Higher borrowing costs, inflation and office vacancies resulting from remote work are prompting investors to be cautious when it comes to commercial real estate, with industrial buildings used for distribution and warehousing providing bright spots in the sector, according to Re/Max.
A report published June 1, which looked at 12 commercial real estate markets across Canada in the first quarter of 2023, found that downtowns were suffering most from the persistence of remote work long after pandemic restrictions were lifted.
“The office sector continues to struggle in markets across the country,” the report said, adding that some companies are anxious to reduce their physical footprints to cut costs.
Half the markets surveyed reported that efforts are underway to repurpose commercial offices as residential space to help return activity to the downtown core. Although the report noted that not all buildings are suited for retrofit, some major centres are providing incentives to encourage conversion to residential.
Calgary, for example, provides a $75-per-square-foot subsidy to developers for converting offices to residential, with 10 buildings approved so far.
“By way of conversion, more than 1,200 new homes will be created and approximately one million square feet of commercial office space will be eliminated, breathing new life into Calgary’s downtown core,” according to the Re/Max report.
Buildings are also targeted for conversion in Halifax, Ottawa, London, Toronto and Winnipeg.
“The retrofit and renovation activity not only brings desperately needed residential product online, but it also supports the surrounding retail shops and restaurants, transit systems and the overall health of our downtown neighbourhoods,” said Christopher Alexander, president of Re/Max Canada.
The report said municipal and provincial red tape is the most significant “holdback,” particularly in light of the federal government’s immigration targets over the next couple of years. Zoning amendments, applications and approvals on conversions were mentioned as sticking points.
“We need partners in our city planning offices to streamline the applications and approvals process in a timely manner — months, not years — to bring these properties to market,” said Elton Ash, executive vice president of Re/Max Canada.
The report said the retail segment of commercial real estate, including shopping malls, is looking more resilient than expected after consumers sought online shopping options in droves during pandemic lockdowns. But it was industrial real estate including distribution and warehousing centres that outperformed almost every other asset class in the first quarter, with all markets reporting strong sales and lease activity.
Both property and lease values climbed in the three-month period, with activity pushing beyond major centres such as British Columbia and Ontario as investors and end users looked to neighbouring provinces for more affordable prices.
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“A spillover of demand from these provinces and key markets have bolstered sales of industrial product in Edmonton, Calgary, Regina, Saskatoon, London-St. Thomas, Halifax and St. John’s,” the report said. “While demand has softened from peak levels reported in 2022 in most Canadian markets, inventory levels remain extraordinarily low, given the headwinds the industry has encountered.”
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