The Canadian commercial real estate market has experienced a profound metamorphosis in the wake of the global pandemic. The recently released Re/Max 2023 Commercial Property Report offers an insightful analysis, painting a picture of remarkable resilience, strategic adaptation, and transformative trends across the nation’s diverse property sectors. Examining 12 major commercial hubs, the report highlights several pivotal developments that collectively signal a robust path toward recovery and sustained growth.
Christopher Alexander, President of Re/Max Canada, emphasizes the unexpected vigor witnessed in several key markets. “Despite prevailing challenging market conditions, regions like Edmonton, Calgary, Regina, and Saskatoon demonstrated strong activity in the first quarter of the year,” Alexander notes. He further explains the underlying dynamic: “A persistent shortage of available inventory across various asset classes continues to exert upward pressure on commercial values and lease rates, particularly within the industrial sector. This scarcity keeps prices buoyant, with further escalation anticipated as market momentum builds through the latter half of the year.” This introduction sets the stage for a detailed exploration of the forces reshaping Canada’s commercial property landscape, from the extraordinary performance of industrial assets to the innovative repurposing of office spaces and the enduring strength of the retail sector.
Industrial Real Estate: An Unstoppable Force in the Canadian Market
Without question, industrial real estate stands as the undisputed star performer within the Canadian commercial property market. Characterized by exceptionally strong sales and lease activity across virtually all markets, this sector continues to significantly outperform other asset classes. The relentless surge in e-commerce, coupled with critical supply chain re-evaluations and the growing demand for efficient last-mile logistics, has fueled an insatiable appetite for industrial spaces.
Investors and end-users, particularly those based in British Columbia and Ontario, are actively expanding their search perimeters into neighbouring provinces. This strategic shift is driven by a quest for larger distribution and warehousing facilities, often at more accessible price points compared to the highly competitive and increasingly expensive major urban centers. This heightened demand has created a significant ripple effect, spilling over into markets such as Edmonton, Calgary, Regina, Saskatoon, London-St. Thomas, Halifax, and St. John’s. Despite some normalization from the peak demand levels observed in 2022, sales remain robust, leading to what the report describes as “extraordinarily low” inventory levels across the country. The shortage of prime industrial land and existing facilities means that rental rates are escalating, and developers are increasingly turning to build-to-suit projects to meet specific tenant requirements, highlighting a long-term structural demand that shows no signs of abating.
Land Sales and Approvals: Navigating Bureaucracy and Fueling Future Development
The market for commercial land sales has demonstrated commendable stability, even in the face of significant headwinds posed by higher interest rates and escalating construction costs. Acreage specifically zoned for industrial, multi-family, and retail use remains exceptionally sought-after in Canada’s major urban centers. This demand is intrinsically linked to Canada’s robust population growth and the pressing need for more housing and supporting infrastructure.
However, this promising demand is often met with substantial bureaucratic hurdles. The lengthy and often complex approval processes, compounded by layers of “red tape” at municipal levels, frequently hinder the timely commencement of new construction projects. Elton Ash, Executive Vice President of Re/Max Canada, underscores this critical challenge: “Population and GDP growth will continue to be a strong driver bolstering urban expansion in cities across the country.” He adds, “Naturally, a growing population base attracts new business and services, and we are seeing that translate into solid demand for most types of commercial real estate across the board. We need partners in our city planning offices to streamline the applications and approvals process in a timely manner — months, not years — to bring these properties to market.” The efficiency of these processes is paramount to ensuring that supply can keep pace with demand, mitigating further price increases and fostering sustainable urban development.
An interesting development illustrating market adaptability is the re-emergence of Vendor Take-Back (VTB) mortgages in several markets. As sellers and buyers navigate a tighter credit environment and higher financing costs, VTBs have become a crucial tool to bridge financing gaps and facilitate transactions. Re/Max Canada’s analysis of closed transactions in the Greater Toronto Area (GTA) during the first quarter (Q1) of 2023 offers compelling evidence of this trend. The percentage of VTBs as a proportion of total sales over $2 million substantially increased over year-ago levels, climbing to 9.55 per cent from 5.82 per cent in Q1 2022. This means that VTBs now represent nearly one in ten commercial transactions in the GTA, signaling a creative approach to deal-making in a challenging financial landscape and reflecting a willingness by sellers to participate in the financing structure to close deals.
Retail’s Resilience: Bricks and Mortar Defies Online Dominance
Contrary to widespread predictions that the relentless growth of online sales would irrevocably diminish the physical retail sector, the Re/Max report reveals a surprising and robust resilience. The retail sector continues to exhibit solid activity in retail nodes and shopping centers across 11 of the 12 markets analyzed. This remarkable performance underscores a fundamental truth: consumers are actively gravitating back to physical stores, seeking experiential shopping environments and tangible interactions that online platforms cannot fully replicate.
This renewed consumer confidence is translating into significant investment in major shopping malls and supporting the enduring appeal of the bricks-and-mortar experience. Property owners and developers are responding by enhancing retail spaces, incorporating amenities, entertainment options, and diverse food and beverage offerings to create destinations rather than mere points of transaction. Furthermore, the strategic integration of residential applications on commercially zoned properties is profoundly enhancing the retail landscape. This burgeoning “live-work-shop” phenomenon creates vibrant, self-contained communities where residents have immediate access to retail, services, and employment, fostering sustained foot traffic and economic vitality within these mixed-use developments. This trend not only strengthens the retail environment but also addresses urban density needs and offers a holistic approach to city planning.
Challenges and Transformation in the Office Sector
The office sector remains the most dynamic and challenged segment of the commercial real estate market. Employers continue to grapple with the pervasive impact of hybrid work models, which have fundamentally altered the demand for traditional physical office space, particularly in downtown cores. Many companies are strategically downsizing their footprints to reduce operational costs, while others are redesigning their workplaces to incentivize employees with more collaborative, amenity-rich, and socially engaging environments, recognizing the office’s evolving role as a hub for culture and innovation rather than just individual workstations.
Amidst these significant shifts, a pivotal trend is emerging: the proactive repurposing and conversion of underutilized Class B and C office buildings into residential units. While the report acknowledges that not all buildings are structurally or economically suitable for such retrofitting, several major Canadian centers are actively promoting and incentivizing these conversion projects. This initiative serves a dual purpose: it breathes new life into downtown cores struggling with high office vacancies and, critically, helps to alleviate Canada’s severe housing shortage.
Calgary stands out as a leading example with its innovative Downtown Calgary Development Incentive Plan. This program provides a substantial $75-per-square-foot subsidy to developers for converting obsolete office spaces into much-needed residential units. To date, 10 buildings have already been approved for conversion under this plan, a move that is projected to create over 1,200 new homes and effectively remove approximately one million square feet of vacant commercial office space from the market. Similar transformative conversion projects are also gaining traction and are currently underway in other major Canadian cities, including Halifax, Ottawa, London, Toronto, and Winnipeg, signifying a widespread recognition of this strategic solution.
Christopher Alexander further elaborates on the profound impact of these initiatives: “Commercial office markets are experiencing a transformational shift in the aftermath of the pandemic. Downtown cores were virtually decimated by Covid restrictions and have yet to come back to life in many Canadian centres. The conversion programs now underway ensure that our city centres remain vibrant in the future, restoring vital foot traffic that is the lifeblood of the country’s core urban areas.” He concludes, emphasizing the broader community benefits: “The retrofit and renovation activity not only brings desperately needed residential product online, but it also supports the surrounding retail shops and restaurants, transit systems, and the overall health of our downtown neighbourhoods.” This strategic repurposing represents a far-sighted approach to urban planning, fostering sustainable growth and revitalizing central business districts into dynamic, mixed-use communities.
Outlook and Government Action: Building Momentum for Future Growth
The Re/Max report concludes with an optimistic outlook, highlighting numerous positive indicators that underscore the ongoing vitality of commercial activity across Canada. A renewed and robust demand for housing has re-energized builders and developers, leading to a resurgence of projects that were placed on hold throughout 2022. This reawakening of the residential construction sector has a natural cascading effect, stimulating demand for commercial services, retail spaces, and industrial support.
Alexander confidently asserts, “The momentum is building, with some pent-up demand evident. The fundamentals underpinning the market squarely supporting ongoing commercial activity in the year ahead.” This forward-looking statement suggests that despite lingering economic uncertainties, the core drivers of Canada’s commercial real estate market remain strong. Factors such as continued population growth, strategic infrastructure investments, and an adaptable business community are expected to sustain this positive trajectory. Government action, particularly in streamlining approval processes and incentivizing sustainable development, will be crucial in maximizing these growth opportunities and ensuring the long-term health and vibrancy of Canada’s commercial property landscape.
For a comprehensive, market-by-market overview and a deeper dive into the trends shaping Canada’s commercial real estate, readers are encouraged to consult the full report directly.
For the full report, including a market-by-market overview, click here.