Commercial real estate investing in Atlantic Canada

The short answer

Commercial real estate investing means owning property for the income it produces and the value that income supports: apartment buildings, mixed-use, industrial, retail, office and land. It is priced on its net operating income, financed on that income rather than on your salary, and bought and sold through a small number of commercial brokers, lenders and owners. In Atlantic Canada the markets are smaller, the relationships matter more, and the person who knows the right twenty people usually sees the deal first.

Commercial Group is a network of people who do this. It is not a brokerage, a lender, a fund or an advisor, and nothing on this website is a recommendation to buy anything.

What counts as commercial

The line most lenders draw is at five residential units. A duplex or a fourplex is financed like a house, on your income and credit. A building of five or more units is financed as a business, on the building's own income, and that is the world this guide describes. Canada Mortgage and Housing Corporation's multi-unit mortgage loan insurance, including the MLI Select program, applies to rental housing of five or more units. Mixed-use, industrial, retail, office and development land are commercial by definition.

The asset classes, and what each one asks of you

• Multifamily (apartment buildings). The most common first commercial purchase in the region. Steady demand, many small tenants, and access to CMHC-insured financing. The work is management: tenants, turnover, maintenance and provincial tenancy rules. See the page for multifamily investors.
• Mixed-use. Commercial space on the ground floor and residential above, common in the older parts of Halifax, Saint John, Charlottetown and St. John's. Two kinds of tenant, two kinds of lease, and often an older building.
• Industrial. Warehouses, workshops and flex space. Fewer tenants on longer leases, with less day-to-day management and more dependence on each tenant's business.
• Retail. From a single storefront to a plaza. The value sits in the leases and the tenants' ability to pay them, so the diligence is on the covenants and the terms.
• Office. Leases, tenants and location, with the added question since 2020 of how much space businesses will keep.
• Land and development. No income until something is built, so returns come from approvals and construction. The development guide walks through the stages.

How the numbers work

Three figures carry most commercial conversations, and none of them involves your personal income.

• Net operating income (NOI). Rent and other income, less vacancy and the costs of running the building (taxes, insurance, utilities, repairs, management), before mortgage payments. Everything else is built on this number, which is why the first thing a buyer asks for is the rent roll and the operating statements.
• Capitalization rate (cap rate). NOI divided by price. It is how commercial property is compared: a building bought at a lower cap rate is more expensive for each dollar of income. Cap rates differ by asset class, location, building age and tenant quality, and they move with interest rates. Current figures come from the commercial brokerages' own market reports, not from this page.
• Debt coverage ratio. NOI divided by annual mortgage payments. Lenders set a minimum, and it, not the price, usually decides how much you can borrow. The raising capital guide gives the figures lenders commonly look for.

The other thing to understand early is that you add value by changing NOI: raising income, cutting costs, filling vacancy, or adding units. A building bought at a fair price and run better is worth more. That is the ordinary way money is made in this business.

How deals are found

Some commercial property is listed with a brokerage and appears on the public listing services. A good deal of it is not. Commercial listings are exempt from the rule that puts residential listings on an MLS system within days, so a broker can market a building privately to buyers they know, and many sales are agreed between owners who know each other. The practical consequence is that the buyers who see the most opportunities are the ones commercial brokers and other owners think of first. The off-market guide covers how to become one of them, and the networking guide covers how to meet them.

How deals are financed

Commercial mortgages come from the chartered banks' commercial lending teams, from credit unions, from lenders that specialize in CMHC-insured apartment loans, and from alternative and private lenders at a higher price. For rental housing, CMHC insurance lets lenders offer higher leverage and longer amortization than a conventional loan; for everything else, expect to bring more equity. A commercial mortgage broker's job is to match the deal to the lender. Equity comes from you, from partners, or from investors, and the moment it comes from investors the securities rules apply. All of this is covered in plain language in the raising capital guide.

Talk to a lender or mortgage broker before you look at buildings, not after. Knowing what you can finance changes which buildings are worth your time, and it is what lets you say "I can close" when a broker asks.

The people a first deal needs

• A commercial mortgage broker or lender, first, for the reason above.
• A lawyer who does commercial transactions, for the agreement, title, leases and any partnership or investor documents.
• An accountant, for how to hold the property (personally, in a company, with partners) and what that means for tax.
• An appraiser, whom the lender will require, and a building inspector or engineer for the condition of the building and an environmental consultant where the lender or the site's history calls for one.
• A property manager, unless you will manage it yourself, and an insurance broker who places commercial property.
• Other owners. The people who have already done what you are about to do are the best source of all of the above, and of a straight answer about what it is really like.

Most of these people are in the room at Commercial Group's evenings in Halifax, alongside the investors and owners the room is primarily built for.

What is different about Atlantic Canada

• Scale. The markets are small by national standards. That means fewer transactions and fewer buyers for any one building, and it means the active people know each other. Reputation travels, in both directions.
• Four provinces, four sets of rules. Residential tenancy law, property tax, land transfer tax and the rules for non-resident buyers all differ by province, and they change. Nova Scotia, for example, has had a temporary rent cap in place in recent years. Check the current rules with the province before you underwrite a building, and get local advice when you cross a provincial line.
• Halifax and everywhere else. Halifax is the region's largest market and where most of the institutional attention goes. Moncton, Saint John, Fredericton, Charlottetown and St. John's are smaller markets with their own owners, brokers and dynamics, and a building that would attract a dozen bidders in Halifax may attract two elsewhere.
• Relationships over listings. Because the markets are small, a larger share of deals move privately, and the lenders and brokers you know determine what you see. Networking is not an optional extra here; it is how the market works.

Where to start

1. Decide what you are buying. One asset class, one area, a size range. "A 6 to 20 unit building in Halifax or Dartmouth" is a plan; "commercial real estate" is not.
2. Talk to a lender or mortgage broker. Learn what you can finance and what they will need from you.
3. Learn the numbers on real buildings. Ask brokers for the rent roll and statements on listed properties and run the NOI, cap rate and debt coverage yourself until it is routine.
4. Get into the rooms. The association events, the annual forum, and a private network when a few people can vouch for you. The guide to investor groups in Atlantic Canada compares them.
5. Buy the first one with people who have done it. A partner, a mentor or simply other owners you can call. The partners guide covers how.

Next step

If you own or invest in commercial property in Atlantic Canada, or you are working toward your first building, apply to join Commercial Group. Say what you own or what you are working toward. There is no fee, no minimum portfolio size, and every application is reviewed personally within 3 to 5 business days.