Ray Wong, vice-president of data operations for Altus Group’s data solutions division. (Courtesy Altus)

Commercial real estate investment in Canada is experiencing a major resurgence in confidence, with an Altus Group report chronicling $23.8 billion in Q1 transaction activity.

The real estate analytics and research company said that figure, transacted across all major asset classes in Canada during Q1 2022, is a 52 per cent hike from Q1 2021. Deal volume was up across all major asset classes with the exception of hotel transactions.

Just over 3,250 transactions were completed in the first quarter of 2022, a 25 per cent increase compared with the same period of 2021.

“The Canadian commercial real estate industry demonstrated resiliency throughout 2021, investment activity kicked off 2022 with an upswing in momentum,” the report states. “All asset classes reported an increase in activity (with the exception of hotels) accompanied by a return in investor confidence, the market was also subjected to heightened investor scrutiny.

“This closer analysis can be attributed to rising interest rates, volatility catalyzed by the pandemic, and the impacts of the current geopolitical climate.

“The most active asset classes in the first quarter of 2022 involved transactions of industrial and office assets as well as both ICI and residential land. A combination of excitement and tentativeness characterized 2022 with a note of cautious optimism and anticipation of growth in Canada’s commercial real estate space.”

Confidence in Canada’s CRE market

Raymond Wong, vice-president of data operations for Altus’ data solutions division, said overall there is a fair degree of positive confidence in investment in the CRE market.

“We can see that with the first-quarter results and granted, also realize that a lot of the first-quarter activity was based on overflow from 2021,” said Wong. “Then we got hit with the Ukraine war, we got hit with higher interest rates.

“So now the numbers have changed to a certain extent. Construction costs are now higher. The cost to borrow is a little bit higher and real estate is still performing quite well on the industrial and multifamily side, but I think now we’re looking at more scrutinization of those numbers.”

He said there are a number of potential questions in play.

“What are the expectations on returns, as well what are the expectations between the purchasers and vendors?” Wong explained. “Has that changed? And, whether or not that may cause a bit of a pause in the marketplace as people get caught up with the new numbers, as well as where we’re going with inflation and employment activity and the question of a possible recession.”

Andrew Petrozzi, director, commercial research, Western Canada, for Altus Group. (Courtesy Altus)

Andrew Petrozzi, director, commercial research, Western Canada, for Altus Group, said the market has seen and continues to see, a strong demand for land, particularly in Vancouver, and an increasing demand for land in Alberta.

“Industrial remains a very strong asset class, both in the West, in both Alberta and B.C., particularly you are seeing increased demand for industrial in Calgary and industrial in Vancouver remains red hot as well. In Edmonton you’re actually starting to see an increase in demand, particularly around the multifamily side,” he said.

“You’re seeing a recovery of sorts in Alberta. Part of that is fuelled by probably some of the conflict obviously in Eastern Europe. Higher energy prices do translate generally to a more positive outlook for Alberta and when people have a positive outlook for Alberta that increases confidence and we have seen that confidence reflected in the early part of the year and certainly in late 2021 and into 2022 as well.”

Office sector investment doubles

According to the Altus data, the office sector was quite active with just over $3 billion in sales activity – almost double the investment volume registered in Q1 2021 – securing its place as the asset class with the strongest growth year-over-year in dollars invested.

With 245 transactions conducted in Q1 2022 accompanied by people beginning to go back into the office, investment in the office sector is resurgent.

This resumption in activity was also a reflection of negotiations that were paused in the second half of 2021 now coming to fruition, according to the report.

“The industrial sector recorded the highest investment volume in terms of both dollars and the number of transactions. In the first quarter of 2022, the industrial asset class saw 735 transactions valued at slightly less than $5.8 billion, a 66 per cent increase when compared with Q1 2021,” said the report.

“The land sector remained very active in the first quarter of 2022 registering 643 ICI land sales and 553 residential land deals, a 26 per cent and 30 per cent increase in the number of transactions, respectively, from the same period in 2021.

“Land transactions represented more than $8.9 billion in investment volume, an increase of more than 110 per cent compared with the same period last year, which totalled 36 per cent of all transactions across all of the asset classes to the end of the first quarter of 2022.”

“Investment in the retail and apartment sectors also continued to demonstrate growth, reporting a 24 per cent and five per cent increase in the transactions completed, respectively, year-over-year.

“The national investment in retail properties grew 55 per cent and was valued at $2.6 billion in the first quarter of 2022; more than $3.1 billion – an eight per cent increase compared with a year earlier – was invested in the Canadian apartment sector.”

Nationwide interest in land

Wong said the nationwide interest in land is positive.

“That shows that there is overall confidence going forward and a lot of the owners and developers are banking on future growth and the need for housing. Industrial has always been the sort of silent (asset class) but every year it produces good returns.

“With the pandemic it just accelerated that demand and to a certain extent Canada is still under-warehoused, especially compared to the U.S.,” said Wong.

“So you have a very good increase in rents especially for the last seven years – 10 to 20 per cent depending on the building. We have very strong returns and you always had an active market both from the user standpoint as well as from the investment standpoint.

“Over the last couple of years, we’ve had a stronger increase in demand from investors, driving up the price, and I think that’s caused some of the users to step back a little bit. There’s been very strong investment activity from institutions as well as private investors coming into the industrial side.”

Wong added that the office sector has come back. It has been a bit of a grey area recently with more people working remotely on a regular basis, or the adoption by some companies of hybrid work models.

“The good news is that for office there’s still a certain level of confidence with the number of people that have stepped up. . . . Yes, residential and industrial is getting a lot of that attention, but office is not dead yet,” he said.

“I think we can still see an evolution and by the level of investment activity, there are buyers for the office assets.”

Petrozzi said land is severely constrained in B.C. both for industrial and residential real estate.

“Land has always demanded a bit of a greater premium in British Columbia as a result of our geographical and political boundary constraints,” he said. “As a result, that supply has continued to tighten which is another modifying factor adding on to this increased demand. . . .

“That’s one of the reasons you’re seeing a kind of rush for land – try to get it while you can.”

Toronto, Vancouver, Montreal top markets

According to Altus Group’s Investment Trends Survey for the first quarter of 2022, the most preferred markets by investors were Toronto and Vancouver, followed closely by Montreal. All three markets reported an upswing in their momentum ratio, which calculates the percentage of buyers over the percentage of sellers.

Food-anchored retail strips, suburban multiple-unit residential and industrial land were the Top-3 most preferred products by investors.

This is consistent with similar trends noted in 2020 and 2021 that can be attributed to the essential nature of the assets as well as the flexibility these property types offer with potential for redevelopment in a time of constantly evolving consumer needs.

“National overall capitalization rates continued to compress across all major asset classes in the first quarter of 2022 with the exception of industrial assets. This may be driven by the rise in interest rates and the related impact on consumer spending, thereby reducing demand for manufacturing/distribution facilities,” the report states.

“However, the impact of rising interest rates is expected to be minimal in the first half of 2022 as transactions were negotiated prior to the change in interest rates, but will become more apparent in the second half of the year. Industrial assets will continue to remain a favourite with investors as supply lags absorption.”

“As investment in all asset classes (except hotels) registered strong performance in the first quarter of 2022, the Canadian commercial real estate industry appears poised for continued growth through the year with some caveats.

“Interest rate hikes, combined with the ongoing impact of a volatile geopolitical environment and the lingering aftermath of pandemic containment measures, will become more apparent as the year progresses and may constrain select investment activity.”