Foreigners interested in buying property abroad in a market that appears to be well positioned to withstand the current downturn and to stage a solid bounce back once the economy improves may find a good potential in Canadian commercial real estate. Investments in commercial real estate in Canada have proven especially resilient to the current downturn, which is a stark contrast to commercial real estate around the world, especially in the United States, where vacancy rates on various types of commercial properties, such as office, industrial and retail space, have climbed to multi-year highs. At the same time, rents on commercial properties have declined substantially, prompting owners of certain types or commercial real estate investments to offer various rent discounts and incentives. Therefore, in most economies, commercial real estate is in for an extended downturn that will slash income flows and returns for many investors. However, investments in Canadian commercial real estate are likely to are much better than most comparable markets.
Unlike in the United States, rents in the Canadian commercial real estate market have remained stable because vacancy rates have been relatively low. In Canada, office vacancy rates, for instance, have increased to about 6 per cent, which is well below vacancy rates reached in previous cycles. In fact, there are even some localities, such as Ottawa, which are bucking the trend. While vacancies have clearly increased over the past several quarters, they still remain exceptionally low compared to other countries in the world, especially the United States. What is working to the benefit of the Canadian commercial real estate investments, however, is that vacancies are increasing from a low base because, in general, there has been a limited supply of new commercial properties in most local markets. This should keep rent declines low and therefore should offer to foreign investors buying property abroad a rent yield that will be better than that provided by comparable commercial real estate investments in the United States and similar markets. Stable rental income flows should thus appeal to foreign commercial property investors interested in buying property abroad.
Another benefit of investing in Canadian commercial real estate market is that the current downturn in Canada should be both shorter and milder than in most developed economies. The economic recession in Canada will likely end in the second half of this year. Canada’s recovering economy will start adding employees to the nation’s payrolls much sooner than will other economies in the world, especially that in the United States. As a result, utilization rates for vacant commercial properties in Canada should improve sooner, helping the market stabilize. The only exception may be Toronto and Calgary markets, which will continue to see rising vacancies and falling rents due to oversupply issues. However, this will mean that commercial real estate prices in those markets will decline, creating opportunities for foreign property investors to capitalize on lower property values.
Investments in commercial real estate in Canada in the current cycle should also turn around much quicker than in previous cycles because this time the Canadian commercial real estate market does not suffer from the excessive supply of commercial properties. Therefore, the market rebound is expected to happen within two years, which is only a half of the time it usually takes for commercial real estate markets to stage a comeback from recession.
Even though the number of commercial property purchase transactions has dropped precipitously over the past several quarters, many investors interested in buying commercial real estate abroad, will likely flock to Canada’s commercial property market seeking good investment opportunities for the economic expansion that lingers ahead. Investments in Canada’s commercial real estate traditionally earn strong income for foreign investors that seek investments in markets characterized by long-term stability.