Tight commerical inventory levels

Tight commercial inventory levels impede sales activity in most major Canadian real estate markets, says RE/MAX

October, 29, 2013
Mississauga, ON (October 29, 2013) – While unprecedented levels of demand have been reported for commercial real estate in key Canadian markets this year, a shortage of available product continues to hamper sales activity virtually across the board, according to a report released today by RE/MAX.
Commercial Investor Reports
British Columbia
Greater Vanvouver
Alberta Edmonton
Saskatchewan Regina
Manitoba Winnipeg
Nova Scotia Halifax  
Newfoundland and Labrador St. John's
The 2013 RE/MAX Commercial Investor Report, highlighting trends and developments in 11 major centres across Canada, found that commercial inventory remained scarce during the first half of the year, particularly in the multi-unit residential, industrial, and retail sectors.  Sales softened in 73 per cent of markets examined between January and June 2013 in response to dwindling supply.  Hamilton-Burlington, St. John's and Calgary bucked the trend, reporting a 15 per cent, 10 per cent and eight per cent increase respectively in the number of commercial units sold.   Dollar volumes have declined in tandem, with the exception of the Greater Toronto Area—where RealNet reports volume is up almost 28 per cent over last year's levels to $7.7 billion—Hamilton-Burlington and Winnipeg.  Despite some pullback by large institutional investors (REITs and pension funds), smaller investors and end users have been particularly active, fuelling demand for industrial product, multi-unit residential product—on both a large and small scale basis—and retail storefront.
"There's a lot of money chasing a limited supply of commercial product, be it multi-unit residential, industrial, or retail storefront," says Gurinder Sandhu, Executive Vice President, Regional Director, RE/MAX Ontario-Atlantic Canada.  "In some areas of the country, we're seeing unsolicited offers on product not available for sale—often well above market value.  Demand has placed serious upward pressure on price in most markets and contributed to lower cap rates across all asset classes.  Looking forward, little is expected to change heading into 2014, which makes inventory the ultimate wildcard in commercial performance." 
The report identified two major drivers responsible for the upswing in demand for commercial properties—the combination of historically low interest rates and relatively solid economic performance.  Over the past two quarters, Gross Domestic Product has risen on a national basis by 2.2 and 1.7 per cent respectively.  The Bank of Canada is expecting third quarter performance to hover between two and 2.5 per cent.  That's translated into renewed confidence from a business perspective and provided the catalyst necessary to renew market activity.
"Risk aversion appears to be behind the thrust for commercial product, with owner-operators now investing in themselves," says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada.  "Rather than pay rising office, industrial or residential rental rates, end users are competing against small and large investors for prime commercial buildings.  The trend is especially evident in terms of demand for industrial real estate where a limited supply of product has generated the lofty prices now attached to that sector."
Tight market conditions were noted for industrial product in 91 per cent of markets (10/11) examined in the RE/MAX report.  Owner-operators were exceptionally active in major centres, with most seeking out buildings under 10,000 sq. ft.  Strong demand fueled price increases across the board, with the most pronounced appreciation occurring in Regina, where the price per acre of industrial land almost doubled between 2008 and 2013.
The report also found that the market for retail product, including storefront, strip plazas, and malls, continued to be characterized by solid demand, with close to 82 per cent of major centres (9/11) noting an upswing in activity.  Supply was of particular concern in trendy, urban cores.  Strong retail expansion—underway in centres across the country—supports ongoing demand, given the influx of American and international brands to the Canadian marketplace.  Their presence has increased competition, along with the desire for increased visibility and a stronger footprint in the marketplace.  Ongoing residential construction has also provided a boost, giving rise to a growing number of box stores, power centres, outlets and strip plazas in newer communities throughout the nation.
Multi-unit residential remained a perennial favourite, with virtually all markets reporting consistent demand.  End users were also extremely active, enticed by the opportunity to live in their investment, while at the same time securing a steady income stream.  The appeal of this segment was universal in nature.  From small to mid-market purchasers, right up to large institutional investors, buyers were keen to get a piece of this segment.  However, inventory proved particularly elusive.  The lack of new rental construction in many markets has created a bottleneck in demand versus sales, and the stark reality is few owners are listing existing product.
"Those with commercial holdings have sent a clear message," says Sandhu.  "They're essentially saying, 'we have a good thing going, and we're not willing to part with it.'  For love or for money, owners are holding firm and it's creating a real challenge in the marketplace.  A serious portion of commercial sales are exclusive—that's been the case for years—but as demand has risen, it's made navigating the market increasingly difficult, especially for those with a lighter portfolio.  Yet, buyers remain undaunted.  In what many have traditionally considered a 'big fish' game, more and more individuals are making the foray into the market—a reflection of confidence, climate and a new investor mindset." 
While most segments of the market remain fairly vibrant, the report found that inventory has been quietly building in Canada's office segment.  New construction and, in some cases, consolidation of space among existing tenants has resulted in rising vacancy rates.  While values have held relatively firm so far this year, some softening of lease rates is possible should the current trend continue.  Land sales—especially on the residential end—have also trended downward in 2013, in tandem with housing starts which are off last year's pace by 15 per cent.  Although major players continue to step up to the plate to secure favourable positioning down the road, some developers have clearly scaled back.
"On the whole, Canada's commercial market is quite sound," notes Ash.  "The majority of investors—both local and those from abroad—seem intent on long-term holds which, despite the supply issue, always bodes well for stability.  Our major centres are redefining themselves through revitalization and exciting new projects, and we're raising our profile in the process.  Population growth and increased density will absolutely necessitate further evolution and place greater pressure on commercial product down the road.  Future prospects, combined with current market realities—such as weak returns in other investment classes—have all but made commercial real estate a darling among investors."
RE/MAX is Canada's leading real estate organization with over 19,000 sales associates located in 750 independently-owned and operated offices nationwide.  The RE/MAX network, now in its 40th year, is a global real estate system operating in more than 90 countries, with over 6,300 independently-owned offices and more than 89,500 member sales associates.  RE/MAX associates lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral, and asset management.  For more information, visit: www.remax.ca


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