Capital gains tax spurs record commercial real estate sales

By
Millicent Wong
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An increase in commercial real estate activity last month is attributed to recent changes in capital gains tax.

According to Colliers Canada, the changes, which took effect on June 25, sparked a wave of asset sales as owners rushed to sell their assets before the new tax consequences kicked in. The flood of transactions set a new record, with Colliers closing 156 transactions from June 1 to June 30. — 26 percent more than were completed in June 2023, and the highest number of June transactions in a decade.

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Adam Jacobs, national research director at Colliers, pointed out the significant impact of the tax change.

“It was obviously a big surprise to us because the commercial real estate market was in the dumps,” Jacobs said. “Everyone had the opportunity to do a deal at the old capital gains tax rates, and I think that's what people were doing: 'I think I'm just going to cash out now and close the deal before I have to deal with more taxes in the future.' It's already a tough market, and it's only going to get tougher.”

The commercial real estate sector has been in turbulent waters since the nationwide lockdowns as a result of the pandemic. According to Coldwell Banker Richard Ellis (CBRE), the nationwide office vacancy rate rose to 13.4 percent in the fourth quarter of 2020, reaching the highest level of available office space since 2004. In the first quarter of 2021, the figure had risen to 14.6 percent. Although the market has recovered slightly, the vacancy rate is still high at 14.4 percent. — a stark contrast to the time before the pandemic, when the vacancy rate was around two percent.

The industrial market is also seeing an increase in vacancy rates, rising from one percent to 2.4 percent in the first quarter of 2024 compared to the previous year.

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Although June was a blockbuster month for all types of commercial property, the industry is now grappling with the new tax landscape and its long-term impact on future investment. After last month's bounce, the sector faces the dual task of adapting to the tax changes while also dealing with wider market challenges.

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

“I don't think it will have a big impact on downtown areas. For years, downtown buildings have been owned by companies like Omers, Sun Life or Canada Pension Plan. — “They are the kind of owners who think very long-term. They manage very large assets and are not going to sell just because they don't like this market,” he said.

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

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“We talk about it as if the capital gains tax was zero before. There was a capital gains tax before and now it's a little bit more. But I've definitely heard some arguments that say if you calculate the return over five, seven, 10 years, it (the capital gains tax) really doesn't make much of a difference,” he said.

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