Canada could potentially break the record for commercial real estate investment this year, hitting the $50bn mark, according to the latest market outlook by CBRE.
Paul Morassutti, vice chairman of CBRE Canada, said macroeconomic tailwinds, supportive immigration policies, and a bull market are three main factors that could help boost Canada's commercial real estate market.
"There are challenges ahead, including rising rents, limited office and industrial space, new technologies and the all-important issue of climate change. But ingenuity across our industry has demonstrated that creative solutions and skilful management of these issues can ensure the real estate market's ongoing success," he said.
The CBRE market outlook said there is pressure to deploy capital to commercial real estate as yields on traditional investment vehicles start to moderate.
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The construction of new commercial spaces will also attract more capital, allowing the sector to perform more strongly. In fact, CBRE said 70% of downtown office space and 50% of industrial space under construction are already pre-leased.
While major markets remain popular investment targets, domestic players competing with foreign capital are starting to unlock assets in smaller cities.
Mid-sized domestic players and private capital are expected to increase in regions such as Ottawa, Waterloo Region, Hamilton, the B.C. Interior, and Quebec.
CBRE said major markets appear to be facing oversaturation. In fact, office rental rates in these areas continue to climb amid record-low vacancy rates. This makes it a struggle for tenants to secure a space.
"A lack of desirable square footage in major centres threatens to thwart companies looking to enter or expand in Canada. Even after space is secured, the rapid growth of technology, changing demographics, and a shifting global economic environment are contributing to a sense of unpredictability," CBRE said.
On the industrial front, the lack of extensive bay options makes it impossible for tenants to house all their operations in a single distribution centre in major markets.
CBRE identified structural issues that could further impact the investment in commercial real estate. The first is housing affordability, particularly in big cities like Toronto and Vancouver. The skyrocketing prices in these two cities might drive workers away from downtown cores.
Infrastructure is also going to be a problem. CBRE said under-investment in transit could hurt business growth, with commercial spaces competing for proximity to a limited number of transit hubs.
"Left unaddressed, these forces have the potential to not only slow commercial real estate momentum but worsen income-inequality and inflame societal tensions. We must rise to the new challenges and opportunities that lie ahead if Canada is to solidify its status as a primary global investment destination," Morassutti said.
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