-ago levels for the same period, according to Altus Group. Many industrial property owners are not interested in selling. Tenants are expanding operations at record pace. Smaller industrial space is extremely limited, with scant availability in central Ottawa at present. Owner-users tend to seek out smaller buildings while single tenants are usually in older, stand-alone buildings. Four very large, new projects with spaces of 20,000 sq. ft. and up are in the final stages of construction with vacancies filling fast for large users and distributors. Lease rates on new buildings with high ceilings currently hover at $18 per sq. ft. (net). Only five industrial buildings are “officially” on the market at present, with pricing that ranges from $300 to $400 per sq. ft.

Given the currently supply crunch in Ottawa’s residential housing market, builders and developers have shifted their focus from condominiums to rental apartments that typically offer a better return. According to Urbanation’s Q1 2024 Ottawa Rental Market Results, rental market conditions tightened in Ottawa during the first quarter of the year as demand strengthened and new supply slowed. Just 131 units were completed in Q1 2024, on the heels of a multi-decade high of 3,194 units in 2023. Fifty-seven per cent of the 111,276 apartment units proposed for development across Ottawa have been approved. Demand continues to outpace supply in the city, with vacancy rates hovering at 1.6 per cent in the first quarter. Average rental rates for purpose-built rentals edged higher as a result, rising six per cent to $2,462 in the first quarter of 2024, compared to $2,319 posted during the same period in 2023.

Land shortages have been reported but could be easily remedied if the city chose to make changes to its existing zoning plan. That said, residential builders and syndicates continue to buy up suburban land on speculation. Most projects take at least three years to become shovel-ready with almost all builders now hiring professional planners to facilitate the process. Real Estate Investment Trusts (REITs) continue to be active in the Ottawa market, with investment concentrated on the residential apartments that complement their existing portfolios, including office buildings in the core and large retail shopping centres in the suburbs.

While office space has had its challenges in Ottawa’s downtown core, seven office buildings are now undergoing conversion to residential apartments, which has removed a sizeable amount of square footage from the overall market. 200 Elgin is currently in the process of transitioning from a B-class office building to an apartment. The six other buildings have completed the conversion process or are in the finishing stages of conversion to residential. Office vacancy rates currently hover at 11 per cent in the downtown core but would be closer to 19 per cent had conversion not occurred.

The post-pandemic desire to work from home continues to impact employers in the Ottawa area, with the city’s largest employer, the federal government, moving to bring civil servants back to the office for three days a week. Ample demand for quality office space in A-class buildings exists in the downtown core, with most prospective tenants seeking greater square footage, while older B and C-class buildings are losing tenants as support services to the federal government downsize. This trend has impacted retail operations in the core, particularly restaurants in close proximity to government offices. Movement to central Ottawa has also been stifled in large part due to expensive parking rates. The suburbs, however, continue to flourish, with office space in Barrhaven, Ottawa’s newest and fastest-growing suburb, almost impossible to find. Steady demand also exists for tech-space in Kanata.

On the whole, the city’s retail sector is stronger than expected, as availability rates have edged slightly downward. Consistent demand for retail properties exists, but supply remain tight. Strip plazas are coveted by investors but unlike other areas of the country, most developers are not interested unless the land size and zoning are appealing. The city’s two major malls have added new tenants but show little interest in adding residential components to their properties. Revitalization efforts are underway to improve the historical ByWard Market with the introduction of the $129 million ByWard Market Public Realm Plan. Construction is expected to commence in 2025, which will include a transformation of the area bordered by George St., Sussex Dr., St. Patrick Street, and Dalhousie Street. The vast undertaking, the first phase of which is scheduled for completion in 2027, will ultimately create an enviable local retail/social hub and tourist attraction over a 15-year period, bolstering foot traffic to the area.

Although interest rates have made tenants and buyers more skittish, there has been greater movement in recent months, with customers biting the proverbial bullet in anticipation of rate cuts down the road. However, recent increases in the federal government’s capital gains tax have hampered sales of smaller residential apartment buildings in recent weeks, with many owners choosing to hold back on selling their properties at the higher tax rate. All asset classes are expected to be affected, eventually placing greater upward pressure on values in an already tight marketplace.

Halifax Regional Municipality

Interprovincial and foreign investors continue to play a substantial role in Halifax’s commercial real estate market, sparking demand for the city’s industrial, multi-family, retail and to a lesser extent, office properties in the first quarter of the year. The city’s unexpected population growth in recent years has amplified the need for housing and services, which has prompted the municipality to push for greater density, increased investment in infrastructure and healthcare, as well as the reconfiguration and improvement of access routes into Halifax, freeing up acres of land for future commercial and residential developments in the process. Through the Cogswell Interchange Exchange district, a $122 million joint initiative between the province and municipality that will connect downtown with the north end and waterfront, more than 16 acres of road infrastructure will be converted into a mixed-use neighbourhood, including new residential and commercial developments.

Industrial remains the top performer in 2024 with vacancy rates falling under one per cent. Demand remains greatest for flex space, warehouses, and stand-alone buildings from single-tenants and owner-operators, many of whom are distributing products throughout Atlantic Canada. Real Estate Investment Trusts (REITs) such as Skyline have also been active in the market, with projects like the multiphase, net zero development currently underway that will bring more than 400,000 sq. to Bayers Lake Business and Industrial Park by the third quarter of this year. Some large-scale retail/industrial operators such Volvo’s heavy equipment division (StrongCo) and John Deere are building new facilities in Halifax’s industrial parks. Aeroplan Park, servicing the airline industry and home to large corporations in the aviation industry such as Pratt and Whitney, has been experiencing expansion. Asian investors have been instrumental in the development of cold storage, lobster processing plants, and warehousing facilities in the park, given its proximity to Halifax’s Stanfield International Airport for overseas export. A transfer of land is also occurring within city limits as occupants of traditional industrial areas move to suburban industrial/business parks on the periphery such as Bayers Lake, allowing land once earmarked industrial to be converted to multi-family residential.

With the city running about 20,000 units short of demand, construction of residential apartments cannot happen fast enough. According to the Canada Mortgage and Housing Corporation, rental apartment construction is hitting record highs month over month and this momentum is expected to continue. Investor appetites have also grown in this segment of the market, given rapid population growth and affordability. For example, Hazelview Investments recently announced it has commenced construction on a two-tower rental community at 210 Willet St. that will add 530 units to the Halifax market upon completion in 2026. The federal government announced its intention to invest $268 million to build five buildings in Halifax, Bedford, and Truro, adding 710 units through the Rental Construction Financing Initiative. Several outdated schools in high-density neighbourhoods have been purchased and rezoned as future residential development properties, with as many as 1,800 to 2,000 units expected to come on-stream once completed.

Residential conversion is underway in the downtown core as commercial office vacancy rates approach 14 per cent. One example is the Centennial building on Hollis where repurposing to multi-unit residential is in progress, while office space in Dartmouth, including a former hotel on King St. and the Royal Bank of Canada (RBC) building, are also undergoing redevelopment. Other offices include the RBC building and the BMO buildings on George St. Many of the older buildings near the waterfront are ideal for retrofit, with more landlords investigating repurposing. The municipality is considering incentives for developers who convert office to rental, following in the successful steps taken by the Calgary government.

Flight to higher quality product continues to occur in the downtown core, where A-class buildings are attracting the most tenants, with the average net lease at an estimated $30 per sq. ft. plus taxes, maintenances, and insurance (TMI). Cap rates for office space currently sits at 7 1/2 to 8 ½ per cent, while suburban markets hover between eight and nine per cent.

Retail continues to surprise, showing year-over-year strength in both sales and leasing, with vacancy rates edging lower. Despite several smaller business closures, malls in the Halifax area are seeing a steady influx of new tenants, ranging from Simon’s, Nespresso, and Orange Theory Fitness to restaurants such as Milestone’s Grill and Bar. Atlantic Canada’s largest indoor mall – Mic Mac Mall – is nearing approval on a sizeable mixed-use development that will include over 1,000 residential units, including senior living, two office towers and a major family entertainment area. Steady foot traffic in traditional shopping pockets such as the Spring Garden area in downtown Halifax continues to support some of Atlantic Canada’s finest boutique shops and dining experiences.

The hospitality industry is thriving, with a substantial increase in tourism to the city, including a strong uptick in interprovincial travel in recent years. Room rates have tripled as a result, prompting more of the city’s existing hotels to consider expansion and a growing number of prominent hotel chains to enter the market. Moxy Hotels just debuted its brand in Halifax—the first Moxy’s to open its doors in Canada. The 160-room Moxy Halifax Downtown, part of Marriott Bonvoy’s portfolio of over 30 extraordinary hotel brands, has “staked a place in Halifax’s iconic food and beverage community.”  The Moxy brand joins the Sutton Place Hotel (2020) the Muir, (2021), and Halifax Tower Hotel and Conference Centre (2022), as the most recent additions to the Halifax Travel and Tourism landscape.

While higher rates have had an impact on land development, creative financing has helped close most deals, with an estimated 70 per cent of deals involving a three-to-five-year vendor take-back mortgage (VTB). With Canada Mortgage and Housing Corporation’s (CMHC) favourable financing packages and 50-year amortization, REITs, pension funds, and institutional investors have been most active in the Halifax market to date, given the attractive price points and the need for more purpose-built rentals.

Newfoundland and Labrador

Renewed provincial optimism has contributed to a significant uptick in demand for commercial properties in the Greater St. John’s area as expectations for economic growth rise in Newfoundland and Labrador for 2024. Commercial transactions in the city are up almost 14 per cent in the first four months of the year, with 25 properties changing hands year to date, compared to 22 sales for the same period in 2023.

The government is “working towards a strong, smarter self-sufficient and sustainable province,” according to the province’s Budget 2024 press release. In its economic outlook section, the province reported Real GDP is expected to climb 5.1 per cent in 2024, in large part due to a rebound in oil and nickel production, while opportunities in the green energy, low carbon oil, mining and aquaculture industries are expected to further bolster economic activity. Population growth is forecast to climb almost one per cent year over year, on the heels of a strong 2023.

Few jurisdictions can match the abundance of resources of the Newfoundland and Labrador area, given its hydrogen gas, oil, minerals, windmill, and energy projects. Approximately $12.4 billion in major capital spending is underway, with mining and oil and gas leading the province. Some of the projects underway include: West White Rose Project (Cenovus Energy, Suncor Energy, and OilCo) valued at between $3.4 and $3.8 billion; Vale Newfoundland and Labrador Limited continued development of the underground mine at Voisey’s Bay’s Reid Brook and Eastern Deeps deposits, valued at $2.69 billion USD;  Voisey’s Bay Wind Energy Project (Innu-Inuit Envest Limited Partnership and Vale Newfoundland and Labrador Limited) valued $77.6 million; Rio Tinto IOC is making upgrades to Iron Ore processing, valued at approximately $70 million; while Cooke Aquaculture is expanding its integrated farming operations at a cost of $35 million. Infrastructure growth in the province has had a significant impact on commercial real estate markets.

Just 52 commercial listings are currently available for sale over the $500,000 price point in St. John’s and the surrounding areas –down almost 28 per cent from the 72 listings recorded this time last year. Tight inventory levels are having an impact on values, placing upward pressure on prices. Older listings are starting to move as investors/owner-operators grow impatient. Demand is greatest for diversified warehouse/office properties on the market offering an 80/20 split with a laydown area in the yard. Only two are available for sale in the city and four in neighbouring subdivisions. Limited product is available in Mount Pearl’s Industrial Park, with prices edging north of $1 million.

With the exception of a new retail development that will add an additional 590,000 sq. ft. in the Shoppes at Galway, some pullback has occurred in commercial construction as builders and developers shift their focus to the existing shortage in residential housing. Canada Mortgage and Housing Corporation’s (CMHC) incentive plan to increase stock of purpose-built rentals, offering five per cent down, favourable rates, and 50-year amortization periods, coupled with the elimination of the federal government’s goods and service tax, has been effective in re-directing development. According to the report by the government agency in 2023, Newfoundland-Labrador will need to build 10,000 homes a year or the province will be short 60,000 housing units by 2030.

Over the past year, St. John’s city council has fielded a numerous applications for rezoning, planning and construction permits for medium and low-rise apartments, including a 10-storey apartment on New Cox Rd.; Harbour Capital Corporations proposal for a 12-storey and two seven-storey apartments, plus the conversion of the existing home to a four-plex; a 60-unit apartment building with eight townhomes on the site of the old orphanage, a heritage property destroyed by fire in Logy’s Bay; and a four-plex on the site of the IJ Samson school. There have also been some interesting conversions, including a Super 8 Hotel to a residential apartment with 82 one-bedroom units and studio suites in 2024. Ground has also been broken on three six-storey student housing buildings across the Memorial University’s main campus.

While the office sector remains soft, with more than 300,000 sq. ft. of vacant space available in the city, excitement is starting to build in the city, given the resumption of projects in hydrogen gas, oil, mining, wind energy, and aquaculture. The possibility of reopening the existing Upper Churchill Agreement drawn up in the late 1960s has also added to the enthusiasm. The city’s return to prosperity is expected to bode well for the commercial market for the remainder of 2024 and into 2025.