The State of Commercial Real Estate in Canada

From a transactional standpoint, particularly for investments, it was one of the slowest years we’ve had in a long time. Inflation and subsequent interest rate increases prompted a sense of uncertainty across global real estate markets. Canadians spent most of the year asking whether interest rates would keep rising, and wondering what the effects of these elevated rates would be.

The past 18 months have witnessed the impact of these rises, sending ripples through the commercial real estate (CRE) cap rate landscape-intricately influencing property valuation processes, dampening transactional activities, and curbing landowners’ enthusiasm for acquiring new properties or initiating fresh developments. As real estate inherently operates in cycles, we find ourselves navigating a transitional period, adapting to the enduring presence of elevated interest rates as we turn the page to 2024.

A recession’s impact on the national market <https://sr.studiostack.com/c/link?l=1506928&s=1506926> Statistics Canada reported that the national economy shrank in the third quarter by 0.3 per cent. The data agency’s preceding report showed a slight retraction in the previous quarter too, but those figures have since been updated to show 0.3 per cent growth last spring. Whether we’re on the verge of a recession or in the thick of it, there are somethings to consider.

In times like these, occupiers usually pull back on expansion plans, which will continue to drive up vacancies. We’ve been seeing this trend already, particularly in the technology sector.

A recession may also start to shift the balance of power back towards employers as workers face more competition in a labour market that’s shedding jobs. Research has shown <https://sr.studiostack.com/c/link?l=1506930&s=1506926>  that managers are more interested in increasing in-office occupancy than their workers, so with more decision-making confidence, we could see higher office use, which could counteract the effects of some companies wishing to reduce their footprints.

The biggest potential impact of a recession would be a reduction in interest rates. Economists from Benjamin Tal to David Rosenberg have predicted a significant reduction in rates over the next two years. Lower rates would reactivate the investment and lending markets, helping offset some of the expected increases in cap rates. When, and how fast that happens is up for debate.

Managing distress

Higher debt loads, interest rates and a lack of liquidity mean Canada will experience distress. While some companies will be challenged, deals will accelerate as organizations rebalance their portfolios and find strategic ways to weather the storm. We’ll witness companies fade, startups emerge and consolidation occur in both the private and public real estate markets. Promisingly, innovation and movement are a byproduct of hard times and a healthy and essential step in restarting the next cycle.