Understanding shifting demand in Canadian commercial real estate market

KEY DRIVERS AND TRENDS

Population Growth and Housing Shortage

Canada's population reached 40.8 million by January 2024, with over 1.2 million net international migrations in 2023. This surge has exacerbated the existing housing shortage, prompting builders and developers to focus on multi-family construction and purpose-built rentals.

The Canada Mortgage and Housing Corporation (CMHC) has incentivized this shift with programs offering low-interest rates, favourable terms, and 50-year amortization periods, creating a conducive environment for residential construction even in a high-interest rate scenario.

Multi-family Construction

Purpose-built rentals dominate the construction landscape in major urban centers. This trend is driven by the federal government's removal of GST on new residential builds and the CMHC's Apartment Loan Program.

Markets like Vancouver, Calgary, Regina, Winnipeg, London, Ottawa, and Halifax have particularly low vacancy rates (below 1.8 per cent), indicating high demand for rental housing.

High-density and Mixed-use Development

Limited land availability and continued population growth in urban areas have led many mall and shopping center landlords to integrate residential components, creating mixed-use developments.

This approach is not only a response to the housing crisis but also a strategic move to increase property value and utility.

Capital Gains Tax Impact

Smaller investors are feeling the strain of an increased capital gains tax inclusion rate from 50 per cent to just over 66 per cent, as announced in the 2024 Budget. This has led some to pull back on selling properties, affecting market dynamics.

Industrial Real Estate

Industrial real estate remains in high demand, with tight inventory in markets like Hamilton, Halton to Niagara, Newfoundland and Labrador, and Halifax. Despite increased availability due to new space, demand continues to outpace supply.

Businesses are considering properties on city outskirts for affordability and in areas like Vancouver, where industrial land is scarce, looking to Alberta or the US for alternatives.

Bricks and Mortar Retail

Traditional retail spaces still hold appeal, particularly in neighbourhood settings where service-related businesses (health and wellness, medical offices) are thriving.

Malls are evolving to better tenant mixes and incorporating new uses such as daycare facilities to adapt to changing demographics and needs.

Luxury Retail Brands

High-end brands are expanding in major markets like Toronto's Yorkville, the Bloor Street 'Mink Mile,' and Vancouver's Alberni Corridor, maintaining robust demand for premium retail space.

Farmland

Farmland, especially in Saskatchewan, is performing exceptionally well due to record commodity prices and large-scale purchases by farming corporations. The FCC Farmland Values Report noted a 15.7 per cent increase in price per acre in 2023, with even higher gains in certain regions.

Hospitality Industry

The hospitality sector has rebounded strongly, with significant growth in room rates and new hotel developments, particularly in Halifax. This resurgence is attracting interprovincial investors to hotel properties.

Real Estate Investment Trusts (REITs)

REITs are adjusting their portfolios, leading to divestments of older assets and acquisitions of newer properties, particularly in office and retail segments.

Adaptive Reuse

Adaptive reuse of commercial buildings is gaining traction, with cities like Calgary, Winnipeg, and Halifax leading in converting office spaces to residential uses. This trend addresses both office space surplus and housing shortages.

Vendor Take-back Financing

Elevated interest rates have impacted land development, but vendor take-back financing is helping close deals, particularly in markets like the Greater Toronto Area and Halifax.