Five factors to consider when investing in commercial real estate

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While COVID-19 affected the outlook for certain types of commercial real-estate, with lockdowns and changing work patterns that still continue, many high-net-worth investors see strategic opportunities in the sector.

With geopolitical risk, inflation and interest rate hikes, as well as ongoing business and economic repercussions from the pandemic, investors are seeking solid long-term investments beyond debt and equity.

“Commercial real estate is holding its value and growing at an impressive rate. Canada’s fundamentally strong economy, our impressive immigration rates and many other factors make this an asset class that has long-term benefits, says Benjamin Shinewald, President of BOMA Canada.

Here are factors to consider when looking at investing in commercial real estate:

COVID Variants

The outlook is still varied. The arrival of omicron last November has complicated the commercial real estate outlook by slowing the pace of people returning to offices and shopping in person. But already, with masking and other COVID-related restrictions lifted in most cases, companies are ramping up plans to fill office buildings, though retailers and other businesses are struggling with supply-chain disruptions. The question mark on the horizon is whether another variant will arrive to drive further waves that may affect in-person interactions.
https://financialpost.com/fp-work/companies-need-to-make-the-return-to-office-a-priority

Offices

Experts recommend downtown and Class A. Vacancy rates climbed nationally in 2021 from just above 11 per cent at the beginning of the year to 12.7 per cent in Q4, but there are lots of regional variations. Vacancies are roughly the same in downtown offices as suburban properties, but more sub-tenants are renting downtown properties, and asking rents per square foot are higher than in suburban properties. “Tenants in the main cities in the [4th] quarter were drawn to quality,” Colliers Canada says, and in some cases have moved from Class B properties to sublet in Class A.

Retail

Retail patterns continue to change, says Colliers Canada’s Senior Vice President Victor Cotic. This does not mean that people are abandoning shopping for online entirely; rather, they are heading to malls and stores to look at goods and get sales advice, but often making their purchases later from home or their mobile devices. The idea of shopping to stock up on goods is giving way to shopping as an experience, he says. Another real estate trend is adding retail to new residential developments, so people can shop nearby.

Regions

Core markets such as Toronto, Montreal and Vancouver are still the easiest for commercial real estate investors to navigate — they are magnets for newcomers, whether immigrants or people moving from other parts of Canada, and more people means more business, manufacturing and commercial activity. But don’t overlook regional markets, Cotic says: “If you live in say, North Bay, it can make sense to invest in a property in a market that you know.”

Industrial

This is the most promising area for investing in commercial real estate right now, according to industry insiders. Demand is up, rents are rising and companies are looking for new places to manufacture, store goods and organize inventories as the entire world’s supply chain is in the middle of a makeover.

SOURCES: Colliers Canada National Market Snapshot Q4 2021 and Q1 2022; Victor Cotic, Colliers Canada Senior Vice President, National Investment Services; Benjamin Shinewald, President, BOMA Canada