Commercial real estate will endure continued inflation and interest-rate challenges into the second and third quarters of 2024, experts and economists predict. But there are some asset gems that investors should consider in the coming year that could outpace the market or prove to be good long-term bets.
Consider a data centre in Quebec. With cheap hydro power, the biggest expense involved in data centres, Quebec is a prime location, says Adam Jacobs, senior national director, research at Colliers Canada.
Alternative investments, such as data centres, retirement homes, student apartments and laboratory space, can work well for big institutional investors looking to diversify, he says.
“The advantage to those is they tend to not be tied to the overall economy and job market,” he says. “They’re tied to some other thing or trend in society.” Data centres tap into the bigger trend of everyone being online, for instance.
Nathaniel Baum-Snow, economic analysis and policy professor at Rotman School of Management, adds that data centres, which can be located in rural areas, are a different animal than the usual urban-bound asset.
The health of tech-friendly assets is underscored by the high performance of unit prices for real estate investment trusts (REITS) that focus on that sector, Prof. Baum-Snow says.
“One of the ways people who work in real estate use to forecast the future of different market segments is to look at the valuations of real estate investment trusts that invest in different classes. Any class that involved tech has been doing pretty well … and office has not been doing very well,” Prof. Baum-Snow says.
Despite the slump for office property in the past three years, now could be the time to jump back into that asset class, says Mark Fieder, president of commercial real estate firm Avison Young Canada.
“If somebody wants to take advantage of the market and buy for the longer term, office is starting to look more attractive,” Mr. Fieder says. “The pricing expectation of sellers is starting to come in line and a rate cut will help that bid-ask gap.”
He says early buyers are going to be the winners. “We have 24 months in front of us on that front.”
It’s going to be interesting to watch the buyer-seller behaviour in a market where you’re waiting to see if interest rates are going to come down.
— Mark Fieder, president of Avison Young Canada
Mr. Jacobs agrees that bargain hunters could be eyeing the low cost of office assets, with some targeting smaller business tenants, in particular.
“We’re starting to see a few more deals on the smaller end of the office market, not so much the downtown mega deals,” he says.
Prof. Baum-Snow says the office market is still challenged. As leases come up for renewal, releasing is happening at half or two-thirds the amount of space as before, resulting in high vacancy rates, he says.
“That’s going to come with a reckoning of decreasing lease rates. That’s happening a little bit but not to the extent it would need to fill all the space,” he adds.
Colliers’s National Market Snapshot Q3 report found Canadian office vacancy at just over 14 per cent.
New high-end buildings won’t be abandoned, Prof. Baum-Snow says, but lease rates likely won’t grow.
Offices purpose-configured for lab space and medical offices will be more resilient because they aren’t subject to the work-from-home trend, Prof. Baum-Snow adds.
Mr. Jacobs’s pick for smaller investors looking for a solid 2024 investment is apartments and multifamily assets, which are a little less labour-intensive to operate than some other classes.
“We’ve got a growing population at a level no other wealthy country does,” he says.
Apartments are the growth opportunity as house ownership continues to be out of reach for many Canadians. Even large investors are beginning to look at this asset class, he says.
There are some risks, Mr. Jacobs adds. For example, rents are subject to regulatory change and immigration policy could change.
Prof. Baum-Snow says interest rates have started to have a negative impact on residential development and for the next year or so it will be harder to start new big multifamily developments. But if interest rates come down and immigration continues, the multifamily market could pick up, he says.
Even through the troubled pandemic years, industrial has been the favoured asset class, with its escalating lease rates and low vacancies.
Warehouses that are well-situated with easy access to major transportation corridors will continue to be in demand, Prof. Baum-Snow says, and according to Mr. Fieder, interest in small bay industrial space is growing.
“Not everybody needs 400,000 square feet. Small bay, or what I call industrial multiple, is getting a lot of attention right now,” Mr. Fieder says. “While we’ve been building lots of big industrial, not a lot of small industrial and small bay has been built in recent years. It’s going to get a lot of attention from developers.”
Mr. Fieder and Mr. Jacobs also have confidence in hotels, a smaller asset class that hasn’t attracted much attention recently.
“If there’s a movement from the municipalities to eliminate Airbnbs and create more housing, there’s going to be less hotel space,” Mr. Fieder says. “It could put a lot of pressure on [existing] hotel rooms.”
While experts still recommend Toronto and Vancouver as particularly attractive locales for most commercial real estate, there are other locations which should find favour with investors in the coming year.
For industrial real estate, Mr. Fieder advises investors to look east of Toronto to the Durham region. Companies, including H&M, Toyota and Amazon, are making commitments in the area, which has a stable labour supply, he says. And Kitchener-Waterloo has the strategic advantage of its proximity to the Greater Toronto Area.
Calgary is a good multifamily market with an influx of immigrants and people coming from other parts of Canada, Mr. Fieder says. Mr. Jacobs notes the population growth in some smaller markets, such as Barrie, Ont., and Dartmouth.
Whatever assets are involved, Mr. Fieder expects momentum and movement back to business in 2024.
“It’s going to be interesting to watch the buyer-seller behaviour in a market where you’re waiting to see if interest rates are going to come down,” he says.