The commercial real estate market in Canada is composed of six different sectors, these sectors being office buildings, industrial, retail, multifamily, land and miscellaneous. The strongest sector in Canada is currently the retail industry. In 2013, Loblaws and Canadian both released IPOs. These IPOs were only small floats of around 15%, while the parent corporation held onto 85% of its real estate. This was a way for these companies to monotize their assets in order to bring in additional capital that they could re-invest into core businesses. These IPOs gave investors in the retail market a wider variety of options to choose from when it comes to choosing an investment. Vacancy rates for commercial properties are also quite low and the only worry down the road for this sector is how point-of-sale retailing will change over the next 10 years. The biggest driver of growth for the retail sector was portfolio transactions. The largest of these transactions was the H&R Real Estate Investment Trust (or REIT) acquiring Primaris REIT, which was valued at approximately CA $3.1 billion. Other noteable transactions were KingSett Capitals acquisition of a Primaris portfolio valued at CA $1.9 billion as well as RioCan and the Ontario Pension board taking full or partial control in a series of Primaris assets.
The office building market has performed poorly in 2013 from an absorption perspective. The economy is quite flat at the moment and new construction in downtown areas has yet to be available to the market. As a result of the lack of availability for prime office real estate in downtown areas, companies are choosing to look elsewhere for office space. As a result of this, the absorption rates in suburbs have actually been decreasing over the past couple years while the absorption rate in downtown areas have increased dramatically. (Graph 2, Absorption rates) On a per capita basis, there has been more office space development in the west than in the east and this has mostly just followed the trend of job growth. (Graph 3, Construction follows jobs and shifts west)The two cities in Canada with the highest forecast for office space development are Calgary and Toronto. These two markets also have the highest GDP growth and job growth potential.
There is also the industrial sector, which has been remarkably well controlled over the past few years, staying within 25-50 BEPs of the 10 year average. There has been more industrial development in the west than in the east, but again this is just based around the fact that the job markets in the west are growing faster than in the east. Edmonton has been one location that has been on fire industrially in the past year and the latter, along with Calgary are both cost push markets in terms of labor and land. Toronto and Montreal are not cost push markets and the average lease costs are approximately half of what they are in Calgary and Edmonton. Ecommerce is the driving force of construction in this sector.
Paragraph 2: Who
There are three major stakeholders in the Canadian commercial real estate market, these being developers, private investors and larger institutions. An evolving trend in commercial real estate is high levels of construction, especially in western Canada where the demand for well located, class A real estate well exceeds the supply. Forecasted construction for both the industrial and office building sectors is almost double in the west what it is in the east. (Graph 4, consutrction activity resuming) More speculative development is forecasted because “there is a lot of capital that wants to get into the real estate market, and it cant find what it wants. So it’s more likely to build it and take the leasing risks” (David Bowden, CEO of Canadian operations of Colliers International).
Investments into REITs is becoming an increasingly popular investment option among individuals as “REITs have outperformed the
