Canada in 2017 the commercial real estate(CRE) market attracted 24.2B US dollars a 35% decrease compared to 2016, and we see numbers in $21.5B range for 2018.The drop was due to governmental policies and the reduction of loans between energy and mining companies; NAFTA has had a decisive impact on the inflows and outflows of capital. In fact the EU and the US are the main investment partners in Canada. Nearly a third of investment in stock in Canada is held by the US, the Netherlands, Luxembourg, Switzerland Japan, Brazil, Hong Kong and Germany. Canada has very favorable business climate and is rank 22nd of the World Banks 2019 Doing Business Report.
Canada has a stable CRE market that is facing obstacles in the housing market. In 2016 the CRE market in Canada was at a record high of $34.7B dollars.With foreign investment totals of $5.6B which accounted for 27% percent of all deals above $10M. In 2018 the Canadian home market was down 16% with the backdrop of rising interest rates.The primary cities for capital flow are Toronto and Vancouver; both are going through a construction boom. The construction sector in the two cities is on track to its 10th year of growth. Toronto land cost is competing with Vancouver for record rates. The vacancy rate for downtown office space is 3.4% and appears to be getting tighter. Vancouver market fundamentals look good and is expected to grow at 2.3%.The condo and townhouse markets have slowed in Vancouver brought on by a 20% percent foreign buyers tax and a empty home tax of 1% percent on homes above $3M . Vancouver was second to Montreal for new apartments in the pipeline in 2018.
Vancouver office space is at historic lows hitting 5% vacancy down from 6.8 percent in 2017. This is leading more tenants to the suburbs which will see more opportunity for growth in 2019. For capital flow. the focus is on industrial and logistics . Most landlords are holding onto the space that they have and redeveloping old space. Single-Family Residential developer states “The underlying fundamentals of a good market are still fair in Canada. The low-rise segment is under pressure.” Survey respondents see development prospects for single-family housing being the best compared with those for other major property types, a sentiment that has continued to improve over the past three years. Despite positive prospects housing for many is out of reach. The supply is tight because of construction and mortgage stress test controls both the rental and home market sales volume is flattening.In major cities and affordability remains a major concern in Toronto and Vancouver. Single-family housing accounts for a quarter of residential inventory currently under construction in Canada.In 2017 the housing market sold 46K homes once the stress test was implemented transaction volume dropped 14 percent. The CMCH Canadian Mortgage Housing Corporation believes that pricing will move in harmony with the economy.
Rising interest rates, higher personal debt levels, and tougher stress tests on residential mortgages imposed by the Office of the Superintendent of Financial Institutions have had an impact on consumer affordability in Ontario and British Columbia, as well as in oil-dependent Alberta. But in markets that enjoy greater affordability, including the Maritimes, Quebec, and Manitoba, pricing should remain firm.The office market in Canada was down 12% year over year,the office market is being held up by the tech industry.
However we see industrial or logistic sector will be the best investment sector for global investors in Canada for 2019. Canada has a strong e commerce platform with Shopify and the industrial sector is expanding with the legalization of cannabis.
Canada’s legalization of recreational cannabis is set to boost commercial real estate opportunities across the country in 2019 as emerging companies look to find industrial space to grow the plant and retail space to sell the product. At least one major retail REIT said that legalization may bring premium rents and new demand. There were a number of industrial deals in the first half of 2018 in the logistic market. Looking at deal flow value (CA$6.4 billion) in 2018, major transactions involving companies like Aimia Inc. (CA$2.3 billion), Student Transportation Inc. (CA$1.3 billion) and the A25 bridge in Montreal (CA$858 million) helped deliver a 206.9% increase over 2017 (CA$2.1 billion).
Towards the end of the year, deal activity in the industrial sector was relatively quiet, with no major transactions in the fourth quarter of 2018. Deal volume fell by 50% on a quarterly basis to nine transactions in Q4 2018 from 18 deals in Q3 2018. Deal volume in Q4 2018 was down by 35.7% on a year-over-year basis from 14 deals in Q4 2017. Deal value also declined, falling to CA$302.5 million in Q4 2018 from CA$2.8 billion in Q3 2018 (largely reflecting the Aimia transaction) and from CA$640.8 in Q4 201. Prime markets in Canada are at the mature stage of the real estate cycle and is on a moderate control strategy. But in terms of deal volume, activity fell by 13.2% to 59 deals from 68 the year before.
Canadian retail is looking for various ways to increase the net income. For example, one GTA-based shopping center is considering a long-term plan to convert some of its parking lots into mixed commercial and residential space. But these hedging and niche strategies are often easier said than done. As the retail sector continues to face disruption on several fronts, landlords are looking to data analytic s to develop new rental models, deliver new insights about tenants, and improve operations. Canada is one of the top markets in proptech and is growing aggressively.
The 2019-2020 commercial real estate market in Canada is best explain by Vancouver Kingswood Capital CEO Joseph Segal who said “ your are going to see demand start to diminish, unless you have something exceptional, your going to be like everyone else, and your going to have to wait,because this market will start to turn”. Again we like industrial markets in Montreal,Vancouver, and suburban Toronto. Private Equity natural resource funds has raise $9.3B dollars for investment mining and we feel Canada will be a strong target for logistic, infrastructure, and natural resources in 2019.
We like Montreal real estate hands down which is expect to be boosted by foreign buyers entering into the market. Also prices have not peaked in Montreal which is well located to US northeast and distribution channels to prime markets.
Brookfield Asset Management who raised $2.4 Billion for the Timberland Fund to invest, ARC Financial Corp a PE firm who raised $1.9B and is focused on oil and natural gas . Many of the Canadian pension funds and private equity vehicles have already launched global diversification platforms in the Asia Pacific in search of meaningful yield.