Asset classes investors are betting on with commercial real estate in comeback mode

After one of the softest years on record, the Canadian commercial real estate market has roared back to life.

“We sort of hit bottom in the first quarter of this year,” says Scott Figler, director of Canada research at JLL, noting that national investment activity tapped out at just $8.5 billion during that period.

The firm’s just-tallied transactions for the second quarter surpassed $12 billion. “It’s a really positive story,” Mr. Figler says, adding that the latest total beats the 10-year quarterly average by about $2 billion.

Some transactions were motivated by the federal government’s June 25 increase of the capital-gains inclusion rate to 66.7% from 50%. “A lot of people wanted to liquidate assets before that deadline hit,” Mr. Figler explains.

Additionally, the Bank of Canada’s June 5 interest rate reduction to 4.75% from 5%—the first cut in four years—has created more certainty on the investment side. “We know that interest rates are not going up any more,” Mr. Figler says.

Most of the action focuses on commercial real estate’s four main asset classes. Interest in two of these property types—retail and office—may surprise some industry players.

Industrial

The coveted industrial asset class remains a best bet despite vacancy rates doubling in one year to 4.2% and a slight average rent decrease—the first in more than a decade—to $15.95 per square foot, according to the latest CBRE figures.

“In a healthy market, it’s exactly what should be happening,” says JLL’s Mr. Figler.

“Two years ago, we had extremely low industrial vacancy across the country,” he explains. “So, what happened? Developers started building like never before. The development pipeline grew almost three times larger than any time in Canadian history. A lot of that has just completed. Vacancy has increased, and rents are now falling.

“This isn’t a negative narrative. It’s what we call equilibrium. Maybe there’s a window where you might get a deal because vacancies are on the rise. But it’s not going to last long.”

Retail

A somewhat unexpected addition to investor best-bets lists is the retail asset class, especially grocery-anchored strip malls.

Jon Buckley, senior managing director of investments at Marcus & Millichap, says, “Retail is the most preferred asset right now—and it’s the first time in a long time that’s been the case.”

Despite the huge e-commerce presence in markets across the country, Canada’s retail vacancy rate fell last year to 1.6%, its lowest level on record, according to Marcus & Millichap’s recent Canadian Retail Report.

Meanwhile, lease rates are expected to jump 3.1% this year. Strong population growth has propelled overall demand, Mr. Buckley says.

Retail has also seen a shift in tenants in recent years, moving from more traditional retailers, such as clothing stores, to service-related retail.