How is the war in Ukraine impacting commercial real estate investors? | Ezine Daddy

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

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

Canada’s inflation has risen to 6.7 percent, a 31-year high, according to Statistics Canada. In a bid to stem runaway price growth, the Bank of Canada raised interest rates by half a percentage point to 1 percent in April – the largest single hike since 2000 – and said more hikes are on the way.

In short, it’s both costing more to build and borrowing, making Canadian commercial real estate more expensive than ever, according to CBRE.

A large part of the inflated construction costs, especially those using natural gas, are passed on to the tenants

“The dominant factor for commercial property right now is that we expect extremely strong employment growth – a very large increase in the number of workers hired,” says Jean-François Perrault, senior vice president and chief economist at Bank of Nova Scotland. “And of course you have to house these workers somewhere.

“We thought the commercial sector would do reasonably well post-pandemic and that’s still largely our view. Nothing shakes us, even if, for example, the financing costs have increased.”

Investors are paying higher interest rates, explains Mr. Perrault, “but this is happening in a growth environment that represents the strongest expansion in about 20 years.”

“What happens with expansions is that real estate in particular is doing really well. So the macro context in which people make investment decisions 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.

Reliance Properties Ltd. and Hines-developed 32-story, AAA-caliber office tower at 1166 West Pender St. is intended to address the projected shortage of quality office supplies for 2026, says Jon Stovell, Reliance’s president and chief executive officer.

“The economy is bad,” says Mr. Stovell. “The tenants are coming back. Very large tenants from US technology companies and other companies are forcefully returning to the office market and are taking up a lot of space. [Many] of these companies have grown tremendously during COVID.

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

“We have over one million square feet of office space in the development pipeline, all of which are progressing as planned. So I think the market will be strong.”

Still, Mr Stovell is concerned about the “radically out of control” cost of building materials “which has only been made worse by the situation in Ukraine”.

For example, the price of steel, which has been rising for two years, has only risen higher, he says.

Although both Canada and Russia produce iron and steel, Russia exported nearly $210 million worth of iron and steel to Canada in 2021 (up from $2 billion globally), according to the United Nations Comtrade database on international trade. . With that shipment approved, Mr. Stovell suspects the price has gone up.

“It’s hard to say” whether the war is the direct cause of higher steel prices, Mr. Stovell concedes, “because supply chains are multinational and very complicated. But that’s definitely all part of the general uncertainty.”

The prices for floors made of white oak and glass have also “increased dramatically”, he says.

The Chinese-made flooring is made from oak supplied by Russia, and while trade between those countries continues, the supply chain has been disrupted, he explains. Since the beginning of the war alone, the price of the popular light-colored floor covering has quadrupled.

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

According to Statista, Russia is the second largest silicon producer after China. Sanctions have exacerbated years of global supply shortages, Mr Stovell says.

What’s more, 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 increased costs of running buildings, especially those using natural gas, are being passed on to tenants, he says. Most commercial property leases have such increases built into the leases.

Apartment building owners can only increase rents according to the rate of inflation. “Apartment renters expect rent increases of 5 percent or even more,” says Mr. Stovell.

However, some economists have relatively good news for renters.

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

“If you all agree with this assumption that this is a transitional year, [this inflation] should go away over the next year.”

Still, Kevan Gorrie, CEO of Toronto-based Granite REIT, which owns 119 mostly industrial, warehouse and logistics properties in North America and Europe, warns that Russian sanctions are likely to persist post-war unless Russian President Vladimir Putin is ousted and therefore, inflated commodity prices could persist.

In terms of inflation, “more of a shift in production away from Russia and maybe even away from China to, say, Europe — from lower-cost jurisdictions to higher-cost jurisdictions — will certainly add fuel to the fire,” Mr. Gorrie says.

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

Economic growth will allow rental rates to outpace inflation for many years to come.Rafal Gerszak/The Globe and the Post

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