Canadian Occupiers Purchase Commercial Real Estate 'To Meet Their Own Needs'

Canadian commercial real estate transaction volume may be at its nadir, but sentiment is changing as investors who were sitting on the fence are being coaxed into the market, said Diana Hoang, managing director and broker of record at Spear Realty. 

“We’re probably at the lowest point of the down cycle,” said Hoang, a 15-year veteran of the Greater Toronto Area’s commercial real estate scene. “Property prices in Canada have gone down nationwide, across asset classes.”

Spear Realty is a brokerage specializing in commercial and industrial real estate, land, development and investment in the Greater Toronto Area, or GTA. The company has found a longtime partner in Lantern Capital, which often finances the transactions of Spear Realty clients.

“Sentiment is definitely changing,” said Bav Malhi, CEO of Lantern Capital. “Many companies that need real estate have been renting instead of buying for a long time. For companies that are liquid, this is the best time to purchase commercial real estate to meet their own needs.”

The Bank of Canada reduced its key benchmark rate by 50 basis points to 3.75% in October, continuing a series of cuts that began in June as the country’s inflation has cooled and economic growth has weakened.

The dollar volume transacted in the GTA fell 19% year-over-year in the first half to 9.3B Canadian dollars, Altus Group said in an August report.

“This moment is the perfect time because interest rates are pretty low and property prices have not gone up yet,” Hoang said. “It’s a good time to begin investing in commercial real estate again because you can lock in a good price. That will probably not be the case next year.”

Malhi said he is also advising clients to make critical purchases now. As interest rates decline further, it will boost asset prices, he said.

Government Incentives

Ontario is an advanced industrial and manufacturing powerhouse, with the third-most manufacturing businesses in North America.

Fueled by supportive government policies, a highly educated workforce, rich natural resources and proximity to U.S. automotive and other manufacturing hubs, this segment is serving as a growth engine for the Canadian economy and its real estate sector.

“We’re seeing more demand in manufacturing companies and equipment-makers, specifically,” Hoang said. “Manufacturing is coming back to Canada.”

One of the measures the Canadian government has implemented to support manufacturing is to temporarily allow the depreciation cost of equipment to be booked all at once, rather than as a percentage every year for a set number of years, Malhi said.

“By allocating stronger depreciation, which equipment users can implement aggressively, you create savings that you can then invest in real estate,” Malhi said. “We’re recommending users, who are experiencing vibrant growth, do exactly that.”

Industrial vs. Office

Given these manufacturing tailwinds, industrial real estate has been the most popular CRE sector in Ontario, especially among institutional investors, Hoang said.

“Industrial is still the leader compared to all other asset classes,” she said. “Retail and office are picking up, albeit from a low base, but those asset classes definitely take more creative ownership.”

Hoang has also found that certain investors are acquiring offices to convert all or a portion of the assets into industrial facilities.

Industrial is popular compared to other asset types despite falling rents and a moderate supply glut, she added.

“Rents on industrial real estate have come down, and the only reason they haven’t dropped further is because not all the new construction that was in the pipeline has come on stream,” Hoang said. “Projects have faced construction delays and have been pushed to next year.”

Fixed-Rate Financing Options

Even as most analysts forecast that interest rates will continue to fall, most commercial real estate investors are opting for fixed-rate financing options for their purchases rather than variable-rate loans, Malhi said.

“The word ‘variable’ is scary for people right now,” he said. “The fact that interest rates in Canada increased 13 times in a row during this last cycle is fresh in people’s minds.”

Malhi added that the two-to-three-year fixed-rate option is the most popular among investors.

“When people compare the 8% interest rate from a couple months back to the 5.5% fixed rate available now, people are OK with that,” Malhi said.

Opening Offices And Aligning With Good Partners

Even as the market remains muted, Spear Realty expanded in November to the  southwestern Ontario city of Cambridge. That push is being led by Shawn Quilty, managing director of southwest Ontario, and Megan Beedie, team lead adviser.

“We are growing our team there, even as we’re continually growing our team in Etobicoke and across Ontario,” Hoang said. “We are also planning to open an office in the U.S. next year.”

The Canadian CRE market is at a turning point, which can be difficult to navigate, Hoang added.

“Three years ago, banks were ready to give money to anyone,” Hoang said. “Now they are very selective about only lending to the right borrower and the right location and the right asset class.”

For buyers and sellers, Hoang emphasized the importance of partnering with experienced representation and said she is grateful for the collaboration between Spear Realty and Lantern Capital.

“Lantern Capital has been there to support our clients,” Hoang said. “It’s good to have partners who are able to provide resources and advice to close the deal.”

In September, a transaction on which Spear and Lantern advised was driven by the recent changes to Canada’s capital gains tax structure.

“We had a seller who wanted to sell fairly quickly and a buyer who wanted to buy fairly quickly, and the whole thing came together,” Hoang said. “They bought a partially vacant industrial building and were able to lease it up because the location was fantastic.”

Lantern Capital arranged the financing.

“We can help buyers and sellers navigate the unique circumstances we find ourselves in and align them with the best lender for future success,” Malhi said.

This article was produced in collaboration between Spear Realty and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.