Incentivized builders and developers respond
to the call for multi-family purpose-built rentals
TORONTO, June 6, 2024
/CNW/ -- 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.
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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) –12th 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.
About the RE/MAX Network
As one of the leading global real estate franchisors, RE/MAX, LLC
is a subsidiary of RE/MAX Holdings (NYSE: RMAX) with more than
140,000 agents in over 9,000 offices with a presence in more than
110 countries and territories. RE/MAX Canada refers to
RE/MAX of Western Canada (1998), LLC,
RE/MAX Ontario-Atlantic Canada, Inc., and RE/MAX Promotions,
Inc., each of which are affiliates of RE/MAX, LLC. Nobody in the
world sells more real estate than RE/MAX, as measured by
residential transaction sides.
RE/MAX was founded in 1973 by Dave and Gail Liniger, with an innovative,
entrepreneurial culture affording its agents and franchisees the
flexibility to operate their businesses with great independence.
RE/MAX agents have lived, worked and served in their local
communities for decades, raising millions of dollars every year for
Children's Miracle Network Hospitals® and other
charities. To learn more about RE/MAX, to search home listings or
find an agent in your community, please visit remax.ca. For
the latest news from RE/MAX Canada, please
visit blog.remax.ca.
Forward looking statements
This report includes
"forward-looking statements" within the meaning of the "safe
harbour" provisions of the United States Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of words such as "believe," "intend,"
"expect," "estimate," "plan," "outlook," "project," and other
similar words and expressions that predict or indicate future
events or trends that are not statements of historical matters.
These forward-looking statements include statements regarding
housing market conditions and the Company's results of operations,
performance and growth. Forward-looking statements should not be
read as guarantees of future performance or results.
Forward-looking statements are based on information available at
the time those statements are made and/or management's good faith
belief as of that time with respect to future events and are
subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in
or suggested by the forward-looking statements. These risks and
uncertainties include (1) the global COVID-19 pandemic, which has
impacted the Company and continues to pose significant and
widespread risks to the Company's business, the Company's ability
to successfully close the anticipated reacquisition and to
integrate the reacquired regions into its business, (3) changes in
the real estate market or interest rates and availability of
financing, (4) changes in business and economic activity in
general, (5) the Company's ability to attract and retain quality
franchisees, (6) the Company's franchisees' ability to recruit and
retain real estate agents and mortgage loan originators, (7)
changes in laws and regulations, (8) the Company's ability to
enhance, market, and protect the RE/MAX and Motto Mortgage brands,
(9) the Company's ability to implement its technology initiatives,
and (10) fluctuations in foreign currency exchange rates, and those
risks and uncertainties described in the sections entitled "Risk
Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the most recent Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission ("SEC") and similar
disclosures in subsequent periodic and current reports filed with
the SEC, which are available on the investor relations page of the
Company's website at www.remax.com and on the SEC website at
www.sec.gov. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on
which they are made. Except as required by law, the Company does
not intend, and undertakes no duty, to update this information to
reflect future events or circumstances.
SOURCE RE/MAX Canada