While investing is often associated with stocks and bonds, the Canadian real estate market provides potential investors with plenty of lucrative opportunities. When mortgage rates are low and properties are available, savvy buyers can make a tidy profit in the housing market. However, before an individual decides to invest, they must understand the different ways to invest in real estate, as well as the advantages and disadvantages of each.
Buying, selling and renting
Buying real estate directly is the most common way to invest. Buyers typically purchase a residential property at a low price, renovate it or wait until the market improves, and sell the property at a profit. Buying homes also presents Canadians with the chance to become landlords. Purchasing a property and renting it out to tenants can be a great way to bring in extra income on a steady basis. Continue reading
Most Canadians are familiar with residential mortgages. After all, homeownership is something most people aspire to, so the ins and outs of home loans and mortgage rates tend to reveal themselves to consumers as they take their first steps toward purchasing a property. However, unless an individual is a business owner or investor, they might not understand the intricacies of commercial mortgages.
What is a commercial mortgage?
Put simply, a commercial mortgage is a loan for real estate that is used for business. Whereas a person's house or condominium may require a residential mortgage, commercial mortgages are used for properties that are used for office space, retail, manufacturing and other non-residential services. Continue reading
While Canadian mortgages have been a hot topic for quite some time, the spotlight is usually trained on the residential variety. After all, more people are buying homes for their families than purchasing buildings for businesses. But the commercial mortgage market is just as important for the economy as residential housing, if not more so. The commercial mortgage market often acts as a barometer for more than just real estate. More commercial mortgages tends to mean more jobs, which usually means higher household incomes and a healthier economy.
While the ins and outs of commercial mortgages are similar to residential mortgages, there are some key differences as well.
When it comes to residential mortgages, qualifying for a loan falls squarely on the borrower. Income and credit history are taken into account, and if a borrower doesn’t meet a lender’s standards, the loan is denied. Commercial mortgages, on the other hand, are more about the property itself and the cash flow the property will be earning. Lenders take into account the net operating income of a property, meaning how much money it will be bringing in after payments and depreciation. They also look at the debt service coverage of a property, comparing income against the costs of principal and interest payments. Continue reading
With all the attention focused on Canada’s residential housing market, the country’s commercial real estate prospects are often forgotten. Mortgage rates and regulations affect more than just family homes, and the commercial real estate market is frequently a bellwether of economic trends, influencing everything from employment to retail.
A report from the Richard Ivey School of Business could leave some analysts with concerns about commercial real estate in the country. Data from the Ivey Entrepreneurs Index shows that two-thirds of surveyed entrepreneurs believe the Canadian economy will grow over the next year. While that may not seem like an earth-shattering revelation, it marks a 12 percent decrease from six months ago.
"Entrepreneurs in Canada are becoming more cautious," said Stewart Thornhill, executive director at the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business. "This may be indicative of a wait and see attitude amongst this normally bullish group. External factors such as warnings surrounding the looming fiscal cliff in the United States and unpredictable economic developments in Europe have dampened the spirits of high-growth private business in this country.” Continue reading
Everyone who knows somebody contributing to the commercial mortgage sector – whether he or she is a small business owner who buys office space or part of a larger company that employs commercial real estate professionals to find that perfect available space – needs to thank that person for contributing to the Canadian economy.
Yep, it's true. The latest research from the Real Property Association of Canada and the NAIOP Research Foundation discovered that the commercial real estate sector contributed $63.3 billion to Canadian economic activity last year alone, and the sector is reportedly twice the size of the economies of Newfoundland and Labrador.
But where does all of this economic support come from? Surely it's acknowledged and appreciated, as various rating services have commended Canada on its strong, stable economy. However, the commercial real estate sector provides an abundance of jobs – 340,000 of them, to be exact. Most of these jobs are high-paying professional jobs, according to the report, and equal to the total employment force of the entire Canadian agriculture industry. All of the income from those jobs combined total more than $18.1 billion, roughly twice the income of the agriculture, forestry and fishing industries combined. Continue reading
Although 20 percent of Canadian small and medium-sized business owners reported plans to hire within the next three to four months – a higher number than average – small business confidence levels have fallen to a three-year low. The Canadian Federation of Independent Business (CFIB) reported that this may be attributed to mortgage news, unprecedentedly low mortgage rates and high debt causing difficult economic conditions.
“In addition to the continuing difficulties in Europe and the sluggish recovery in the U.S., elevated household debt levels in Canada will keep personal spending growth in check in the near to medium term, limiting economic prospects for Canada," said Jacques Marcil of TD Economics.
The most pessimistic business owners – specifically retailers – could be found in Prince Edward Island and Nova Scotia. Small and medium-sized businesses in Saskatchewan were the most confident, with the manufacturing, natural resources and financial industry confidence levels remaining higher than average. Continue reading
Many experts will attest that the Canadian housing market is inflated and seemingly oversaturated thanks to incredibly low interest rates, but how is the commercial real estate outlook for business owners looking to buy a space to expand or to lease to other businesses? The Bank of Montreal says now is a particularly good time for investors and businesses of all sizes to invest in commercial property.
"There is a strong demand for these properties by users, who are often able to lease out part of the property for additional rental income," said BMO vice president Steve Murphy.
Commercial investment properties have the potential to do well in the current economy, making it a generally low-risk option for business owners looking to get a bit of financial cushion for their balance sheets. Additional factors that make the investment prospect attractive include:
– Higher occupancy rates, which affects availability and reduces vacancies
– Increased lease rates
– Predicted continual Canadian economic growth Continue reading
Although Canada has generally been able to avoid the massive economic suffering that plagues much of the world, a recent report by Statistics Canada says Canada's economy is growing at a slower rate than expected.
Experts predicted the economy to experience a 0.2 percent growth in May based somewhat on Canadian mortgage trends, but it only grew by 0.1 percent. This disappointment came on the heels of a 0.3 percent increase for April and a 0.1 percent increase in March.
"All told, this sets the second quarter on track for no better than 2 percent growth, and will lead to downward revisions in the consensus for the quarter," Avery Shenfield, chief economist at CIBC World Markets, told the Financial Post.
However, bright spots can be seen in the service sector: The retail sector was up 0.7 percent after a 0.9 percent decline in the previous month, food services increased 0.6 percent, and the finance and real estate sector increased 0.2 percent. Continue reading
Canada may see a surge in commercial mortgages in the coming years, according to a recent analysis from the BMO Financial Group. While the market for commercial real estate has been pretty sluggish since the early 1990s, low mortgage rates in Canada may spark renewed interest from investors.
"The commercial real estate industry benefits from the healthy condition of Canada's financial institutions, the participation of large, well funded operators and institutional investors, whose long-term objectives reduce volatility during downturns," said Earl Sweet, senior economist and managing director with BMO Capital Markets.
According to BMO, there are a number of factors at play in the expected rise in the commercial real estate market:
• A low vacancy rate has limited commercial real estate supplies across Canada
• Canada's businesses have largely dodged the global economic crisis and maintained a high level of performance
• Strong risk aversion from construction, real estate and development firms have kept those balance sheets high
• The continued availability of low-interest loans has helped real estate development nationwide
An analysis from The Canadian Press backs up BMO's findings. The source pointed to a conference call with the president and CEO of Brookfield Canada Office Properties, who said her company is in a strong position and hasn't seen any fallout from the turmoil in Europe.
Canada has been fortunate in that it has been relatively untouched by the economic calamities affecting parts of the world, but businesses have still been facing some challenges. The commercial real estate market is tightening as Canadian businesses continue to expand, but with fewer offices available, the country is seeing a chilling effect on hiring.
A recent report from the CBRE Group showed the state of Canada's commercial real estate market:
• Across the country, office space vacancy is 8.2 percent
• Vacancy rates in downtown areas are 6.1 percent
• Vacancy rates in suburban areas are 11 percent
• The second quarter of 2012 saw office space absorption of 1.3 million square feet, down from 2.1 million in the first quarter
"There was reduced demand for Canadian commercial real estate in the second quarter as global economic instability continued to contrast with the relative strength and stability of the Canadian market," according to the report. "The fate of the Euro, and with it the confidence in the European and World economies, continues to lurch from impending crisis to potential crisis." Continue reading