Canada was one of the four countries in the world to set record in commercial real estate market in 2017 and continues doing so. According to CBRE the country recorded $43.1 billion in investment and that amount can potentially surpass in 2018. The rents are also expected to rise in the upcoming year. If we consider 2016’s record of 34.7 billion, we will see the rising trend in the commercial market.
Several factors make experts to be optimistic about 2018 commercial real estate.
Strong tenant demand coupled with declining vacancy
“Investors are not shying away from Canadian commercial real estate,” said CBRE Canada executive managing director Paul Morassutti.“We have record low vacancy rates, record low unemployment, increasing institutional allocation to real estate and supportive immigration that fuels population growth,” the director said.
According to CBRE, Toronto and Vancouver started with the lowest downtown office vacancies in North America in 2018, 3.7 per cent and 5.0 per cent respectively. It is expected that these rates will fall even lower due to growing tenant demand and a lack of new office space.
“Demand is outpacing supply in the west coast city by more than a million square feet a month despite a raft of speculative construction,” Financial Post reports.
“There is a pool of buyers going for suburban assets. With the downtown, the cost has gotten so expensive, the REITs have started looking other places.” Bisnow quoted Avison Young Capital Markets Group principal and sales representative Richard Chilcott.
Canada viewed as safe place for investment
Morassutti said “Our status as a safe haven with stable rule of law gets more pronounced as geopolitical instability continues to accelerate.” He also added that the Canadian real estate “ has arrived as a true ‘fourth asset class’ that provides yield in a yield-starved world.”
CBRE forecasts even higher records in investment as investors continue to flock to the asset class a as stable, high-yielding investment vehicle.
According to CTV News reports, Canada added between 236,800 and 281,000 immigrants annually between 2004 and 2014. It is very likely that immigration will add up to the demand, especially in the bigger cities where immigrants are most likely to settle down.
Potential risks low
While experts are optimistic about the coming year, 2018 is not without potential risks. CBRE report cites rising interest rates and the fate of NAFTA as issues to watch out for 2018. However the report says that even that will not endanger the sky-rocketing trend of the Canadian real estate.
“When we considered the effect of expected increases in interest rates in 2018, although it raises the carrying costs of landlords and could potentially put pressure on cap rates, it will be mitigated by the rental growth that our record low vacancies will drive during the year.”
“Likewise, when we reviewed the impact of NAFTA on our industrial market, we believe this threat stems from an outdated analysis of the Canadian economy. Today, logistics, distribution and e-commerce account for three quarters of all tenant demand. This logistics and e-commerce activity is predominantly Canadian-based, and this demand will be present irrespective of the result of NAFTA negotiations. With each additional $1 billion of online sales requiring an additional 1.25 million square feet of industrial space to handle its distribution, industrial assets are the winner of a structural change in the economy.” commented Morassutti.