Historically low interest rates and rising confidence in the economy are helping fuel unprecedented levels of demand for commercial real estate in Canada, says a new report.
A shortage of product on the market is hobbling sales activity across all categories – multiunit residential, industrial and retail – according to the 2013 ReMax Commercial Investor Report.
"There's a lot of money chasing a limited supply of commercial product," said ReMax Ontario-Atlantic Canada executive vice-president Gurinder Sandhu.
"In some areas of the country, we're seeing unsolicited offers on product not available for sale – often well above market value. Demand has placed serious upward pressure on price in most markets and contributed to lower cap rates across all asset classes."
A relatively good economic performance – GDP over the past two quarters has risen by 2.2 per cent and 1.7 per cent, respectively – and low interest rates have combined to bolster confidence from a business perspective, says the report released Tuesday.
Sales weakened in 73 per cent of markets examined between January and July 2013 as a result of dwindling supply, the study found.
Hamilton-Burlington, Ont.; St. John's, Nfld.; and Calgary were exceptions to the trend, with 15 per cent, 10 per cent and eight per cent increases – respectively – in the number of commercial units sold.
Big institutional investors such as REITs and pension funds have pulled back from the market a little, but smaller investors and end users have stepped in en masse to help boost demand for industrial, multiunit residential and retail storefront product, says the report.
"Risk aversion appears to be behind the thrust for commercial product, with owner-operators now investing in themselves," said ReMax of Western Canada regional executive vice-president Elton Ash.
"Rather than pay rising office, industrial or residential rental rates, end users are competing against small and large investors for prime commercial buildings."
The report notes that Regina, Sask. has seen the price per acre of industrial land almost double between 2008 and 2013.
In the retail sector, growing competition from U.S. and international brands and the desire for better visibility in a tough market have helped sustain solid demand, the report says.
A bump up in residential construction has also helped boost the number of new box stores, power centres, outlets and strip plazas in newer communities across Canada, it says.
Few owners are listing existing buildings in the multiunit residential space, the study suggests.
"Those with commercial holdings have sent a clear message. They're essentially saying, 'we have a good thing going, and we're not willing to part with it.' For love or money, owners are holding firm and it's creating a real challenge in the marketplace," said Mr. Sandhu.
"A serious portion of commercial sales are exclusive – that's been the case for years – but as demand has risen, it's made navigating the market increasingly difficult, especially for those with a lighter portfolio. Yet, buyers remain undaunted.' More and more individuals are entering a market traditionally considered a "big fish" game, "a reflection of confidence, climate and a new investor mindset," he said.