Industrial strength and multifamily interest counterbalancing office struggles, says VP
Despite ongoing headwinds and an uncertain future for the office sector, there’s plenty of room for optimism in the commercial real estate market, according to a new analysis by RE/MAX Canada.
The company’s latest report, which studied 12 commercial markets across the country, found “considerable resilience” at play in that space in the face of inevitable challenges posed by higher interest rates and ballooning inflation.
Elton Ash (pictured top), RE/MAX Canada’s vice president, told Canadian Mortgage Professional that there was a “real desire to put deals together” in the current market, driven by a strong industrial sector and ever-increasing demand in the multifamily segment.
He said it came as little shock that prospects for the office sector were decidedly less rosy with its post-pandemic future remaining unclear.
“The only weak area right now, no surprise, is office. COVID certainly accelerated the work-at-home [or] hybrid work experience,” he said. “That really is the only dark cloud within the commercial sector.”
The growing popularity of multifamily product is pushing REITS (real estate investment trusts) back into the market, RE/MAX’s report notes. For Ash, that’s a trend that’s likely to continue as immigration, typically a strong driver of activity in the rental market, gathers pace.
“Immigration is really a major factor because naturally, the majority of people coming into the country are looking at rental housing,” he said.
“If we look at all three sectors of basic shelter – rental, and deeded, owned, single-family condominium-type property, there’s just a shortage in all three sectors. So when you look up multifamily purpose-built construction for the rental market, it’s very positive.”
Office challenges remaining a headache on the commercial front
Ash said 10 conversion projects taking place in downtown Calgary, converting office to residential space, were “changing the complexion” of that city’s downtown core, following the example of Vancouver and Toronto which have seen a strong mix of residential and office buildings spring up in recent decades.
Still, continuing uncertainty over whether businesses will start requiring their employees to come back to the office full-time is weighing down on prospects for that space, especially in downtown cores, according to Ash.
“There is a surplus of office space out there as all businesses re-evaluate their need for downtown office space,” he said. “Certainly out in the suburbs it’s going to be less pronounced. There are going to be some marked differences between a downtown core as opposed to a suburban office sector.”
Concerns over the outlook for commercial real estate, and especially the office sector, accounted for a large share of the credit provisions stashed away by Canada’s leading banks in their second-quarter earnings releases, announced in May.
The Q2 financial results announced by Canada’s top banks last week reflected a highly uncertain economic environment, with provisions for credit losses surging as four of the top five banks missed analyst estimates.https://t.co/xBTG0ogzRu#mortgagenews #economy
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 1, 2023
How will the ‘live-work-shop’ phenomenon affect the commercial space in Canada?
Still, Ash said RE/MAX’s overall outlook for the commercial space was positive – and that the “live-work-shop” phenomenon was continuing to grow, with residential applications on commercially zoned property increasing across Canada.
“We look at the Oakridge Centre in Vancouver as a prime example of a complete redevelopment,” Ash said. “It’s going to be 6,000 residential units as part of that entire redevelopment along with upper-end retail in the mall.
“It’s like a built-in marketplace that’s occurring there. But that’s an ideal example of this integration of live, work and play, and how that’s all going to really set the tone going forward.”
The repurposing of commercial office space into residential in many major Canadian centres also emerged as a particularly noteworthy trend. The study indicated 50% of surveyed markets – six out of 12 – reported conversion activity, with buildings targeted for conversion in Calgary, Halifax, Ottawa, Toronto, London, and Winnipeg.
Another trend to watch on the commercial front is vendor takeback financing on a sale, in which a seller is paid out over a period of time on the cashflow of the property.
“That’s something we have not seen for a while, and so that’s related to higher interest rates, perhaps struggles in getting financing conventionally,” Ash said. “It’s not really common, but something that has shown up that we haven’t seen [for some time].”
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