Last Updated on October 24, 2023 by Clayton Jarvis
Landing an investment property in Hamilton or Ottawa is not for the faint of heart. With the Ontario market fully awake after a 6-month slumber in 2019, these formerly secondary markets have become bidding war battle grounds where cap rates can disappear with little more than a nod to your realtor.
According to CREA’s most recent data, the average price of residential properties in Hamilton in January increased 11.9 percent year-over-year, with single-family sales rising 10 percent over the same period. Even townhouses in the Hammer are selling for well over $500,000.
Sales in Ottawa have slowed, falling 8.4 percent year over year in January, but only due to a lack of inventory. The dearth of available properties has led to runaway prices. The average sale price of condos leapt 19.1 percent year-over-year in January, landing at $338,077, while the average price of residential-class properties increased even more – 19.3 percent – to hit $516,229.
With the residential market galloping out of reach for many investors, CREW decided to talk to some commercial experts in each city to find out if either one’s commercial market might provide an alternative entryway.
Ottawa
Like its residential counterpart, Ottawa’s commercial market is growing increasingly tight. Getting in is no cakewalk, but with so much upside, and so many companies moving to the city, investors who can land prime tenants will be well positioned to reap the benefits of rising rents.
“We are seeing office rents in all asset classes increase, which is a result of the overall vacancy rate being at a 10-year low of 6.3 percent,” says Michael Swan, Morguard’s man on the ground in Ottawa. “In the downtown core’s Central Business District, office rents are averaging in the low $20s per square foot and in the fringe or suburban markets the rents are in the mid-teens per square foot.”
The industrial sector is even tighter. A vacancy rate of 2.8 percent has increased industrial rents by 4.7 percent over the last year to $10.60 per square foot.
Ottawa’s commercial real estate scene has been on a steady diet of steroids thanks to the city’s tech sector. But targeting IT means providing the amenities these companies require to be competitive on a global scale.
“Dozens of factors become more important to consider for the IT industry because of their communication and technology needs,” Swan explains. “The ability to select multiple service providers, a dedicated room for service provider equipment to protect against potential damages, back-up generators, and the strength of the Wi-Fi connections for tenants and guests are a few examples of things you should normally consider.”
Considering the upward trajectory of Ottawa’s commercial sector, if there’s a way to buy in, CREW says take it. There’s no shortage of people who balked at buying high-priced real estate in Silicon Valley fifteen years ago. They just don’t talk about it today.
Hamilton
Appropriately enough, Steel Town is a hard one to get into.
“The commercial scene doesn’t always mimic the residential scene, but commercial has certainly been a wild affair over the last decade,” says Drew Blair of Blair Blanchard Stapleton. “There’s been low vacancy and low availability for buildings, both for sale and for lease. There’s a lot of money in the market and the appetite is still very strong.”
As with residential properties, commercial values have been increasing steadily.
“There’s definitely been a significant increase year-over-year. No question,” Blair says. “We keep wondering when these prices are going to hit the ceiling. We’ve been saying that for two or three years now.”
Unlike Ottawa, where a single sector has been driving much of the commercial demand, Hamilton is seeing demand across the spectrum. Blair says industrial properties, commercial land and industrial land are all especially strong, but the diversity of the market is an unquestionable strength. Everybody’s hiring, and when they finally stop, no one sector will be enough to pull the others down.
Hamilton will continue attracting businesses that find life in the GTA too expensive to justify. The rents there are much lower, which is ideal for attracting new tenants – and for increasing rents in the future. Blair says many tenants are not paying premium rents, meaning they will be pressured to pay more upon renewal.
“There’s still some good upside to lease rate increasing with tenants,” he says. “There’s not a lot of new product coming online, so that does help the existing properties in terms of values.”
Now the bad news. Investors who think Hamilton will provide a friendlier entry to the commercial market than Toronto are likely to be disappointed.
“To be honest, this is a very difficult market for beginners to get into,” says Blair. “The average buyer today in this market is experienced. They know what they’re looking for when they look at a building. In a lot of cases they don’t need large due diligence periods. And they have the cash available, so if you have to go get financed as a newbie into the market, the banks are going to be a lot tougher on you.”
