The Mighty Maple Leaf
Investors skate to stability in Canada.
With an economy based on a
strong banking sector and an ample supply of natural resources, Canada’s early
emergence from the global recession has real estate investors getting off the
The Canadian real estate
investment market saw a strong increase in 2010, particularly toward the end of
the year as debt and equity started to fuel deals. The 2010 total was $18.9
billion in investment, a surge of 47.9 percent year-over-year from the $12.7
billion in 2009, according to CB Richard Ellis — close to the $19.8 billion of
peak investment year 2005.
“From an overall
perspective, foreign investors are being drawn to a stable, well-run investment
market driven by the strength of the banking system,” says Jim Becker, market
director for Michigan, Ohio, and Canada for Chicago-based Jones Lang LaSalle.
“It’s now being seen as a safe haven with low corporate taxes, a high tax base,
and an attractive environment for businesses.”
But despite its stability,
Canada attracted only about $249 million — 1.6 percent — of its total 2010
investment volume from outside the country, according to CBRE.
Trophy Assets Hard to Find
Part of the reason for
lackluster foreign investment may be high entry barriers to the trophy office
market — especially in Toronto, where just a handful of institutional investors
hold all the class A assets.
Toronto, Canada’s largest
office market, revolves around the banking sector and has shown improvement
based on gains in the financial sector, says Robin White, executive vice
president in the investment group of Avison Young, a national real estate firm
based in Toronto.
“In the big picture, Canada
never found itself in the same troubles as the U.S. and Europe,” he says.
“We’ve skated through better than some and the banks are in good shape, making
stellar profits at this point.”
The Toronto office market
remains tight, with a vacancy rate less than 9 percent and only seven options
for tenants needing more than 100,000 square feet, according to Jones Lang
LaSalle research. Controlling most of the city’s trophy assets are the Big Five
banks headquartered in the city: Royal Bank of Canada, Toronto-Dominion Bank,
Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce.
In fact, roughly 90 percent
of the office product in Toronto is controlled by those five entities — and
don’t even think about buying, says Becker.
“With the competition to
own these assets, you might think the owners would see their chance and take
their money,” says Becker. “But that’s not the case. They want to keep their
chips in the pot.”
The hesitation to sell also
comes from the need for most funds to have income-producing assets to fulfill
investment goals, says White. “They’ve been reluctant to sell because they’re
not quite sure how they’ll re-invest again.”
But with capital ready to
be invested, the lack of available office product is pushing institutional
deals into the suburbs and away from core assets. “[Investors] are forced to
look farther afield,” White says. “As a result, suburban assets —
grocery-anchored retail, things that are well-leased and income-
producing — are appealing.”
Most new office product is
being built in Toronto’s suburbs, with 1.5 million square feet delivered in
2010 and 1.2 million sf in the pipeline this year.
In Montreal, an older stock
of office properties — built up before the major banking institutions moved to
Toronto — is now being converted to exposed brick, urban office space, says
Phil Dowd, a vice president in the Toronto office of Jones Lang LaSalle. That
stock has drawn a steady base of creative companies such as video game
development teams and the research and development arms for pharmaceutical
“It’s a very well-preserved
city, and it’s built up a sophisticated office market,” says Dowd. “The video
gamers love the brick-and-beam office stock.”
Retail Fuels Industrial
In other real estate
sectors, a trickle-down effect is in place, fueled by U.S.-based retailers
looking north to expand market share. “In Calgary, Montreal, and Toronto, our
clients are building to serve a large consumer retail market,” Becker says.
“There is a lot of disposable income in Canada, and Home Depot and Target, for
example, are recognizing that and making moves.”
In January, Target Corp.
spent $1.8 billion to acquire more than 200 Zellers locations across Canada.
The retailer plans to convert most of the stores to its Target format. Lowe’s,
which entered the Ontario market in 2007, is moving into western provinces,
opening stores in Calgary, Alberta, British Columbia, and Saskatchewan.
Kohl’s, Marshall’s, J.
Crew, and J.C. Penney are getting ready to enter the country as well, says
Sandy Shindleman, CCIM, SIOR, president of Winnipeg-based Shindico. “There is
definitely an uptick in retail deals,” he says.
That retail growth is
fueling industrial real estate as well, as warehouses and distribution centers
are needed and logistics companies are booming with the new business to move
“Distribution is a big part
of the Ontario industrial market,” says John O’Bryan, vice chairman of CBRE
The segments of the
industrial market based on automotive and other manufacturing were hurt badly
by the recession, he adds. “Cap rates are back to 2007 levels in many areas.
But the rental markets haven’t kept pace, particularly in industrial.
Manufacturing took it on the chin, so areas such as Ontario, closely associated
with automotive, were bashed.”
And while manufacturing has
lagged on the industrial side, the natural resources component of the country’s
economy has been strong with growing demand for oil outside the Middle East.
Mineral-rich portions of the country have been a driver for industrial growth
surrounding the country’s oil supplies and the industry of transporting it,
refining it, and exploring for it. (See sidebar.)
Residential development has
followed the natural resources-related industrial growth in some of Canada’s
key mineral regions. In an oil-rich market like Alberta, jobs are being created
in direct proportion to oil production, said Scott Hughes, CCIM, SIOR, managing
director of Integrated Management and Realty in Edmonton.
“For every 1 million
barrels of oil produced, you need 20,000 workers. And every barrel that is produced
right now is sold,” Hughes says.
Multifamily Demand Stays
The British Columbia
segment of Canada’s multifamily market is the most active. In the Vancouver
market, an explosion in residential/multifamily development is following a
boost in rents and an infusion of new investment.
“The market for Pacific
trade in Canada comes right through Vancouver,” says Dowd.
In 2010 there were 20
transactions for a total dollar volume of $264 million, largely in Vancouver.
Vacancy ended 2010 at 1.9 percent. Cap rates are in the low 4 percent range,
according to Avison Young, with cities outside Vancouver approaching 6 percent.
Cap rates for trophy assets remain compressed and in the 3 percent range.
However, rent controls are
holding back some of the multifamily values in many of the markets, says Avison
Young’s White. “Residential has been a strong sector,” he says. “But with the
rent controls in some of the markets, you’re not seeing the value that you
would see otherwise.”
Multifamily cap rates range
from 5 percent to 5.7 percent in Calgary and from 6 percent to 6.7 percent in
Montreal, according to Colliers.
Tight market conditions are
expected to push Toronto rental rates higher, with immigration being a key
driver in the market, according to CBRE. In the Greater Toronto area, the
rental vacancy rate fell from 3.1 percent in 2009 to 2.1 percent in 2010, with
a further 1.8 percent drop forecasted for 2011, according to CB Richard Ellis.
Cap rates in 2011 are expected to be in the 6.2 percent to 6.5 percent range.
New condominium completions
are adding to the secondary rental pool in Toronto as first-time homebuyers are
taking a wait-and-see approach, opting to rent until the market settles.
Forecasts for the remainder
of 2011 call for continued growth in Canada’s real estate investment market as
the banking sector expands and capital continues to flow from the renewed
interest by institutional investors and real estate investment trusts.
“Overall, it’s a relatively
boring economy,” says CBRE’s O’Bryan. “A relatively good banking system and
natural resources are among the strong pillars that have held up the economy.”
Daniel Duggan writes about
commercial real estate for Crain’s Detroit Business.
Canada’s Oil Play
While fear spreads over the
geopolitical chaos involving Middle Eastern oil, Canadian oil becomes more and
A major economic driver for
the country comes out of the Alberta province, where oil exploration,
transportation, refining, and research dominate the industrial market. The oil
sands deposits in Alberta represent the second largest oil reserves in the
world, with 178 billion barrels of oil reserves. Producing close to 3 million
barrels a day and exporting 1 million per day, Canada’s oil industry is a huge
A tight vacancy level in
the 4 percent range combined with increased demand has speculative real estate
projects on the drawing board. Scott Hughes, CCIM, SIOR, managing director of
Integrated Management and Realty in Edmonton, says growth in oil-based
industrial is highly likely. If the current export level of 1 million barrels
per day is pushed to 2 million or even 3 million barrels, he says, the demand
for commercial real estate will follow.
“To make that kind of a
move, to grow like that, would require a substantial investment in the
infrastructure,” he says. “New pipelines, manufacturing, and transportation
would all be needed.”
Greater Edmonton, with a
96.6 million-square-foot universe of industrial product, saw a vacancy rate of
4.4 percent in 4Q09 drop to 3.6 percent by 4Q10, according to data from
Edmonton-based Colliers Macaulay Nicolls.
New construction, just
under 1 million square feet in 2010, outpaced 2009 significantly, but is far
from the more than 3 million sf built in 2008, according to Colliers.
Net rent in the region
ranges from a low of $6.10 psf to a high of $15.00 psf based on the size of the
location and the region.
Out-of-towners need not
worry ... but bring a lawyer
Thinking of buying in
Canada? Not a large worry, but do your homework.
To date, investment in
Canada has been a game largely for Canadians, with less than 2 percent of real
estate investment coming from foreign investors.
That need not be the case,
says Sandy Shindleman, CCIM, SIOR, founder and president of Winnipeg-based
Shindico. Nearly half of the brokerage practice at his firm is based on retail,
a sector showing large interest from U.S. investors chasing the U.S. retailers
“The real estate in Canada
looks the same and acts the same as the real estate in the United States,” he
says. “Leasing contracts are similar and the idea of a net lease is very
He adds that the tax
treaties between the U.S. and Canada keep many tax issues from becoming
complicated; for example, taxes paid in Canada are credited in the U.S.
Developers typically have
engaged Canadian firms or used joint-venture structures to navigate the local
issues that exist from market to market.
Investors sometimes use
Canadian firms for due diligence. But it’s best to hire a local counsel in that
area, says Mark Rubenfire, a partner at the law firm of Jaffe, Raitt, Heuer
& Weiss PC in the suburbs of Detroit.
“Issues related to title,
local tax laws, things of that nature really are best handled by a local
counsel to ensure you’re getting the right advice,” he says.
And pay attention to the
exchange rates, he adds.
“Changes in the exchange
rates can change the deal,” he says. “If you get a swing in the rates, you
could wind up making money off the currency play as well.”