Canadian Commercial Real Estate Outlook, Fall 2023

Investment volumes remain buoyant despite high interest rates and slowing economy.

September 12, 2023
  • Scott Figler
  • Heli Brecailo
  • Chad Piche

For the past year real estate markets seemed to be weathering high interest rates better than expected. Rapid population growth, tight labour markets, and elevated household savings supported the Canadian economy and, by extension, demand for real estate. However, as the economy remains hampered by higher interest rates, labour shortages, geopolitical issues, and slowing exports, it will grow more difficult for Canada to continue to defy predictions of a recession.

Investment into commercial real estate has slowed, but remains high by historical standards.

Investment sales reached $28.5b for the first half of the year, down about 25% from last year’s record setting pace. However, despite rising interest rates and a slowing economy, investment volumes are on track to reach their third highest annual total on record. Commercial real estate investment has been driven mostly by private investors and family offices, which have been responsible for nearly 60% of all market liquidity over the past two years.

The retail and hotel sectors have seen strong investor interest this year, while office and land have been the most challenged relative to their performance in recent years.

Distress sales are not yet materializing

As commercial real estate investors continue to grapple with a shifting market, there have been predictions of an imminent wave of distress asset sales. In Canada distress asset sales peaked following the Global Financial Crisis in 2009-2010 at around 2.7% of total sales ($525m overall), rose again after oil prices collapsed in 2014-2015, and peaked again in the aftermath of COVID in 2020-2021 at 2.6% of total sales ($920m overall). So far in 2023 distress sales remain low by historical standards.

Office vacancy continues to rise across most of Canada, especially in core markets

Once the tightest office markets in North America, vacancy has risen most sharply in Toronto, Vancouver, Montreal, and Ottawa since 2020. As tenants are lacking clarity on the economic outlook, they are generally postponing decisions on their occupancy footprint. Sublease availability across Canada has more than doubled from pre-pandemic levels as many companies have downsized their footprint due to hybrid work schedules.

Industrial rents continue to grow, but are slowing down

User demand is normalizing from the red-hot pace of 2021-2022, at the same time as the industrial construction pipeline hits record levels of 50.3m s.f. Market conditions have softened as a result, with national vacancy up for the third straight quarter to 1.9%. Consumers will welcome all this, as skyrocketing industrial rents were contributing to inflation.

Retail investment volumes rebounding

The first half of 2023 saw just over $3.1b in total retail investment sales across Canada, putting the Canadian retail investment market on track to top $6b in sales for only the second time since 2019. Returning foot traffic and investors' desire to diversify portfolios beyond industrial and multifamily are fueling an uptick in investor sentiment.

Slowing multi-unit residential construction investment spells trouble for rental market in years ahead

Investment in multi-unit residential construction slowed to $3.6b in July 2023, down by 16.7% year-over-year. High debt financing costs, material costs, and labour costs are dampening appetite for ground-up rental development which could further constrain apartment-seekers and sustain high rental growth in the medium term. To help generate more rental housing supply, the federal government recently announced that they will look to drop the GST tax on future rental housing developments and some provincial governments gave verbal commitment to do the same.

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