TORONTO, ONTARIO--(Marketwire - Oct. 16, 2012) - The continued strength in Canada's real estate industry, along with the expectation of low interest rates in the medium term, should provide added appeal for investors looking for income-producing commercial real estate properties, according to BMO Economics.
The report notes that real estate development and management have been leading sectors in Canada's economy, both on the residential and commercial sides. Additionally, the industry has been an important driver of small business. Of the 5.2 million people in Canada employed in small business in 2011 - firms with less than 100 employees - 775,000 worked in the construction and real estate and rental industries.
"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 and Managing Director, BMO Capital Markets.
Mr. Sweet noted several factors that make the sector attractive for investors:
- Supply is limited, with vacancy rates lower than historical norms across segments in many cities.
- Risk-averse operations have helped to improve balance sheet performance of developers, construction firms, and realtors.
- 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 commercial real estate industry benefits from the healthy condition of Canada's financial institutions, the participation of large, well funded operators and institutional investors, whose long-term objectives reduce volatility during downturns," stated Mr. Sweet. "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. Meanwhile, large U.S. retailers are targeting what they view as the underserved Canadian market for expansion."
"The strong commercial real estate fundamentals also extend to the owner-occupied market, where businesses own commercial properties for their own use. 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, Senior Vice President Commercial & Treasury Management, BMO Bank of Montreal. "Now may be a particularly good time for businesses to invest in commercial property for their own use. BMO provides mortgage financing for owner-occupied properties, where the primary financial strength of the business can support the loan," added Mr. Murphy.
Mr. Sweet noted that the market is likely to grow at a more tempered pace this year and next, with Canada's economic growth expected to ease to 2.0 per cent. "Furthermore, the still-unresolved Eurozone crisis and slowing momentum in the United States and several major emerging markets will continue to weigh on investors' risk appetite and adversely affect the industry in the short run."
In Canada's largest business centres, BMO Economics commercial real estate outlook revealed:
- Toronto - Canada's largest commercial real estate market significantly bolstered its recovery in 2011, supported by stable consumer and business confidence, the health of the financial services sector, and an upturn in manufacturing. This good performance extended through the first half of 2012, with downtown office vacancies at a relatively low level.
- Montreal - Montreal office vacancies fell from close to 11% in mid 2010 to the low 8% range at the end of 2011, but rose notably during the first quarter of 2012 on softer employment in the business and professional services industry. However, a recovery in that industry, continued growth in financial services, and limited new supply tightened the market in Q2.
- Vancouver - The ongoing lack of supply has maintained higher pricing in all commercial property asset classes in Vancouver. This, along with low bond yields and volatile stock markets, is driving traditionally conservative investors into commercial real estate.
- Calgary - The industry in Calgary has rebounded rapidly since the recession, bolstered by strong growth in employment, retail sales, and investment in resource-based and supporting industries."
About BMO Financial Group
Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified North American financial services organization. With total assets of $542 billion as at July 31, 2012, and more than 46,000 employees, BMO Financial Group provides a broad range of retail banking, wealth management and investment banking products and solutions.