Overall Real Estate Market
With rising interest rates, tightening lending standards, and growing concerns about a recession, there is a global repricing happening across all real estate classes. More investors are moving to the sidelines. Investors remaining in the market are focused on what they can control – income growth and good tenant retention. Investors are looking for niche opportunities that potentially offer high returns.
Increasing rents over the past few years, driven by high construction costs, is making it difficult for more tenants to accommodate higher rental costs into their budgets. Vacancy rates are slowly rising, and commercial cap rates are rising with correspondingly lower property values. This has widened the gap between seller and buyer expectations.
On a longer-term basis, commercial real estate still stacks up well against other investment classes. After one of the shortest and fastest rate hiking cycles in history, many economists are suggesting governments are close to ending rate hikes. While rates are unlikely to go back to just above zero, there should be a significant basing around historical levels.
Industrial real estate prices have remained stronger than other classes as vacancy rates remain historically low. There has been limited new construction due to material and labour shortages, which has kept construction prices high, relative to potential rental income. Based upon CBRE data, industrial vacancy rates in southern Ontario remain below the 2% range and constructions costs are in excess of $200 per sq.ft. Base rental rates are north of $10.00 per sq.ft. – $12.00 per sq.ft. in urban areas west of Hamilton.
In Sarnia-Lambton there were four industrial building sales that closed between January and June with a median list price of $1,500,000 and a sold price of $1,350,000. Three of the buildings were between 8,625 sq.ft. and 35,000 sq.ft. The fourth was 2,100 sq.ft. There was limited leasing activity with 21,900 sq.ft. leased across four buildings with the median leased spaced size being 4,800 sq.ft. The median base rental price was $7.95 per sq.ft. and the median additional rent was 4.50 per sq.ft.. All the reported leasing was in older buildings. In new buildings, base rent would be greater than $10.00. per sq.ft..
Commercial Market (does not include multi-residential)
There were over 20 commercial properties sold in the first six months of 2023. Five of these sold between $200,000 and $250,000, four sold between $400,000 and $850,000, five were over a $1,000,000 and one sold for over $5,000,000.
There were 37 leases signed with the median base rent at $13.00 per sq.ft.. Generally, rates ranged from $7.71 per sq.ft. to $23.00 per sq.ft. base rent.
The demand for office space has remained sluggish relative to supply, as the dynamic of working from home on a full, or part-time basis changed during Covid with the workplace model offering more flexible working arrangements.