Although the U.S. commercial real estate market faces a seemingly dim outlook, with Morgan Stanley analysts predicting prices could plunge by almost 40 per cent, that won’t be the case north of the border, experts say.
“Nothing in our market updates for Q1 of 2023 indicates that will happen here,” explains Damon Conrad, national director of Royal LePage Commercial. “The two real estate industries are significantly different in the way we handle commercial lending and how our banks conduct evaluations.”
Another reason for optimism is a possible end in sight for interest rate hikes.
“It doesn’t look like there will be any more,” says Robert Kavcic, senior economist at BMO Capital Markets, though he adds a wait-and-see approach is necessary to establish what impact they have on lowering inflation.
And they seem to be doing their job, according to Statistics Canada, which reports that the country’s yearly inflation rate continues its downward trajectory, falling to 4.3 per cent in March.
Industrial and office
Among the sub-sectors of CRE, “industrial is holding up very well,” says Kavcic.
A key reason is there’s simply not enough of it to go around, points out Conrad. “Demand is going to outweigh product supply for the foreseeable future.” It’s a different story for the office sector, which is facing a lot of challenges.
According to commercial real estate firm CBRE, the office vacancy rate across the country continues to rise—hitting 17.7 per cent in Q1.
“Office is the most exposed,” notes Kavcic. “In addition to all the cyclical changes, there’s been a big structural change because people are not going into the office like they used to. And I think that’s going to be permanent.”
But the Class B and Class C buildings are in the toughest spot. Class A buildings, on the other hand, are benefitting from a flight to quality.
“There are companies that are doubling down and ramping up,” says Conrad, explaining that’s part of an effort to attract employees back to the office and promote collaboration in a physical work setting.
Retail
The spectacular rise of e-commerce during pandemic lockdowns caused analysts to wonder if the death of bricks-and-mortar retail was near. The sector was on an uneven keel well before the pandemic—Deloitte Canada reported that foot traffic at the country’s top shopping centres dropped 22 per cent in 2019 compared to the previous year.
With some retailers already on shaky ground, the rolling lockdowns lead to bankruptcy for some. But with the ease of pandemic restrictions, those who managed to survive were pleasantly surprised to discover consumers were eager to return to shopping in person.
CBRE reports that “despite economic headwinds, retail sentiment remains positive for 2023.”
Consumers, however, have also retained their enthusiasm for online shopping, meaning brick-and-mortar retail has had to innovate to attract and retain foot traffic.
Notable examples are Toronto-based Yorkdale Shopping Centre, which is set to add residential units in the upcoming years, as well as mixed-use projects such as The Amazing Brentwood in B.C. and Richmond Yards in Halifax.
Hospitality
“The hospitality real estate industry as a whole is resilient,” says Jason Kleyn, a broker at Re/Max Ultimate Realty in Toronto.
While the pandemic put a squeeze on dining in, it expanded another market that continues to grow.
“There’s been a shift in focus to takeout,” explains Kleyn. “That’s led to hospitality-based mergers and acquisitions, which is growing rapidly here in Canada.”
The most notable is Foodtastic, a Montreal-based franchise company that’s tacked on Freshii and Quesada to its massive portfolio that includes Second Cup and Pita Pit.
Another trend sees the hospitality industry offering something new and different to attain the most value for their properties. Kleyn cites examples, such as cafes offering yoga and art classes and restaurants featuring specialty beer, spirits and wine bottle shops.
“It combines the retail and hospitality markets,” says Kleyn. “It’s also about creating unique experiences for consumers.”
Rita Simonetta is a Mississauga, Ont.-based freelance journalist and fiction writer whose work has appeared in publications across Canada, including the CBC and Pivot Magazine.
