Canada's commercial real estate sector is poised for recovery and growth in 2022: Morguard

Morguard Corporation has released its 2022 Canadian Economic Outlook and Market Fundamentals Report, providing a detailed analysis of the 2021 Canadian real estate market as well as trends to watch for in 2022. Morguard's 24th annual edition revealed that investment performance remained strong in 2021 for industrial and multi-suite residential rental properties. Office and retail showed signs of stabilization due to efforts to reduce the spread of COVID-19 and the subsequent easing of some restrictions. For 2022, Morguard forecasts increased investor activity following the anticipated post-pandemic full economic reopening. The full report with regional insights and video is available at morguard.com/research.

"Multi-suite residential rental and industrial properties are anticipated to continue outperforming when compared to office and retail assets," said Keith Reading, Director, Research at Morguard. "As the economic picture improves in 2022, investors will broaden their investment horizons in 2022 by looking to increasingly acquire office and retail assets."

Multi-Suite Residential Real Estate

Decreased levels of immigration and post-secondary students entering the country throughout 2021 contributed to reduced demand in the multi-suite residential segment. The national vacancy rate rose 1.0 per cent year-over-year in October 2021 to a four-year high of 3.2 per cent, with more pronounced vacancy in the country's larger metropolitan areas. Despite the overall softening, investment demand surpassed supply as the segment's sustained strength retained investors' interest. With the reopening of Canada's borders and continued job growth, rental demand is forecast to gradually grow in 2022 and remain one of the preferred targets for investors.

Commercial Real Estate

Investment activity in the office segment in 2021 was relatively muted given the uncertainty of when pandemic restrictions would lift. A total of $1.9 billion in office property sales was reported in the first half of 2021, down 37 per cent year-over-year from $3.0 billion reported in the same period in 2020. During 2022, most tenants are expected to welcome their employees back to their physical office space after a prolonged absence. Subsequently, tenants will begin to make decisions related to their longer-term leasing requirements. In turn, activity levels and market conditions will stabilize. Investor confidence will increase with the strengthening of the sectors leasing fundamentals, bringing a sense of certainty to the segment.

Industrial assets had record-low inventory levels across Canada in 2021. The national industrial availability rate reported a low of 2.3 per cent at the end of the first half of 2021 with even lower rates in Vancouver, Toronto, and Montreal. Warehouses, logistics and e-commerce businesses continued expanding at a relatively rapid rate, continuing the trend seen since mid-2020. As leasing demand continues to outpace supply, tenants may have difficulty finding available industrial space in 2022 despite an anticipated pickup in construction activity. The strong leasing outlook will continue to attract investment capital to the sector, resulting in record or near-record high transaction closing volume in the coming year.

Continued restrictions for in-person shopping contributed to the retail segment's reduced activity in 2021. Short-term lease renewals and government aid supported Canadian retail operations throughout the course of the year. Despite the support, extended lockdowns contributed to declines in landlord and retailer revenues, and, in some cases, forced independently owned stores to close permanently. Retail sector performance patterns will improve in 2022, with the loosening of pandemic restrictions and the return of shoppers to retail centers. With a more confident outlook, assets with necessities-based tenants will remain a prime target of investors. Leasing market conditions are forecast to stabilize in the second half of 2022, after an initial adjustment period.

Economic Factors

Canada's economy is expected to continue to bounce back from the pandemic-driven correction in 2022, with output rising between 4.0 per cent and 5.0 per cent on an annualized basis. The services sector will be a key driver of growth in the coming year, following proportionately stronger expansion in the goods production sector in the earlier stages of the pandemic. Growth will continue at a more moderate rate in 2023, given the winding down of government support programs and monetary policy tightening.

In 2022, Canada's labour market will strengthen, driven by the largely positive economic growth trend. By the fall of 2021, the unprecedented job losses due to the pandemic had been recouped, which drove the national unemployment rate down closer to the pre-pandemic level.

Retail consumption and housing market activity will support economic growth in 2022, in support of largely positive commercial real estate sector performance trends.

The 2022 Canadian Economic Outlook and Market Fundamentals Report is a detailed analysis of the 2022 real estate investment trends to watch in Canada. The full report, including analysis for the real estate markets in Halifax, Montreal, Ottawa, Toronto, Winnipeg, Regina, Saskatoon, Calgary, Edmonton, Vancouver and Victoria, is available at morguard.com/research.

Key takeaways

• Multi-suite residential rental fundamentals will gradually strengthen during 2022, as demand is bolstered by increased immigration and loosening of pandemic restrictions
• Office property investment activity remained relatively muted over the recent past, due primarily to the sector's somewhat uncertain outlook.
• Industrial real estate is predicted to continue outperforming in 2022, keeping with the trend of near record-low availability rates over the past few years
• Retail property sector fundamentals are expected to gradually stabilize over the near term