The housing market and commercial real estate market are typically intertwined in very traditional ways. Currently, in Toronto, we are seeing the housing market affect the commercial real estate market in ways that you may not expect. Here are three ways the volatile Toronto housing market is impacting CRE.

Condo Development is Impacted

Individual home prices reached nearly $1 million until the government intervened. Although the price of homes has stabilized, owning a home for many Toronto residents is still not within reach. The good news, the bidding wars are over and the price of homes aren’t being driven up needlessly because of it. The negative side is that people are losing confidence in the market and fewer people are spending money to buy homes or upgrade their home, inevitably impacting future consumption.

One of the most direct impacts of the volatile housing market on CRE is on condos in Toronto. Last year, prices increased by nearly 20%. Many of the new condo developments attract families who cannot afford a single-family home. As families are looking for alternative housing options due to high prices, condos will become an attractive option.

The Office Market is Linked to the Housing Market

While the housing market has not directly affected the office market, the two are certainly linked simply because people who work in Toronto, also need a place to call home. Employers want to accommodate employees by being located in easily-accessible properties in a well-connected area. Owner-operators now need to be creative in where they place properties. An example of this is transforming warehouse space into new industrial-style residential property.

Commercial properties become highly attractive when they have the potential to be transformed into high-rise residential towers like malls can. Along with that, malls have ample parking and has the space to be redeveloped into residential property. The increasing cost of housing in Toronto presents trouble to commercial developers since now the city’s conditions favor residential development over commercial development. The bottom line is commercial buyers can’t compete with residential developers when it comes to price.

Investors Continue to Pour Money Into CRE Despite Housing Woes

When the housing crisis hit Toronto just two years ago, CRE investors continued to pour money into CRE and reached $14.5 billion. Despite a volatile housing market, the strong economy boosted CRE fundamentals in Canada and kept the market successful. While the economy is strong now, there is trepidation about the future. The economy is still fragile and a substantial increase in interest rates could force the market to take a dark turn. A rate increase has the potential to incite a recession and the repercussions could affect the country in nearly every CRE sector.

The commercial real estate industry in Canada has been record-setting for the past nine years, surpassing the average expansionary cycle of six years. Canada and Toronto have the potential to rewrite history and continue in its healthy cycle, but only time will tell.