Canada's commercial real estate sector will avoid the devastating collapse it faced in the recession of the early 1990s, thanks to conservative development and financing practices adopted after its last major slump.
Although new data released yesterday show commercial property transactions fell by half in Canada in the first six months of 2009, it is now clear the downturn for the industry will not be as bleak as the devastating slump seen in the early 1990s, said John O'Bryan, vice-chairman of commercial real estate services firm CB Richard Ellis Ltd.
The data also suggest Canada's commercial real estate sector will not be hit as hard as the U.S. industry this year.
"We were so much more restrained this time around," Mr. O'Bryan said yesterday.
Aside from some excess growth in Calgary and downtown Toronto office markets, Mr. O'Bryan argues most sectors of the commercial industry - including retail, industrial and multiresidential - were not overbuilt over the past decade.
That's because lenders adopted strict financing rules after the collapse of the early 1990s, and because more commercial property is owned by large institutional investors such as pension funds, which take a cautious approach to growth.
"Between the institutionalizing of the business and the lenders having long memories and fairly strict guidelines which they've stuck to, you've had a lot more restraint," Mr. O'Bryan said.
"And that is a big differentiator from the U.S., where there was a lot more speculative building. That's why their part of this cycle is going to be a lot longer than ours."
Still, Canada's commercial real estate sector is far from unscathed in this recession.
The latest CB Richard Ellis data show commercial real estate deals completed in the first half of 2009 totalled $4.9-billion, down 51 per cent from $10-billion in the same period last year. The number of deals dropped 38 per cent to 1,569 from 2,542 in 2008.
Toronto and Calgary were Canada's worst-hit markets. Calgary has seen a major "deceleration" of its real estate boom with the slump in the energy sector, although Mr. O'Bryan said the market is always able to recover when oil prices surge. Calgary deal values slumped 78 per cent in the January-to-June period, totalling just $471-million, compared to $2.2-billion last year.
Toronto saw total deal values fall 66 per cent in the first six months of this year, due in large part to a lack of properties being put on the market and to declining valuations in both the industrial and office sectors. There were 287 deals totalling $1.27-billion in the Toronto market in the first half of 2009, down from 676 deals worth $3.7-million in the same period last year.
Mr. O'Bryan said many owners are reluctant to list properties during the slump if they can avoid selling, and are unhappy with the offers they are receiving from buyers.
"What's different about this [downturn] than the last time is that there is far more institutional money in the market, and that money tends to be a lot more patient and will wait it out," he said.
Vancouver has been the least affected of Canada's major markets, thanks to a long-term lack of supply due to development constraints in the city. In the first six months this year, Vancouver accounted for one-quarter of all of Canada's commercial real estate deals, totalling $1.2-billion, down 22 per cent from last year.
