State of the Southwest Ontario CRE market

It’s an exciting time for CRE in Southwestern Ontario

As major Ontario regions, like Toronto, continue to grapple with record-high housing costs, Southwest Ontario has emerged as a more affordable haven for residents, as well as a mecca of opportunity and innovation for workers in the tech and automotive sectors, and the home to globally recognized universities. This region’s uptick in popularity has, unsurprisingly, also resulted in an increase in its population size. Could Southwest Ontario prove to be a promising player in the CRE market?

On a recent podcast episode, Mitchell Blaine joined Altus Group experts Ray Wong and Marlon Bray to discuss how the present cycle has impacted the CRE market in Southwest Ontario and predictions for the region’s future. Blaine, who assumes the role of Executive Vice President at Jones Lang LaSalle, comes to the table with 19 years of experience in CRE. His impressive resume boasts over a thousand transactions (totaling over $3 billion) and represents a diverse range of global, national, and local companies.

According to Blaine, the rise of Southwestern Ontario is, most likely, part of another “super cycle” in real estate. “We’ve talked a lot about these super cycles, right? The eternal battle of core versus suburban real estate,” Blaine notes. “I think the pandemic threw us into another super cycle, by initiating a pivot out of the core and into the suburbs.”

At the same time, we’ve seen a large portion of the millennial workforce adjust to the remote work format ushered in by the pandemic. Many of these workers may be nearing the age to have kids, and have come to appreciate the lifestyle that comes with more flexible work. “A lot of them may be thinking Southwest Ontario is the right place, and that now is the right time,” notes Blaine. “You get better relative value, and still have the right proximity to a place like Toronto. I think it’s Southwestern Ontario’s time – and the story is still developing. Even at a time when some markets are incredibly challenged, I think the Southwest Ontario commercial real estate is poised for a strong performance.”

Maintaining relative pricing

When considering the growth opportunities in Southwestern Ontario – especially with regards to the price difference for industrial and commercial land – Wong is reminded of 2006 and 2007, when cap rates in certain markets were reaching similar levels on the retail commercial side as Toronto. “You don’t really question some of the cap rates you’re starting to see, that illustrate a little bit less of a gap between the GTA and Southwest Ontario,” Wong points out. But could price increases become a cause for concern in that region due to that demand?

To address this question, Blaine sets his sights on the industrial sector. “Over the years, Cambridge, Guelph was always a buck cheaper a foot than Mississauga for industrial space,” he shares. “And it stayed that way – it was really about 10 to 15% cheaper on a gross occupancy cost basis. So even when rents climb, if you look at the spread over Toronto for tenants with lease rates or even on cap rates, that relative spread versus GTA has maintained.” Brantford, Blaine notes, is a prime example, as it saw a huge amount of land transaction activity due simply to the fact that it hadn’t caught up to that 10 to 15% – even 20% – value spread to Toronto. “Brantford started to catch up… and catch up quickly. So, I think that our relative pricing is still in check but, of course, we need to watch it. The focus on net rents is important, especially on the ownership side.

For more information on episode 26 from our Altus Insights Podcast, click here

Emerging investment trends

According to Blaine, it’s also important to look at the investment side of things – where is the money going? “During the pandemic, we went through an e-commerce super cycle, right? Over that time, everyone was buying groceries and goods from their house,” he points out. “Based on that demand, we were able to make some significant jumps in the e-commerce realm – we still haven't fully saturated that market, but the amount we buy online definitely increased through the pandemic.”

Right now, however, we see another trend emerging – the investment into automotive; specifically, electric vehicle (EV) manufacturing. “The Volkswagen and Stellantis plant in Windsor represents a significant investment into this concept of electrification. A place like Southwestern Ontario is the backbone of a lot of manufacturing and, as we know, the automotive sector has been hit the hardest over the last few years.

But now, with some of these investments in the manufacturing of EV batteries, you need to look at the ‘multiplier effect’ that putting a couple hundred million (or billion) dollars into a town has on commercial real estate,” Blaine explains. “So, I think we need to watch the demand cycle; specifically, what happens with commercial real estate over the next five to 10 years. And I think there is a risk of the urban core seeing some increased pressure if we really embrace this electrification cycle, which appears to be the direction we are headed.”

Has Southwestern Ontario become a booming tech hub?

Southwestern Ontario has also seen significant growth in the tech sector, as of late, with a variety of tech companies and start-ups opening offices in the region. “I’ve always felt that Southwestern Ontario is a bit underrated,” Blaine admits. “The focus has always been on Toronto, as well as Ottawa for security and tech companies. But when you consider the intellectual capital and talent that was coming out of Waterloo, Wilfred Laurier, and Western University, you realize that this region is a very talent-rich community.”

As a result, Southwestern Ontario has become an undeniably dynamic – albeit perhaps still somewhat misunderstood – tech scene. According to Blaine, what we are seeing now might be the result of investment houses looking at their strategies. In fact, looking closer at capital flows in Southwestern Ontario, money appears to be migrating into the community from around the world, whether it be out of Toronto, out of Vancouver, out of Quebec, out of the U.S., or Europe. “I think there's a lot of interest in the region right now, and we're seeing an influx of capital flows that are challenging some of the capital sources that have been around in our community for quite a while,” Blaine elaborates. “If we can get more Canadian capital into the hands of the people who want to develop these properties in this region, I think we’re going to continue to see the prices rise.”

The intersection of the post-secondary landscape and the CRE market

It’s also important to consider the impact of high-ranking universities on the CRE market; after all, it’s not just the presence of the universities themselves, but also the institutions as a whole. “As an example, we've seen U of T open up a shop in the region,” explains Blaine. “When you start to get these anchor tenants into a city, you can expect to see a bit of a trickledown effect. You’re going to start attracting more talent, and you’re going to need housing for those people. You’re also going to need restaurants, gyms, and all the other things that go along with a growing city.”

As a result, many university towns become little pockets of prime CRE opportunity as investment dollars are poured into those places. Kitchener-Waterloo is a fascinating case study, as the city has seen a massive influx of tech talent. “Microsoft has set up shop down there, and you're seeing a lot of other smaller companies now latching onto their coattails,” Blaine notes. “We’re going to see a lot of development follow suit, and I think investors want to get in on it. There's a lot of depth in this market – it's good times for Southwestern Ontario.”

Keep your eye on Southwestern Ontario

Now, more than ever, there is a great deal of interest in the Southwestern Ontario market, so if you’re not taking a hard look at the region – it might be time to change that. If we consider what’s happened over the last decade, we see a massive transition unfolding. Historically, Toronto was driving a lot of Ontario’s economic growth, as most of the investment activity seemed to be funneling from the U.S. into Toronto. However, now we are seeing that focus (and investor interest) shift into Southwestern Ontario. “I think we are going to see a lot of development and dynamic things happen in this region – new money, new capital, new sectors, and exciting growth,” Blaine shares. “I think the Southwestern Ontario tech sector is an absolutely booming one, and I think you're going to see a lot of investment and development on the infrastructure and transportation side of things.”

Of course, where there is opportunity, there are going to be challenges. “The housing market is a hot topic right now, and there is, admittedly, a lot of pressure there. So, there’s going to be some growing pains,” Blaine adds. “But I think there's a lot of opportunity, and if you can get on the right side of the market, I think it's a fantastic place to invest, as well as a fantastic place to live and work. So, we're very excited for what the future has to bring.”