Demand for commercial real estate soars nationwide amidst economic expansion and stock market volatility, according to RE/MAX® Canada Brokers
Investors flock to ‘bricks and mortar’ as hedge against inflation in Q1 2022
With North American stock markets dangerously close to correction, bricks-and-mortar commercial real estate continues to resonate with institutional and private investors, particularly those who are personally vested, across almost every commercial asset class in major Canadian centres, say RE/MAX brokers.
The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential—particularly purpose-built rentals—and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets.
Commercial Real Estate Report Highlights
The report examined 12 major Canadian centres from Metro Vancouver to St. John’s. Regional highlights include the following:
- 92 per cent of markets surveyed (11/12) reported extremely tight market conditions for industrial product in the first quarter of 2022. Newfoundland-Labrador was the only outlier.
- 67 per cent of markets surveyed (8/12) found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, Hamilton-Burlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.
- While demand for overall office space in the core remains relatively soft in 92 per cent of markets (11/12) across the country, Metro Vancouver continues to buck the trend.
- Suburban office space continues to prove exceptionally resilient in 67 per cent of markets surveyed (8/12). Those markets include Vancouver, Calgary, Saskatoon, Winnipeg, Hamilton-Burlington-Niagara, Ottawa, Halifax-Dartmouth and Newfoundland-Labrador.
- Development land remained sought after (industrial/residential) in 67 per cent of markets surveyed (8/12) including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and Halifax-Dartmouth.
- End users are encountering challenges in terms of expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.
- Retail is on the rebound in 75 per cent of major Canadian markets (9/12), with strong emphasis on prime locations in neighbourhood microcosms. The trend has been identified in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Hamilton-Burlington-Niagara, Toronto and Ottawa.
“The overall strength of the Canadian economy continues to propel massive expansion in commercial markets across the country in 2022,” says Christopher Alexander, President, RE/MAX Canada. “What began as heightened demand for industrial space to accommodate a growing e-commerce platform during the pandemic has blossomed into a full-blown distribution and logistics network that encompasses millions of square feet in markets across the country. Recent volatility in the stock markets has also prompted a shift to greater investment in the commercial segment as investors look to real estate as a hedge against inflation.”
Given the current shortage of land/space, commercial real estate developers and end users looking to build, have become increasingly creative in 58 per cent of markets surveyed (7/12), including Metro Vancouver, Edmonton, Regina, Saskatoon, Winnipeg, London and the Greater Toronto Area. The supply/demand crunch has proven the adage, ‘necessity is the mother of ingenuity,’ as new solutions emerge in the marketplace. In Metro Vancouver, Oxford Properties introduced the first industrial multi-storey industrial/commercial space in 2019 and a second stratified multi-storey facility—Framework by Alliance Partners—is planned for False Creek Flats. The first building is nearing completion and leased to Amazon while the first and second phase of the False Creek development is sold out and a third phase is currently selling at $725 per square foot.
In the future, municipalities may also consider industrial land reserves, registered areas dedicated to industrial in municipalities that are experiencing land constraints, given overwhelming demand.
“Land development is pushing city boundaries in major centres and municipalities are scrambling to accommodate residential and industrial intensification,” says Alexander. “At present the process is painfully slow in most centres, even where land is already serviced. Given the on-going likelihood of demand, policy that helps availability or fast-tracking of approvals would certainly be a boon to the market.”
The RE/MAX Canada 2022 Commercial Real Estate Report also identified a growing trend in infill land assembly that targets retail storefront/strip retail malls in mature areas for mixed-use developments by institutional and private investors. These new developments almost always have a residential housing component on top, often purpose-built rentals or condominiums, given the shortage and need for greater densification. Smaller investors and end users are largely shut out of this market and tenants are having difficulties securing long-term leases in these key areas. Canada Mortgage and Housing Corp. (CMHC) is offering an exceptionally attractive financing package for multi-unit, purpose-built residential construction, with a 50-year-amortization rate, low loan-to-value ratios, and favourable interest rates.
Institutional and private investors remain exceptionally active in the commercial real estate market across the country, spurring demand for industrial/office/retail product on a large-scale basis. Extensive portfolios are a primary target, especially those containing 10 or more properties. Spillover from activity in major centres is also serving to bolster smaller, secondary markets, where affordable price points, in relative terms, prove attractive, especially as savvy investors anticipate future needs and potential, given urban sprawl, density, population growth, pricing and inventory trends.
While retail is making a comeback in prime neighbourhoods, the return of foot traffic should have a positive impact on the market moving forward. Revitalization of older retail spaces and malls is underway to enhance the shopper experience and influence the return to in-person shopping. This, in turn, is attracting tenants. The sector is expected to continue to strengthen as markets move past former pandemic constraints and more favourable conditions emerge to support retail growth.
RE/MAX Canada has found that cannabis outlets are largely over-represented in most major Canadian centres. As the industry amalgamates, there could be an influx of retail inventory returned to the market over the next 12 to 18 months.
Other trends noted in the commercial market by RE/MAX Brokers include novel ways to expand exposure and streamline the selling process. As inventory of farmland dwindles and price per acre has risen, realtors have turned to auctions with great success in Saskatchewan. Saskatoon, for example, which typically has about 300 listings for grain farms for sale at this time of the year, has seen available properties drop to below 90. Realtors have turned to auctions as a more effective way to increase exposure to a wider audience, generating offers from across the country, as well as the US. The trend is another sign of a heated marketplace where buyers are willing to compete for the right product in the right location in a transparent process.
“The soaring price of commodities has bolstered Western Canadian markets, with resource-rich provinces such as Saskatchewan, Alberta, and Manitoba experiencing unprecedented growth as industries emerge from their slumber,” says Elton Ash, Executive Vice President, RE/MAX Canada. “Saskatchewan, in particular, is reinvigorated, with the economic engine just heating up in agriculture, mining, forestry, and potash.”
Continued strength is forecast in commercial markets, supported by population growth and further economic expansion. According to the RBC Economics, Provincial Outlook published in March, GDP growth is expected to climb to 4.3 per cent in Canada, led by BC, Saskatchewan and Alberta in 2022. An unquenchable demand for product in the industrial, multi-unit residential and farmland sectors will persist as intentions remain strong, despite a serious scarcity of inventory. Buyers, large and small, will continue to seek opportunity as investors increasingly favour tangible assets. Dollar volume is up across the country in almost every market as the principals of supply and demand impact values. Lease rates are also edging upward. With the pandemic fading quickly from memory, the return to the workplace—either full-time or in a blended/hybrid format—is expected to spark the next wave of growth, revitalizing downtown office buildings and breathing new life into the core.
Regional Commercial Real Estate Insights