- What Canadian commercial real estate investment transaction volume plummeted 55.3% quarter over quarter in Q1
- Why It’s part of an ongoing trend of private investors who make smaller transactions accounting for more of the sales volume
- What’s next Industrial and multifamily continue to perform well as office leasing sees some improvement in select markets
Investment capital flowing into Canadian commercial real estate took a nosedive in Q1, Morguard said in a new report.
Just $2.6bn of transaction volume was recorded in Q1 for deals over $10m across the Greater Vancouver, Calgary, Toronto, Ottawa and Montreal areas, marking a 55.3% quarter-over-quarter decline and a four-year low for the quarter.
Sales volumes fell quarter over quarter across asset types, including multi-suite residential (-50.2%), industrial (-55%), retail (-55.3%) and office, which hit a seven-year quarterly low of $282.8m.
The largest transaction of the quarter was MDM Venture’s $138.7m purchase of The Quarry, a shopping centre in Cochrane, Alta. Morguard’s $125.3m sale of its office property at 181 Queen Street in Ottawa to Public Services and Procurement Canada was next, followed by RioCan Real Estate Investment Trust’s $100m purchase of a 50% interest in Lawrence Plaza in Toronto.
The slowdown in capital coming into the commercial real estate sector has been ongoing since the second half of 2022, when the rising cost of debt began mixing with economic uncertainty, Morguard noted. Those factors contributed to a widening gap in price expectations between buyers and sellers.
Industrial properties have remained relatively popular investments, with the sector outperforming other asset classes. In Q1, industrial deals accounted for $1.2bn of the total $2.6bn of investment transactions.
Owner/users were the main drivers behind these sales — which Morguard attributes to “the financial advantages of ownership and the desire to control the real estate in which they operate.” A number of private capital groups also took advantage of reduced competition as institutions and pension funds remain on the sidelines.
Multi-suite residential rental properties were the second most popular asset class in Q1, accounting for just over $568m of sales spread across 21 transactions and just over 2,000 units. Still, the quarterly average transaction size dropped to a three-year low as more private groups picked up smaller-scale properties. Meanwhile, institutions and pension funds are increasingly looking outside of Canada.
Limited positivity for leases
Despite continued headwinds in Canada’s office leasing market, some major cities saw notable improvements. Edmonton and Ottawa experienced “materially positive performances,” with 127,000 sq ft and 91,000 sq ft of space absorbed, respectively.
In addition, the Post’s north tower and B6 in Vancouver and Wawanesa Tower in Winnipeg were all fully or close-to-fully leased upon completion in Q1.
Toronto and Montreal, however, saw significant declines, with nearly 700,000 sq ft of space returned in Toronto and over 300,000 sq ft of space returned in Montreal. These losses contributed to the national vacancy rate inching higher to 18.4% — a 60 bps year-over-year increase. Tenants are continuing to downsize, Morguard said, leading to weakening demand.
The industrial leasing market also waned, with the national availability rate rising to a six-year high of 3.7% in Q1. This is 220 bps higher than the cycle-low of 1.5% seen in Q3 2022. “The rising
availability trend of the past several quarters was driven in part by a combination of a surge of new supply and an increase in sublease offerings in certain markets,” Morguard said.
Nearly 9.6m sq ft of new supply came to market in Q1, much of which was suited to warehouses and logistics users. Vancouver and Calgary were the only major markets to see positive absorption of 1.4m sq ft and 1.2m sq ft, respectively.
Retail leases remained relatively stable, with the national vacancy rate standing at 6.6% — down 40 bps year over year. Downtown cores where foot traffic has remained low have seen vacancy rates remain elevated.
Stores selling essential items, as well as discounters, are continuing to expand as space in prime or premium locations has fallen into relatively short supply.