Strong population growth and housing supply issues have prompted a significant shift in the Canadian commercial real estate market as builders and developers adopt an “all-hands-on deck” approach to solving Canada’s housing shortage.

RE/MAX Canada examined 12 markets across the country and found the push for intensification in the first quarter of 2024 has gained greater momentum as builders and developers from coast to coast turn their attention to purpose-built rental construction—some at the expense of new residential condominiums, and to a lesser extent, commercial builds. All 12 markets surveyed identified multi-family and industrial real estate as the top-performing asset classes in their market, followed by retail, with eight out of 12 markets (66.7 per cent) reporting strength. Farmland in Saskatchewan also topped the list of high-performing asset classes, with one of the strongest years on record, while demand for hotels and strip plazas also proved popular.

RE/MAX

FULL REPORT

TORONTO, June 6, 2024 /CNW/ — Strong population growth and housing supply issues have prompted a significant shift in the Canadian commercial real estate market as builders and developers adopt an “all-hands-on deck” approach to solving Canada’s housing shortage, according to a report released by RE/MAX Canada.

RE/MAX Canada’s 2024 Commercial Real Estate Report examined 12 markets across the country and found the push for intensification in the first quarter of 2024 has gained greater momentum as builders and developers from coast to coast turn their attention to purpose-built rental construction—some at the expense of new residential condominiums, and to a lesser extent, commercial builds. All 12 markets surveyed identified multi-family and industrial real estate as the top-performing asset classes in their market, followed by retail, with eight out of 12 markets (66.7 per cent) reporting strength. Farmland in Saskatchewan also topped the list of high-performing asset classes, with one of the strongest years on record, while demand for hotels and strip plazas also proved popular.

“The overwhelming need for shelter, combined with the Canada Mortgage and Housing Corporation’s (CMHC) Apartment Loan Program that has incentivized builders and developers with low interest rates, favourable terms, and 50-year amortization periods, have created the perfect storm in today’s high interest rate environment,” says RE/MAX Canada President Christopher Alexander. “Unfortunately, with Canada’s population surpassing 40 million people this year, even the current upswing in residential construction continues to fall short of the thousands of units required in most major markets.”

According to Statistics Canada’s Quarterly demographic estimates, provinces, and territories; Interactive dashboard, the country’s population reached 40,769,890 as of January 1, 2024, with net international migrations in 2023 topping 1.2 million (1,240,769).

Commercial Real Estate Trends:

  • Multi-family construction continues unabated across Canada. Purpose-built rentals are the primary focus in every major urban centre analyzed, with student housing and seniors’ residences following in lockstep, thanks to the CMHC and the federal government’s decision to cancel the GST on new residential builds. Seven markets including Vancouver, Calgary, Regina, Winnipeg, London, Ottawa and Halifax had vacancy rates at or below 1.8 per cent in 2023, according to CMHC’s Rental Market Report released in January 2024.

  • High-density & mixed-use development. With land being a finite product and continued population growth in major urban centres, many mall/strip plaza landlords have come to realize that the best use of their properties means increasing density. As a result, a greater number of malls and shopping centres are exploring a residential component, with a clear trend toward future mixed-use developments.

  • Capital gains tax—the government giveth and taketh away. Smaller investors are particularly hard hit by the increase in the capital gains tax inclusion rate, from 50 per cent to just over 66 per cent, as outlined in the 2024 Budget announcement. While a handful of investors were scrambling to get their properties sold prior to the June 25 deadline, most pulled back on listing their properties for sale.

  • Industrial real estate continues to experience strong demand across Canada, with tight inventory impacting several markets across the country (including Hamilton and the region spanning Halton to Niagara, Newfoundland–Labrador, Halifax Regional Municipality.) Despite an uptick in availability in many areas of the country due to an influx of new space, demand remains steady. End users are most active in the market, with warehousing, manufacturing and flex space most sought after. Affordability is a growing factor, especially in larger urban centres, prompting some businesses to consider industrial property on the outskirts of the city. In Vancouver, where large tracts of available industrial land are almost non-existent, some business owners are looking east to Alberta (rail access) and south to the US seaboard (access to ports).

  • Bricks and mortar retail stores still hold their appeal, despite the huge e-commerce presence in markets across the country. Neighbourhood retail is performing well, with busy retail avenues experiencing a shift from more traditional retailers selling goods such as clothing or jewellery to service-related retail, especially within the health and wellness industries and storefront medical offices. Many malls continue to expand and redevelop in an effort to perfect the tenant mix. Several markets are experiencing increased demand for daycare facilities, given significant population growth.

  • Luxury retail brands continue to expand their presence in major Canadian markets – Yorkville, the Bloor Street ‘Mink Mile,’ and Yorkdale Shopping Centre in Toronto, as well as Vancouver’s Alberni Corridor and Oak Ridges Mall continue to attract global luxury retailers.

  • Record commodity prices have contributed to an expansion in Saskatchewan, with many farmers sitting on pent-up-cash reserves. Farmland throughout Saskatchewan is being gobbled up by large farming corporations, sending values skyrocketing to new heights. The province led the country in terms of percentage increase in the price per acre of farmland in 2023, according to the FCC Farmland Values Report released in March 2024, with a 15.7-per-cent gain year over year. Percentage increases were even higher in Saskatchewan’s East Central region, where values rose by 20.8 per cent. Supply of farmland remains exceptionally tight in areas outside Regina and Saskatoon, with the lowest number of properties listed for sale in years. In fact, few farms make it to the Multiple Listing Service (MLS) because most are selling through word of mouth. The vast majority of deals are cash purchases and are not dependent on financing.

  • The hospitality industry has roared back to life in many parts of the country. In Halifax, room rates have tripled, existing hotels are expanding, and a growing number of prominent hotel chains are entering the market, including Moxy Halifax Downtown, part of Marriot Bonvoy’s portfolio. Interprovincial investors are now vying for hotel properties in markets such as Saskatoon.

  • Real Estate Investment Trusts are re-examining existing portfolios with an eye to changing the mix. As a result, there has been an increase in divestment of certain assets – usually older office or residential buildings, while purchases of other assets are occurring, typically newer construction in office and retail.

  • Established businesses have experienced strong activity in Saskatoon this year. The market, which has experienced a significant influx of interprovincial investors over recent years, as well as increased population growth, has noted unprecedented demand for existing businesses such as grocery stores, gas stations and restaurants.

  • The office sector in the downtown core continues to struggle as availability rates climb in almost all markets across the country, with B and C class buildings most impacted. Conversions are helping to take excess space off the market, but it’s not a fix-all solution. Conversions are complex and most buildings are not suited to the process. Business Improvement Areas (BIA) and municipal plans to revitalize downtown areas and attract foot traffic will play a role in reviving core areas. Residential development is certainly helping and improving demand for retail/services as a result.

  • Adaptive reuse is gaining momentum nationwide. Calgary—with the highest rate in the country, is lowering its availability rate through the adaptive re-use of commercial office buildings. Seventeen residential conversions are either completed, underway or planned in the city to date. Winnipeg has several conversions completed and another four planned. Halifax Regional Municipality and Ottawa are making headway with five and seven converts underway respectively. While Edmonton, Toronto and Vancouver have been slow on the uptake, the first downtown conversions are now planned. Lower downtown office vacancy rates in the Greater Vancouver Area are likely behind the lack of conversion projects to date. The need for density has not only bolstered office conversions, but adaptive re-use of other types of buildings as well, including hotels and underutilized schools. Municipalities are getting more creative in finding solutions to the housing crisis and as such, re-zoning is occurring and likely to intensify.

  • Vendor take-back financing is the key to some land development deals. While elevated interest rates have impacted land development in many markets, some sellers in the Greater Toronto Area and Halifax Regional Municipality are offering buyers vendor take-back mortgages on land purchases to close the deal.

“Density, population growth and the housing crisis remain significant factors influencing market activity, but a variety of drivers will have an ongoing impact on the Canadian commercial real estate market moving forward,” says Alexander. “This includes economic performance; interest rates; incentives and development policies, processes and fees; tax policies; construction costs, land costs and servicing; labour shortages; housing affordability and availability; revitalization efforts and hybrid/remote work policies; social issues and more. Diverse market dynamics exist, but overall improvement is expected to characterize conditions and demand as 2024 progresses.”

Commercial real estate markets in Western Canada are expected to remain strong, with Alberta, Saskatchewan and Manitoba bolstered by a positive economic outlook in 2024. The energy and mining sectors have also contributed to strong activity in Newfoundland and Labrador, while interprovincial migration, immigration, and travel and tourism have buoyed economic prospects in the Halifax Regional Municipality. While cost-prohibitive major urban centres such as Toronto and Vancouver have experienced some moderation in demand, more affordable markets in surrounding areas have picked up the slack, particularly in the industrial segment. Case in point would be strong industrial activity outside of the Greater Toronto Area, including Halton to Niagara Regions and London, while Calgary and Edmonton continue to draw activity from the Greater Vancouver Area.

“Cautious optimism is growing with the likely end to quantitative tightening expected in the latter half of the year,” says Alexander. “Confidence levels are expected to rise, sparking renewed activity in the market. Supply issues are expected to persist for the most sought-after segments as purchasers view to strengthen their investment portfolios with an evolving mix of assets. In the longer term, the underpinning of the Canadian commercial real estate market appears positive. Residential housing needs and a swelling population are anticipated to be the root and catalysts of growth in most commercial segments. Inevitably, as communities expand, so too does the need for all types of services, prompting greater business development and increasing requirements of operations and infrastructure. Simply put, growth begets growth, and the ripple effect is already evident.”

Market-by-Market Overview

Greater Vancouver Area, Squamish to Chilliwack

Despite hesitation among some commercial real estate investors amid growing concerns over how current conditions will play out, cautious optimism exists. Recovery has been slow from last year’s pull back, but tides are expected to turn in the Greater Vancouver Area, including Squamish to Chilliwack, with the Bank of Canada’s first rate cut.

Last year was one of the softest years on record in terms of commercial real estate in the Greater Vancouver Area and industry leaders had hoped for a return to more normal levels of activity in 2024. There was a slight uptick in the number of investors looking at available properties in the first quarter, but the swell was quashed by the federal government’s April announcement raising capital gains taxes to 66 per cent. Sellers immediately pulled back on listings.

Cap rates are up on industrial, retail and office product as a result, while multi-family has remained relatively stable due to low vacancy rates in the city. The multi-family asset class has proven to be a safe and secure investment, but some investors avoid multi-family because of the provinces’ Residential Tenancies Act that makes it more difficult for landlords to keep up with inflation.

The asset class has been bolstered by the Canada Housing and Mortgage Corporation’s (CMHC) Apartment Construction Loan Program, which promises builders and developers preferred rates and longer amortization periods. The program was topped up by another $15 billion in April as part of the government Canada Builds program. The federal government has also cancelled Goods and Services Taxes (GST) on purpose-built rentals.

Vacancy rates in Vancouver hovered at just under one per cent in October 2023, according to the CMHC’s Rental Market Report, with the rental rate of an average two-bedroom apartment up almost nine per cent year over year. Purpose-built rental apartment inventory rose by 3,144 new units in 2023, with most of the available rentals located in the City of Vancouver and Surrey. There is a greater percentage of rentals coming into market now than in years past, with Southeast Vancouver, the Tri-Cities, and Surrey expected to see the largest growth in rental supply in the near future.

In the coveted industrial asset class, availability sat at 4.2 per cent in the first quarter of 2024, up two full percentage points from the same period one year ago, according to Altus Group. Leasing is getting tougher, with industrial in the downtown core particularly hard hit, as tenant pools wane and absorption moderates. Vacancy rates are expected to climb as more space opens up in coming months. Landlords need to be more cognizant of lease rate price adjustments in the market to be competitive.

Little new industrial product is expected to come to market as a lack of developable industrial land and residential intensification takes precedence. Movement of B.C. businesses to industrial markets in Alberta is climbing, especially if the client is looking for large tracts of development land. It’s easier to find 40-to-60-acre properties ideal for manufacturing facilities and distribution centres in Alberta than it is in Vancouver, where the cost would be extraordinary. Those leaving the province are typically looking for the availability of space and rail access, typically choosing either Calgary (where cost savings are greater for those seeking rail access) or Edmonton. Some BC businesses that need to be close to ports are looking at US markets such as Seattle and Portland.

Availability rates in the office sector are amongst the lowest in the country at 12.4 per cent, according to Q1 2024 statistics compiled by Altus Group. Most tenants are content to remain in their current premises. Some are downsizing, but most landlords are willing to work with existing tenants rather than search an increasingly narrow tenant pool. Landlords that are selling their properties tend to be looking to diversify their portfolios while those that are looking at product are interested in the lower cap rates. While downtown office performance is soft, an interesting dynamic is emerging in the suburbs. Strata buildings are holding their price per sq. ft. Fully tenanted buildings offered lower cap rates than those buildings with vacant units. Owner-investors are particularly interested in these properties for their own use and are willing to pay a higher dollar value for a property that has an existing vacancy they can assume, allowing the tenants to help subsidize their purchase.

Retail has seen a shift in tenants in recent years, moving from more traditional retailers such as clothing or jewellery stores to service-based offices and restaurants. Vacancy rates have remained steady at 2.3 per cent, with scant new retail development coming to markets. Smaller mixed-use commercial is an attractive option well-suited to medical consulting firms, therapeutic offices, and daycare facilities. However, a chronic shortage of daycare space in the lower mainland has created upward pressure on values. Commercially zoned daycares require parking requirements that allow for the creation of a playground or, alternatively, a rooftop playground, which are increasingly hard to find. The demand has only increased as more daycares are needed as the population in the lower mainland continues to grow.

Several malls within the Greater Vancouver area, including Squamish to Chilliwack, are considering the addition of a residential component, including purpose-built rentals, condominiums, retail and offices. Perhaps one of the best examples is the first phase of the redevelopment of Oakridge Park, which is scheduled to open in Spring 2025. The 650,000 sq. ft. mall includes a strong tenant mix, including stand-alone shops for luxury retailers such as Prada, Louis Vuitton, MaxMara and Moncler and an abundance of dining options within a mixed-use residential/office/retail community. In Langley, Willowbrook Shopping Centre recently completed its expansion/renovation, adding another 140,000 sq. ft. of space including food precinct, outdoor pedestrian shopping, and gathering spaces. Applications have been submitted for seven new residential high-rise towers on adjacent properties by two different developers.

Those in the development business tend to hold onto assets that bring in income and tend to move when the timing is right, given how large and costly redevelopment can be. Land is finite in the lower mainland and as such, regardless of how successful the retail business is, the community need for higher densification trumps all. For all shopping developments moving forward, there will likely be residential component included. While strip plazas may be targeted for residential conversion in other areas of the country, the high cost of land coupled with today’s interest rates make the prospect less appealing. Older strip malls not generating enough rent could be a better target.

Downtown retail has had its challenges, especially in high-rent districts, including Granville and Robson. Given an increase in vandalism in the area, there’s been an exodus by some businesses to shut down or relocate to other neighbourhoods.

Real Estate Investment Trusts (REITs) and institutional investors remain cautious, although are prepared to move if the deal makes sense. No one is overleveraging their portfolio at present, especially given tight lending policies currently in place for commercial real estate, with some lenders asking for 40 to 60 per cent down. Deals are increasingly difficult to keep together in a business environment that is not conducive to growth, but the promise of an end to quantitative financing down the road and lower interest rates have investors keeping their eyes open.

Calgary

With population growth rising by just over 200,000 in the province in 2023, the demand for housing has never been greater in Calgary. Multi-family purpose-built rentals in the city are the top-performing asset, with vacancy rates sitting at a tight 1.4 per cent in October of 2023, according to the Canada Mortgage and Housing Corporation (CMHC).

The influx of interprovincial migration and immigrants is challenging the city’s housing stock, with vacancy rates at the lowest level in a decade. More than 3,000 new units came on stream in the city in 2023, with newly completed units available the Beltline, Downtown and the North Hill areas. Purpose-built rental apartment starts have overtaken condo starts for the first time in 2023. The CMHC was instrumental in the shift, offering low interest rates, nominal down payments, and long amortization periods to builders and developers who answered the call in abundance, especially after the federal government cancelled the Goods and Services Tax (GST) on new builds.

In fact, Calgary leads the country in conversion projects in the downtown core, with 17 former offices converting to residential rentals. Several of the projects have already been completed and the result in terms of foot traffic has sparked some renewed interest in retail space in the downtown core. Some of the other considerations for excess office space include hotels and colleges with built-in residence options. By 2026, more than 11,000 people are expected to be living in the downtown core. As such, Calgary is one of few markets in the country that has registered a decline in office availability, sitting at 23.2 per cent in the first quarter of 2024, according to Altus Group. While still impacted by hybrid work schedules, the office sector in the core has seen some downward momentum in vacancy rates, in large part due to conversion efforts and incentives offered by the municipal government. Suburban office space has remained relatively stable year over year, with staffing less impacted by the hybrid work model.

Calgary’s retail sector is doing well, with few vacancies reported in the city. The segment has experienced an uptick in demand for medical space, as well as health and wellness businesses. Demand for daycare centres continue to be strong, but given the necessary requirements, a limited supply of product is available. The tenant mix is changing at many of the city’s malls, with some adding new restaurants to draw additional shoppers. Some landlords are looking at converting underutilized parking lots to purpose-built residential. RioCan recently acquired land adjacent to its Glenmore Landing Shopping Centre to create a mixed-use development that calls for greater densification through purpose-built rentals.

Strip plazas continue to thrive in Calgary, with little to no retail availability. Investors are particularly interested in this product, given its mixed-use potential for retail and multi-family.  Development land is also sought after, with properties within proximity to the city’s core especially desirable. In an effort to target affordability, the city is also investigating the conversion of the Franklin LRT parking lot to as many as 300 purpose-built affordable rentals.

Industrial remains strong, despite an uptick in availability rates to 5.8 per cent in the first quarter of 2024, compared to the same period one year earlier, according to Altus Group. More balanced conditions have emerged with the influx of new inventory into the market, dominated by warehousing and distribution facilities. An additional 3.6 million sq. ft. is expected to come on-stream in the year ahead, placing additional upward pressure on the overall vacancy rates. More specialized product is experiencing tighter market conditions, with fewer listings available for sale/lease. Owner-occupiers are most actively seeking smaller commercial buildings, while larger tenants appear to be more comfortable with renting.

Real Estate Investment Trusts (REITs) and institutional investors continue to be active in both the industrial and multi-family segments, given the high rate of return on multi-family and industrial in the city. According to the Business Council of Alberta in its Spring 2024 Report, business expectations and intentions are strong, and the province is attracting a larger share of venture capital dollars, now at 11 per cent in 2023 from seven per cent in 2022, despite a national dip in overall investment. With population growth, business expansion and overall economic prosperity, the outlook is bright for Calgary’s commercial market.

Edmonton

Unprecedented immigration and interprovincial migration into the province have contributed to a strong economic performance over the past year, underpinning vigorous commercial expansion in both the multi-family and industrial asset classes throughout Edmonton and the surrounding areas.

Demand for rental housing is front and centre given the city’s current supply crunch. Multi-family apartment construction is gaining ground after a soft 2023, when apartment starts declined significantly as developers grappled with increased costs, labour shortages and supply chain issues. Housing starts in Alberta hit a new record in April 2024 at 1,636 units, with Edmonton up 64 per cent compared to year-ago levels for the same period. Preferred rates, higher loan-to-value ratios and extended amortization periods offered by the Canada Mortgage and Housing Corporation’s (CMHC) Apartment Construction Loan Program are behind the push for purpose-built rentals that may not have otherwise moved forward. Vacancy rates dropped to 2.4 per cent in October of 2023 (4.3 per cent in 2022), despite close to 3,000 rental units coming on stream in the Edmonton CMA last year, with most located in the downtown core, West, and Mill Woods, according to the CMHC’s Rental Market Report.

CMHC’s mortgage loan insurance for multi-unit student housing has also attracted capital investment from outside the province, with several large student housing projects underway near the University of Alberta, MacEwan University, Concordia University and NorQuest College.

Construction in Edmonton’s industrial sector continues unabated with new developments going up in peripheral areas such as Acheson, Parkland, Leduc/Nisku, and St. Albert where tax obligations are significantly lower. Vacancy rates remain low –hovering at 2.5 to three per cent—and new product is absorbed quickly. The city continues to attract national tenants in large part due to higher cap rates. The most sought-after buildings at present are those that offer storefront showrooms with distribution and warehousing in the rear.

Retail is on the upswing as prosperity grows in the city, with more people venturing out to shops and restaurants. Development land zoned retail is increasingly difficult to find, and buyers are willing to pay a premium for suitable land. Private developers will pick up good locations if attached to a viable project. Grocery sites are highly desirable. Lease rates for new retail product –approaching $45 per sq. ft.— reflect the higher costs of land and construction.

Malls continue to perform well, attracting big-name retailers such as Nike, which recently opened its largest store in Canada at West Edmonton Mall, as well as American fast-food chains Chick-fil-A and Krispy Kreme. Renovations and upgrades are underway as landlords continuously seek to improve the shopping experience. The recent completion of the Mill Woods Transit Centre, a future stop on the LRT’s Valley line, has created future possibilities for the mall to enhance its value, while at the same time, helping to ease the city’s housing shortage. A masterplan created by the Mill Woods Town Centre includes a mixed-use development for the site featuring three high-rise residential towers.

Strip malls and retail centres remain popular in the city and peripheral areas. There has been a shift away from more traditional retail operations to more service-oriented retailers including medical and dental offices, health and wellness clinics, and hair and nail salons, just to name a few.

The weakest asset class in Edmonton is its office sector. Despite a report from Altus Group that found availability rates have edged slightly downward to 19.9 per cent in Q1 2024, compared to the previous quarter, the downtown core continues to struggle. Tenant flight to quality Class A buildings and the suburbs is still occurring, with net lease rates on the upswing, rising just over 10 per cent year over year, now priced between $25 to $27 per sq. ft. While rates have climbed, some of the older buildings in the downtown core are selling at close to land value as demand has essentially evaporated and REITs divest existing office portfolios.

Efforts underway to improve the downtown business district have resulted in some success, best illustrated by the increase in foot traffic. Restaurants are reaping the rewards as more people are drawn to the core in large part due to greater safety and security measures, hybrid work models and large-scale events including concerts and hockey games. New purpose-built rentals complement existing condominium developments in the core, with some office spaces transitioning to residential. The Phipps McKinnon Building, sold in March of this year, is the most recent project with the new owners planning a $22-million partial redevelopment including 90 residential units on the fourth to tenth floors.

Edmonton’s commercial market is expected to flourish in the future, as the population surges ahead. GDP growth in the city is expected to outperform the national average, with positive business sentiment driving investment this year. The stage is set for tremendous growth in the city’s bourgeoning tech sectors, specializing in nanotechnology, microelectromechanical systems, big data and analytics, and machine intelligence (AI), all of which will fuel increased demand for office, industrial, retail, and multi-family construction in the years ahead.

Regina

An optimistic local and provincial outlook has underpinned strong commercial activity in Regina and the surrounding areas in the first four months of 2024, with a 50 per cent uptick in sales over year-ago levels for the same period. Twenty-four commercial properties have been sold year to date on the city’s Multiple Listing Service (MLS), with larger sales contributing to a 68 per cent increase in average price year over year.

Economic expansion is underway in the Queen’s City, with its labour market “firing on all cylinders.” Approximately 10,000 more people are working in the region yet demand for skilled workers is ever growing. International and interprovincial migrants continue to accelerate population growth and drive demand for housing. According to Regina’s recent economic report card, the unemployment rate hovered at 3.4 per cent in March of this year, while non-residential building permits soared 18 per cent as of February year to date, compared to year-ago levels.

Recent investment in the city includes the first phase of SaskPower’s new logistics warehouse, which was completed earlier this year, with the second phase expected to open by 2026. The company has also wrapped up its head office refurbishment and the purchase and renovation of a nearby building, which would bring its overall investment in Regina to more than $400 million. The case is also building for a biomass cluster in the Greater Regina Area (GRA), with Economic Development Regina (EDR) joining public and private sector leaders in support of the project, which could generate as much as $1.8 billion in economic activity by 2027. According to a recent press release from Economic Development Regina, “the GRA’s biomass play primarily focuses on the agriculture sector, and includes crops and crop residue, including canola, wheat, and flax. Those products can be transformed into bioenergy or other biomaterials.”

Growing global demand for clean energy is elevating the province’s uranium giant Cameco on the world stage, creating job opportunities in the northern parts of the province, while Saskatchewan’s potash producers, supplying a third of the world’s potash, continue to create a windfall for the province.

Against a vibrant economic backdrop, interprovincial investors, primarily from Ontario, continue to filter into the commercial market, vying for the city’s top-performing asset class –industrial—with the local business community. Vacancy rates at 1.1 per cent for industrial product have frustrated many potential buyers, especially given scarce inventory of warehousing and distribution space in sought-after industrial parks such as Parker Industrial, Ross Industrial, Tuxedo Park and the Warehouse district.

New industrial development within Regina usually involves the demolition of existing industrial facilities or building on the limited serviced land available in areas such as Ross Industrial Park. Businesses not requiring a location in Regina Proper may choose to exit the city in favor of surrounding communities where land is less expensive to buy, services are less expensive to complete, and of course, much less tax.

Higher servicing costs in the city proper have deterred developers from bringing on more serviced land in recent years, as higher costs and levy fees cannot be recouped at current market values. Neighbouring areas such as Pilot Butte and White City offer land priced at approximately $200,000 per acre for industrial projects. The cost of construction, however, can add to lease rates being a bit higher for new buildings versus existing but there are a lot of positive offsets for the new versus used.

Activity has been greatest in the $500,000 to $750,000 price range, with commercial properties listed in this sweet spot moving quickly, some in multiple-offer situations. When an owner-occupier is involved, properties will typically move above market value. Limited availability of industrial and existing multi-family within the city of Regina has influenced the uptick in values.

Vacancy rates for purpose-built rentals hovered at 1.4 per cent in late 2023, according to the Canada Mortgage and Housing Corporation (CMHC), with apartments near the University posting the lowest vacancy rates at 0.3 per cent. Just 176 units were added to Regina’s purpose-built rental stock in 2023, an increase of 1.3 per cent over the previous year Little multi-family product is available for investors, particularly in Regina’s coveted northwest corner. Properties that do make it to market are selling quickly. Cap rates on existing multi-family typically run between 5.5 per cent and six per cent.

Prior to the Federal Budget, affordable townhouse clusters with a minimum of five attached units could be found in smaller numbers in residential communities to larger projects in higher density areas. The concept is now growing in popularity with investors due to attractive financing rates and longer amortization periods as promoted and approved by CMHC, coupled with incentives including the cancellation of the Goods and Services Tax (GST) up to $1 million, and relaxed provincial sales tax (PST) for new builds. Widespread development of townhomes is expected to continue given the current housing crisis—especially in higher-volumes—but investors will now be forced to take a hard look at their long-term investment strategy given the introduction of the new capital gains tax effective in late June. There has been a slight pullback in recent weeks as investors weigh their options, with one commercial landlord taking 15 properties off the market, given the inability to sell within the deadline.

Real Estate Investment Trusts (REITs) and institutional investors are always active in Regina, but few large deals have been announced this year. Most tend to focus on purpose-built rentals and are typically prepared for a long-term hold. Several large projects are in the planning stages, with a quick glance at applications to amend zoning bylaws at the city showing a variety of proposals, including a mixed-use high rise, a townhouse-style development with 166 units and a medium-density residential townhome development for 162 units currently in the queue. The city has also taken advantage of federal government incentives to create additional housing by removing neighbourhood restrictions and allowing construction of up to six-storey apartments throughout Regina proper.

Retail has seen some exodus from the downtown core, with The Bay announcing the closure of its Cornwall Centre location next spring. Social issues in the area continue to impact retail in downtown, an area that is already seeing a reduction in foot traffic post-pandemic due to hybrid work schedules. Enclosed malls are also struggling as consumers continue their relationship with e-commerce. Most retail activity is occurring in suburban markets with strip plazas and big-box retail doing relatively well. Demand for lease space is relatively healthy, with a new mix of tenants coming to the forefront.  Increase in demand for storefront from dental and medical offices –both for sale and for lease– is evident yet little existing product is available. Lease rates are running high for relatively new retail construction in sought-after neighbourhoods, especially for start-ups.

Given the current healthy economic climate, both locally and provincially, multi-family, small strip malls, and industrial properties will continue to be the premier asset classes. Farmland will continue to perform well as strong demand exists from local farming operations, supported by the increase in commodity values. As a result, farmland values are rising with upward pressure on the price per acre.

Saskatoon

Saskatoon’s commercial market continued to experience strong demand for multiple asset classes in the first quarter of the year, with transaction volume for existing businesses, hotels and farmland on the upswing as local and interprovincial investors enter the market. More conventional multi-family, industrial and retail categories remain solid year over year, with some upward pressure on values.

Positive economic growth in key sectors of the provincial economy have set the stage for a vibrant commercial real estate market in 2024. The province is growing at rates not seen for more than a century, and the economy continues to accelerate with record private capital investment and GDP growth, according to a May 7th press release from the provincial government. The latest GDP numbers for Saskatchewan show GDP reached an all-time high of $77.9 billion in 2023, surpassing year-ago levels by 1.6 per cent–well above the national average of 1.2 per cent. Private capital investment is projected to reach $14.1 billion this year, an increase of 14.4 per cent over 2023.

Business sales and acquisitions for well-established retail franchises, convenience and grocery stores, restaurants and gas stations have soared this year, despite incredibly tight lending practices. Limited inventory levels have hampered sales to date, especially for gas stations, but buyers continue to wait patiently in the background.

Hotels are now a preferred access class with many investors. Four hotels changed hands so far this year in Saskatoon and the surrounding areas, with large investors from Ontario leading the charge. For example, a 40-room hotel with net net income of $260,000 per year generated six competitive offers, all coming from the same province. Supply is also limited in this segment of the market, due in part to many hotel owners who are holding off on sales until their books reflect a full year of post-pandemic reservation activity.

Demand remains solid for warehousing and distribution space in the industrial market, with lease rates climbing to $12 to $15 per sq. ft. Investors and owner-occupiers are seeking older industrial buildings within Saskatoon for demolition and rebuilding or repurposing. While there is pressure to build new developments on the outskirts of town where land costs are lower, the price of construction has dramatically increased in recent years, given labour shortages, the high costs of financing and servicing the land.

Developers are more likely to focus their attention on the multi-family segment in Saskatoon due to the current housing shortage, with most sitting on pre-purchased land at present in a build-to-hold pattern until they bring in partners. Real Estate Investment Trusts (REITs) and institutional investors are exceptionally active in this segment, given the two per cent vacancy rate (October 2024) and an average monthly rental rate for a two-bedroom apartment up by nine per cent, according to the Canada Mortgage and Housing Corporation (CMHC). While condominium construction has also been affected by higher overall costs, the potential for higher monthly rental rates has investors lining up, particularly for townhomes and row housing.

Demand for retail has been consistent, given the current rate of residential construction throughout Saskatoon. Strip plazas and stand-alone buildings are most sought after by eager tenants, with lease rates ranging from $25 to $35 per sq. ft. plus common areas. However, investor interest in strip plazas has subsided somewhat in 2024, compared to levels reported in years past, with inventory climbing as a result. Malls are also under pressure, with three currently listed for sale.

Saskatoon’s downtown office market is struggling in large part due to the addition of several new office buildings, which created a vacuum in B and C-class buildings. There is some divestment occurring this year, with Dream Investment Fund recently listing a large portfolio of nine office buildings (three of which are in Saskatoon and six are located in Regina), representing more than half a million sq. ft. of office and retail space. Hybrid work schedules combined with post pandemic social issues are having an impact, resulting in a significant reduction of foot traffic in the core.

Farmland remains a coveted asset class in the province, with large corporate farms gobbling up acres of land this year. Saskatchewan led the country with the highest percentage increase recorded in cultivated farmland in 2023, according to the FCC Farmland Values Report released in March 2024. The price per acre rose 15.7 per cent last year, with the strongest uptick reported in the East Central region where values surpassed the overall average at 20.8 per cent. Values were highest for irrigated land in the West Central and South West regions, fetching an average of $6,500 per acre.

Supply of farmland remains exceptionally tight, with the lowest number of properties listed for sale in years. In fact, few farms make it to the Multiple Listing Service (MLS) because most are selling through word of mouth. Multiple offers are occurring with increasing frequency, especially on properties that are adjacent to existing farm operations. Record commodity prices in the past year have contributed to the expansion boom, with many farmers sitting on pent-up cash reserves. The vast majority of deals are cash purchases and not dependent on financing.

Winnipeg

While the high cost of construction continues to impede development of Winnipeg’s top-performing asset class, the influx of just over 400,000 sq. ft. of industrial space over the past two quarters has brought some-much needed inventory to this exceptionally tight market. Vacancy rates for industrial have edged slightly higher as a result, now sitting at 3.1 per cent, but space is expected to be absorbed as demand from national tenants continues unabated.

Notwithstanding the recently completed inventory, limited availability remains. Additional construction is underway in Winnipeg’s Northwest and Southwest quadrants. Lease rates for industrial space are relatively stable at present, despite the increase in supply.

Winnipeg’s “post-pandemic hangover” continues to impact the city’s downtown office segment. A vibrant redevelopment plan for the former Hudson’s Bay building and Portage Place, combined with the conversion of under-utilized office space to residential apartments and hotels will reduce office inventory and should breathe new life into the urban centre in coming years. To date, several offices have been converted to residential, including the top 10-floors of 433 Main St. and the retrofit of 175/85 Carlton St. Hyatt Hotels announced late last year that the six-storey empty office space at 325 Broadway will be converted to a Hyatt Centric, a 140-room boutique hotel. The True North Real Estate Development Plan and the Southern Chiefs’ Economic Development Organization’s vision for Portage Place and the Bay moving forward would be a boon for the city.

Flight to quality Class A space continues its trend in Winnipeg, with the completion of the True North development, pushing up vacancy rates in B and C class buildings in the core. Wawanesa officially moved from their 191 Broadway offices to the third True North Square building recently, adding approximately 120,000 sq. ft. of vacant space to an already over-saturated market. Altus Group recently pegged availability rates in the city at 15.8 per cent in the first quarter of the year, up significantly from year-ago levels. Shadow vacancies are also a reality as hybrid work schedules take hold. Employers are dealing with diminished requirements for office space; however, often the under-utilized space is not large enough to sublet, and there’s no demand, thus creating a problem for employers and landlords alike. ARTIS REIT is leading the way in divestment of their office holdings in the city.

While conversion to residential is no easy feat, given electrical, mechanical and plumbing restrictions, offices that have a smaller floor plates (typically 10,000 sq. ft. or less), and large windows generally have the best chance for residential conversion. The selection and planning process takes time, including concrete x-rays of each floor, and continual revisions to original plans as new details emerge. While conversion is an expensive undertaking, it can provide landlords with a good return on investment if their properties work.

Winnipeg’s suburban offices are holding their own, with a vacancy rate well below the core. More quality space is needed in this segment, but few commercial developers (and lenders) are interested at this juncture in time.

Builders and developers have been focused on the creation of additional housing units, given the city’s housing shortage, with construction cranes dotting the city’s skyline. The Canada Mortgage and Housing Corporation (CMHC) continues to incentivize builders with attractive interest rates and long amortization periods. Coupled with the federal government’s cancellation of the Good and Services Tax (GST) on new residential construction announced last year, this segment of the commercial market continues to rattle and hum. According to the CMHC, more than 1,600 units were added to the housing pool in 2023, with vacancy rates hovering at 1.8 per cent for purpose-built rentals in October 2023. Demand for rental units were greatest in suburban areas, with vacancy rates outside the core hovering at a tight 1.3 per cent.

Winnipeg is also one of the cities that has taken advantage of the federal governments new housing initiative, receiving $12.5 million to loosen existing zoning restriction on new development in residential neighbourhoods. The move will allow investors to buy and demolish a single-family home in any community to build multi-family infill without approval from the city.

Polo Park Mall is in the planning stages of a substantial mixed-used development the vacant land surrounding the mall, including several high-rise apartment buildings ranging between six and 12 storeys. The development will take more than 20 years to complete, once approved.

Retail throughout the city has been exceptionally strong with low vacancy rates. Limited construction activity has occurred in the retail sector as of late, which has strengthened demand for existing product. Bricks and mortar stores remain as relevant as ever, despite strong e-commerce transactions. The city hasn’t seen a lot of big-box development in recent years, with most large format brands looking for turnkey deals at present.

Malls are doing well, with an influx of new restaurants, entertainment facilities and gyms complementing the existing tenant mix. Retail in the core has struggled due to the reduction in foot traffic and social issues. The long-term objective for the core is the development of more residential apartments and hotels to increase foot traffic.

The prospect of lower or even predictable interest rates combined with solid business investment intentions in the province bodes well for the commercial real estate market in 2024. Unemployment rates remain below the national average, sitting at 4.8 per cent as of April 2024. Health care, wholesale and retail trade and manufacturing remain the greatest economic drivers, which combined with increased immigration to the province, should further bolster commercial activity.

London

London’s commercial market remains relatively unchanged from year-ago levels, but activity is expected to gain momentum later this year as interest rates move downward. The city’s rapid growth and close proximity to major transportation routes and the US border have bolstered demand for commercial real estate in recent years. Industrial, multi-unit residential purpose-built rentals, and retail remain the strongest asset classes, while office leasing continues to struggle in the city’s core.

Demand for industrial properties has remained consistent with year-ago levels, although a lack of available product has hampered sales. Demand is largely driven by end users, many in the fabrication, distribution, warehousing and construction industries, looking for product ranging in size from 5,000 sq. ft. to 20,000 sq. ft. Leasing is also a popular option but space is limited, which has contributed to upward pressure on the price per square foot. Industrial space now rents out for between $10 to $12 per sq. ft., almost triple prices paid seven to eight years ago. With few serviced lots expected to come on stream in the near future, continued upward pressure on prices and lease rates will likely persist.

While the retail segment continues to show strength and with scant availability in the city’s strip plazas, malls in the area continue to evolve. Cadillac Fairview’s Masonville Place has plans to build several residential towers, up to 22 storeys in height, in its under-utilized parking lot in an effort to complement their retail presence. Other malls, such as the Galleria, are changing up their t