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Hamilton in 2022: Interest rates cooled a blistering CRE market

The year 2022 was a tale of two markets for Hamilton’s commercial real estate sector.

With $1.95 billion trading, 2022 was Hamilton’s fifth consecutive record year for dollar volume, but Q4 2022 was the region's weakest since 2016. The main culprit was, of course, interest rates.

The impact of rising interest rates on the 2022 CRE market cannot be overstated.

The Bank of Canada has consistently stated it will increase rates to squash pesky inflation. With the BoC's key overnight lending rate starting with 0.25 per cent in February 2022 and escalating to 4.25 per cent in December, the effect was felt most prominently in Q4.

After approximately 2.5 years of quantitative easing and extremely low interest rates to stimulate the economy, the commercial real estate market had been in overdrive for an extended period of time. 

Phenomenal start for CRE in 2022

2022, for the first six months or so, was phenomenal. We witnessed Hamilton’s largest CRE deal on record, with Stelco selling its 809-acre land parcel along Lake Ontario to Slate Asset Management for a whopping $518 million.

It ended up as the third-largest CRE transaction in the GTHA during 2022. Slate offered, in a statement, its desire to develop this investment into a world-class industrial park projected to create 23,000 jobs and $3.8 billion for the economy.

Coincidentally, Hamilton’s second-largest purchase in 2022 was also industrial land, as IKEA Properties purchased 65 acres on the Hamilton Mountain for $82 million. The purchase was reported to be a site for IKEA’s future fulfillment centre.

Today, however, with interest rates 425 basis points higher than 12 months ago, cap rates have risen. This in turn has lowered the values seen during the previous two-and-a-half years of low rates.

The BoC predominantly raised the policy rate during the middle of 2022.

Interest rates rise, activity declines

Between April and July the policy rate increased by 2.25 per cent. Hence the Q4 impact and what’s being projected by most economists for the majority of 2023 - it's going to be a slow year with price-discovery now taking effect.

It appears the City of Hamilton also followed a similar trajectory as it hit the $1-billion mark in building permit values in the shortest time ever, on June 17.

The city had also broken the record in 2021 and eventually exceeded $2 billion. For 2022, Hamilton’s pace slowed near the end of the year and topped out at $1.85 billion.

That's still a fantastic amount, but not reaching its perceived full potential.

Hamilton also fell in line with another 2022 defining trend - a hot start and cold finish that affected all asset classes.

In the multiresidential sector, Hamilton tends to experience about four to six transactions per month. During Q4 2022, Hamilton witnessed two multiresidential transactions.

Multiresidential, arguably the strongest asset class, traditionally holds the lowest cap rates, so much so that some buyers are willing to operate under a negative yield during the first few years of ownership.

Rising cap rates appear to have cooled that segment, even though we’re continuing to see rental rate appreciation, with would-be home buyers pivoting to the rental market.  

Retail holds its own, sees a new trend

Retail, an asset class deemed radioactive during the heart of the lockdown measures, experienced a nice bounce-back in 2022. Multiple small- to medium-size plazas traded for decent values, which is a marked improvement over 2020 and 2021.

During those periods, retail was hardly trading at all.

Also in 2022, Hamilton’s largest retail assets began to see reductions in pure retail exposure with the incorporation of mixed-use elements.

Eastgate Square, the city's largest CRE purchase of 2021, is being prepared for a 5,100-unit residential development across 10 development blocks.

Up the road at 200 Centennial Pkwy. N., Smart Living revealed plans for four towers containing 1,150 units.

On Hamilton Mountain, Cadillac Fairview announced a variety of plans including two 12-storey towers containing 320 units and most recently, the build-out and accommodation of Tesla's largest retail and service centre in Canada.

Another new trend in residential land sector

The residential land sector saw a new trend develop near the end of 2022.

Broadly, high-density land in Hamilton trades for $20-30 per buildable square foot, with some properties transacting lower and some recent examples hitting $40 per buildable square foot.

More recently, Hamilton witnessed three transactions sell for much more than the norm, at over $100 per buildable square foot.

The common thread between all three is at the time of sale there were various approvals (site plan, building permit, zoning by-law etc.) in place.

I'll need to take note of other similar transactions to comfortably label the cause of the high purchase prices, but other large markets, such as Toronto, witnessed similar transactions.

Overall, it could be a sign for Hamilton that the residential land market is beginning to mature as more and more developments take shape every year.

Thus far in 2023, the policy rate sits at 4.5 per cent and inflation is steadily falling, but the economy surprisingly continues to remain strong.

This has led many to predict the high-policy-rate environment will persist for the remainder of the year and potentially the beginning of 2024.

In the short term, transactions are sure to slow, especially compared to the hyper activity of the past two-and-a-half years, as a period of price discovery occurs due to the increasing cap rates.

As we move forward, it’ll be interesting to see if sellers are willing or able to hold onto assets into 2024, when rate cuts are projected to begin, in order to recoup some value. And if not, what opportunities become available as a result.

Hamilton and most, if not all, markets in Canada, will now witness a correction period.

Thankfully, Hamilton witnessed incredible momentum even before the pandemic, which has provided a fantastic foundation from which to fully rally and move forward.

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