Strength of two sectors offset more subdued performance elsewhere
Resilience in Canada’s commercial market in the second quarter of 2023 was driven mainly by the robust performance of the industrial and multi-residential spaces, according to a new report by real estate firm Morguard Corporation.
The company’s senior director of research Keith Reading (pictured) told Canadian Mortgage Professional that overall quarter-on-quarter growth in the sales figure for multi-suite residential rental, industrial, office, and retail property types had been spurred by the strength of the first two, making up for more subdued activity among the latter pair.
“It was primarily industrial and multi-res driven, this increase. Retail’s still relatively quiet, same with office,” he said. “But you find during times of uncertainty that industrial and multi-res tend to be the favourite with investors.
“In both cases, they’ve performed better than the other two classes, whether it’s an economic downturn or economic uncertainty – which in this case is interest-rate driven and it’s inflation-driven.”
That’s perhaps unsurprising, Reading added. “In terms of multi-res, people need a place to live regardless of the economic picture and with industrial, you still need to move goods around, no matter the economic backdrop, so they do tend to be again the strongest performers.”
The strength of the industrial and multi-res spaces helped offset the impact of muted retail sales and climbing office vacancy rates as companies continue to grapple with the question of whether to bring their employees fully back to the office.
Commercial real estate remains resilient despite challenges: RE/MAX executive | Canadian Mortgage Professional https://t.co/ynrIVsNhz5
— Denise Liboiron (@DeniseLiboiron) June 8, 2023
What’s behind the continued strength of the multi-residential sector?
Sales of rental properties posted a 29.5% quarterly increase, according to Morguard’s report, with the average asking monthly rent for listed units for the 25 cities tracked by Rentals.ca at the end of May jumping by 10.6% year over year.
Surging immigration is only likely to help the sector maintain its strength, Reading said, particularly with demand having long exceeded supply even before population growth is taken into account.
“We’re already seeing significant shortages of rental apartments across the country and then we’ve got record immigration in 2022 and above-average arrivals expected over the next year or two. So that’s only going to put more pressure on the rental market,” he said.
New Canadians tend to rent first upon arrival, Reading said, a trend that will likely persist due to low levels of supply in the housing market and interest rates and borrowing costs that remain prohibitively high for many immigrants.
“People arriving in the country, whether international or interprovincial, tend to rent a place and then maybe get comfortable with the city or region that they’re in before they purchase a home,” he said.
“So it’s going to apply more pressure on rental housing and for tenants that will be difficult trying to find a vacant apartment to move into. For landlords, it’s good because their buildings will be full and rents will continue to rise.”
Is there room for optimism in Canada’s commercial market?
Canadians’ consumer spending slowed notably during the second quarter – but remained healthier than envisaged in the first half of the year, Morguard’s report said, in the face of persistently high inflation and interest rates.
“I think groups were anticipating a more rapid slowdown in spending, but we’re only just starting to see that unfold,” Reading said. “I also think retail’s been a little stronger than most people anticipated, having bounced back relatively well from the pandemic downturn or closures.”
That better-than-expected performance means that there are positive signs ahead for the commercial real estate market, he added, despite the well-documented struggles at play in both the office and retail spaces.
“But I think an overall message right now in the commercial real estate market is that there are some winners and there are some losers, and investors have really focused on the more stable parts of the commercial real estate.
“That’s why multi-res and industrial are still pretty popular with investors. There’s still some hesitance with the high cost of debt, but I think it bodes well for those two sectors over the next little while.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
