North American real estate markets soared throughout 2021, fueled in large part by monetary and fiscal stimulus from governments in relation to the pandemic. Other factors that increased demand across all asset classes included pent-up consumer demand, migration, a return to pre-pandemic immigration levels (particularly in Canada), vaccination levels that allowed for re-opening across states and provinces (albeit at very different paces and in some areas temporarily), and economic growth.
Overall sector stabilization
Overall, investment performance was strong in 2021, particularly for industrial and multi-family residential rental properties across North America. With these asset classes now priced at a premium and office and retail vacancy levels beginning to stabilize, as restrictions ease across the U.S. and Canada, there has been a return in investor demand for office and retail. In Q4, rental prices for office space pushed upwards. We expect this trend to continue in 2022, as the economic picture continues to improve, and tenants return to office.
It is expected that multi-family and industrial properties will continue to outperform office and retail in 2022, however, the demand delta between the two different sets of asset classes should narrow. Improved investor confidence is evident, as private investors moved off the sidelines last year, boosting year-to-date (through September 2021) commercial real estate investment volume by about 12% above the 2019 levels. According to CRBE’s Canadian Investment Overview, multi-family and industrial sectors were most active in 2021 with investment volumes of $4.4. billion.
We are not seeing any slow-down in the residential real estate markets in North America. We are seeing people return to city living and in-office work schedules but are not necessarily from where they left from.
Migration during the pandemic accelerated trends, especially in the U.S., to warmer climates that offer business friendly environments and low taxation. The states where Trez Capital is active, including, but not limited to; Texas, Arizona, Colorado, Utah, Florida, South Carolina and Georgia, make up 68.5% of net projected U.S. population growth from 2021 to 2026.
In Canada, a combination of increased immigration, which saw 401,000 new permanent residents in 2021 (surpassing the 1913 record as reported by the Government of Canada), and work-from-home flexibility, fueled strong residential demand in both primary urban centres and secondary markets. Immigration will continue to support demand with 411,000 and 421,000 immigrants expected in 2022 and 2023, respectively.
2022 will be another strong year for housing across Canada based on 2021 performance that saw housing markets across the country outperform historic investment levels. Toronto, Montreal and Vancouver saw investment volumes of $7 billion, $2.8 billion and $2.6 billion – record-setting totals.
Recently, Trez Capital provided a $48 million construction loan for a condominium development in midtown Toronto. The loan supports the construction of a four-storey building totalling more than 57,000 square feet, with 36 units.
Trez Capital also provided a $38 million revolving line for the acquisition, renovation and stabilization of duplex, triplex, quadplex and townhome units in various municipalities in Southern Ontario, creating much-needed rental stock. The two loans highlight Trez Capital’s strategic approach to developments in Eastern Canada, of targeting both primary and secondary markets experiencing strong population growth.
Similarly, certain smaller markets such as Victoria, B.C. experienced a disproportionate rise in rental prices (Victoria may now be the country’s most expensive city to rent in according to liv.rent). This is likely tied to the pandemic and the ability to work remotely. Provincially, Alberta and Saskatchewan are projected to lead the country in economic growth in 2022, and Trez Capital expects to be active in all these markets.
Operating out of our Vancouver and Toronto offices, the veteran loan origination team at Trez Capital is well-positioned to serve the Canadian market. The team, combined, has over 90 years of experience in lending, banking and commercial real estate.
Commercial real estate outlook
Growing communities rely on different types of commercial real estate classes. Sectors that will continue to see growth in 2022 include storage, retail (for goods and services), hotel and industrial. In the fall of 2021 unemployment had rebounded to near pre-pandemic levels showing positive signs that as restrictions ease, the economy will respond and demand for commercial real estate space will rise.
We continue to see projects in planning and land acquisition stages and expect demand for industrial and logistics to become stronger. Overall, our team looks for projects across asset classes with strong fundamentals and borrowers with consistent track records to deliver best-in-class projects.
It is expected that the Bank of Canada will raise interest rates in the first half of 2022 to cool inflationary pressure, though, lingering pandemic restrictions may factor into the timing and quantum of the increase(s). The Bank of England and National Australia Bank increased rates in December 2021, an indicator of what lies ahead for Canada. Developers will need to stress-test their proformas and financing cost assumptions for the year ahead, though increased revenue (whether upward pressure on rental rates or higher sales prices) should offset a portion of the financing costs with cap rates expected to remain stable in most markets.
Meeting market demands
The Canadian economy is predicted to bounce back in 2022, giving a much-needed correction to the effects from the pandemic. The team continues to look for projects with strong fundamentals.
Trez Capital has surpassed $4 billion in assets under management and has funded over 1,600 transactions totalling more than $13.5 billion CAD since inception. Approximately half of the loans since 2009 have been to repeat borrowers and Trez Capital’s first borrower and first investor still do business with us today.
For more information, please contact:
Eric Horie, Senior Managing Director, Head of Origination, Canada