Commercial real estate is a large and complex asset class that offers investors a range of unique opportunities. Most investors focus on the four main sectors that are well-established in major Canadian markets: industrial, office, multifamily, and retail. More niche sectors are often overlooked, as they are less established and have unique features to navigate. Yet, opportunities in niche sectors can be lucrative and generate strong risk-adjusted returns for investors, while also providing insulation from cyclical economic trends.

In this article, we'll explore three compelling niche sectors in Canada: self-storage, manufactured housing, and student housing. The opportunity for outsized growth in these sectors is particularly pronounced for investment managers that are well-positioned to quickly execute value-add and opportunistic investment strategies.

1. Self-Storage – Meeting Growing Demand for Secure Space

The Canadian self-storage sector has grown rapidly over the last decade. The sector’s growth even continued through the pandemic, with 8 of 10 major metro markets in Canada experiencing price increases from 2020 to 2021.

Such stability and consistent growth during economic downturns is unusual in broader commercial real estate. The self-storage sector’s growth is attributable to demand drivers for self-storage space that persist during all economic times. Life events such as divorce, death of loved ones, and people moving to new homes will always create demand. Similarly, steady population growth, e-commerce growth, and the trend toward downsizing and smaller living spaces continue to increase demand in the sector in Canada.

The Canadian market is under-supplied and has ample room for growth. Compared to the U.S. market, the Canadian market is far less saturated and mature. According to CBRE, the U.S. has 5 to 8 square feet of storage space per capita on average, whereas the Canadian market has only one-third of this supply, at 2 to 3 square feet per capita. Even Canada’s larger metropolitan markets are undersupplied. Vancouver has 1.35 square feet per capita, and Toronto is still well below saturation levels at 3.5 square feet per capita.

Generally, an operator or developer can grow or enter the market by buying an existing storage facility, building a new facility, or converting a building to self-storage use. The keys to success for developers and investors are to seek out locations that are less saturated with supply, and to minimize development risk by seeking sites where proper zoning is either already in place or is achievable in the shorter-term.

Self-storage is an appealing investment with strong risk-adjusted returns, as consistent demand for self-storage space insulates the sector during economic recessions. Demand in the Canadian market continues to outpace supply, which will drive sustained market growth and continue to present strategic opportunities for investors to operate and develop self-storage assets.

2. Manufactured Housing Communities – Adapting to Demand for Affordable Housing and Secondary Properties

Manufactured housing communities consist of prefabricated homes, often referred to as mobile homes or trailers. The land upon which these communities are situated is generally directly or indirectly owned by an operator, while the individual owns the house. Manufactured housing has become more prevalent in recent years, as demand has grown due to housing affordability issues and buyers seeking affordable vacation homes. Over the past 15 years, manufactured housing communities have proven to be a very stable asset class in commercial real estate. In evaluating mortgages secured by manufactured housing community properties, credit rating agencies in North America have recognized this stability by assigning manufactured housing community properties amongst the lowest capitalization rates of any asset class, a direct result of the stability of this asset class.

The manufactured housing sector is expected to experience notable growth in the coming years. In September, Canada Mortgage and Housing Corporation (CMHC) maintained its projection that Canada needs about 3.5 million homes by 2030 to restore affordability. As such, CMHC has committed $550 million over 6 years to fund innovative initiatives in affordable housing. Manufactured homes, which qualify as CMHC-insured housing, are supported as a viable option for quality, affordable housing across the country.

Investors who recognize the demand for affordable housing can find profitable opportunities in this sector. There are very few Canadian capital providers in this space because acquiring, managing, and lending to these communities requires an understanding of zoning regulations, property rights, community dynamics, and tenant relations. That said, demand for affordable housing remains through both good and bad times, so the sector can yield a stable stream of rental income that is more recession-resistant than traditional real estate sectors. Having relationships with operators that have proven execution capabilities in this sector is critical and bolsters the strength of opportunistic or value-add investment strategies.

3. Student Housing – A Specialty Sector with Consistent Demand

Canada is home to numerous top-tier educational institutions, attracting a significant number of domestic and international students. In fact, Canada’s international student population has risen dramatically in the past two decades, from 123,000 in 2000 to over 800,000 in 2022. Canada is on track to host around 900,000 international students in 2023, as the number of students that travel for school to Canada continues to increase annually at record levels.

While Canada’s educational system is well-positioned to attract students and grow, its purpose-built student housing supply is not. The influx of students creates a consistent demand for suitable accommodation options, though nearly every major post-secondary institution is facing student housing shortages. Student housing is an underserved niche sector and is an opportunity for investors that are looking for a more recession-resistant, steady stream of income.

Investing in student housing requires careful consideration of location, amenities, and property management. Those who are successful leverage innovative value-add strategies in re-imagining how to optimize the utilization of space and create shared communal living areas that best serve student lifestyles. Finding a lender can be more challenging than other sectors, as institutional lenders are more hesitant to provide competitive loan terms. That said, with proper capital and diligent property management, student housing can generate steady cash flow and attractive returns.

Conclusion – Opportunity for Institutional and High Net Worth Investors

While the traditional real estate sectors remain strong, sophisticated investors recognize the potential of niche sectors in the Canadian market. Self-storage facilities, manufactured housing communities, and purpose-built student housing offer diverse avenues for investment, each with its own set of challenges and rewards. By exploring these overlooked sectors, investors can manage risk in their portfolios and target outsized, risk-adjusted returns, all while contributing to solving supply issues across Canada's evolving real estate landscape.

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