Higher debt costs hindering development, experts say – Winnipeg … – Winnipeg Free Press

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A higher cost of debt has hindered development in Manitoba despite demand in several real estate markets, a panel of experts relayed Wednesday.

“The debt is just too expensive,” noted Martin McGarry, Cushman & Wakefield’s chief executive.

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He sat on a panel discussing the state of the industry, which the Building Owners and Managers Association of Manitoba hosted.


Chase Allen, managing director of Canada ICI Capital Corp, speaks at the Building Owners and Managers Association of Manitoba state of the industry luncheon on Wednesday.

McGarry used CentrePort Canada as an example. The inland port’s vacancy rates continue to decline, he said.

One CentrePort development, called Steele Business Park, has been divided into three phases. The first phase is fully leased, and the second is leasing, according to its website. The third isn’t yet being built.

“The debt cost is so high, and that’s the real problem,” McGarry said.

He expects developers may need to charge $15 per square foot in the third phase.

“If you’d asked me two years ago, ‘Is $15 a square foot a reasonable rental rate?’ I would’ve said no,” he told the crowd.

The first and second Steele Business Park buildings rent for roughly $11.95 and $13.50 per square foot, respectively, McGarry said.

There’s demand for the inland port’s units, he added.

“We need to build more real estate,” he stated. “It’s as simple as that.”

Debt costs have risen over the past 21 months alongside Bank of Canada interest rate increases. The central bank has raised its key policy rate 4.75 points, to five per cent.

“Debt costs is one of the things that is hindering a lot of developers, whether it’s multi-family or industrial,” said Chase Allen, managing director of Canada ICI Capital and a panelist Wednesday.

Still, he called the interest rate environment “normal” when comparing it to the past 50 years. Many Canada ICI Capital clients make the rates work, Allen added.

Raising rent is necessary to compensate for mortgage costs, said Calvin Polet, the president of Neptune Properties. The trickle-down effect means businesses take on more costs and, often, pass those to consumers, Polet continued.

“The only tool we have to build real estate is rent,” McGarry added, saying he believes inflation will remain higher than the Bank of Canada’s target.

Polet figured the inflation rate will eventually return to two per cent (which is the Bank of Canada’s target midpoint in a goal one to three per cent range). The national inflation rate was 3.1 per cent in October, according to recent Statistics Canada data.

Manitoba’s inflation rate was 1.9 per cent last month.

McGarry predicted construction costs have “finally levelled off.” Canada’s residential construction price index jumped 51 per cent since the start of the COVID-19 pandemic, a June 2023 Royal Bank of Canada report found.

“It’s not going to be any cheaper,” McGarry said, noting some developers may be waiting for input costs to decrease before starting projects.

Polet said he looks forward to stability in the coming year and expects interest rates to plateau. The past two years have been marked by pandemic-era operations, supply chain backlogs, interest rate increases and inflation.

Despite online shopping being a pandemic-era norm, retail demand is “strong,” Polet said.

“What I’ve been watching for is weakness in retail, and we’re not quite seeing it,” he stated. “We’ve been taking the opportunity to reinvest in our retail.”

Industrial demand has also been strong, Polet said on a Fairmont Winnipeg stage.

Office tower demand is a different story.

“The reality is, (it’s) not great, but it’s also not dire,” said Paul Kornelsen, CBRE Winnipeg vice-president and managing director.

Older and out of date office spaces continue to see vacancy rates climb. While Class A offices — generally the newest — have a vacancy rate of 14 per cent in Winnipeg, classes B and C are nearing 19 per cent.

Kornelsen described it as a “bifurcation of the market.”

“If you want to… continue to play in the game, you’re going to have to upgrade your facility,” ha said.

Offices at 444 St. Mary Ave. and 200 Graham Ave. are among the downtown buildings renovating their lobbies, Kornelsen noted.

McGarry called for incentive programs to redevelop — or demolish — old buildings.

Winnipeg is home to much new development, including Railside at The Forks and the Wawanesa Insurance office tower being built in True North Square, said Sean Kliewer, a senior vice-president with Colliers International.

There seems to be more development in Winnipeg now than “in decades previous,” he added.

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Gabrielle Piché

Gabrielle Piché

Gabby is a big fan of people, writing and learning. She graduated from Red River College’s Creative Communications program in the spring of 2020.

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