Shut Out of the Residential Housing Investment Market? Take a Look at Commercial

The perks of commercial real estate investment

One thing the commercial real estate market has going for it is enormity.

Matt Rachiele, the Calgary-based senior vice president of investment sales for Colliers International, says the global commercial real estate market is worth more than $230 trillion.

“This is the world's largest, and arguably one of its most important asset classes,” Rachiele says. “And unlike many other industries, no single group controls even 1% of it globally. So the opportunities to participate are literally boundless.”

That wide openness means commercial investors can often be quite particular about the properties they buy and the kinds of tenants they rent to. That’s not always the case when you have an empty house and a $3,000 mortgage payment to make.

Because commercial leases tend to span years, investors can typically take more of a “set it and forget it” approach with their tenants. You won’t have to worry about any midnight move-outs or occupants who threaten to withhold rent because the shower takes more than five seconds to heat up. You can structure commercial leases so tenants are responsible for maintenance and repairs.

While financing a commercial property generally involves investors ponying up down payments between 20 and 35%, your individual credit history doesn’t play as much of a factor. That can help commercial investors get their first properties.

“Lenders evaluate the property,” says Kirill Perelyguine, a commercial real estate broker for Royal LePage in Toronto. “So the bank's looking not as much at you personally as what the property is, where it's located, what kind of cash flow it produces.”

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The state of Canada’s commercial real estate market

You might think that COVID-19 decimated the commercial space. But Canadian investors just spent a record $14 billion on commercial properties in the second quarter of 2021, according to the most recent Canada Investment MarketView from CBRE real estate in Toronto.

“Investment activity has built over the first half of 2021 due to significant capital backlogs, a growing pipeline of property listings and an improving COVID outlook,” CBRE writes, adding that the country is on pace to reach a full-year investment total of $49.6 billion, which would smash the previous record from 2018.

The most in-demand asset classes among investors are industrial and multi-family properties. The former continues to benefit from the rise of online retail, while high real estate prices bolster the latter by forcing Canadians to rent longer.

Retail properties are in the midst of a rebound, accounting for $2 billion in sales in Q2. Those properties, however, are highly sensitive to location and tenant mix; you’ll likely benefit from professional guidance when getting your feet wet in the commercial space.

“You should be ever mindful that you don't know what you don't know,” Rachiele says.

Commercial properties that intrigue Perelyguine include lakefront resorts and hotels, and self-storage facilities near major population centres.

A hidden gem?

Securing a quality property in Canada’s largest commercial markets — Toronto, Vancouver or Montreal — won’t be easy or cheap. The competition in the commercial space may not be quite as tight as it is in each city’s residential market, but it’s fervent enough to keep pushing prices higher.

Perelyguine says demand for industrial space in Toronto, for example, is “going absolutely nuts.”

“The price per square foot went up from $200, just three years ago, to $400 or $450. I’ve seen $600 per square foot,” he says.

Rachiele says Calgary is home to a number of attractive no- to low-vacancy commercial assets, but to find them, investors may need to partner with an established fund or syndicate of limited partners.

“Part of the reason for that is that higher quality assets are more frequently traded off-market,” he says, “meaning you'll never even get a crack at them unless you have boots on the ground here.”