Commercial asset classes see renewed interest
Investors are showing renewed interest in various asset classes as the market stages a comeback, The Globe and Mail said in a report.
After a challenging year, the Canadian commercial real estate market is showing signs of recovery. Scott Figler, director of Canada research at JLL, noted that the market hit its lowest point in the first quarter of 2024, with national investment activity at just $8.5 billion.
However, the second quarter saw an improvement, with transactions surpassing $12 billion.
“It’s a really positive story,” Figler said, adding that the latest total exceeded the 10-year quarterly average by roughly $2 billion.
Several factors contributed to this upturn. The federal government's increase of the capital-gains inclusion rate to 66.7% from 50% on June 25 motivated many investors to liquidate assets before the deadline.
Additionally, the Bank of Canada's interest rate reduction to 4.75% from 5% on June 5 – the first cut in four years – has created more certainty for investors.
The bulk of investment activity focused on the four main asset classes: multifamily residential, industrial, retail, and office. Interest in retail and office properties surprised some industry players.
Multifamily residential
Amid Canada’s home-ownership affordability crisis, rental apartment buildings emerged as the most promising investment.
Mark Goodman, principal at Goodman Commercial Inc., highlighted a surge in activity in Metro Vancouver, where six multifamily properties worth $88.5 million were sold in a single month.
"Multifamily is hot because of the supply/demand imbalance, which is not going anywhere," Goodman noted.
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Canada Mortgage and Housing Corporation (CMHC) has indicated that the country needs about 3.5 million new housing units by 2030 to restore affordability, with 2.2 million of those being purpose-built rentals.
The past 30 years have seen only 570,000 apartments built in Canada. Goodman emphasized the low investment risk, with vacancy rates close to 0% and average national rents reaching $2,185 a month in June.
Industrial
The industrial sector remains strong despite a rise in vacancy rates to 4.2% and a slight decrease in average rents to $15.95 per square foot.
Figler explained that the increase in vacancy rates is a result of a surge in development, which brought the market to equilibrium.
"Vacancy has increased and rents are now falling. This isn’t a negative narrative. It’s what we call equilibrium," he said.
Retail
Retail properties, especially grocery-anchored strip malls, have become a preferred asset class.
Jon Buckley, senior managing director of investments at Marcus & Millichap, stated, "Retail is the most preferred asset right now – and it’s the first time in a long time that’s been the case." Despite the rise of e-commerce, Canada’s retail vacancy rate fell to a record low of 1.6% last year, and lease rates are expected to rise by 3.1% this year.
Office
The office sector, despite facing challenges, is seen as an opportunity. Mark Fieder, principal and president at Avison Young Canada, believes in the potential for office investment.
"The number of workers in offices is building every day," he said. "Demand is going to start going up again."
Montreal-based Groupe Mach has been active in this sector, acquiring 16 properties in Ottawa over the past 2½ years.
A recent Colliers report noted office rental rate increases in eight out of 12 major cities, with the national average rising to $21.55 per square foot and the vacancy rate stabilizing at 14.5%.
Specialty assets
Specialty commercial real estate properties, such as data centres, hotels, senior and student housing, and farmland, are also drawing significant investor interest.
Figler pointed out the operational expertise required for these assets, often leading investors to seek strategic partnerships.
For instance, QuadReal’s acquisition of US company CA Student Living and Fengate Asset Management’s $1.8-billion purchase of eStruxture Data Centers are examples of such partnerships.
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