2021 was undoubtedly a lucrative and tumultuous year for Canadian commercial real estate markets across all sectors. While sellers were profiting from unprecedented growth, many potential buyers were left looking at a shortage of listings and information. Many buyers and investors are asking what will come next in 2022. Can we expect to see the market grow, shrink, or change?
2021: A Summary
In 2021, the Canadian real estate market was marked by unprecedented lows in interest rates. As interest rates began to drop at the start of last year, home prices continued to climb. The housing markets in and around major Canadian cities such as Toronto, London, Mississauga, Barrie, Brampton, Vancouver, and beyond experienced extreme continued growth throughout 2021. As a result, housing became an increasingly unaffordable luxury for many Torontonians, with no help from the federal government to help control the pricing boom.
For commercial real estate investors, this meant that multi-unit rental properties such as apartment complexes or condominiums saw increased return rates as Canadians turned to rentals as a cheaper alternative to traditional home ownership.
The Growth of Industrial Real Estate
In 2021, industrial real estate vacancy rates hit an all-time low while demand hit an all-time high. This shocking surge in the value of industrial properties can be attributed to the post-2020 e-commerce boom and the resultantly increased need for shipping infrastructure. In order to fulfill the needs of consumers, companies across North America needed to establish new shipping and distribution centers, skyrocketing demand for industrial real estate.
A more significant amount of warehouse space is required to handle the logistics of shipping goods directly to consumers instead of traditional supplier-to-retail channels of distribution. As the digital sales presence of a company grows, the amount of real estate that they need to operate also grows.
Another side effect of the pandemic is the unpredictable surges in demand for various goods that retailers must swiftly react to. Market conditions in 2021 caused many companies to store additional stock in their inventories, transitioning from a Just-In-Time (JIT) inventory style to the Just-In-Case (JIC) style. Keeping larger inventories requires larger amounts of space, leaving many companies desperate to expand their current collection of industrial facilities. Both these factors led to skyrocketing demand for warehouses and other types of industrial real estate across Canada.
Predictions for the Market in 2022
In 2022, we expect to see continued growth in the commercial real estate market across a number of different sectors. Commercial residential properties and industrial real estate will likely continue to be the fastest growing sectors of the market.
Commercial Residential Properties
The increasingly high cost of single-family homes combined with the increased adoption of hybrid work models has translated to demand for larger, higher-end units. For example, some renters are upgrading from a one-bedroom to a two-bedroom to ensure they have a place to work from home.
As property prices in urban centers continue to rise, we can also expect to see continued growth in suburban markets, as businesses migrate away from these centers to keep up with consumer demands and trends.
The Effects of E-Commerce
Despite the promise of increased interest rates threatening to drive down demand, the continued scarcity of industrial properties ensures consistent growth within the sector. As the demand for e-commerce is not expected to diminish any time soon, we can expect to see continued growth within this sector.
Despite the rise in e-commerce sales, brick-and-mortar store locations are still generating massive revenue and are projected for continued growth as we enter a post-pandemic world. Investing in traditional retail real estate is still an excellent option for most buyers.
Increased Interest Rates
The Bank of Canada promised to increase interest rates in 2022 to combat growing inflation and bond yields. The overnight rate was expected to rise from 0.25% to 0.50%. However, given a number of economic tailwinds, including the Russian-Ukrainian conflict, the Bank of Canada has recently increased its target overnight rate to 1%.
Despite this continued increase in rates, it is not likely the change will be drastic and sudden, nor is it likely to have severely negative effects on the market.
As the prime rate increases, variable-rate mortgages and new fixed-rate mortgages will be privy to these higher interest rates. If you have been accumulating debt since the onset of your mortgage, you may have difficulty absorbing the change— especially since commercial mortgages are a lot more difficult to obtain than residential mortgages.
How to Take Advantage of This Year’s Trends
Due to the limited supply of commercial properties, your greatest challenge as an investor will be finding the perfect listing. When searching for commercial real estate listings, there are many online platforms you can browse. But if you prefer a more personalized approach, you can explore a few other options
Meeting with a real estate agent is one option that can help you answer many of your investment-related questions and allow you to find properties more easily. Joining a real estate investment club is another great option. You do not need to be an investment expert to join one of these clubs, but member networks and events can introduce you to plenty of people who are. Member networks and databases can be great resources for finding listings in your city of choice.
If you are interested in purchasing property in 2022 but are not ready to get started just yet, there are a few ways you can prepare yourself. Speaking with a Clover Mortgage broker can be a great place to start by learning what lenders and mortgage products you can qualify for. If AAA lenders are not in the cards for you, start getting comfortable with the potential of working with alternative lenders.
The down payment, asking price, and mortgage rate of a commercial property will likely require more capital than a residential real estate investment. Because of the higher value of commercial mortgages, the criteria for mortgage approval will also be a lot stricter. Your credit score, source of income, and debt to income ratios will be carefully analyzed. The property itself will also undergo heavy screening. In some cases, you may have to prove and justify the profitability of the business occupying your building in order to establish the stability of your cash flows.
If you are interested in learning more about your investment options, contact Clover Mortgage today to schedule a free consultation with one of our professional commercial mortgage brokers!
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2022 commercial real estate market trends: JPMorgan Chase.
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Canada's commercial real estate sector is poised for recovery and growth in 2022: Morguard.
Cision Canada. Retrieved April 19, 2022, from https://www.newswire.ca/news-releases/canada-s-commercial-real-estate-sector-is-poised-for-recovery-and-growth-in-2022-morguard-819736482.html
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