Saving Commercial Real Estate

As Canadians continue to live and work through the COVID-19 pandemic, many investors wonder how to financially navigate through these times.

Real estate can be one of the more stable areas for investment.  While many of us think residential real estate is an area to put our investments, Canadians are also turning to commercial real estate.

What is Commercial Real Estate?

Commercial real estate refers to properties used specifically for business or income-generating purposes.  This can include everything from a single storefront to a huge shopping centre.  It can provide rental income and some potential capital appreciation for investors.1

As an investor, you have several choices when it comes to commercial real estate investments.  There are four asset classes in commercial real estate:  office space, industrial, multi-residential properties and retail.

In one of our last blogs about Commercial Real Estate Investing, we talked about how commercial real estate is a stable, secure investment choice.

These properties have the potential to create returns through three sources:  consistent cash flows from operations; increases in equity from mortgage principle repayment (in a sense the tenants buy the building for you); and, increases in property value over time.

The Rise of E-commerce

Since we recently looked at how the COVID-19 pandemic affected the office space market, let’s look at industrial space.

Did you shop online during the pandemic? Have a few extra boxes lying around?  Well, you are not alone.

According to Statistics Canada, retail e-commerce sales reached a record $3.9 billion in May, a 2.3% increase over April and a 99.3% increase over February ($2.0 billion).  Year over year, e-commerce sales more than doubled—with a 110.8% increase compared with May 2019.2

With the surge in e-commerce through the COVID-19 pandemic, companies are looking for space to set up logistics and warehouses in industrial areas.

“The Canadian industrial market hasn’t missed a beat.  In fact, it has unprecedented momentum and is truly the rock star of the commercial real estate world right now,” said CBRE Canada Vice Chairman Paul Morassutti.  “Investors, tenants and developers recognize that e-commerce and logistics demand is here to stay and they’re making big forward-looking industrial commitments.”3

Demand for Industrial Real Estate

According to CBRE, demand for industrial space remains strong and businesses are making confident decisions for the future.

An excellent example of this is Amazon Canada’s recent announcement of new fulfilment centres and delivery stations in Ontario.

“We’re thrilled to continue expanding our operations in Ontario with our newest fulfilment centres in Hamilton and Ajax,” said Sumegha Kumar, Director, Canadian Customer Fulfillment Operations, Amazon Canada.  “We’ve had great success with the talented workforce in Ontario, and we look forward to creating an additional 2,500 full-time jobs.”4

Amazon Canada also confirmed it will build five new delivery stations for Kitchener, Stoney Creek, Vaughan, Etobicoke and Scarborough.  These expansions will bring Amazon Canada’s total to 10 fulfilment centres in Ontario and 16 in Canada.

These e-commerce and pandemic pressures could trigger a fundamental shift in the industrial market as well.  In the past, industrial buildings were rarely seen as the highest and best use for a site because office, retail or residential were always better options.

But this perception may be evolving.

“Owners are now looking at retail centres and saying, I can convert some of this into warehousing and lease it to industrial tenants,” says CBRE Executive Vice President Matt Brown.  “Given where industrial lease rates are at and how valuable the buildings themselves are, industrial development could soon be seen as a viable alternative to preconceived highest and best uses in certain cases.”5

There was $342.2 million in industrial land sales in the GTA between April and August 2020, with 507 acres transacted, according to CBRE Research.  This compares favourably with the same period last year, when the region’s industrial land sales volume totalled $362.4 million, for 560 acres.  And it is the demand for logistics and fulfilment properties that is driving the bulk of these land sales.6

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