Capital gains tax spurs record commercial real estate sales

Article content

A surge in commercial real estate activity last month is being attributed to the recent changes in capital gains taxes.

According to Colliers Canada, the changes, which came into effect on June 25, prompted a wave of asset sales as owners rushed to divest before the new tax implications took hold. The flurry of transactions set a new record, with Colliers closing 156 deals from June 1 to 30 — a 26 per cent more than were completed in June 2023, and the highest number of June transactions in a decade.

Article content

Adam Jacobs, national head of research at Colliers, noted the significant influence of the tax change.

“It was a big surprise for us, of course, because the commercial market was down,” Jacobs said. “Everyone had an opportunity to do a deal at the old capital gains tax so I think that was what we saw people do: ‘I think I’ll just cash out now and do the deal before I have to deal with more taxes in the future.’ It’s already a difficult market, and it’s getting more difficult.”

The commercial real estate sector has been navigating turbulent waters since the nationwide lockdowns triggered by the pandemic. According to Coldwell Banker Richard Ellis (CBRE), the national office vacancy rate soared to 13.4 per cent in the fourth quarter of 2020, marking the highest level of available office space since 2004. By the first quarter of 2021, the figure had climbed to 14.6 per cent. Although the market has improved slightly, today’s vacancy rate remains high at 14.4 per cent — a stark contrast to the pre-pandemic era, when vacancies hovered around two per cent.

The industrial market has also had an increase in vacancies, jumping from one per cent to 2.4 per cent year over year in the first quarter of 2024.

Article content

Although June was a blockbuster month for all types of commercial real estate, the industry is now grappling with the new tax landscape and its long-term implications for future investments. In the wake of last month’s surge, the sector faces the dual tasks of adapting to the tax changes while dealing with broader market challenges.

Jacobs believes that the increased capital gains tax will not affect all commercial markets.

“I don’t think it will have a huge effect on downtowns. For years, the downtown buildings have been owned by the likes of Omers, Sun Life, or Canada Pension Plan — the kind of owners who have a very long term view. They have very big assets under management, so they’re not going to sell simply because they don’t like this market,” he said.

Jacobs also believes that the long-term impact of the higher tax might be minimal.

“We talk about it like the capital gains tax was zero before. There was already a capital gains tax and now there’s a little bit more. But I’ve definitely heard some arguments that say, when you do the math on your rate of return over five, seven, ten years, this (capital gains tax) doesn’t really make a huge difference,” he said.

• Email: shcampbell@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Share this article in your social network