Last week, we placed a positive spin on the current residential property market and tried to point to where homebuyers can find affordable housing across the country. This week, let’s get a better look into the commercial real estate market, a sector of the market that has taken a back seat in the minds of many Canadians given the state of the rest of the market.&nbsp;According to Collier Canada, the national industrial vacancy rate is continuing to increase, sitting at 3.2% as of December 2024. The total office vacancy rate is even higher, at 14.6%. They attribute this to a relatively large increase in supply - about 37 million square feet of space. In most major cities across Canada, the vacancy rates remain high and are steadily increasing quarter after quarter. In Toronto specifically, commercial real estate transactions have decreased 27% in the industrial sector and 46% percent in the office sector, year over year.&nbsp;Collier Canada brings up some explanations for the higher vacancy rates and lower transaction rates. The first one is the trend of working from home. This clearly reflects in the decrease in demand for office spaces in markets across the country. They also point out how building and development has slowed, not just transactions. They list some conditions that disincentivize builders, including high costs of land, crushing taxes, high construction costs, weak conditions for pre-construction sales and leases in the condo and office market, and the removal of government initiatives like CMHC building incentives for apartments. They mention the change in preference from downtown to suburban development, with the vacancy rates in downtown areas now far exceeding suburban vacancy rates. This key difference is due to a number of things: commute difficulty, higher living costs, horribly painful never-ending construction, and employee flight from cities to the suburbs in hopes of lower housing costs.&nbsp;In terms of the retail real estate market, the sector experienced a 20% decrease in transactions. JLL points out the supply of retail real estate is not meeting the demand and rent prices are continuing to rise, both factors contributing to the lowering transaction rates. RENX also cites the low construction rates for retail suitable spaces. A major barrier in the commercial real estate market is the preference to shop online rather than in store. Re/MAX says that shoppers prefer big box stores less than experiential retail experiences. Examples of this are stores that integrate virtual reality and integrative sales practices that ultimately leave customers returning. This allows retail stores to offer something a pure e-commerce solution cannot - an <a href="http://experience.re/MAX">experience. Re/MAX</a> describes the experiential retail model as “retail locations with features like augmented reality, virtual reality, and smart mirrors”. Regardless of how convenient online shopping is, there will always be a need for a physical store, as long as businesses sustain the need. The interaction between the online shopping world and the physical shopping world are kept alive through “buy online and pick up in store” experiences, where many customers do not want to wait days for shipping and wish to receive their product almost immediately. Re/MAX also points out that landlords of commercial spaces are eager to rent out their spaces, and now we will find more multi-use complexes that “make it easy to live, work, shop, and socialize within a single development.”&nbsp;Changing the retail experience takes creativity, vision, and money. However, there is a strong future for those that get it right. People are by nature social. They want to get out. They need to get out. While the commercial environment is currently complicated, and the threat of a general economic slowdown is real, those that prepare will be rewarded.&nbsp;Federal Conservative leader Pierre Poilievre just announced that if elected he will make significant and sweeping changes to how capital gains are taxed in Canada. 0% for Canadian focused investments. This would be a fantastic change that will encourage investment flow in and economic growth. Those who invest in Canadian businesses and real estate could benefit from this new opportunity.

Commercial Real Estate: Where Next?

Commercial real estate faces high vacancies and shifting trends, but strategic investors can seize opportunities in retail, office, and industrial spaces.

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