Top Performers in Winnipeg Commercial Real Estate Market Impeded by Construction Costs

2024 Winnipeg Commercial Real Estate Trends

While the high cost of construction continues to impede development of the top-performing asset classes in the Winnipeg commercial real estate market, the influx of just over 400,000 sq. ft. of industrial space over the past two quarters has brought some-much needed inventory to its exceptionally tight market. This, according to the RE/MAX 2024 Commercial Real Estate Report. Vacancy rates for industrial have edged slightly higher as a result, now sitting at 3.1 per cent, but space is expected to be absorbed as demand from national tenants continues unabated.

Notwithstanding the recently completed inventory, limited availability remains. Additional construction is underway in Winnipeg’s Northwest and Southwest quadrants. Lease rates for industrial space are relatively stable at present, despite the increase in supply.

Winnipeg’s “post-pandemic hangover” continues to impact the city’s downtown office segment. A vibrant redevelopment plan for the former Hudson’s Bay building and Portage Place, combined with the conversion of under-utilized office space to residential apartments and hotels will reduce office inventory and should breathe new life into the urban centre in coming years. To date, several offices have been converted to residential, including the top 10-floors of 433 Main St. and the retrofit of 175/85 Carlton St. Hyatt Hotels announced late last year that the six-storey empty office space at 325 Broadway will be converted to a Hyatt Centric, a 140-room boutique hotel. The True North Real Estate Development Plan and the Southern Chiefs’ Economic Development Organization’s vision for Portage Place and the Bay moving forward would be a boon for the city.

Flight to quality Class A space continues its trend in the Winnipeg commercial real estate market, with the completion of the True North development, pushing up vacancy rates in B and C class buildings in the core. Wawanesa officially moved from their 191 Broadway offices to the third True North Square building recently, adding approximately 120,000 sq. ft. of vacant space to an already over-saturated market. Altus Group recently pegged availability rates in the city at 15.8 per cent in the first quarter of the year, up significantly from year-ago levels. Shadow vacancies are also a reality as hybrid work schedules take hold. Employers are dealing with diminished requirements for office space; however, often the under-utilized space is not large enough to sublet, and there’s no demand, thus creating a problem for employers and landlords alike. ARTIS REIT is leading the way in divestment of their office holdings in the city.

While conversion to residential is no easy feat, given electrical, mechanical and plumbing restrictions, offices that have a smaller floor plates (typically 10,000 sq. ft. or less) ,and large windows generally have the best chance for residential conversion. The selection and planning process takes time, including concrete x-rays of each floor, and continual revisions to original plans as new details emerge. While conversion is an expensive undertaking, it can provide landlords with a good return on investment if their properties work.

Winnipeg’s suburban offices are holding their own, with a vacancy rate well below the core. More quality space is needed in this segment, but few commercial developers (and lenders) are interested at this juncture in time.

Builders and developers have been focused on the creation of additional housing units, given the city’s housing shortage, with construction cranes dotting the city’s skyline. Canada Mortgage and Housing Corporation (CMHC) continues to incentivize builders with attractive interest rates and long amortization periods. Coupled with the federal government’s cancellation of the Good and Services Tax (GST) on new residential construction announced last year, this segment of the commercial market continues to rattle and hum. According to the CMHC, more than 1,600 units were added to the housing pool in 2023, with vacancy rates hovering at 1.8 per cent for purpose-built rentals in October 2023. Demand for rental units were greatest in suburban areas, with vacancy rates outside the core hovering at a tight 1.3 per cent.

Winnipeg is also one of the cities that has taken advantage of the federal governments new housing initiative, receiving $12.5 million to loosen existing zoning restriction on new development in residential neighbourhoods. The move will allow investors to buy and demolish a single-family home in any community to build multi-family infill without approval from the city.

Polo Park Mall is in the planning stages of a substantial mixed-used development the vacant land surrounding the mall, including several high-rise apartment buildings ranging between six and 12 storeys. The development will take more than 20 years to complete, once approved.

Retail throughout the city has been exceptionally strong with low vacancy rates. Limited construction activity has occurred in the retail sector as of late, which has strengthened demand for existing product. Bricks and mortar stores remain as relevant as ever, despite strong e-commerce transactions. The city hasn’t seen a lot of big-box development in recent years, with most large format brands looking for turnkey deals at present.

Malls are doing well, with an influx of new restaurants, entertainment facilities and gyms complementing the existing tenant mix. Retail in the core has struggled due to the reduction in foot traffic and social issues. The long-term objective for the core is the development of more residential apartments and hotels to increase foot traffic.

The prospect of lower or even predictable interest rates combined with solid business investment intentions in the province bodes well for the commercial real estate market in 2024. Unemployment rates remain below the national average, sitting at 4.8 per cent as of April 2024. Health care, wholesale and retail trade and manufacturing remain the greatest economic drivers, which combined with increased immigration to the province, should further bolster commercial activity.