The City of Toronto is home to near-limitless opportunities in real estate if you can manage to buy. These days, the number of people looking to buy residential real estate in Toronto is simply overwhelming the market's ability to supply homes. According to the Canadian Real Estate Association (CREA), the city has been dealing with less than a month of supply for the past two years. The result is many frustrated buyers who are looking for something else.
Investors looking for an alternative may want to consider the commercial sector in Toronto. Toronto and the GTA have a huge range of commercial real estate available from small convenience stores all the way up to office towers and large industrial complexes.
Investing in commercial real estate can be quite a different experience than residential real estate but can still provide a lot of opportunities for cash flow and returns. With so much to choose from, it may be daunting to decide on where to begin in commercial real estate. In this article, we will look at why you should invest in commercial real estate in Toronto, what options are available to you, and what you need to know before buying.
Why buy commercial in Toronto?
Investing in commercial real estate is a very different task compared to investing in residential. Aside from the different sizes and uses of buildings, things like financing, due diligence, and finding tenants take longer and are more complicated. So why get involved if it's so complicated?
There are many reasons why you may want to invest in commercial real estate. For one, it offers the same benefits as any real estate ownership meaning you are investing in a physical asset that can grow in value over time and can provide cash flow while you own it.
Commercial real estate also offers many different opportunities for collecting and growing cash flow. One of the most common and obvious ways would be to rent your space and collect rental income. You could also choose to buy commercial property for a business that you own yourself which can provide a lot of benefits from over-paying to rent a space.
The City of Toronto is also a great location for business and commercial properties. For shops, there are many areas with high foot traffic that will get a lot of attention. For offices, you will be in one of Canada's business hubs which can draw a lot of tenants. For industrial businesses, Toronto is an ideal location due to its proximity to shipping routes that can reach the whole province.
Toronto is a large and growing city. The demand for commercial space is steady and will continue to grow as more people settle to live in the area.
What to know before buying
Before buying commercial real estate, you should understand that the process is a bit different from residential real estate. For one, commercial properties can be a lot more expensive and don't appreciate in quite the same way as residential homes. When looking at commercial real estate, you must always keep in mind the profitability of the property as this can determine your returns, your properties value, and your mortgage terms.
Commercial properties are also highly affected by their local market and fluctuations so due diligence is crucial when buying a commercial. Often, the due diligence process can take months to complete thoroughly.
Also, owning commercial real estate can be much more like owning a business than a single residential property. Your tenants may very well be business owners and they will come to the table with negotiation skills and expectations. You will need to be familiar with business practices and legal concerns in order to be successful.
Finally, if you aren't super familiar with the commercial space, you should rely on real estate professionals who are experienced in the commercial space. You should look for an agent who specializes in commercial real estate to help you find commercial real estate listings. You should also consider seeking out real estate lawyers and mortgage brokers who specialize in commercial real estate.
Popular commercial property types
Multifamily properties are large residential properties with five or more units. Operating a multifamily property is usually less hands-on than a single unit and you will likely hire a property manager to handle a lot of your daily tasks. Cash flow opportunities in a multifamily property can be much higher than in single residential units, making them popular for investors. In Toronto, there is high demand for residential space and higher density residential will only become more and more in demand. For a residential investor looking to get into the commercial space, multifamily is one of the best options.
Retail real estate has seen some challenges with vacancies in recent years, though there are still many opportunities to make money here. For these properties, you can operate your own business or rent the space out to retail tenants. Either way, location is crucial both for accessibility by shoppers but also for meeting the demands of the area.
Office space, similarly to retail, has had some difficulty in recent years though demand is bouncing back. You could use this as an opportunity to find a deal in the current market, though in the world of remote work, you should understand the risks of investing in this sector. Office buildings can be very large in Toronto so they are more often purchased by larger real estate corporations.
Even in a city as packed and developed as Toronto, industrial space is in high demand. As opposed to other sectors, the location of industrial properties is not of as high importance and industrial zoning is limited to certain areas that are ideal for industrial anyway. Rather, when buying in this segment, you need to focus highly on the amenities your industrial space can offer businesses and how to remain profitable while charging competitive rents.
How much will it cost?
In Toronto, the commercial sector is no different than the residential sector in that the prices are quite high. Pricing is also handled a bit differently in commercial real estate as the price per square foot measurement is much more commonly used as a way to compare properties.
Average commercial prices vary greatly across the GTA
According to recent stats from Toronto Regional Real Estate Board (TRREB), the average cost per square foot for an industrial property in the GTA was around $322. In commercial and retail properties, the average price was $337.89. For offices, the per square foot cost was $398.23.
However, these rates will vary greatly based on the local area, the size of the property, features, and more, so the average is not super reliable. In general, you should try to compare commercial properties that are nearby one another and have similar features for an idea of what a fair price is.
Financing commercial real estate properties
Financing is also available for commercial properties, though it can be a bit different than residential mortgages that you may be used to. In general, mortgages will have higher rates and higher minimum down payments (up to 85% financed), as well as slightly different lease terms and amortization periods. In addition, the qualifying standards for a lease will be based in part on the property's profitability as well as your own financials.
Commercial real estate in Toronto can offer investors great returns and new challenges. Across the different property types in the commercial space, there are many different price points for any investor to get started and there are even more different strategies to make your investment perform. If you are looking for something different in Toronto, this may just be for you.