The year kicked off with a unique landscape for commercial real estate.
The market transitioned from the comfort of record-low interest rates to 14-year highs while stronger-than-expected employment data from Statistics Canada in January left central bankers uncertain of their next steps to slow inflation.
The reaction of the market adjusting to central bank fiscal policy has led to investors taking a closer look at specialized sectors.
By diversifying their commercial real estate portfolios, they are setting plans in motion for their best assessments on potential short- and long-term returns.
I sat down with Colliers’ national practice group leaders in brokerage to get their outlooks on their respective sectors, which are garnering significant attention from our clients and the market.
Warren Wilkinson, national alternative asset practice group leader
The best way for investors to mitigate investment risk is to diversify. In this current economic climate, we are seeing traditional commercial real estate assets command less attention and alternative assets begin to gain significant traction.
These assets include self-storage, medical and life sciences, retirement and long-term care facilities, student housing, data and call centres, manufactured housing and RV parks.
As interest from clients and the market continues to grow in this segment, sector experts across Canada are seeing a rise in inquiries to share best practices, research, access to available properties and knowledge to advise decision-makers on an alternative asset commercial real estate investment.
Tyler Dolan, national debt advisory practice group leader
Debt advisory is an important commercial real estate solution for 2023 given the frequent changes in the risk tolerance and appetite of lenders due to rising interest rates, along with ever-changing regulatory and economic conditions.
This makes it more important to engage experts with strategic relationships with the lending community to matchmake quality borrowers and projects with the right source of capital. That expertise can assist in putting together comprehensive loan applications tailored to the target audience, whether it be a pension fund, insurance company, bank, credit union, trust, non-bank lender or private lender.
The recent upward movement of interest rates has caused challenges for many looking to finance new construction or refinance existing properties – the result being that borrowers must inject additional cash equity into their projects or bring additional mezzanine debt.
We are also seeing complications in replacing construction debt with term debt upon completion of new developments, with shifting metrics from when deals were written versus when they are closing.
As a result, the old saying “time is money” is critical and it has become paramount for debt advisory teams to deliver a strategy that aligns with clients based on the economic factors of the year, so only viable lending partners will be approached.
Peter Garrigan, national industrial practice group leader
Our industrial advisors across Canada continue to observe a sustained demand for industrial real estate, accompanied by a shortage of new supply.
This trend has fuelled growth in the sector, particularly in our three major markets of Toronto, Vancouver and Montreal.
Since Q1 2021, these markets have experienced exponential growth with an availability rate of approximately one per cent. Notably, over 90 per cent of the new supply that entered the market was already pre-leased, indicating persistent demand.
In response to supply-chain issues that have impacted construction in recent years, many organizations have turned to technology to overcome these challenges and innovate industrial supply.
Despite the limited availability of space, with only one to three per cent of the total inventory for each market currently under construction, we anticipate further rental growth throughout 2023 and beyond.
However, tenants with flexibility in their lease terms are expected to delay major decisions as they assess the economic outlook throughout the year.
Robert Frost, national multifamily practice group leader
The multifamily sector is projected to perform well in 2023 and continues to be one of the most sought-after asset classes for both private and institutional investors.
While the current economic environment has slowed investment volume, there are early signs of the market stabilizing, which should result in a marked increase in activity for the latter half of the year.
This will largely be driven by inflation continuing to ease and interest rates holding, which should bring confidence back to the investment community.
Rental demand remains very strong in an undersupplied market and the big question will be whether new supply can keep up with the projected Canadian immigration targets set at approximately 1.5 million people over the next three years.
With high interest rates and cost to borrow, many newcomers are likely to rent for some time, fuelling rental demand and rising rents.
With the market stabilizing and strong long-term fundamentals, we should see a resurgence of capital flowing back into the multifamily sector this year, leading to cap rate compression despite elevated interest rates.
Madeleine Nicholls, national retail practice group leader
The long-term outlook for the retail sector in Canada for 2023 is positive, with anticipation of one to two years of heightened openings and closures.
Canadian retail sales outpaced inflation and climbed to an all-time high of $735 billion at the end of 2022 and are expected to continue growing throughout this year.
Additionally, retail rents have generally held steady for the second half of 2022 after significant increases in the first half of 2022. They appear to look stable into the first half of 2023, with some upward pressure on inducements.
In 2023, we expect to see new business concepts emerge, especially those with a focus on the consumer experience both in-store and online, which will continue to evolve the retail landscape.
Bobby MacDonald, national technology practice group leader
Our tech advisory team has observed the pivotal role of tech occupiers in pre-leasing new developments in major Canadian cities over the past few years.
Landlords in Canada's three largest cities continue to consider tech tenants as downtown anchors and support the incubation of the next major tech startups.
In Vancouver, significant leasing commitments from Amazon and Microsoft demonstrate the enduring significance of the tech sector to the city's economy, given the city’s proximity to the major global tech hub in Seattle.
In Ontario, Waterloo has earned the title Silicon Valley of the North due to its thriving tech industry which boasts the highest density of tech startups in all of Canada and ranks second in the world behind San Francisco.
In Montreal, the city's lively culture of food, music and arts, coupled with affordable living, has created an optimal talent pool for creative and technology-focused organizations.
Despite the recent news cycle highlighting layoffs in the tech sector, many companies are simply right-sizing their employee bases and divesting from moonshot programs to reduce expensive capital.
Throughout 2023, practical programs will continue to stabilize the tech industry and demonstrate its longevity, thereby confirming the necessity of real estate requirements.
This stability is further enhanced by government funding commitments to digital technology and scale AI.