The commercial real estate market continues to evolve

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Despite economic headwinds, the Canadian commercial real estate market continues to evolve from coast to coast. Its three main sectors – industrial, office and retail – have held steady, according to the RE/MAX 2023 Commercial Property Report, which takes a deep dive into current trends and first-quarter performance across 12 markets, from Vancouver to St. John’s, as the landscape evolves post-pandemic. Positive indicators suggest an upswing “may be in the cards for the back half of the year.”

Industrial real estate poised for dynamic growth

The brightest star in the commercial real estate realm is the industrial sector, outperforming almost every asset class in markets across the board. It is experiencing strong sales and lease activity, according to the recently released RE/MAX report. A robust spillover of demand is sparking new investment in secondary markets as investors and end users expand their search for distribution and warehousing outside key urban centers.

Christopher Alexander, president of RE/MAX Canada, says those areas and communities stand to attract new people and more employment.

“It bodes well for local economies,” he says. “Some of the challenges will probably be minimal because the land is a lot less expensive than highly populated, high-demand cities like Toronto or Vancouver.”

The report also shows inventory levels remain low and land sales remain solid, despite higher interest rates and construction costs. And, like the current mood of the stock market, the attitude is bullish and positive.

“There’s a real attitude of ‘let’s do a deal,’” says Elton Ash, executive vice-president at RE/MAX Canada. “The deal makers are out there, working hard and getting results. That holds true whether you are a landlord or tenant, a lessor or lessee, buying property or selling it.”

RE/MAX holds that the industrialization of land in the suburbs makes sense, especially for setting up distribution points and transportation hubs. One factor inspiring the trend is the growth in consumer demand for products. “It’s an interdisciplinary connection,” says Ash. “It’s an exciting trend that will continue to grow as consumerism grows. Companies need to be able to solve supply chain issues, which were accentuated during COVID. It showed the need for the outlying areas to be better tooled to react.”

The retail sector reinvents itself

It wasn’t too long ago that in-person shopping was almost considered a thing of the past, but the RE/MAX report shows the retail sector has found a new groove. Its strength and resilience were somewhat unexpected – “surprising,” says Alexander.

“Despite how well online shopping can work for people, physical stores and malls haven’t been as impacted as you might think,” he explains. “The very definition of what a store is is being redefined. It can be more of a showcase that helps consumers get the information they need to make their purchases online. We’re also seeing the rise of multi-use complexes, with the number of residential applications on commercially zoned properties growing across the country.”

Consumer preferences that favor a live-work-shop lifestyle and bricks-and-mortar shopping experiences are also driving change in the retail sector, underscoring the findings of the RE/MAX report, which shows 11 out of 12 markets reporting solid activity in retail nodes and shopping centers.

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Ash points to the redevelopment of the Oakridge Park project in Vancouver as an example of what the future of shopping centers could look like. Slated to open in late 2024, the 30-acre site will have residential towers with homes for more than 6,000 residents, office space, upscale retailers, plus a nine-acre rooftop public park.

“By offering that lifestyle, you’re building a marketplace for yourself as a landlord,” he says. “And stores like it because they can lease smaller spaces and reduce inventory on-hand as in-person and online shopping shows they can complement one another. This is an exciting trend that will likely continue as we see more of this type of multidiscipline retail hybridization.”

Ongoing struggles in the office sector

Employers are wrestling with hybrid work models and opting to reduce their physical footprint to cut costs, especially in the downtown cores of markets across Canada. They’re also considering new ways to incentivize employees to return to the workplace, emphasizing the benefits of in-person socialization.

Meanwhile, building owners are looking at transforming commercial office spaces into residential units – an expensive proposition but one that is crucial to preventing the hollowing out of downtown cores and ensuring their future vibrancy, according to the report. Fifty per cent of the markets surveyed by RE/MAX are reporting conversion activity.

Ash says other cities can learn from Calgary, which, in 2021, introduced the Downtown Calgary Development Incentive Plan that provides developers with a subsidy of $75 per square foot for office-to-residential conversions aimed at offsetting the high cost of retrofitting. Ten buildings have been approved to date and more than 1,200 new homes will become available, successfully eliminating approximately one million square feet of commercial office space.

“I applaud the city for this incentive,” said Ash. “Calgary was the worst downtown office market in the entire country, with a 30-per-cent vacancy two years ago. The city’s move has brought needed life to downtown and absorbed vacant spaces that hurt the local tax base. The ROI for the citizens of Calgary is going to be great.”

The trends are an indication of significant upcoming opportunities.

“If you’re an investor right now, making sure you can weather any storm is important, along with being very conscious of your cash flow and cap rates,” says Alexander. “Investors need to have some flexibility in case they run into some chops and have to get creative [about] what to do with their space. As we’ve seen recently, out-of-the-box thinking is effective.”

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Advertising feature produced by Globe Content Studio with RE/MAX. The Globe’s editorial department was not involved.