Strong projections for CRE investment in Canada

Tuesday, August 8, 2017

Investment in Canadian commercial real estate is expected to generate strong demand and performance despite the strengthening economy driving a rise in interest rates and less accommodative monetary policy, according to a new report by Morguard Corporation.

“After a second consecutive quarter of stronger than expected economic output, projected growth for 2017 has now surpassed 2016 levels, with signs pointing to an early winding down of global monetary stimulus,” said Keith Reading, director of research at Morguard. “Despite a perceived eagerness to raise interest rates, particularly in the United States, low inflation pressure should continue to act as a buffer against rapid monetary policy change in the near term.”

In Canada, early estimates indicate that commercial real estate investment remained brisk during Q2 despite the spectre of rising interest rates. The office sector is expected to lead the way with $2.0 billion in closing volume, with the retail and industrial asset classes registering more than $1.0 billion each.

“Demand for Canadian commercial real estate continues to outpace supply as Canada remains an attractive, stable option for investment,” said Reading. “While we anticipate that interest rates will continue to rise, the change will occur gradually and at levels that remain palatable for investors. There will be little variation in the strength of the Canadian property market in the near term.”

The leasing sector also showed progress in Q2. Nationwide office vacancy rates remained low, powered by record-low vacancy in the Toronto downtown submarket and declining rates in Vancouver and Montreal. Robust office occupancy rates were tempered slightly by Calgary and Edmonton, who are still battling extended oil sector weakness. Similar trends were identified in the industrial sector, with low national vacancy rates despite higher vacancies in the two Alberta population centres.

In the Canadian housing market, recent policy changes began to produce the desired cooling effect. Total sales and average pricing both dipped during the quarter but there are indications that the respite might not last long.

“Historically hot markets like British Columbia, Toronto and Montreal are already showing signs of reheating despite recent cooldown efforts,” said Reading. “Long-term, however, the cumulative effect of increasing interest rates should act as a buffer against future housing market imbalance.”

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