BMO: Commercial property investment paying big dividends

“After a severe and protracted market downturn in the 1990s, the commercial real estate industry in Canada has been characterized by cautious development and prudent lending practices," said Earl Sweet, senior economist at BMO Capital Markets, the author of the report. “Higher occupancy - spurred by steady growth in employment, manufacturing, wholesaling, and retailing - is reducing office, industrial, and retail vacancies, while lease rates are edging upward.”

The assessment jives with analysts across the board as they examine the economy and supply challenges for businesses looking to expand into larger retail and office space.

That push is expected to continue, said Sweet, benefiting large commercial property investors but also their smaller, less-experienced counterparts now flocking to that end of the market.

The positive outlook is based on several key factors, according to BMO.

•    Supply is limited, with vacancy rates lower than historical norms across segments in many cities.
•    The healthy balance-sheet performance of developers and construction firms has ignited investor interest.
•    Robust corporate performance - along with lending discipline - have maintained the quality of real estate loans at a high level.
•    Ultra-low interest rates have supported real estate development and prices in Canada.

The strong real estate fundamentals also extend to the owner-occupied commercial market, said Sweet, pointing to businesses that own the properties they use. Demand there is also increasing.

“There is strong demand for these properties by users, who are often able to lease out part of the property for additional rental income," said Steve Murphy, a senior VP for BMO Bank of Montreal. "Now may be a particularly good time for businesses to invest in commercial property for their own use.”

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