Investing in commercial real estate can be a smart decision for those looking to diversify their portfolio and generate long-term wealth. One market showing strong growth potential is the suburban market. We ran the numbers to demonstrate the benefits of owning property in the suburban market, namely Barrie based on utility bills and property taxes.

Lower Utility Rates

One of the main advantages of owning commercial property in the suburban market is low utility costs. Unlike urban areas like Toronto, where utility rates are generally higher due to increased demand and usage, suburban areas tend to have lower utility rates due to lower demand and usage. For instance, there is a 62% difference when comparing Toronto’s water rates at $4.39 /M3 to Barrie’s water rates at $2.73/M3 (combined water/wastewater rate). These savings significantly decrease your net operating costs and ultimately your return on investment.

Property Taxes

Property taxes are usually based on the assessed value of the property and can vary greatly by location. In general, suburban areas tend to have lower property tax rates than urban areas due to a variety of factors, including lower real estate prices and lower demand for public services.

Even though property tax rates tend to be more stable in suburban areas than in urban areas, tax rates can fluctuate significantly due to changes in economic conditions and government policies. The average rate for property taxes in cities like Oshawa, Guelph and KW is 2.75% compared to Barrie’s 1.43% commercial property tax rate. Barrie has an excellent infrastructure so property owners in the area have a level of predictability and security that helps them make informed decisions about their investments.

Growth Potential

Aside from the economic benefits of lower utility bills and property taxes, owning commercial property in the suburban market has significant growth potential. Suburbs are often characterized by rapid population growth, which can drive demand for commercial real estate and the development of property zoned commercial. Development charges in the city of Barrie are half of those charged in Vaughan. The consistent development & growth in Barrie will ultimately lead to higher property values ​​and rental prices, further increasing the return on investment for property owners.

Lower utility rates also attract residents looking for a greater quality of life. Post-pandemic, we see the influx of homebuyers who insist on working locally or from home, especially in today’s housing market. Businesses in Barrie seeking a skilled labour force will be satisfied with a pool of talent who have made the move to an affordable and less crowded place to live just an hour north of Toronto. This can lead to a more stable tenant base and lower vacancy rates compared to urban areas, which can increase the long-term stability and profitability of commercial real estate investments in suburban markets.

In summary, owning a commercial property in the suburban market has many benefits, including reduced utility costs and property taxes, strong growth potential, and a more stable tenant base. By carefully analyzing local market conditions and working with experienced real estate professionals like Stephanie Maye, Broker of Record, investors can take advantage of these benefits and achieve their financial goals.

The suburban retail market is primed for a comeback as a result of major retailers opening “new” locations in response to widespread store closures during the pandemic.

Retailers were compelled to close their doors as the pandemic spread and lagged on, leaving many suburban areas with vacant storefronts and stagnated property values. However, as the effects of the pandemic steadily recedes and customer confidence is on the rise, major retailers are turning back to suburban areas because of the lower rents and growth potential they offer.
TRREB reported that total commercial sales in Q4 2022 were down to 224 sales, from 430 a year earlier in Q4 2021. Sales in the industrial sector amounted to 80 in Q4 2022 – down from 142 sales in Q4 2021. Commercial/retail sales were down from 178 in Q4 2021 to 73 in Q4 2022. There were 71 office sales in Q4 2022, a drop from 110 sales in Q4 2021.

For Simcoe County, there are currently 26 active MLS listings in the retail sector. As of March 2023 the average cost for purchasing retail in Simcoe stands at $572/sf.

The retail asset class is anticipated to benefit significantly from this revitalization by Zellers. First and foremost, it will breathe new life into regions that had suffered from loss of convenient retail, boosting foot traffic and property values. Investors will be well-positioned to benefit from the retail sector’s revival in suburban areas if they move swiftly to capitalize on this trend. Investing in properties in these areas now will allow you to benefit from the increasing demand for retail space and experience a consistent stream of rental income.

READ LOCAL NEWS ARTICLE HERE

An alternative financing option in commercial real estate.

Although real estate ownership for businesses is profitable in growing markets, with an increase in the value of the property and reduced debt through loan repayment, many businesses need additional capital to thrive in inflationary times like we are experiencing now. Whether the business is purchasing new equipment, adding new products, or making renovations, costs have increased, and this means it may be time to add new debt to the balance sheet. Debating this does not have to give you a stomachache!

You have heard of the infamous “sale/leaseback” transaction which is being used more frequently to supply additional capital without increasing the company’s debt load and monthly mortgage commitments. History shows that this type of transaction has been extremely popular among the big retail and industrial chains.

It is a simple equation and requires little, to any physical transition. The business property is sold to a third-party investor who agrees to lease the property to the original owners who become the tenant. This enables owners of commercial property to put their appreciated equity to work in other areas of the business. So rather than just waiting for the building to appreciate and reap the rewards, more can be realized because the value of the equity applied to the business in real-time will typically results in a better bottom line overall.

There are always two views to how a business approaches property – similar to the concept of car ownership habits – (either you believe in owning or you believe in leasing), in the case of business this largely depends on the type of business and related activities. Nevertheless, any investment is really about a return on the equity invested. With cash or other assets invested into commercial real estate, you are principally relying on the income generated, along with the mortgage reduction, and the depreciation – all of which we assume will provide that return and increase the equity in the property; something we term value appreciation. However, we have learned never to take things for granted – nothing is ever guaranteed.

So, the pros and cons boil down to the particular business and what stage in the life cycle they are at. Professional practices such as CPAs, attorneys and physicians frequently use these transactions to avoid constant valuations as partners retire and new ones join. For the general business, the advantage is that a sale/leaseback may produce more actual cash than a traditional loan. Under this structure, an owner can usually receive 100% or more of the appraised value in a sale-leaseback. The real estate value can also be affected by the terms of the sale-leaseback. Higher rent for a longer term (assuming the seller tenant is creditworthy) will usually lead to higher values.

The cons include the concern about having solid business advice so that the lease rate does not outweigh the value that could be realized by holding the property or borrowing against the property. And there is the human side of the transaction; committing to the new owner means a new dynamic between parties so it is important to have a Maven at your side to walk you through all the numbers and risks.

The aspect of timing is important to consider. The current demand for net-leased investments is at a historic high, especially in the industrial space – this is driving cap rates down & prices up. Interest rates are climbing but have yet to echo the double digits we have experienced in the past. At this point, they remain relatively low and desirable to investors who have been holding onto cash waiting for the squeeze to bring opportunities forward. Additionally, the returns that foreign investors can achieve in Canadian real estate are far greater than the returns in many overseas markets. As the banks tighten their lending belts because of new regulations like the foreign buyer ban  in the residential market or the Basel III rules, this opportune timing may be limited. If your business could use an analysis of what the sale/leaseback would mean to your bottom line and future, Maven CRE is the partner that will walk you through the pros and cons as they apply to you.

We know our valued client base is laser-focused on the viability of a property and income potential or payback of their investment dollars when purchasing a property for their business. Already these savvy investors have had their investment advisors ask them about their stance on ESG. It’s part of the Responsible Investing Trend. Typically, ESG is not recognized in a real estate investment transaction, but it should be. ESG is hot topic for investors and at Maven Commercial Real Estate we want to treat your investments with absolute respect.

You know and understand capital, and you have the market knowledge, and technical expertise, but we also want to know how important ESG is in your purchase priority list so we can highlight properties and communities that go above & beyond the standard.

Here are 5 Points You Should Know About ESG 

• Environmental, social, and governance (ESG) is used to screen potential investments based on a set of criteria that take into consideration a multitude of factors including building products, location, LEED certifications, social landscape, labour force options etc.; all of which affect the property search.
• Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. This means having the ability to take measures to lower pollution, CO2 output, and reduce waste. Will your client need a property that allows them to excel in these areas?
• Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. It also means having a diverse and inclusive workforce, at the entry-level and all the way up to the board of directors. Will your client need access to a diverse or skilled labour force or local suppliers?
• Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. It’s out of scope for a property search per se, however, when you are dealing with a company that is guided by ESG principals knowing and understanding ESG importance, you’ll immediately recognize that stakeholder.
• Real estate and infrastructure are closely related; the real estate industry is a major consumer of energy. Therefore, the construction of more sustainable buildings, e.g., by means of new eco-friendly materials or smart technological heating or ventilation, not only helps the environment, but it also boosts the return of the respective real estate investment, improving investment performance in the long run. The social and governance of real estate holdings might be equally as important to the investor so ask.

If you want to see the criteria take a peek here: ESG Reporting Insights.

When you are looking for the right property for your business, there may be factors about a property that fit your ESG mandate. Now you can highlight them because you are in The ESG in CRE know!