Canadian development land sales peaked at around $30 billion in 2022, dropped to $16.5 billion in 2023 and are on pace for about $10 billion this year.

“It’s a tremendous decline, but it follows the trends for other kinds of commercial real estate investments not just in Canada, but worldwide,” said Jim Costello, MSCI head of real estate economics and MSCI Real Estate chief economist, as he moderated a panel on land availability and values at the May 28 Land & Development conference in Toronto.

“We had this incredibly low interest rate environment where people were buying things, and then it all fell back. So far, there's nothing really showing a big turnaround.”

There hasn’t been major downward land repricing yet, however, because owners and developers see future opportunities coinciding with Canada’s population growth and they don’t want to take a loss in the face of that potential.

“When I started in the development business, my original mentor used to say, ‘The fastest way to go broke is to put debt on land because if interest rates go up you're done,’ ” said Avison Young principal and president of global investment management Amy Erixon.

“Land is the flexibility in your pro forma. Construction costs just don't move that much and they certainly don't normally move down.”

More creative planning is needed

Erixon hopes slumping land and condominium sales act as a wake-up call for governments and planners to speed up the development process.

“This is probably the most exciting and challenging time to be a planner,” said Erixon. “The challenge is how to think more creatively. How do you densify retail? How do you take care of parking lots at schools? How do we get more sites? How do we make those sites available? 

“Should governments be leasing land for zero and then have some hope built on the back end in terms of under-utilized assets? 

“It's a time to get creative and I'm really optimistic that there's going to be a renaissance economy in Canada, which there has to be.”

Optimism in Montreal

“Since the ‘80s we’ve had political issues and language issues that may have stunted the development of Montreal, but that has put us in a nice position right now to be able to go for carbon neutrality by 2050 and be able to densify,” said Thierry Samlal, executive vice-president of Montreal-based commercial real estate services firm PMML.

There are 45 major buildings under construction in Montreal and 36 on standby even in the current uncertain economic environment. Thirty of the buildings to be built in the short term are between 23 and 63 storeys, so Quebec’s largest city is providing some good news at a time when there isn’t a lot of it.

Several transit-oriented development sites across the Island of Montreal will increase in density in coming years, particularly in eastern Montreal, according to Samlal.

Family-owned businesses are also looking to sell small industrial properties that can be rezoned for multifamily properties in the future. 

Differences between Vancouver and Alberta

A significant number of foreclosures are occurring in Vancouver due to investors from outside the city who were very aggressive and became overleveraged when buying land a few years ago. They didn’t have local expertise and are now struggling to salvage their sites.

“You can buy it for 50 cents on the dollar, but it's challenged real estate,” said Andrew Tong, managing director of Vancouver-based Integral Strategic Real Estate Ltd., a boutique real estate investment and advisory firm he founded last year after nearly 30 years at Concert Properties.

“In Alberta, we’ve seen the same type of downward trend. There's been a little bit of a slowdown, but there's more opportunity in Calgary and Edmonton on the multifamily side. On the condo side, I don't see it hanging on very strong.”

Erixon credited the City of Calgary for removing nine million square feet of empty office space to reduce vacancy levels and Tong acknowledged the city for being a leader in incentivizing the conversion of obsolete office buildings to multifamily.

Greater Toronto Area is struggling

CBRE vice-chairman Casey Gallagher said there were only four condominium launches with 958 units in Toronto in Q1 2024, which he largely attributes to the rapid increase in interest rates.

“To me, condo stopped being housing quite a long time ago,” Gallagher said. “It really became an investment vehicle.”

The Toronto housing market is best defined by the rental marketplace, according to Gallagher, who noted the average value of a downtown rental building is substantially below the condo equivalent. 

Gallagher expects more distress transactions in core-plus Greater Toronto Area locations due to developers of smaller projects not having strong enough balance sheets.

Toronto-based Gallagher said current transactions often have longer-term development horizons as purchasers expect the Toronto market will bounce back. Affordable housing deals — in conjunction with the City of Toronto, the province and CMHC financing — are also happening.

Industrial and retail land

“It's difficult to get sites and it's difficult to get money, but I think that there's still demand for industrial and retail land,” Erixon said. 

Gallagher said industrial land prices are correcting after the boom earlier this decade. Developers are being cautious and looking at potential returns to see if they can move forward with acquiring and developing sites.

Access to labour is also a consideration when choosing development locations, Gallagher added, as workers don’t want lengthy commutes.

Tong said some developers in Vancouver, Toronto and Calgary were buying industrial land and selling it in small pieces as condo strata properties, but many have backed off due to high interest rates.

A bit of concern is also creeping in with industrial landlords since they’re no longer seeing the outrageous rent increases of two years ago and vacancies have risen -- though they’re still at low levels. Tong expects industrial development to slow for those reasons.

Industrial tenants coming off long leases and seeing rents triple on renewal may reduce space to save money, Erixon said.

In Vancouver, Tong said companies are looking to Calgary as a logistics hub because rents are lower there.

Any industrial space of more than 100,000 square feet being developed in the Montreal area is outside the city, according to Samlal.