After record commercial real estate investment volumes in Atlantic Canada for the past two years, activity in the region slowed in 2023 largely due to higher interest rates.
CBRE hosted a recent market outlook event in Halifax that drew more than 900 and included presentations and a panel discussion on the performance of the Atlantic Canada market.
“As we look into 2024 with the expectation that interest rates are going to slowly start to come down, we would see investment activity picking up, but it isn't going to happen overnight,” CBRE Atlantic Region managing director Andrew Bergen told RENX in an interview.
“The next six months are probably going to be challenging, but we see more opportunities once the economy picks up.”
Multifamily continues to be the most-traded asset class, with new construction and older class-C buildings the biggest sellers.
Activity has been slowed, however, as vendors want to sell apartment buildings at prices based on potential income generation while buyers want to pay based on current rental rates.
Their argument is that, with rent caps and little turnover, it will take years to achieve market rents.
Purpose-built rental has driven development in the region for the past decade and Bergen said almost half of Halifax’s housing stock is rental.
However, the population boom that began three years ago, with people moving to the East Coast during the COVID-19 pandemic, is creating a housing shortage and leading to higher rents.
Based on current and projected population growth figures, Bergen said Halifax needs to produce 40,000 new housing units by 2030 – but it has added only 27,000 in the past 10 years.
“We were underprepared in terms of the pace of the population growth, so we feel like we're at a bit of a crossroads in terms of public transportation, infrastructure and housing,” Bergen said.
“We're at a very critical point right now in terms of how we accommodate the huge influx of new residents.”
Construction cost increases and supply delays have caused developers to re-evaluate future projects which could exacerbate the problem.
On a more positive note, some underperforming office buildings are being converted to multifamily uses.
Bergen predicts that trend will intensify in the next year or two, particularly if governments provide incentives to offset some of the initial costs for developers as they’ve done in Calgary.
Sidewalk Real Estate Development is converting the 14-storey Centennial Building at 1660 Hollis St. in downtown Halifax from pure office use to mixed-use with 141 residential units and 75,000 square feet of retail and office space.
It’s expected to be completed in 2025.
Sidewalk is also pre-leasing The Shuffle, formerly a seven-storey structure at 65 King St. in Dartmouth that’s had multiple uses over the years.
The developer has added an eighth floor and a ninth-floor amenity rooftop to create an apartment building with 81 units and retail at grade.
Some people who moved to Atlantic Canada because housing was less expensive than in larger cities and they had the ability to work remotely might leave if stronger back-to-office mandates come into effect.
However, it’s still too early to predict if that will happen and how it could affect the local office market.
The technology sector, the biggest driver of office growth, is now focusing on profitability and giving back space as tenants right-size to accommodate lower occupancy.
Cognizant leased 25,000 square feet in Halifax’s Baywest Centre and planned to at least double that to add 1,000 new employees. While it’s on track to add those people, it no longer plans to increase its footprint.
Suburban office space has been winning the battle with downtown in attracting tenants. It has experienced positive absorption in all office types mainly due to shorter commutes and free parking.
That said, there’s also been a flight to quality as tenants seek to attract and retain employees with newer buildings and better amenities. This has meant positive absorption for downtown Halifax class-A office space.
Amid recession fears and inflated construction costs, sub-let vacancy has risen from one per cent in 2019 to 9.2 per cent. The call centre, insurance and tech sectors have all experienced higher vacancy rates.
The news hasn’t all been negative, though, Bergen noted.
“It's very sector- and industry-specific in terms of growth and very organization-focused in terms of culture, values and the need for a physical office.
"But there have been some positive success stories and companies taking on more space while growing.”
Retailers are lining up to take advantage of Atlantic Canada’s economic and population growth. Those experiencing strong sales are expanding with additional stores or repositioning existing outlets.
Pet Valu opened 17 new stores in 2022 and 2023 and is looking at its existing outlets to better understand how to get more sales out of its real estate.
Vacancy has significantly decreased in grocery-anchored strip centres with surface parking, which is creating competition in larger markets and leading some retailers to look for opportunities in smaller centres.
A grocery-anchored centre is being developed by Ross Ventures in the north part of Fredericton, N.B.
“Retail has re-emerged in Atlantic Canada after a challenging few years through the pandemic,” Bergen explained. “We've seen a lot of activity in the retail market with new brands opening stores.”
Fjallraven is another international retailer new to Halifax.
Increasing costs are impacting retail deals and putting immense pressure on rents, which is making new-build, small single-tenant pad sites tough to profitably develop.
Urban retail growth is being driven by food and beverage outlets, some as part of mixed-use developments.
Halifax’s Spring Garden Road has also experienced a resurgence in popularity as a pedestrian shopping street for local and national retailers.
After recent unprecedented rent growth, the Atlantic Canada industrial market has slowed. But with a lack of development land options, users are paying more to acquire or rent warehouse spaces.
Industrial space remains in demand, particularly in Halifax and in Moncton, but few investors or occupiers are willing to sell since they have nowhere else to go.
Halifax has an industrial vacancy rate of just two per cent and other cities are stepping in to take advantage. For instance, a 120,000-square-foot Walmart distribution centre opened last year in Moncton.
“Companies are looking at Atlantic Canada as an opportunity to really take advantage of the shift in global supply chains and logistics,” Bergen said.
“Being an entry point on the east coast of Canada is very cost-effective and efficient in terms of distributing goods.”