Photo: James Bombales
It’s been another banner year for the Canadian commercial real estate market. With over $43.1 billion in investments, 2017 is the best year on record, and 2018 is expected to perform even stronger, says CBRE.
This year, growing tenant demand, combined with declining vacancy rates, are expected to cause an increase in rental costs, despite rising interest rates and NAFTA uncertainty, according to CBRE Canada’s 2018 Real Estate Market Outlook Report, published today.
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“Every year, we critically assess the threats to the Canadian commercial real estate market, but for each challenge we found, there was an even stronger reason to be optimistic about 2018,” says Paul Morassutti, Executive Managing Director for CBRE Canada, in a press release.
The report revealed that 2017’s commercial real estate investment volume exceeded 2016’s previous record amount of $34.7 billion by almost a quarter. As a result, Canada was one of only four countries around the world to set back-to-back investment records.
According to the commercial real estate and investment firm, 2018 could see commercial real estate “set a historic treble of consecutive investment records,” with investors continuing to purchase in the market.
Morassutti says this year Canada will once again be at the centre of two powerful investment trends.
“Firstly, our status as a safe haven with stable rule of law gets more pronounced as geopolitical instability continues to accelerate,” says Morassutti.
“Secondly, real estate has arrived as a true ‘fourth asset class’ that provides yield in a yield-starved world. As a result, institutional allocations are set to increase by over 20 per cent in the next five years,” he adds.
However, there are potential risks that the commercial real estate market could encounter in 2018. Expected interest rate hikes could raise the carrying costs of landlords and put pressure on cap rates, but CBRE expects interest increases to be mitigated by rental growth.
NAFTA negotiations are another threat to the market, but CBRE says the outcome on Canada’s industrial market will be minor due to continued tenant demand.
2018 will prove to be a tough year for investors as downtown offices in multiple Canadian markets continue to face declining vacancy rates, which are at, or near, all-time lows.
Toronto and Vancouver start 2018 with the lowest downtown office vacancies in North America at 3.7 per cent and 5 per cent, respectively. With supply unable to meet this growing demand until at least 2020, CBRE predicts downtown vacancy will dip to 3.3 per cent in Toronto and 4.9 per cent in Vancouver this year.
In 2018, office vacancy rates are also expected to fall in London, Waterloo Region, Ottawa, Montreal and Halifax.