The continued strength in Canada’s real estate industry, along with the expectation of low interest rates in the medium term, should provide added appeal for investors looking for income-producing commercial real estate properties, according to a new report from BMO Economics.
“After a severe and protracted market downturn in the 1990s, the commercial real estate industry in Canada has been characterized by cautious development and prudent lending practices,” said Earl Sweet, senior economist and managing director with BMO Capital Markets.
Sweet noted several factors that make the sector attractive for investors:
- Supply is limited, with vacancy rates lower than historical norms across segments in many cities.
- Risk-averse operations have helped to improve balance sheet performance of developers, construction firms and realtors.
- Robust corporate performance—along with lending discipline—has maintained the quality of real estate loans at a high level.
- Ultra-low interest rates have supported real estate development and prices in Canada.
“Higher occupancy—spurred by steady growth in employment, manufacturing, wholesaling and retailing—is reducing office, industrial and retail vacancies, while lease rates are edging upward. Meanwhile, large U.S. retailers are targeting what they view as the underserved Canadian market for expansion,” explained Sweet.
Sweet said the market is likely to grow at a more tempered pace this year and next, with Canada’s economic growth expected to ease to 2%. “Furthermore, the still-unresolved eurozone crisis and slowing momentum in the United States and several major emerging markets will continue to weigh on investors’ risk appetite and adversely affect the industry in the short run.”