“Canadian commercial real estate has been a primary benefactor of a decade of economic growth and distinction on the global stage. Further integration into the global economy coupled with technological change has produced new sources of demand, an influx of foreign capital and changing business needs and behaviours,” say the authors of the recent CBRE 2019 Canadian Market Outlook. Numbers don’t lie. A strong demand for office, residential, and industrial persists throughout the major city centres. In the Canadian office sector, national construction activity reached 16 million square feet for the first time since Q4 2015, while in the industrial sector the national average net asking rent reached a record high of $7.97 per square foot in Q1 2019.
Yet despite seeing these stats as reasons to rejoice, the typically prickly bunch that are CRE senior executives look for things to worry about, as evidenced by responses in the REALPAC / FPL Q1 Canadian Real Estate Sentiment Survey. “The biggest challenge is a cooling trend on new product absorption, predominantly brought about by price levels and affordability, and compounded by policy at both the provincial and federal levels (tax structures and stress tests)—that has affected it more on the higher than the lower end,” said one respondent. “There’s a need and desire for housing, but it puts affordability more at risk. There’s a spike in prices on the low end as demand shifts, and policies are actually hurting the people that they’re trying to help.”
A major concern voiced in the Sentiment Survey was that while fundamentals are strong, the wild card is government intervention, acting as a major contributor to rising interest rates and other concerns. “There’s a lot of desire at all levels of government to try and tinker. There’s interest rate hikes and stress testing with home-buyers,” said one respondent. “We are also seeing it at the provincial level with trying to implement tax policies to dissuade money laundering, and there are lots of initiatives that municipalities are trying to enact. All with good intentions, but not well thought out, which makes us nervous, especially if the government continues to want to intervene.”
The government did intervene, at least in Ontario. With Bill 66 passing third reading in the Ontario legislature, municipalities in the province stand to gain hundreds of millions of dollars by opening public construction contracts to all qualified bidders. The bill updated Ontario’s outdated labour laws, which had blocked almost $2.5 billion worth of publicly funded municipal infrastructure work from fair and open competition. Isn’t that good news?
“While government, business leaders and average Canadians adjust to changing conditions, it is important to remember that these difficulties are by-products of Canada’s significant competitive advantages, stable institutions, high quality of life and a decade of G7-leading economic growth,” CBRE reminds us. “In the eyes of the world, Canada remains a haven from instability. It is a place where opportunity can become reality and prosperity is a more likely outcome than it is simply a possibility.” Let’s keep that in mind, everyone.