Sector poised to keep outperforming the markets, Colliers says
While stock markets have had their ups and downs – mostly downs of late – commercial real estate has done well for investors.
Scott Chandler, senior vice-president of Colliers International’s capital markets group, notes that real estate has outperformed stocks this year and looks set to do so in 2019.
There are some warning signs ahead. A higher interest rate environment could affect the levels of buying and selling commercial real estate, Mr. Chandler says. Yet bonds continue to deliver meagre returns, which he says should sustain investor interest in real estate.
“There is still a great role for real estate, which is coming into its own as an institutional class of investment,” he says. “It has been a good year, and there is a lot of institutional capital chasing relatively scarce supply.”
The year 2018 will end up being a record or near-record year for commercial real estate transactions in Canada, he adds.
Colliers, a global real estate services and investment management company, points to high levels of activity in Toronto, Montreal and Vancouver, especially in the downtown office, industrial and apartment markets.
What’s on the horizon for commercial real estate?
Mr. Chandler predicts that momentum should continue with increased interest from foreign institutional buyers. Foreign buyers have hurdles associated with currency fluctuations, but “they’re definitely looking [to Canada],” he says.
He cites U.S.-based Blackstone Property Partners’ $3.8-billion acquisition of Pure Industrial Real Estate Trust, earlier this year, as an example of foreign interest in Canadian assets.
Real Estate Investment Trusts (REITs) are also evolving. For many years, REITs were a convenient way for investors to take part in commercial real estate growth.
REITs swelled their portfolios by gobbling up existing real estate properties. Now, as assets have become scarcer, REITs have transformed into developers by necessity.
“REITs are no longer just pure aggregators,” says Mr. Chandler. “There is a lot more building from the REITs, so you’re seeing a shift.”
Another trend is renewed interest in downtown real estate. That’s best illustrated by the move of high-profile tenants such as Amazon in Vancouver and Microsoft in Toronto from suburban spaces to the downtown cores.
It’s not just banks and legal firms taking those premium locations, says Mr. Chandler.
He forecasts that downtown space will continue to be in high demand. So will well-located functional suburban offices, on transit and with amenities.
Retailers, meanwhile, continue to look for urban locations as part of the larger densification trend in the country’s largest cities. Increasingly, people are choosing to work, live and shop in downtown cores.
Immigration and migration to major cities is also prompting developers, for the first time in decades in many markets, to build new apartment towers in large numbers. Until recently, new condo towers have soaked up some of the apartment demand in big cities.
The Greater Toronto Area continues to be the hot spot for Canadian commercial real estate. There’s scarcity not just in the residential sector, but in the industrial sector where demand is soaring due partly to the e-commerce revolution and the subsequent need for warehousing space.
It doesn’t hurt that commercial real estate has easily beaten stock market-based investments generally, notes Greg Peacock, managing director of Colliers International’s private equity capital investment group.
“With the TSX down eight or nine per cent this year, it is even more of a reason why people want to get into real estate,” says Mr. Peacock.
He sees no sign of the current high levels of interest and deal-making slowing.
The private equity capital pool includes funds and groups backed by high-net worth investors. They’re also taking aim at commercial real estate growth, just like the country’s big institutional investors.
“There is just a lot of demand across every asset class,” says Mr. Peacock.
This content was produced by The Globe and Mail’s Globe Content Studio, in consultation with an advertiser. The Globe’s editorial department was not involved in its creation.