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Local commercial real estate thriving, but momentum hampered by a lack of supply
Oct 31, 2013
Demand for commercial real estate remains solid in Winnipeg, despite more than a decade of consecutive price growth, according to a recent report.
Tight market conditions, however, have hampered momentum, according to the 2013 RE/ MAX Commercial Investor Report, with a shortage of product across all segments. 
“Risk aversion appears to be behind the thrust for commercial product, with owner-operators now investing in themselves,” said Elton Ash, regional executive vice-president for RE/MAX of Western Canada. “Rather than pay rising office, industrial or residential rental rates, end users are competing against small and large investors for prime commercial buildings. The trend is especially evident in terms of demand for industrial real estate where a limited supply of product has generated the lofty prices now attached to that sector.”
Purchasers are now sitting on the sidelines for the right property. There were 117 sales that occurred between January and June 2013, versus 137 during the same period in 2012, a decrease of approximately 15 per cent. 
Yet, dollar volume climbed nine per cent, according to the Johnson Report. 
Competition remains strong, with quality listings often snapped up as soon as they hit the market. Multiple offers continue to occur, especially on multi-unit residential product and owner-occupied buildings. 
Off-market deals are also commonplace, with the $2 million to $10 million range accounting for the lion’s share of demand. Most buyers hail from Western Canadian markets, but there has been a considerable influx of overseas investors in recent years. 
Industrial real estate is highly sought-after, with owner-occupiers driving approximately half of all industrial sales. With listings few and far between, many are now looking to leasing to fill their needs. In response, a wave of new construction is underway, but with the current 3.5 per cent vacancy rate in this segment, there is concern that by the time this product comes on stream, building activity will have gotten slightly ahead of demand. In the mean-time, new product will help alleviate some of the supply crunch. 
On the retail end, while vacancy rates have edged up, hovering near four per cent, the amount of available space remains in line with the 10-year average. The introduction of new brands to the marketplace and expansion by existing retailers has propped up activity in this sector, along with ongoing residential development, which has bolstered the need for shopping and amenities. The latter driver has been particularly notable in southwest Winnipeg, which continues to be the hottest area for retail and industrial development. 
Purchasers seeking out office space in Winnipeg are favouring the immediate periphery of the downtown core. Smaller properties in good locations, offering approximately 5,000 square foot of space, are coveted and drawing multiple bids. Vacancy rates on Class A and B office space hover between seven and 7.5 per cent. As such, new construction is generally occurring by need on a company-by-company basis. 
Some new office towers had been discussed for the downtown core, but to date, plans have not moved forward. 
Bare land remains a hot commodity in Winnipeg, with prices climbing as much as 25 per cent year-over-year. Developers continue to acquire quality land on the periphery of the city, especially if it is serviceable in the next five years, as well as infill properties within the city. It is estimated that some developers have acquired enough land to represent a 60-year land bank. 
Yet, as further annexation of the city occurs, additional price growth will be inevitable, and most are firm in the belief that land acquisition will leave them well-positioned for the future. 
Multi-family residential properties are also drawing serious interest. Larger buyers, including the Real Estate Investment Trusts (REITs), are particularly keen, looking to snap up significant blocks of 100 doors or more. Plenty of small investors exist, active under the $2 million range, with most looking for strip malls or two-to-three-tenant buildings. Banks have become more stringent in their lending policies, but most buyers are able to satisfy requirements. 
Solid economic fundamentals will continue to support the commercial sector in the months ahead.