What’s happening in Canadian Commercial Real Estate? Your Questions Answered

During our Q4 2021 Quarterly Market Pulse Small Business Credit Trends and Insights Webinar, our panel of experts discussed the small business boom and the opportunities these new enterprises present for Canadian lenders, as well as, the latest economic update, small business insights, and small business credit trends. 

We asked one of the presenters, Claudia Verno, National Director, Research at JLL Canada, a global commercial real estate service provider, to answer a number of follow up questions we received from the audience regarding commercial real estate trends.


What are some of the key commercial real estate trends you are seeing?

In JLL’s latest Canadian Investment Outlook we’ve summarized the trends which include:

  • Investment volumes reached a record $63b this year, fueled by pent-up liquidity and low interest rates. We will probably see momentum continue at this pace in the first part of 2022 until rate hikes work their way through the economy.

  • Toronto, Ottawa, and Montreal had record years. However, stealing the show was West Golden Horseshoe (KWC + Hamilton + Guelph), where liquidity saw the highest jump on a proportional basis, in other words relative to an average year in that market. WGH was up 70 per cent on its five-year average for investment volume.

  • In general we are seeing capital being deployed to smaller secondary and tertiary markets as core cities are becoming increasingly expensive. Some cities that saw spikes in capital flows are London, Barrie, Quebec City, Kelowna and Victoria. 


Do you anticipate the lease rate per square foot going up in the major Canadian city centres? 

Despite the pandemic, net-asking leasing rates for office, industrial and retail have not fallen. In fact, they have risen in some markets. Two major trends in real estate that we have observed during the pandemic are expected to continue. First, trophy (landmark) and Class A (prestigious) office buildings will be able to maintain and raise their net-asking rents at the expense of older buildings due to a flight to quality. Second, industrial leasing rents will continue to increase and, in some cases, approach those typically found in offices given the chronic shortage of available industrial space.


Do banks and lenders tend to be more conservative when underwriting mortgages for commercial real estate than for residential real estate?

Given that most individual residential mortgages are insured and that the average commercial real estate mortgage is considered BBB, I believe that, on average, banks are indeed more conservative when underwriting CRE than individual residential real estate.


How do the hikes in interest rates and inflation impact the commercial real estate market going forward?

Higher interest rates will undermine the math for certain buyers and some bids. This could skim the buyer pool and therefore weigh on pricing. On the other hand, investment funds are under pressure to deploy capital, both on the equity and the debt sides. Higher interest rates would put us back to where we were in 2018-2019 when capital was still flowing easily. 

Furthermore, higher Consumer Price Index (CPI) price gains could theoretically lead to some institutional investors to move allocations from fixed income to real estate as a hedge against inflation (cash flows are indexed to CPI). These two effects should counterbalance and the overall effect could end up being a wash – but 2021 was a record year and also a recovery year. All in all, we will likely see a moderate fall in liquidity in 2022 but nothing drastic.


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