As we enter 2023, we’re operating in a drastically different financial environment than 2022. With upcoming challenges ahead in the commercial real estate world, it’ll be interesting to observe where future opportunities may lie.
Despite ever-increasing interest rates over the past several months, industrial and multiresidential assets are continually in demand in Hamilton.
The former is witnessing vacancy rates at one per cent and the latter claims the lowest capitalization rates across Canada compared to other asset classes.
In conjunction with this, Hamilton continues to witness unfettered demand for land that can accommodate industrial, low- and high-density residential and student housing development.
In the past four months there have been a few transactions that potentially reveal Hamilton’s high-density development market is beginning to mature and a new subclass is emerging: land with approvals.
It’s important to remember Hamilton only recently has begun to foster and witness a burgeoning high-density development environment, with most projects being constructed downtown.
Recent high-density development history
Some of the earliest land purchases occurred in 2015, when 15 Queen St. S. was purchased for $4 million per acre – or an affordable $5 per buildable square foot (PBSF). 15 Queen St. S. is now home to the nearly complete 24-storey Platinum Condos.
To clarify, PBSF is a calculation that divides asset value (or purchase price) by the gross buildable area (GBA) of the potential development. When analyzing land transaction values, PBSF is a more accurate metric than per acre, as it quantifies the anticipated development.
However, per acre is a decent metric to roughly gauge value, especially when GBA is not known.
In 2015, only a handful of high-density residential land transactions occurred in Hamilton.
Since 2019, high-density land which can accommodate heights of up to 30 storeys (the approximate height limit for Hamilton’s Downtown Secondary Plan), has seen transaction values of $9 million to $12 million per acre or $25-30 PBSF.
The most recent transactions are pushing nearly $14 million per acre or $40 PBSF.
Since 2018, more transactions are occurring, involving more experienced buyers.
This, along with higher interest rates, construction costs and, presumably, future increased demand with the federal government aiming to accept a record 500,000 immigrants per year, could explain the recent increase in value.
Anomalies in development land transactions
However, a few recent transactions do not fit within the market environment we’ve begun to expect.
In particular, the sale of 98 James St. S., a.k.a. The Connolly site. The site of the former James Street Baptist Church has had a tumultuous history as it was controversially demolished in 2014 by developer Louie Santaguida for a planned 30-storey condo, dubbed The Connolly.
In 2018, that site was sold under receivership to Hue Developments for $8.5 million – or $26.5 million per acre.
This specific example also highlights the merits of using PBSF, as Altus reports this same transaction had a PBSF of $40 – high for Hamilton at the time, but not egregious.
The per-acre figure is over twice the average value.
In September 2022, an unidentified consortium purchased the site for $24 million – or $75 million per acre.
It was reported by the Hamilton Spectator at the time that the buyer “will keep the development plans” and “city approved heritage and building permits will be transferred to the new owners.“
Assuming the information from Altus and the Spectator is correct, that would equal a PBSF value of $113 - about five times more than market per-acre value, and almost triple the market PBSF value.
That is an incredibly high value which appears to be based on the in-place approvals.
Now that Hamilton has almost 10 years of increased high-density residential development, it appears the city is beginning to witness a new subclass of land with approvals.
This is something more developed markets, such as Toronto, currently have.
Approvals mean higher land values
As an example, Bullpen Research and Marketing does a fantastic job of analysing GTA high-density land transactions.
Usually every quarterly report includes a “pre-zoning application” PBSF value and a “zoning approved” PBSF value, which usually indicates a higher value for the zoning-approved transactions.
It makes sense as fewer resources are required to develop land with zoning approvals.
More examples are starting to appear in Hamilton. 15 Cannon St. W., a partially constructed six-storey development, was sold under receivership for $8 million or $50 million per acre in October.
Details on conditions associated with sale and GBA are unknown, which doesn’t provide an accurate PBSF, but leads to an assumption of higher-than-typical value associated with approvals.
This is based on the massive per-acre value and a roughly estimated PBSF of over $200 based on what’s currently constructed.
In December, 282 MacNab St. N., a proposed 10-storey development site adjacent to the Hamilton West Harbour GO Station, sold for $6.5 million or $20.3 million per acre.
The GBA has been cited as approximately 75,300 square feet, which provides a PBSF of $86.
According to the Spectator in late 2020, the city's planning committee has provided approval. In early 2022, a development application was filed.
As high-density projects have had time to undergo the various land entitlement processes, it’s becoming apparent there’s a market for “ready-to-go” high-density residential land in Hamilton.
2023 is forecast to be a potentially tame year for commercial real estate in Canada, but Hamilton has a bright future due to the progression of its residential development market.
Interested in learning more about the Hamilton market? Please join me in Hamilton on Jan. 25 for the Forge & Foster Hamilton Commercial Real Estate Year-end Report, to learn about how Hamilton performed in 2022, other trends we’re seeing and what lies ahead for 2023.