After a broadly positive year of real estate performance in Eastern Canada last year, Morguard expects a repeat performance for 2014. Eastern Canadian markets like Toronto, Ottawa, Montreal and Halifax are expected to benefit from the broader economic trend, which should in turn boost the performance in the region’s property markets. Investors will continue to try to expand or establish a footing in these markets, given their history of investment performance. Both income and capital trends will continue to stabilize, with the potential for further growth a distinct possibility.
“Eastern Canadian property markets will continue to be a source of stable and attractive investment yields and cash flow over the near term,” said Keith Reading, Director of Research at Morguard. “Property values should range at, or close to, the peak for well leased assets in prime locations, with performance being buoyed by ongoing access to relatively low cost debt and equity funds.”
Morguard Corporation released its 2014 Canadian Economic Outlook and Market Fundamentals Research Report. The 16th Annual Research Report contains economic, demographic and capital market influences and trends and forecasts for each real estate property class, both on a national and metropolitan level. The detailed findings can be used to develop individual asset or portfolio decisions that can drive the success of individual organizations or investors, by maximizing their return on investment.
2014 Real Estate Investment Trends to Watch in Eastern Canada
- Solid fundamentals will continue to characterize Eastern Canada’s property markets in 2014, buoyed by a stronger economic growth outlook.
- Property values will continue to range close to the peak, supported by robust demand, low cost equity and debt financing, and increased institutional allocations.
- Income performance will stabilize, with growth potential in certain asset classes and locales.
- Leasing fundamentals will also exhibit positive trends, although softening may occur in, for example, Ottawa’s office market.
- Construction activity will rise over the next few years. In the office sector, development activity will rise markedly in downtown sub-markets in Toronto, Montreal, Ottawa, and Halifax. Retail will remain relatively conservative, in terms of construction completions over the near term. Industrial development will increase in Toronto, with the completion of several new speculative projects, with more muted activity in Ottawa, Montreal, and Halifax. Purpose-built rental development will be limited, in keeping with the long-term trend.
- The arrival of U.S. retailer Target will continue to impact the retail sector in all Eastern markets, resulting in an intensification of discounter competition. The broader retail sector will continue to adjust to changing shopping channels, formats and consumer preferences. A conservative volume of new construction projects are in various stages of development.
- The multi-family residential real estate sector will continue to stabilize, as rental buildings remain largely full. However, competition from the rental condominium market will remain higher than in recent years.
Real Estate Investment Overview
The Eastern Canadian real estate investment market will see a continuation of positive performance in 2014, given a more robust economic outlook. Demand for Canadian exports is forecast to rise, helping to drive economic output in export sector rich markets like Montreal and Toronto. At the same time, domestic demand will improve, supporting warehouse and distribution demand.
Holders of assets in Eastern Canada will be the beneficiaries of largely stable market fundamentals in 2014. Core property values, on the rise for much of the past few years, will hold at the peak. Non-core property values will stabilize, having slipped slightly in 2013. Demand for investment-grade property will continue to outpace supply. However, capital flows will remain above the long-term average. Returns will remain attractive, which will drive investment capital to the region. In short, commercial real estate owners can expect another run of solid results in 2014, barring an unforeseen shift in market fundamentals.
Canada’s largest financial and business region will see continued property market strength and stability in the coming year, after a strong showing in 2013. Rental markets, on balance, will stabilize, with a measure of softening possible. In the retail leasing market, high quality vacant space will remain limited, with occupancy ranging in the low-to-mid nineties. Prime rents will, therefore, hold at the peak for the cycle with the potential for modest growth. Multi-family rental sector fundamentals will also hold at the peak for the cycle, with tight conditions, rising rents, and a lack of vacant units. The industrial leasing market will continue to be Toronto’s star performer. Demand will continue to outpace supply, particularly for new functional space.
Major office construction activity in the downtown south of the core will impact the market over the next few years. This will result in vacancy in older buildings in the Financial Core and other downtown clusters of office space as tenants relocate to this newly built state-of-the-art space. Suburban sub-markets will continue to see the introduction of new supply as well, with a more modest rise in vacancy as the likely outcome. For the most part, vacancy levels will remain healthy overall.
The strength of Toronto’s rental markets and the improvement in the region’s economic growth profile will help boost investment performance. Demand will outpace supply, as investors look to take advantage of these market factors. As a result, values should hold at the peak. Returns will reach attractive levels, drawing capital to the market. Core offerings will be met with strong interest and aggressive bids. In short, investment and rental market trends in Toronto’s property market will be largely positive over the near term.
Ottawa’s commercial property outlook will be characterized by a slightly softer trend overall, as the regional economic growth trend continues to disappoint. Rental market performance will be somewhat uneven, although conditions will reflect a broadly positive profile. The region’s office market will see occupancy levels steadily decline over the near term, as government fiscal restraint continues to take a toll on demand. The delivery of new supply will also drive occupancy lower. Rents will likely erode, although the decline will be modest. The multi-family, industrial, and retail sectors will stabilize, with most metrics holding at the peak for the cycle.
The lack of a firm development cycle in these sectors will act as a buffer against any weakness that may unfold. The relative stability of Ottawa’s commercial property market and economy will continue to support investment sector strength.
Ottawa’s property investment market will see a continuation of generally healthy trends in 2014, mirroring those of the previous year. Office properties with long-term government tenancies will attract the strongest interest. Retail and multi-family rental properties will also be in demand. Ottawa’s niche industrial sector will be active. However, the size of the market will make it difficult for investors to source available product. The relative stability of the national capital region will ensure the market stays top-of-mind with investors. Values will hold at the peak, with demand outdistancing the supply of assets.
Montreal’s commercial property market will see gradual improvement over the next 12 to 24 months, as economic output is set to rise
slightly. In 2014, growth is forecast to eclipse the 2 per cent mark, at 2.1 per cent, according to the most recent Conference Board of Canada forecast. This will support stabilization in the region’s business-driven rental markets, industrial and office. Demand will be sufficiently positive, ensuring occupancy levels hold at or near the cycle high. Rents will also stabilize, although there is the possibility for near-term erosion in the office sector due to the introduction of new supply. The retail and multi-family residential rental sectors will post ongoing strength, given a relatively healthy demand-supply dynamic. Stable rental market conditions will be a boon for the investment performance over the next couple of years.
Investment market strength will persist in 2014, in keeping with the current phase of the cycle. Demand for core property will continue to surpass supply, with plenty of capital from various sources, both private and public, chasing yield. Another solid investment performance is anticipated for the coming year, following a period of attractive returns across all major asset classes in 2013. Property values are expected to stabilize in 2014, ranging at or near the cycle peak. Once again, the challenge for investors will be to source core assets in which to invest.
Halifax’s commercial real estate market will receive a boost in 2014, as the region’s pace of economic growth picks up. The Conference Board of Canada is predicting real Gross Domestic Product will increase by 2.6 per cent in 2014, up markedly from the pace of 2013 which saw the metric rise by 1.7 per cent. The upward shift in output will have a positive effect on Halifax’s commercial rental markets. The resulting office space demand should result in the absorption of at least part of the over 500,000 SF of new inventory being constructed over the next five years. Contract work at the Halifax shipyard will drive job growth, which will benefit the retail sector and the industrial market to a degree. Ongoing stability in the multi-family residential rental sector will persist, boosted by youth employment recovery and migration patterns. The broad rental market stability in all major commercial sectors will also be a benefit to the region’s investment performance over the near term.
Halifax’s commercial property investment market will see strong activity and fundamentals over the near term, with trends similar to those of the past few years. National and local investment groups will continue to look to Halifax for diversification and yields that are typically higher than those of the nation’s larger cities. Strong local commitment to the market will also ensure bidding activity remains aggressive and values at the peak. Transaction volume will be limited only by the availability of product. In short, Halifax’s commercial property market will generate broadly stable fundamentals over the near term, in keeping with the medium-term trend.