Canada’s Commercial Real Estate Exhibited Resilience in Q1 2024: Morguard

According to Morguard's 2024 Economic Outlook and Market Fundamentals First Quarter Update, the Canadian commercial real estate sector has shown positive signs of market resilience in the first quarter.

Canada’s commercial real estate sector showed resilience during the first quarter, as investment sales activity slowed down according to Morguard’s 2024 Economic Outlook and Market Fundamentals First Quarter Update.

According to the report, industrial properties were the most popular acquisition target of investors and owner/users. The report noted that multi-suite residential rental property finished second to industrial in recorded transaction volume in the first quarter.

“The Canadian commercial real estate sector in the first quarter has shown positive signs of market resilience,” said Angela Sahi, president and chief operating officer of Morguard. “The continued popularity of multi-suite residential real estate and the steady demand from industrial property buyers as investment targets will bolster the market’s positive growth trajectory.”

Morguard noted that when looking ahead, the Bank of Canada’s stance on potential rate cuts and the evolution of inflation pressures will continue to shape the Canadian economy for this year and beyond.

“The ongoing high interest rates continue to impact the real estate market, leading to increased costs of debt and widening of the gap between seller and buyer price expectations,” said Keith Reading, senior director, research at Morguard. “With inflation remaining stable, the Bank of Canada vigilantly monitors economic progress for rate cuts. This provides a solid foundation for real estate poised for growth, supported by investor confidence across various real estate sectors.”

According to the report, in the first quarter, Canadian multi-suite residential rental emerged as the second most popular acquisition target of investors, which continued the trend seen over recent years.

Smaller-scale properties sold to private groups have accounted for a large share of investment sales activity, the report noted, while institutions and pensions funds have increasingly sought acquisitions outside of Canada.

As a result of an availability shortfall, there have been few sales of large over the past year, according to the report. A little over $568.0 million of multi-suite residential rental investment property transaction volume was reported for the first quarter for properties sold for at least $10.0 million in the Greater Vancouver, Calgary, Toronto, Ottawa, and Montreal markets combined.

According to the report, despite the modest transaction volume total recorded in the quarter, investors remain confident in Canada’s multi-suite residential rental property sector.

Industrial property led in investment property sales, the report noted, while overall capital flow into the asset class slowed quarter over quarter.

According to the report, owner/users accounted for a significant share of industrial property sales in the first quarter, in seeking to capitalize on the financial advantages and control attainable through ownership. Private capital groups capitalized on reduced competition levels and industrial leasing fundamentals were relatively stable and healthy.

The report noted that both Vancouver and Winnipeg recorded positive absorption of office space, marking the first time since the third quarter of 2022.

In terms of retail leasing fundamentals, they remained stable during the first quarter, with vacancy levels generally flat, according to the report. While space in prime locations was limited, vacancy levels stayed elevated in certain downtown cores. Overall, supply and demand were balanced, the report noted.

The Canadian economy displayed stronger-than-expected growth in early 2024 partially driven by population growth, an uptick in household and government spending, and rising residential housing demand. Inflation remained elevated due in part to persistently high rental costs mortgage interest rates, according to the report.

The Bank of Canada also maintained its policy interest rate in the first quarter and emphasized its intention to closely monitor economic performance and inflation in the coming months to determine the pace and extent of interest rate adjustments.

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