Posted By Michael Brooks,
January 27, 2017
Although Canada is a small nation in economic terms relative to the U.S., Europe and Asia, it has a sophisticated and mature real estate market. By mature we mean that the dominant players in the Canadian commercial real estate market are not wealthy families as one might find in some developing nations, but publicly traded corporations, pension funds, life insurance companies, real estate investment trusts (REITs) and other pools of professionally managed capital. To be sure, there are still many wealthy individuals and families invested deeply in real estate throughout Canada, but many have also sold their assets to a public entity, or taken their company public so as to allow further growth through access to public capital markets.
Data on the size of the commercial real estate market (as opposed to the institutional grade market) in Canada, and therefore Canada as a percentage of the global commercial real estate market, sourced from within Canada, is annoyingly difficult to come by without using a top-down approach. Statistics Canada does not keep nor seek out particular data on the size or value of the commercial real estate market generally. The Canada Mortgage and Housing Corporation (CMHC) has reasonably good data on the apartment sector only. Aggregating broker market-area reports from major urban centers would be a start, but might not cover enough of the Canadian market to be useful. However, larger institutional investors tend to focus on larger markets such as the six or eight largest cities in Canada; others may focus regionally or have a suburban strategy. Knowing the size of the market based on reliable data would enable investors to better understand market share and more precisely manage over-investment and under-investment in a given market. |
Commercial real estate is a large part of the Canadian economy. REALPAC commissioned a report in 2012 that conservatively suggested the Canadian commercial real estate sector produces:
• over $60 billion in annual economic activity
• approximately 340,000 jobs
• $7.2 billion in personal and corporate income tax revenue annually
• $18.1 billion in earned income annually.
At 2,200 people, the annual Toronto Real Estate Forum, co-sponsored by REALPAC, is a who’s who of the commercial real estate sector, at least for Ontario: people get to know people, people talk, people do deals, and people invest across Canada. This brings us to the final point: reputation matters. Trust matters, professionalism matters. In the community of people involved in the real estate industry in Canada, trust and reputation fuel the transactions that occur every day. Big money is at stake. No one wants a partner, lender, borrower, supplier, purchaser, vendor, lawyer, accountant, appraiser, consultant or agent who cannot be trusted, has a bad reputation, is a poor (or non-) communicator or is unprofessional. Those who lack those qualities become less desirable participants in any deal. Those who have those qualities find people to do business with and are successful.
Construction taken together with real estate is likely one of the two or three biggest industries in Canada.
The Canadian commercial real estate market is large to Canadians but small in relation to the global market. With US$784 billion of institutional grade real estate, there is much to choose from in Canada. On the other hand, Apple Inc. had a market capitalization of US$735 billion as at June 2015. If Canada’s institutional grade real estate market is 1/10 the size of the U.S. institutional-grade real estate market, Canada’s market size should be US$2.6 trillion.
The Canadian real estate market may be small by world standards but offers ample opportunity for investment. Those with capital seeking a return on investment can purchase income producing real estate and obtain a yield and perhaps capital appreciation as time goes by. Traditionally, well-maintained real estate is a good inflation hedge. In most cases, capital appreciation can be enhanced by appropriate additional capital investment, active and intelligent management, careful leasing and proper ongoing maintenance. On the other hand, capital appreciation is not guaranteed. Most real estate markets are cyclical, reflecting the ups and downs of the economy at large or, in some situations, unique market ups and downs based on local overbuilding, poor management, regional economic events, a significant immediate drop in local demand, and the like. Prudent investors diversify their investments to avoid or minimize the effect of down cycles; declines in value in one area or asset class can be offset by stability in the other areas or asset classes and leave enough equity or cash on hand to enable the investor to ride out the down cycles.
Canada is an excellent country in which to invest in real estate. The country is politically stable and federal, provincial and municipal laws encourage growth while systematically guiding rational development of residential areas, commerce and industry. As with all investments, there is both opportunity and risk in commercial real estate. There is opportunity because of the ability to add value through physical improvements to land. There is the ability to add value through regulatory approvals to land (such as by increasing permitted height and/or density, or changing permitted uses to a use more highly valued in the marketplace). There are opportunities to benefit from increasing rents to the extent there is scarcity of supply (or excess demand) in a given market for that particular use or location. There is the ability to achieve capital gains if inflation makes substitute properties more expensive or if the market demand for the rent generated by the building increases the value of the building.
Although commercial real estate is made up of land and buildings, it is really a business about people, for people and by people: giving people a place to live; giving people a place to work and shop; giving people places to go; giving places life – places that are attractive to people draw renters and generate higher rents; those that do not, generally do not rent well, or rent at a lower price point. Those needs change over time, reflecting changing societal priorities, technological advancement, and economics. Low-ceiling-height industrial was made obsolete by lift trucks that could lift pallets of goods higher. Newer industrial facilities now have ceiling heights approaching 40 feet. Strip retail and main-street retail were overtaken (at least for a time) by modern enclosed (and air conditioned) indoor shopping malls. Older brick office and other buildings with fixed interior concrete walls were made obsolete by steel and concrete office towers with clear longer spans between the elevator and the external windows, and movable partitions. Elevators and air conditioning made obsolete those buildings that did not have them.
The above article was sourced from the first Canadian commercial real estate textbook titled “Canadian Commercial Real Estate: Theory, Practice, Strategy”, authored by Dr. Michael Brooks and published by REALPAC. This innovative new textbook is now available for purchase here.
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