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Blog: Investing in Canadian Commercial Real Estate

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Investors fuel robust pace of sales in Canada’s commercial real estate market

As investors continue to search for yield in a competitive marketplace, Canada is increasingly landing on radar for international investors.  

Globally, the sale of commercial real estate and multifamily assets reached record highs in 2021, surpassing US $1.3 trillion, according to Real Capital Analytics. The Canadian real estate market also is experiencing a robust pace of investment activity. Domestic and global investors propelled a new annual high volume of transaction activity in 2021, while cap rates also set new record lows in almost every property type. Commercial and multifamily property sales for 2021 topped $59.3 billion, exceeding the $35.2 billion in sales that occurred in all of 2020.

There are some common drivers behind that surge in investment activity, notably the abundant “dry powder” from investors globally that are searching for accretive risk-adjusted yields. Institutions are maintaining, if not increasing allocations to real estate, and they are looking for secure places to deploy that capital.

Steady growth path

Canada is attractive to investors for a number of reasons. It’s a mature market with a diverse and growing economy, not to mention possessing the stability and transparency that many global investors are seeking. Globally, Canada is the 7th largest property market in the world at an estimated value of $363.9 billion, which puts it ahead of other major countries such as Hong Kong, Australia, and Sweden, according to MSCI. Canada is also the fastest growing country in the G7 thanks in large part to strong immigration. According to Census data, Canada’s population grew by 1.8 million people during the 5-year period from 2016-2020.

In addition, the country’s economic growth has bounced back to pre-pandemic levels, with GDP growth of 4.8% in 2021 that is expected to moderate to 3.9% in 2022 and 2.8% in 2023, according to the OECD. New supply in major Canadian markets does not appear to accommodate the demand that continues to be created from e-commerce, and population growth has proven to create significant demand (23.6 million sf per year) and put upward pressure on rental rates.

One of the reasons the Canadian economy absorbs financing crises better than its U.S. neighbour is because it has less appetite for exotic structures. Occupancy levels also are more stable due to a more disciplined approach to speculative development, which helps to keep development from getting overheated.

Leader in ESG

In a marketplace where investors are increasingly focused on ESG, Canada is emerging as a leader. Since 2016, Canada’s volume of sustainable investing assets has more than doubled to an estimated total of US $2.4 trillion as of 2020, according to the Global Sustainable Investment Alliance. According to the Canada Green Building Council, there have been more than 4,350 LEED certified buildings in Canada and more than 8,500 LEED registered buildings since 2004 – giving Canada the second highest number of LEED projects anywhere in the world. The Canadian government also is committed to achieving net-zero emissions by 2050 and is working towards a target to reduce greenhouse gas emissions by 40-45% from 2005 levels by 2030.

Investors pursue industrial assets

Consistent with global trends, the favoured property types in Canada are industrial and multifamily. Strong fundamentals and a positive outlook for growth are fueling investment activity in both sectors. E-commerce demand has pushed industrial vacancies to less than 1%, which in turn is driving strong rent growth. Compared to the U.S., Canada’s supply chain is not as developed, meaning that demand from e-commerce has not been as explosive as it has been in the U.S. However, investors see an opportunity to get into a market where there is significant potential for more expansion ahead. One of the factors driving demand is population growth. According to an analysis by CBRE, population that is expected to grow by 2 million people by 2026 will generate demand for an additional 81.2 million sf, based on the assumption that consumption of goods by the average person translates to 40 sf of space.

The strong fundamentals in the industrial market have resulted in exceptional rental rate growth and cap rate compression, both of which are expected to continue, which has resulted in very strong total returns. Investor demand being focused on core and build to core results in less competition for strong value-add and core-plus investments, which has also been experiencing extremely strong market fundamentals, resulting in strong relative risk adjusted returns. Despite Canada’s large land mass, growth remains focused on major metropolitan areas, such as Montreal, Toronto, Vancouver, Calgary, Quebec, Edmonton, and Ottawa. In particular, companies that are looking for a highly educated talent pool and access to transit and amenities are targeting the top three gateway markets – Montreal, Toronto, and Vancouver.

Investors leverage local expertise

For many investors, the risk-adjusted returns and growth outlook present a strong business case for “why” to invest in Canada. A second important question for investors is “how” to successfully deploy capital, while also getting the best risk-adjusted returns. Like any country, Canada has its nuances where you need that insider’s perspective and boots on the ground local knowledge to find good investment opportunities. Mistakes can be costly. As an example, the U.S. retailer Target made an aggressive move into Canada several years ago that turned into a failure. The company ended up closing all 133 of its stores and exiting the market. As a counterpoint, Walmart has a thriving business in Canada with more than 400 stores. Target failed because they didn’t understand the market.

For commercial real estate investors, the Canadian market is very concentrated from an ownership perspective, which makes it difficult to access properties. Another unique nuance of the Canadian market is that transactions are more than just business, deal-making is very relationship and trust based. That is why it is important for investors to work with local partners that understand those dynamics and have relationships to identify opportunities and execute on investment strategies.

Triovest Investor Relations | Luigi Luppi | lluppi@triovest.com


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