Resilience and transformation: Canada’s commercial sector post-pandemic

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In the aftermath of the pandemic, Canada’s commercial real estate market has undergone significant shifts and adaptations. The Re/Max 2023 Commercial Property Report reveals a landscape characterized by resilience and transformation across various sectors. 

From the booming industrial real estate to the repurposing of office spaces and the surprising strength of retail, the report analyzed 12 major commercial real estate markets across the country, revealing several key trends that Re/Max says offer promising signs for recovery and growth. 

“Several markets, including Edmonton, Calgary, Regina and Saskatoon, experienced strong activity in the first quarter of the year, despite challenging market conditions,” says Christopher Alexander, president of Re/Max Canada. 

“A shortage of available inventory across various asset classes continues to place upward pressure on commercial values and lease rates, especially within the industrial sector. Prices remain buoyant as a result, with further escalation anticipated as momentum improves heading into the latter half of the year.” 

Industrial real estate: A stellar performer 

 

Industrial real estate emerges as the standout performer in the Canadian market. With strong sales and lease activity across all markets, the sector continues to outperform other asset classes. Investors and end users in British Columbia and Ontario are expanding their search perimeter to neighbouring provinces, seeking distribution and warehousing facilities with more affordable pricing. 

The demand has spilled over to markets such as Edmonton, Calgary, Regina, Saskatoon, London-St. Thomas, Halifax, and St. John’s, driving sales despite softening demand from peak levels in 2022 and leading to “extraordinarily low” inventory levels. 

Land Sales and approvals: Navigating red tape and encouraging development

 

Land sales remain solid despite challenges posed by higher interest rates and construction costs. Acreage zoned for industrial, multi-family, and retail use is particularly sought-after in major Canadian centers. However, the lengthy approval process and red tape hinder new construction. 

“Population and GDP growth will continue to be a strong driver bolstering urban expansion in cities across the country,” says Elton Ash, executive vice president of Re/Max Canada. 

“Naturally, a growing population base attracts new business and services, and we are seeing that translate into solid demand for most types of commercial real estate across the board. We need partners in our city planning offices to streamline the applications and approvals process in a timely manner — months, not years — to bring these properties to market.” 

Vendor take-back mortgages have also re-emerged in several markets as sellers work with buyers to close the deal. 

In Re/Max Canada’s analysis of closed transactions in the Greater Toronto Area in the first quarter (Q1) 2023, for example, the number of vendor take-back mortgages (VTBs) as a percentage of total sales over $2 million rose substantially over year-ago levels, climbing to 9.55 per cent, up from 5.82 per cent in Q1 2022, with VTBs now representing almost one in 10 transactions.

 

Retail’s resilience: Bricks and mortar defy online sales growth

 

Contrary to expectations driven by the growth of online sales, the retail sector continues to exhibit surprising resilience. The report reveals solid activity in retail nodes and shopping centers across 11 of the 12 markets analyzed. 

Consumers are gravitating back to physical stores, driving investment into major shopping malls and supporting the bricks-and-mortar experience. Additionally, the integration of residential applications on commercially zoned property further enhances the retail landscape and fosters a live-work-shop phenomenon.

 

Challenges and transformation in the office sector

 

The office sector faces considerable challenges as employers navigate hybrid work models, resulting in reduced demand for physical space in downtown cores. Some companies are downsizing to cut costs, while others seek to incentivize employees with social workplace environments. 

Amid these changes, a significant trend is emerging: the repurposing of Class B and C buildings into residential units. While the report notes that not all buildings are suitable for retrofitting, several major Canadian centers are actively promoting conversion projects to breathe new life into downtown cores and address the critical housing shortage.

Calgary, for instance, introduced the Downtown Calgary Development Incentive Plan, which provides a $75-per-square-foot subsidy to developers for converting offices into residential units. With 10 buildings already approved for conversion, this initiative will create over 1,200 new homes and eliminate approximately one million square feet of commercial office space. Similar conversion projects are also underway in Halifax, Ottawa, London, Toronto, and Winnipeg.

“Commercial office markets are experiencing a transformational shift in the aftermath of the pandemic,” says Alexander. “Downtown cores were virtually decimated by Covid restrictions and have yet to come back to life in many Canadian centres. The conversion programs now underway ensure that our city centres remain vibrant in the future, restoring vital foot traffic that is the lifeblood of the country’s core urban areas. 

“The retrofit and renovation activity not only brings desperately needed residential product online, but it also supports the surrounding retail shops and restaurants, transit systems, and the overall health of our downtown neighbourhoods.” 

 

Outlook and government action 

 

The Re/Max report highlights positive indicators that underscore ongoing commercial activity in Canada. Renewed demand for housing has sparked the interest of builders and developers, with projects that were on hold in 2022 making a comeback. 

“The momentum is building, with some pent-up demand evident. The fundamentals underpinning the market squarely supporting ongoing commercial activity in the year ahead,” Alexander explains. 

For the full report, including a market-by-market overview, click here.

 

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