Investing in Commercial Real Estate in Canada: What are the Risks Associated and How to Overcome Them?
In Canada, buying commercial properties (like stores and offices) to make money is common. But there’s a problem: some investments can be risky.
As we say, “It’s important to look before you leap”, these risks cannot remain unnoticed. So, this article will highlight some major risks associated with commercial real estate in Canada so that you can make a wise decision.
Status of Commercial Real Estate Market in Canada
The commercial real estate market in Canada is growing day by day. Right now, it’s worth about $77 billion, and experts think it could grow to $111 billion by 2029. That’s a big increase!
For the past thirty years, Canada’s real estate business has been doing really well. People who invest in buildings and land have had lots of chances to make money and grow their businesses.
But then came COVID-19. This virus changed everything. Businesses closed, borders shut down, and people spent less money. It was tough for landlords who own buildings and for the people who rent them. They had to change how they did things to keep going.
Still, more people are moving to Canada, and more jobs are being made. Businesses need more places to work, so they’re renting more offices and factories. That means the commercial real estate market is growing in Canada.
Also, big American companies like Costco and Apple have come to Canada, which makes things even busier. To keep up, Canadian stores are changing how they work, like doing more online shopping. This helps them stay competitive.
What are the Advantages of Commercial Real Estate?
What are the Risks Related to Canada’s Commercial Real Estate Market?
Investing in commercial real estate can be exciting and profitable, but it also comes with risks. Here, we’ll break down the main risks in simple terms and offer practical solutions for each.
- Economic Risks
Commercial property values can go down if the economy isn’t doing well. When businesses struggle, they might not pay rent or might leave, leaving buildings empty. Interest rates and inflation can also affect how much it costs to borrow money or how much things cost overall.
Solution: Keep an eye on economic trends and have savings set aside for tough times. Invest in diverse locations and properties to spread the risk.
- Market Risks
The market for commercial real estate in Canada is dynamic and can shift rapidly. One of the primary risks investors face is fluctuating demand for commercial buildings. If there’s an oversupply of available space and not enough businesses seeking rental properties, landlords may find it challenging to attract tenants. This situation can lead to vacancies and reduced rental income, impacting the profitability of investments.
Furthermore, demand levels vary across different regions of Canada. Urban centers like Toronto and Vancouver often experience high demand due to their economic vibrancy and population growth, which can drive up property prices. In contrast, smaller cities or rural areas may have lower demand, making it harder to maintain steady rental yields.
Solution: Research the local market before investing. Look for properties in growing areas with stable businesses.
- Regulatory and Legal Risks
Laws about where and how buildings can be used can change. Taxes on property might also change, affecting how much money investors make. Buying and managing property also involves legal rules that can be complicated.
Solution: Work with experts like lawyers, real estate agents, and tax advisors. Stay updated on local laws and plan for changes.
- Operational Risks
Maintaining a building costs money, like fixing things or keeping it safe. If tenants leave, it can take a long time to find new ones. This can mean less money coming in for a while.
When a commercial tenant leaves, their space can stay empty for 6-12 months or longer. If a big part of a property is empty—like 10%, 20%, or even 30%—it can really affect how much money the investor makes.
Solution: Budget for maintenance and have savings for empty periods. Keep good relationships with tenants to reduce turnover.
- Environmental Risks
Some properties might have pollution from past use that can be expensive to clean up. Laws about protecting the environment can also affect what owners can do with their property. Climate change can also affect how safe buildings are from floods or other problems.
Solution: Do environmental checks before buying. Follow environmental laws and plan for climate changes when building or managing property.
- Financial Risks
When investing in commercial real estate, financial risks loom large, especially when borrowing money to purchase properties. Borrowing entails paying interest, which adds to the overall cost of ownership. If interest rates increase, as they can with changes in economic conditions, the cost of borrowing also rises, potentially squeezing profit margins.
Another significant financial risk is ‘leveraging’, which involves using borrowed funds to finance a large portion of the property purchase. While leverage can amplify returns if property values rise, it also magnifies losses if property values decline. This scenario can leave investors vulnerable to financial strain, especially if rental income doesn’t cover mortgage payments and other expenses.
Solution: Plan finances carefully. Consider fixed-rate loans to avoid surprises with interest rates. Don’t borrow more than you can afford to pay back.
- Lack of Knowledge
Investing in commercial real estate can be tricky if you don’t have experience or knowledge of how the market works. Unlike buying a home, commercial properties involve different factors like lease agreements, property management, and market dynamics that can be unfamiliar to new investors.
Solution: To overcome this challenge, it’s beneficial to seek guidance from experienced professionals such as real estate agents who specialize in commercial properties. They can provide valuable insights into market trends, property valuation, and potential risks specific to commercial real estate.
Additionally, starting with smaller investments allows you to gain hands-on experience and learn the intricacies of managing commercial properties without exposing yourself to excessive financial risk.
By both methods, you can build confidence and knowledge gradually, making more informed investment decisions in the competitive Canadian commercial real estate market.
The Bottom Lines
Investing in commercial real estate in Canada can be a smart way to grow your money, but it’s not without risks. Economic changes, market fluctuations, legal issues, and operational challenges can all impact your investment.
To manage these risks, it’s crucial to stay informed, diversify your investments, and work with experts like lawyers and real estate agents. By taking these steps, you can make more informed decisions and increase your chances of success in the Canadian market.
