June 2013 Monthly Report
First, a mea culpa: last month, we speculated that it was likely that we would now have an NDP government. Like everyone else, we were wrong. With the Liberals' reelection, it's likely that there will not be any big surprises that will impact the housing market. Expect the status quo.
One sector that will likely benefit from having a Liberal over an NDP government is the commercial real estate market. After a strong run in the residential real estate market over the past several years, more and more people have begun asking questions about commercial real estate and its viability as an investment product. The answer to this question is that commercial real estate has proven to be a strong, stable investment, especially when compared to the recent volatility in the stock market or the infinitesimal interest rate returns being paid out by banks.
BC, in particular, has seen a disproportionate number of fortunes being made in commercial real estate (http://www.vancouversun.com/health/Cancer+donation+sets+record/6676983/story.html). In fact, 4 of the 8 BC-based billionaires made their fortunes through commercial real estate investments (http://en.wikipedia.org/wiki/List_of_Canadians_by_net_worth).
So what are the similarities and differences between residential and commercial real estate?
Residential and Commercial real estate share some commonalities and the licence to trade either asset is the same. That being said, because there are several key differences, real estate agents typically focus on one category or the other. There are exceptions, of course, and in smaller markets, agents often need to sell all manner of real estate. Macdonald Realty's sister company, Macdonald Commercial (http://www.macdonaldcommercial.com) offers professional commercial real estate services in all seven (7) main commercial real estate asset classes:
- 1) Land
- 2) Office
- 3) Retail (Stores, Malls, Shopping Centres, etc.)
- 4) Industrial (Warehouses, Distribution Centres, Industrial Manufacturing, etc.)
- 5) Multifamily (Apartments)
- 6) Leisure (Hotels, Sport Facilities, etc.)
- 7) Healthcare (Medical Centres, Nursing Homes, etc.)
Pros of Buying Residential Real Estate:
- It's the only investment product that you can also live in.
- The Principal Residence Exemption (http://www.taxtips.ca/filing/principalresidence.htm) is the single biggest tax loophole that the typical Canadian can take advantage of.
- The Realtor MLS system makes the residential market more liquid and transparent.
Because of this, buying a principal residence is one of the best investments you can make. That said, if you're considering buying real estate as a pure investment, you may also want to consider commercial.
Pros of Buying Commercial Real Estate:
- Most commercial tenancies (except multifamily) are triple net, meaning the tenant(s) is responsible for paying (1) property tax, (2) insurance, and (3) common area maintenance of the leased property IN ADDITION to their negotiated lease rate. In residential, the landlord is primarily responsible for these three items and must pay it out of the rent he collects.
- Commercial leases are generally considered to have been negotiated between two equal parties, meaning that both sides need to adhere to the stipulations of the lease. In residential, the Residential Tenancy Act is heavily tilted in favour of the tenant, meaning that it is much more difficult to get rid of bad tenants in residential real estate.
- The commercial real estate market is generally more stable than residential real estate market because it is more likely to be based on 5- to 10-year prevailing lease rates rather than psychology or speculation. This means it generally has a more objective economic rationale underpinning the price than the residential real estate market.
The reason that many people shy away from commercial real estate is one of familiarity. Everyone has had the experience of living in a residential property and therefore has at least a rudimentary knowledge of what it is. In commercial, there are so many different asset categories that even seasoned commercial agents tend to focus on a few of them. After all, a nursing home, a parking lot, and a hotel all require different management skill sets.