The Top Commercial Real Estate Investment Strategies in Canada

Although often touted as a safe haven when compared to the stock market’s volatility, over the past 25 years, Canada’s S&P/TSX composite index has actually generated annual returns equal to, or better than, even key Canadian real estate markets such as Toronto and Vancouver, which have experienced skyrocketing increases in residential real estate prices over the past few years.

Like any investment, commercial real estate investing comes with risks. However, applying sound commercial real estate investment strategies can be an essential counterweight in balancing an overall investment portfolio – especially if you know how and when to invest.

The Pros and Cons of Investing in Commercial Real Estate

The pros of investing in commercial real estate include:

The power to leverage
In a low-interest rate environment of, say, 2-3%, you can use commercial real estate loans to create profit knowing your property’s annual appreciation – regardless of tenant rent – could be in the 5-6% range, giving you a 3% gain right off the bat.

A possible source of passive income
Add income from tenant rentals of your property – and if you can keep maintenance and property management costs down – you can pay off your commercial real estate mortgage and start making real profits.

Security in the face of rising inflation
Since landlords tend to offload at least a portion of inflationary price increases to their tenants, owning commercial real estate can be a hedge against inflation.

The cons of investing in commercial real estate include:

A higher risk-to-return ratio
In a high-interest rate environment such as today’s 6-8%, the increased cost to borrow compared to the average commercial property’s appreciation rate will set you up for a net loss unless you can augment your investment with tenant income.

Debt load
Building maintenance, property management and tenant acquisition and retention costs eat into your profits even at the best of times, but in an economic downturn, one significant, unplanned maintenance event such as needing to replace a roof or dealing with a sudden vacancy could make it harder to repay your mortgage loan. Because your commercial real estate property and all its assets were likely used to secure financing, you could lose everything if the bank calls your loan.

Understanding Commercial Real Estate Asset Classes

Before you decide which commercial real estate investment strategies to apply, you’ll need to understand what type of commercial real estate asset you want to invest in.

Commercial real estate asset classes/sectors include:

• Office
• Retail
• Multifamily
• Industrial
• Hotel + Hospitality
• Mixed-Use
• Vacant Land
• Special Purpose Real Estate

The Top Five Commercial Real Estate Investment Strategies

The top commercial real estate investment strategies in Canada include:

• The Commercial BRRRR
• Development
• Land Banking
• Long-Term Buy-And-Hold
• Owner-Occupied

You can apply commercial real estate investment strategies to virtually any commercial real estate asset class or sector, and depending on your investment goals, you can either stick with a single tactic or diversify your investment tactics by employing multiple strategies.

The Commercial BRRR
BRRRR, also known as value-add investing, stands for: Buy, Rehab, Rent, Refinance, Repeat

In this scenario, an investor locates an undervalued property or searches for a situation where a property owner needs to sell an asset at a discounted rate, buys it, and then adds value to the property by performing repairs or renovations.

BRRRR investors then lease the property to one or more tenants, wait six to 12 months, and with a positive balance sheet in hand plus greater equity from the value of the rehabilitations, the investor converts the increased equity to cash by taking out a larger mortgage, paying off the original loan and either banking the cash difference or using it to invest in another property.

So long as operating costs are controlled, and tenant vacancies are limited, investors can amass a large portfolio of properties that they can tap for passive income or sell later at a profit.

Development

Becoming a property developer is the riskiest of our top commercial real estate investment strategies.

Because development involves anticipating demand for a specific type of building or complex, understanding current commercial real estate trends is crucial, but even the best efforts can be foiled by external market factors such as a sudden increase in interest rates, a downturn in the economy, interruptions in the supply chain, labour unrest, etc.

Property development usually requires a large amount of capital and a development team filled with seasoned professionals capable of conducting and coordinating various disparate tasks, from market analysis and due diligence to land purchase, financing, construction and marketing.

Land Banking

The biggest benefit of purchasing raw or vacant land is its potential for appreciation. Because land is scarce and the amount ultimately finite, it retains and grows its value during even the most trying economic times.

Land banking takes this fact a step further by identifying and purchasing parcels of land that lie in the path of development so they can be sold for an even greater profit or transformed in partnership with a developer.

In order to benefit from this commercial real estate investment strategy, investors need the resources to research and stay on top of provincial or municipal land development plans, the ability to evaluate the plots based on location, zoning, topography and access, financing or cash on hand for purchasing plots, plus patience and a hands-off attitude.

Long-Term Buy-And-Hold

You can use long-term buy-and-hold investment strategies in any commercial real estate sector, but to be successful, investors need to be mindful of their risk tolerance, how involved in day-to-day operations they want to be and how long they want to hold the asset for.

Owner-Occupied

Owner-occupied commercial real estate investing involves buying a property, utilizing it for your business, and leasing part of the space to one or more tenants so they can help you pay down the commercial mortgage attached to it.

To succeed with this strategy, focus first on finding a building and location that allows your business to thrive and look for tenants afterward.

Consider Starting Your Commercial Real Estate Investment Journey with a REIT

Because the learning curve and financial resources required to engage in commercial real estate investment strategies are steep, consider investing in a real estate investment trust (REIT) before risking your hard-earned capital. Like a mutual or hedge fund, a REIT uses money from a pool of investors to purchase and manage commercial real estate properties with the aim of returning a portion of the profits as a dividend to the REIT’s investors.

Though chancier than government or savings bonds and treasury bills, REITs are considered a relatively low-risk investment. Because individual REITs focus on different commercial real estate market sectors, they can also be an excellent way for novice investors to learn the ropes of commercial real estate investing by seeing how various REITs track and choose the properties they manage.

At the end of the day, commercial real estate investment strategies of all types can be profitable if you do the proper research and due diligence, control costs, get the timing right and spend appropriately.