Morguard Corporation’s 2018 Canadian Economic Outlook and Market Fundamentals Research Report was released yesterday, providing a detailed analysis of the real estate investment trends to watch in 2018.
Overall, the report forecasts another year of strong growth when it comes to the commercial real estate sector, with healthy demand recorded across the country.
While Vancouver and Toronto are expected to hold their titles as the hottest investment markets in Canada, limited supply of properties and skyrocketing prices will force investors to look for opportunities in other markets. Notably, Montreal, Ottawa and suburban Toronto are expected to see a boom in 2018. Alberta is also showing signs of reanimation after a period of sharp depression.
Class A properties (low risk investments requiring little management, such as newly built developments) in suburban areas near transit nodes will also be in high demand in 2018.
Keith Reading, Director of Research at Morguard, believes that the retail market will continue to offer stable international entrants to Canada in the retail sector. Although the Sears liquidation has left a hole in the near-term fundamentals of Canadian shopping centers, a new stream of Canadian investors are expected to fill the gap this year. Much opportunity lies in the re-envisioning of malls, as investors transform traditional shopping spaces into multi-use community hubs containing medical services, theaters, art galleries, recreational services and fitness studios.
While this new trend presents interesting options for diversification, retails centers should still alleviate immediate pressure on vacancy by prioritizing high-growth traditional retailers and service retailers. In the report, Reading claims “the fact remains that Canada is a country of shoppers, and recent positive economic and employment trends should drive healthy spending growth for the foreseeable future.”
All in all, investors are showing a high level of enthusiasm about the Canadian commercial real estate market, as demonstrated by a high volume of transactions over the past 12 months. The pace of interest rate hikes are expected to remain slow, and an abundant flow of low-cost debt will power the market in 2018.
“There is a high supply of capital ready to be invested and Canadian commercial real estate is a proven performer. We are predicting another very busy and competitive market environment across the country in the coming year,” says Reading.
Montreal Specific Trends and Outlook
Montreal’s economy is expected to expand to a stellar 3.2% in 2017, according to CBOC’s Autumn forecast. This is attributed to a resurgence in the goods production sector, after a 5 year slump. A healthy increase in the construction and services sector also contributed to the growth. The economic surge generated positive job market and employment patterns, which in turn created solid growth in commercial real estate, retail, and the residential housing market.
Surprisingly strong labor market conditions reported: The GMA labor market outperformed its forecast in 2017, due to robust economic growth. The region’s unemployment rate dropped to 6.5% in 2017, down from 7.6% in 2016. The biggest contribution to the labor market came from the goods and services sector, which in turn points to a high consumer and business confidence.
Growth expected to moderate over coming years: Following a record level of expansion in 2017, Montreal’s economic growth is expected to moderate in the near term. Certain sectors are predicted to outperform the average – personal finance, insurance, real estate, transportation, and warehousing output. A significant number of major infrastructural projects will boost Montreal’s economy over the next few years.
Office tenants continue to hold the upper hand – Tenants of office buildings in Montreal were favored this past year, in keeping with the medium-term trend.Vacancy rates were higher than the latest spike, exposing tenants to a wider range of alternatives and providing them with more bargaining power. Landlords were also motivated to offer incentives in order to compete with other vacant office spaces. Renovated loft spaces were the most popular choice among tenants in Montreal. However, market conditions in the office space investment sector reflected maturation of the current real estate cycle. Core properties downtown remained in massive demand, with aggressive competition, limited supply and high prices. In 2017 a total of $593.7 million were reported in office real estate sales, a sharp increase from $470.3 million the previous year.
Stable investment trends reported in Montreal’s industrial sector: Landlords were favored in the industrial real estate market, where supply of functional spaces fell short of demand. Availability hit an all time low in mid 2017, according to GBRE statistics. Larger spaces with a minimum clear height of 24 feet were prioritized by tenants.A range of national and local groups have looked to invest funds in the GMA’s investment grade industrial properties. Overall, the industrial sector yielded a return of 6.4% over the past 12 months. The result was made up almost entirely of income growth (capital return was close to zero), fueled by the health of the sector’s leasing conditions.
Gradual progression in the retail sector: A positive performance driver outlook is indicative of progression in the GMA retail sector. Retail sales are expected to rise by 3.5% in 2017 and average 2.4% annually in 2018 and 2019. Demand will soon surpass the supply of quality assets, and so properties placed on the market are expected to generate strong interest.
Montreal’s multiplex residential property report: Demand has kept in pace with supply over the past few years, when it comes to the GMA multi-suite residential property market. The vacancy level was expected to settle at 4.1% in October 2017, 20 bps higher than the 3.9% in 2016. Average vacancy was highest in the bachelor market segment. International migration has been a boon for this sector, a demographic that has typically rented for the first year as a landed resident. Average rental rates continued to grow, despite a flat vacancy curve.Investor confidence was evidenced in the high number of transactions recorded in the multiplex market: $724 million in the first half of 2017. High rise condos in central locations, and with low vacancy rates, garnered the most attention and peak pricing from investors this year. The sector is expected to continue growing at a healthy rate.
The 2018 Economic Outlook and Market Fundamentals Research Report is released annually by Morguard Corporation. A full report is available at www.morguard.com.