Canada’s commercial real estate market is expected to perform well in 2020 with particular strength shown by the rental apartment building sector, according to Morguard‘s 2020 Canadian Economic Outlook and Market Fundamentals Report.
Nationally, economic and population growth suggest strong rental market conditions throughout the year, notes the annual lookahead produced by the Mississauga-based real estate and property management company. Morguard has operations across North America.
Apart from Alberta’s large cities, which continue to struggle with low energy prices, 2019 marked a strong period for commercial property in Canada, said Keith Reading, director of research at Morguard.
Property rental conditions as well as investment activity performed well in 2019 and more of the same is expected in the new year.
The relatively strong performance in the property market came amid modest GDP growth of 1.5 per cent and a few international headwinds, Reading told RENX in an interview.
“The global economy slowed down (and) we know what’s going on with the (U.S.) tariff war,” he said. “But, it was a surprising strong performance in terms of the Canadian market.”
Factors driving the market
“We have pretty healthy population growth, (which is) largely immigration-driven,” Reading said. “That’s a good sign for real estate markets in general.”
Also, Canada’s national housing market has stabilized, even in Vancouver, where home sales activity has returned to historical norms. That follows a year of slowdown amid government policy and tax interventions in the overheated market.
Nationally, there have been seven straight months of increased home sales figures and prices, he said.
“The housing market will go a long way to driving the real estate market in general over the next 12 to 24 months,” he said.
Meanwhile, Canada’s unemployment rate remains near 50-year lows.
“I anticipate that the Canadian consumer will continue to buy things, continue to shop and that will help the economy overall,” Reading said. “The commercial real estate sector is really a service provider to the broader economy.”
Solid demand from tenants, investors
During 2019, investors appeared excited about the rental apartment sector. Multifamily transaction volume totaled $4 billion over the first six months, a pace only slightly below the record-high pace which led to $8.3 billion in investment in 2018, the report said.
Aging Canadians are increasingly downsizing and renting apartments, Reading said.
In 2020, the demand for rental homes in Canada’s big cities will continue to outpace supply and rental rates will climb further.
The industrial asset class remained a solid performer in 2019, following record-high annual transaction volume of $12.7 billion in 2018. In 2020, sales activity is expected to remain strong.
There is not enough industrial space in Canada’s big cities to meet demand. The national availability rate hit a 20-year low of just 3.1 per cent during the first half of 2019.
The office market, driven largely by Canada’s expanding tech industry, continued a strong investment pace this year while downtown rents continued to rise. There was a total of $5.5 billion in deals over the first half of this year, slightly ahead of the 2018 record pace.
The national vacancy rate was at 11.3 per cent at the end of the first half of 2019, but Vancouver and Toronto now have the two lowest downtown office vacancies in all of North America.
Millions of vacant square feet in the struggling Alberta market, particularly in Calgary, placed it at the other end of the scale with vacancy rates continuing to stay well north of 20 per cent.
Reading said retail continues its evolution. Younger shoppers are forcing change on the industry as their shopping habits diverge from those of the boomer generation.
However, in terms of real estate the sector is holding its own. Overall, national retail vacancy fell by 100 basis points to 5.8 per cent in mid-2019.
Meanwhile, investors traded a total of $3.1 billion of retail investment properties during the same time period. While that’s down from 2018’s record pace, it remains above the long-term average.
Storm clouds from the U.S.?
Reading said there are two main areas of concern that could cause trouble in the market.
The first would be signs of economic slowdown or reversal in the U.S.
“The U.S. is on one of the longest expansion phases in history, so if something were to happen in the U.S. that would have a detrimental effect on Canada, but also the global economy, too,” he said.
The second area of concern is if the international tariff war, namely between the U.S. and China, continues to get worse.
“The U.S. is something that I am really watching and concerned about,” Reading said.