Uncertainty over the economy and geopolitical tensions dominated discussions at last week’s Connect Canada conference in Toronto.
Ongoing tension over U.S.-imposed trade tariffs, industry tremors created by artificial intelligence and a shaky national economy are among the headwinds that so far have short-circuited what was expected to be a rebound year for Canada’s commercial property markets.
Instead, paralysis remains – at least in the near term.
“These are things that are extraneous to real estate, so it’s much harder to figure this out,” said Peter Ballon, president of Royalhill Capital. “How do we plan for that? That’s really hard.”
With the market at a crossroads, commercial property investors are eschewing traditional assets and taking more prudent approaches to their existing spaces to find value.
Placemaking driving office interest
Placemaking, the idea of making public spaces more inviting and interesting to visitors, is becoming an essential need for all commercial sectors, particularly the beleaguered office market.
Nowhere is that more apparent than in highly populated urban areas such as downtown Toronto, where vacancies are considerably lower in well-placed buildings with high-quality amenities and inviting public spaces, compared with typical office space found in the city that lacks similar public spaces.
“They are generating premium rents that the city hasn’t seen before,” said Jonathan Olynick, Colliers senior managing director, citing CIBC Square, Brookfield Place and other office buildings in the downtown core.
“There’s such a delta between those buildings and the rents they’re achieving compared to the typical AAA lease,” he said.
Public office spaces with programmed entertainment and opportunities for interaction have experienced sharp increases in the number of visitors and time spent. Younger generations of workers in particular are increasingly demanding such amenities.
“Cookie-cutter developments don’t work anymore. I think that you have a more discerning younger audience who expects great experience in any of the spaces. And you can charge more,” said Coralie Olson, Massivart managing partner.
Green shoots for alternative assets
While some of the more traditional sectors remain challenged, at least in the short term, alternative assets including student housing and senior housing are showing tremendous potential and drawing interest from foreign investors, particularly European.
With tariff uncertainty clouding U.S. investment opportunities, Europeans are said to be eyeing the Canadian market.
“I still don’t have a single U.S. investor in a billion-dollar-plus fund in Canada. I have Europeans tripping over themselves to get into this vehicle,” Harrison Street managing director and student housing investor Jonathan Turnbull said.
There’s still value to draw from traditional asset classes, like industrial. Demand for small bay property, such as industrial condo space, continues to remain strong as tenants look to shed underutilized space.
“We’re seeing the older conversions that are still being eaten up by users, and it’s not getting affected by trade [uncertainty],” said Diana Hoang, owner and managing director of Spear Realty.
Rental replacing condo interest
With residential condominium sales at their lowest point in years, developers are increasingly turning to purpose-built rentals, an asset that was not considered desirable as an investment vehicle until recently.
A lot of the new interest is coming from publicly traded real estate investment trusts, which are increasingly looking to place rental options in planned multifamily developments.
“We are seeing that mix of purpose-built rental and condo versus before when [REITS] would only want to invest in new condos, said Riz Dhanji, Rad Marketing president.
Even with higher capital requirements and the likelihood of a longer horizon before a decent return is realized, developers are showing high conviction for rental properties and shifting their portfolios away from the traditional condo market to take advantage of better financing.
“Compared to the last 20 years, when people were obsessed with condos, it’s swinging the other way with rental,” said Henry Chung, First National Financial assistant vice president of commercial financing.
