Canada’s economy is posting minuscule growth, but the largely government policy-driven downdraft will fan residential rental demand and the industrial sector appears largely immune.
In comparison, the retail and office sectors – the latter with the exception of Metro Vancouver – will continue to face headwinds as consumer and corporate spending contract in most western Canadian markets.
The following is Western Investing’s annual guide to where to safely place your commercial real estate investments in 2019 as Canada and Alberta face elections – and the potential of a change in leadership.
The play: multi-family rentals; office market; industrial speculation
Metro Vancouver’s commercial and industrial real estate sector is coming into 2019 with arguably the best market conditions in Canada. It is witnessing a rare confluence of among the lowest vacancy rates in North America, record-high prices and sustained development that is confidently pushing up office towers, industrial parks and multi-family rental buildings across the entire region.
“It is a historical time for Metro Vancouver’s commercial real estate,” said market analyst Andrew Petrozzi of Avison Young’s Vancouver office.
Vancouver’s downtown office vacancy rate is experiencing record-high prices as leasing costs nudge all-time highs. There are 1.6 million square feet of new offices under development in downtown Vancouver, but most of the space is already claimed.
“The market is showing no signs of slowing down in terms of rental rates. With no major new office buildings delivered until 2021, tenants with upcoming leases are competing within a very tight market,” said Jon Bishop, executive vice-president and managing principal of Devencore’s Vancouver office.
Industrial: Vancouver bare concrete industrial space sells for higher prices than luxury residential condos in any other Canadian city. In Vancouver’s Mount Pleasant and other uptrending zones light industrial space is fetching from $800 to $1,000 per square foot.
The strength of Metro Vancouver’s industrial market is attracting foreign buyers. Unlike residential real estate, industrial is not subject to B.C.’s 20 per cent foreign-buyer tax and is not experiencing a historic meltdown this year.
The latest property transfer data set from the province indicates that the proportion of foreign buyers in B.C. residential deals dropped in 2018.
Rising industrial lease rates mean good cash flow for owners, however, and that’s where foreign buyers are taking note. Net lease rates have doubled in the past two years, and prime new properties can fetch $18 per square foot.
“We’re seeing offshore money, for the first time, coming into industrial because they understand and can see the quality of the investment,” said Todd Yuen, president, industrial, at Beedie. “The rents have finally caught up to the point where we can start to push the development cycle a little bit.”
Multi-family: The sector still has about the lowest vacancy rate possible, in the 1 per cent range, according to Canada Mortgage and Housing Corp., and sky-high house and condo prices will keep tenants in place.
The BC NDP government is restricting annual rent increases to 2.5 per cent this year, which LandlordBC said will stifle investment in the multi-family rental market. Still, with an estimated 50,000 immigrants arriving each year, rental apartments should have no lack of tenant demand.
Average per-door prices for rental apartment buildings are the highest in Canada, but asking prices are coming down, according to NAI Commercial. This opens an opportunity, but cautious lenders are requiring higher down payments, which restricts the number of buyers. Smaller investors could look to the Fraser Valley where per-door prices are often half that north of the Fraser River, but rents and vacancies are similar and capitalization rates are higher.
The play: office sector and industrial land investment
Value for money and a strong return on investment make Greater Victoria’s commercial real estate market a natural fit for western investors.
“We still see a tremendous appetite for investment product in Greater Victoria and I think the same can be said for development properties,” said Ross Marshall, vice-president with CBRE Victoria.
“Our yields are higher than Vancouver, and everyone is chasing yield, so we are a pretty attractive place,” Marshall said, noting strong demand from tenants has driven up rental rates across all property classes.
According to Colliers International, downtown Victoria’s office vacancy was 6.4 per cent overall in the fourth quarter of 2018, down from 7.2 per cent a year earlier. That drop came despite the addition of 280,000 square feet of new office space to the mix.
Victoria’s industrial market is experiencing historically low availability, while land constraints have led to upward pressure and record-high lease rates. The industrial vacancy is 1.1 per cent, one of the lowest in Canada.
The play: industrial
Alberta’s capital city is seeing a more balanced market after four years of near-negative growth. This year offers an opportunity for industrial investors to position at the bottom of an improving commercial real estate scene.
In Edmonton’s northeast industrial heartland, Pembina Pipeline Corp. is proceeding with a $4.5 billion integrated propane dehydrogenation plant and polypropylene facility. Construction is expected to start this year, with the complex fully operational by mid-2023. At the peak of construction, more than 3,000 workers will be on site, with the project expected to create over 200 full-time operations and head office jobs upon completion.
It is a sign of strength in Edmonton’s industrial sector that could increase following the provincial and federal elections in the last half of this year.
Industrial speculators are already placing their bets.
Nearly half the $638.7 million in industrial sales in the first nine months of last year were to investors, not owner-occupiers, and industrial sales easily eclipsed the total industrial investment value for all of 2017.
Avison Young reports that Edmonton’s industrial vacancy rose 1 per cent to 6.3 per cent from the second to third quarter of 2018, despite Q3 absorption of 145,022 square feet.
Total sales of commercial and industrial real estate in Edmonton surged 38 per cent in the first nine months of 2018 compared to a year earlier and were up 86 per cent from 2016 to reach $3.1 billion.
“We are seeing a normalization, a stabilization of the market. This is the new normal [for Edmonton],” said Ben Tatterton, manager of data solutions for Altus Group.
The play: office and industrial
Growth in technology jobs is providing a boost to Winnipeg’s office market. The city has added nearly 5,000 tech jobs in the last five years, bringing the total up to nearly 17,000, a growth rate of about 40 per cent. That’s the second-highest growth rate among mid-sized Canadian cities.
The activity has helped push Winnipeg’s office vacancy rate down to 10.7 per cent, which is the fourth lowest in the country. CBRE sees a steady improvement in the office sector in 2019.
Industrial is the other bright spot for the city this year.
“This is the best the industrial market has been in Winnipeg in 50 years,” said Martin McGarry, president and CEO of Cushman & Wakefield/Stevenson.
Diane Gray, president and CEO of CentrePort, said industrial buildings at that site are going up on speculation, a sign of confidence. “The developers believe we’re on the precipice of massive growth,” Gray said.
Across the city, industrial space is being taken up at a pace of about 50,000 square feet per month. While 450,000 square feet of new industrial space is expected to open or begin construction this year, “it will be some time before industrial supply will meet demand,” Colliers cautioned.
Winnipeg industrial property is selling for an average of $116 per square foot. Annual net lease rates average just over $7 per square foot, but can be double that in the Southwest, where less than 1 per cent of the industrial space is vacant.