In a sign of strong confidence in Vancouver’s office market, construction recently began at 1166 West Pender St., the first new downtown office tower since the pandemic began — and even as the war s intensified.Rendering provided by Reliance Properties

The spike in global commodity prices that followed Russia’s invasion of Ukraine is impacting Canada’s commercial real estate market – in both negative and positive ways, industry experts say.

Inflation in Canada hit 6.7%, a 31-year high, according to Statistics Canada. To rein in runaway price growth, the Bank of Canada raised the interest rate in April by half a percentage point to 1% – the biggest increase since 2000 – and said further hikes were in sight. to come.

In short, it’s more expensive to build and borrow, so Canadian commercial real estate is more expensive than ever, according to CBRE.

Much of the inflated construction costs, especially those using natural gas, will be passed on to tenants

“The overriding factor for commercial real estate right now is that we are looking at extremely strong job growth – a very strong increase in the number of workers being hired,” says Jean-François Perrault, Senior Vice President and Chief Economist at Nova Bank. Scotland. “And, of course, you have to put those workers somewhere.

“We thought the commercial sector would do reasonably well coming out of the pandemic and, to a large extent, that is still our view. Nothing gets rid of it, even if, for example, the cost of financing has increased.

Investors are paying higher interest rates, says Perrault, “but this is happening in an environment of the strongest growth in about 20 years.

“What happens in expansions is that real estate, in particular, is doing very well. So the macro context in which people make investment decisions, including in the real estate sector commercial, is really very favorable.

In a sign of strong confidence in Vancouver’s office market, construction began in March on the first new downtown office tower since the pandemic began.

Developed by Reliance Properties Ltd. and Hines, the 32-story AAA-caliber office tower at 1166 West Pender St. is expected to counter a shortage of high-end office supplies forecast for 2026, says Jon Stovell, president and CEO of Reliance.

“The economy is booming,” says Stovell. “Tenants are coming back. Tenants from very large US technology companies and other commercial enterprises are strongly returning to the office market, taking up a lot of space. [Many] of these businesses have grown tremendously during COVID.

A shortage of silicon and the high cost of the energy needed to turn it into glass have contributed to skyrocketing glass prices.JONATHAN HAYWARD/The Canadian Press

“We have over one million square feet of office space in the development pipeline, everything is going according to plan. So I think the market is going to be strong.

Yet Mr Stovell is concerned about the “radically out of control” costs of building materials, “which have only gotten worse with the situation in Ukraine”.

For example, the price of steel, which has been rising for two years, just skyrocketed, he says.

Even though Canada and Russia produce iron and steel, Russia exported almost $210 million worth of iron and steel to Canada in 2021 (out of $2 billion worldwide), according to United Nations Comtrade database on international trade. With this sanctioned supply, Mr Stovell assumes the price has risen.

“It’s hard to know” whether the war is the direct cause of the rise in steel prices, Stovell admits, “because the supply chains are multinational and very complicated. But it’s all definitely part of the overall uncertainty.

Prices for engineered white oak flooring and glass have also “increased dramatically,” he says.

China-made flooring is made from oak supplied by Russia, and while trade between these countries continues, the supply chain has been disrupted, he says. The price of popular clear floors has quadrupled since the beginning of the war.

“Our buildings use a lot of glass,” adds Stovell.

According to Statista, Russia is the second largest producer of silicon after China. The sanctions have intensified a global supply shortage that has lasted for years, Stovell says.

Plus, it takes “a huge amount” of fuel to melt silicon into a liquid to make glass — another factor contributing to today’s exorbitant prices, he says.

Much of the inflated construction costs, as well as the increased operating costs of buildings, especially those that use natural gas, will be passed on to tenants, he says. Most commercial property rents have such increases built into the leases.

Owners of multi-family buildings can only increase rents by the rate of inflation. “Residential tenants are looking at a rent increase of 5% or even more,” Stovell says.

Some economists, however, have good news for tenants.

Tal Benjamin, deputy chief economist at CIBC World Markets, says inflation could be a problem in the near term. “Sixty to 65% of the inflation we’re seeing right now is COVID-related,” Benjamin said at the recent Vancouver Real Estate Forum.

“If you all agree with this assumption, that this is a year of transition, [this inflation] should disappear within the next year.

Yet Kevan Gorrie, CEO of Toronto-based Granite REIT, which owns 119 primarily industrial, warehouse and logistics properties in North America and Europe, warns that unless Russian President Vladimir Putin is toppled, Russian sanctions should persist even after the war. and, as a result, inflated commodity prices could continue.

In terms of inflation, “more relocation of production away from Russia and perhaps even China to, say, Europe – from lower-cost jurisdictions to higher-cost jurisdictions – will certainly add adding fuel to the fire,” Mr. Gorrie said.

But, he says, economic growth will allow “rents to outpace inflation for many years to come”. This makes commercial real estate “an attractive asset class for investors”.

Economic growth will allow rental costs to outpace inflation for many years.Rafal Gerszak/The Globe and Mail


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