Canada's low dollar continues to make real estate attractive to foreign investors
A limited supply of core quality commercial properties is keeping prices high and causing some investors to look to secondary markets for value – particularly multi-suite residential
Canada’s office leasing market is in a corrective phase. In particular, weak energy prices continue to leave the Calgary office sector in decline, with excess supply putting downward pressure on rents for many owners.
The Greater Vancouver Area continues to see strong performance, with the industrial availability rate at just 4.1%, despite 1.1 million square feet of new space added to inventory in Q1 Demand for space in industrial properties continued to match or exceed supply, leading to stable fundamentals, despite the relatively weak economy.
Canada Faces a Continued Modest Market Supply of Commercial Real Estate Properties
The shortage of high-quality commercial properties for sale, relative to investor capital looking for real estate investments, continued to characterize the Canadian commercial investment property market in the first quarter of 2016.
“A low Canadian dollar, the continued low interest rate environment, and the belief that the sector is a source of stable returns continue to make the Canadian real estate market a strong lure for foreign investors,” said Keith Reading, Director of Research at Morguard. “Foreign investment interests continue to revolve around high quality commercial properties in the Vancouver and Toronto markets.”
However, the report shows that deals involving core quality real estate assets have been infrequent and asset values have been holding near their peak, sending many investors looking to secondary markets for opportunities. Office Leasing Markets Continue to Weaken
Demand for office space remained weak in the first quarter of 2016, largely the result of the weak economy and sagging energy prices. At the same time, two million square feet of new office space came onto the market across Canada, pushing the national vacancy rate up 30 basis points to 12.5%.
However, space demand continued in Vancouver and Toronto, with Montreal also showing well. Urban centres saw a modest increase in occupancy, reflecting the first quarterly progress after two materially negative results in 2015.
Multi-Suite Residential Markets Attract Investors
Multi-suite residential properties are in high demand for investors. The short supply in major city centres has investors looking to secondary markets like Hamilton and London, Ontario, for stable returns. While some new construction is occurring, most new stock coming onto the market are older multi-suite residential properties previously held privately.
“When the economy is weak, people put off purchasing to some degree, which bolsters rental demand,” said Reading. “The consistently healthy migration to Canada from other countries also has stabilized demand for rental accommodation.”
Real Estate Asset Managers Getting Creative to Enhance Returns
With core asset investment properties in short supply, commercial real estate companies continue to look at ways to enhance returns from existing assets.
“With the commercial market as it is today in Canada, asset managers need to get creative and find innovative ways to obtain more value from existing properties. Experienced asset managers and real estate investment companies understand that success in current market conditions is often the product of strategic space development,” said Reading. “Developing innovative new uses for spaces is a trend we’re increasingly seeing – particularly across mixed-use properties – as managers look to generate stronger returns from their owned and existing portfolios.”