Canadian commercial real estate market update
Q1 2022: Commercial real estate industry sees resurgence in 2022
The Canadian commercial real estate industry demonstrated resiliency throughout 2021, investment activity kicked off 2022 with an upswing in momentum. All asset classes reported an increase in activity (with the exception of hotels) accompanied by a return in investor confidence, the market was also subjected to heightened investor scrutiny. This closer analysis can be attributed to rising interest rates, volatility catalyzed by the pandemic, and the impacts of the current geopolitical climate.
The most active asset classes in the first quarter of 2022 involved transactions of industrial and office assets as well as both ICI and residential land. A combination of excitement and tentativeness characterized 2022 with a note of cautious optimism and anticipation of growth in Canada’s commercial real estate space.
Slightly less than $23.8 billion was transacted across all major asset classes in Canada during the first quarter of 2022, a 52% increase when compared with the first quarter of 2021. Deal volume was up across all major asset classes with the exception of hotel transactions. Slightly more than 3,250 transactions were completed in the first quarter of 2022, a 25% increase when compared with the same time last year.
The office sector was quite active, recording slightly more than $3 billion in sales activity, almost doubling the investment volume registered in the first quarter of 2021, securing its place as the asset class with the strongest growth year-over-year in terms of dollars invested. With 245 transactions conducted in the first quarter of 2022 accompanied by people beginning to go back into the office, investment in the office sector is resurging. This resumption in activity was also a reflection of negotiations that were paused in the second half of 2021 coming to fruition in the first quarter of 2022.
The industrial sector recorded the highest investment volume in terms of both dollars and the number of transactions. In the first quarter of 2022, the industrial asset class saw 735 transactions valued at slightly less than $5.8 billion, a 66% increase when compared with Q1 2021.
The land sector remained very active in the first quarter of 2022 registering 643 ICI land sales and 553 residential land deals, a 26% and 30% increase in the number of transactions, respectively from the same period in 2021. Land transactions represented more than $8.9 billion in investment volume, an increase of 110% compared with the same period last year, which totalled 38% of all transactions across all of the asset classes over the course of the 2022 year.
Investment in the retail and apartment sectors also continued to demonstrate growth, reporting a 24% and 5% increase in the transactions completed, respectively, year-over-year. The national investment in retail properties grew 55% and was valued at $2.6 billion in the first quarter of 2022, more than $3.1 billion – an 8% increase compared with a year earlier – was invested in the Canadian apartment sector.
While 2022 started with an upswing in investment momentum (especially for office assets), commercial properties that are essential and flexible in nature will continue to remain investor favourites as demand quickly evolves in response to changing macroeconomic factors.
According to Altus Group’s Investment Trends Survey for the first quarter of 2022, the most preferred markets by investors were Toronto and Vancouver, followed closely by Montreal. All three markets reported an upswing in their momentum ratio, which calculates the percentage of buyers over the percentage of sellers. Food-anchored retail strips, suburban multiple-unit residential, and industrial land were the top three most preferred products by investors. This is consistent with similar trends noted in 2020 and 2021 that can be attributed to the essential nature of the assets as well as the flexibility these property types offer with potential for redevelopment in a time of constantly evolving consumer needs.
National overall capitalization rates continued to compress across all major asset classes in the first quarter of 2022 with the exception of industrial assets. This may be driven by the rise in interest rates and the related impact on consumer spending, thereby reducing demand for manufacturing/distribution facilities. However, the impact of rising interest rates is expected to be minimal in the first half of 2022 as transactions were negotiated prior to the change in interest rates, but will become more apparent in the second half of the year. Industrial assets will continue to remain a favourite with investors as supply lags absorption.
As investment in all asset classes (except hotels) registered strong performance in the first quarter of 2022, the Canadian commercial real estate industry appears poised for continued growth through the year with some caveats. Interest rate hikes, combined with the ongoing impact of a volatile geopolitical environment and the lingering aftermath of pandemic containment measures, will become more apparent as the year progresses and may constrain select investment activity.
Asset pricing will remain sensitive to Canada’s evolving economic environment. However, with pandemic restrictions easing and no further lockdowns anticipated, the outlook for the commercial real estate industry is net positive. Building on the early indications of improved investor confidence in late 2021 that carried over to the first quarter of 2022, Canadian commercial real estate investment activity is well-positioned to continue expanding as the year progresses.
Source: Altus Group
Thinking of buying or selling a property, or have a question regarding the real estate market? Fill out the form below and I'll get back to you promptly.