Is there an economic disconnect between Commercial & Residential Real Estate?

0fc30b0There is no simple yes or no to that question. It can be common to see strength in one sector and not the other. Let’s explore some of the factors that come to play between these two distinct markets.

 

Multi-family residential rental and sale properties

The current demand within the Saskatchewan multi-family investment market remains strong in spite of a considerable increase in vacancy rates within some cities. This sector is often looked upon as the safest area to enter commercial real estate.

The most recent CMHC report states the Saskatoon vacancy rate rose 3 per cent in 2015 to 6.5 per cent. This directly impacts the surplus cash that financial institutions are looking for after debt servicing. Especially in the current low cap rate market the numbers can get very thin which results in the requirement for a larger down payment. Nonetheless good quality assets are in demand.

Overbuilding in either rental or sale property….  One can impact the other

We currently have the perfect storm. Because Saskatoon residential sales have slowed considerably, builders are moving their new home product into the rental market. This is a result of overbuilding and cooling demand.

At the same time there has been a considerable amount of construction of multi-family rental units and somewhat slower population growth. The combined effect of changing demographics and aging citizens can also impact residential demand.

Volatility in the equities market can push investors to CRE

We are seeing that right now. I find it interesting that during a period of reduced economic optimism at both national and international levels we see increased interest in Saskatchewan commercial real estate assets.

Keep in mind this is a time when the residential, industrial and office markets are very soft. This is a great example of not only can there be a disconnect between residential and commercial markets, but there can be a considerable disconnect within the commercial sector itself.

The separate industries within a particular geographical region affect job growth. This results in different sectors in commercial real estate firing on different cylinders at the same time.

I’ve heard it said that Commercial Real Estate leads Residential out of a recession

Based on what I have witnessed over the past 38 years, this can often be true. Generally speaking it is GDP growth within a region that first positively impacts business which in turn provides increased wages and confidence for the public to buy houses.

There are however many other factors that come to play such as mortgage rates and government incentives which can occasionally result in residential leading commercial out of recession. There have been times when business sentiment can be weak and cause hesitation in commercial real estate decisions while residential remains strong.

On another note, I need to say be sure to use a professional that specializes in one or the other. Having spent half of my working career in each sector, I can tell you that the technical and market knowledge required for proper representation are vastly different for each sector. Don’t be fooled by someone who tells you he is an expert in both.

Posted by Barry Stuart

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