Canada's commercial real estate market is on the mend, as an 18-month slump in Toronto has ended and other urban centres are showing signs of renewed activity that suggest the sector has de-coupled from its troubled U.S. counterpart.
After almost two years of flat or declining activity, industry tracker RealNet Canada Inc. said investments in commercial property in the Greater Toronto Area increased by 46 per cent in the third quarter over the second quarter, to $1.31-billion, while the number of transactions increased by 20 per cent.
"This is a statistical sign of a recovery, even if it's not a full-blown recovery," said RealNet president George Carras, adding that sales are still only half of what they were going into the recession. "You can't call a bottom until it's passed, but this data is positive and very factual - it's real, hard evidence, and not anecdotal comments."
More real-estate investors signed deals above the "critical" $10-million threshold. The third quarter saw 27 such deals worth $617-million, nearly double the value in the second quarter, when there were just 17 of those deals worth $313-million, a low point for the recession.
A healthy real-estate sector is considered important because commercial and residential property underpins a significant proportion of the assets of banks, pension funds and other institutions. Troubles in the sector contributed to the demise of some large trust companies in the early 1990s.
CB Richard Ellis vice-chairman John O'Bryan said the Canadian market still faces challenges as corporate tenants negotiate cheaper leases and others abandon warehouses and factories, but the numbers are encouraging as commercial real estate tends to lag the broader economy coming out of a recession. "We're nowhere near the volumes we were seeing in 2007," he said, when the value of deals neared $3-billion a quarter in the GTA. "But before things can get better, they have to stop getting worse and start to firm up - and this is what we are seeing."
While the RealNet data only reflect activity in the GTA, there have been signs of recovery elsewhere and office vacancy rates have stayed below 10 per cent, in contrast to the U.S. where vacancy rates have crept up toward 20 per cent.
"This isn't a local phenomenon - transaction volume is picking up with each passing week across the country," Mr. O'Bryan said. "There has been an exponential jump in inquiries to brokers."
Real estate investment trusts are in a particular position of strength, after raising almost $1-billion in equity in the last year while their main competitors - particularly private buyers - have found capital difficult to obtain. Whiterock REIT, for example, raised about $30-million through bought deals this year and in September took part in an $82-million deal for two office towers in the west end of Toronto.
"We really believe that Canadian commercial real estate is at a good point," Whiterock CEO Jason Underwood said. "The headlines have been so negative because of the problems in the United States, but Canada is so different from a performance standpoint and we believe there are some good opportunities. There's excess capacity in the pipelines and that means you're probably going to see a lot more transactions in the months ahead."
Patrick Lai of Toronto's Redcliff Realty Advisers said it's becoming difficult to justify sitting defensively on cash as quality properties come on the market. Mr. Lai signed a deal in September, buying a Markham, Ont., shopping centre for $32-million. "We all know what's happened this year in terms of the economic crisis, but now we certainly feel this is a good opportunity before everyone else starts to be really interested," he said.
TOTAL VOLUME BY SECTOR, 2009
Residential lots 6.5 % and land 17.6 %
Office 12.6 %
Apartment 10.0 %
Hotel 2.6. %
ICI* land 13.7 %
*Industrial, commercial and institutional
THE GLOBE AND MAIL / SOURCE: REALNET CANADA INC.