Canadian commercial real estate industry remained resilient despite the overall muted growth: Morguard

During the second quarter of 2023, the primary Canadian commercial property sectors showcased remarkable resilience, as highlighted in Morguard’s 2023 Canadian Economic Outlook and Market Fundamentals Second Quarter Update.

When considering all property types, including multi-suite residential rentals, offices, industrial spaces, and retail properties, the collective sales figures notably increased compared to previous quarters. Investors maintained a strong focus on industrial and multi-suite residential rental properties due to their robust fundamentals and promising rent growth projections.

“Despite the overall muted growth in the commercial real estate industry, the Canadian economy demonstrated a significant amount of resilience,” said Keith Reading, senior director, research at Morguard. “The modest growth in various real estate sectors within the last quarter signifies that the outlook for the remainder of this year remains positive.”

In the multi-suite residential sector, there was consistent growth, marked by a notable increase of 29.5 per cent in total sales of rental properties during the quarter. Furthermore, the rent growth phase in the multi-suite residential rental market endured throughout the second quarter, characterized by a year-over-year surge of 10.6 per cent in the average monthly rent for listed units across the 25 cities monitored by Rentals.ca as of the end of May.

This continuous rise in rental prices over the past several quarters, despite a substantial influx of new supply in recent years, can be primarily attributed to record-high immigration rates and stronger-than-expected job growth. The demand for rental accommodations is expected to remain robust in the coming years, supported by the federal government’s plan to welcome additional international arrivals.

The Canadian commercial property sector’s investment sales activities experienced modest growth in the second quarter. This growth was primarily driven by a surge in the industrial sector, where investment property sales increased by an impressive 117.9 per cent compared to the previous quarter. It’s worth noting that industrial space remained in short supply during the second quarter, in line with the medium-term trend, which maintained tight conditions in the leasing market.

Meanwhile, the office leasing market continued its downturn in the second quarter, with the national aggregate vacancy rate continuing to rise. This was partially due to tenants downsizing their office spaces as employees increasingly worked remotely, coupled with delays in long-term leasing decisions.

Retail investment property sales activity remained subdued during the second quarter, a trend that has persisted in recent years. Factors contributing to this slowdown include interest rate hikes by the Bank of Canada and evolving consumer shopping behaviors. Notably, smaller and value-add assets with repositioning potential became more common in the market against a backdrop of relatively muted sales activity.

Canada’s economy exhibited resilience in the second quarter, even amidst certain challenges. While consumer spending slowed during the period, it remained healthier than expected in the first half of 2023, despite the impact of inflation and rising debt payments on household spending power. The stability of Canada’s labor market was primarily driven by a stronger-than-expected economic growth trend. As we look ahead to the second half of the year, both retail spending patterns and job growth are expected to maintain a moderately positive trajectory.

In July, the Bank of Canada once again raised its target overnight rate by 25 basis points to 5.00 per cent, marking the highest level since 2001. Although inflation pressures eased somewhat in the second quarter, with Canada’s Consumer Price Index (CPI) declining from 4.4 per cent in April to 3.4 per cent year-over-year in May, stronger-than-anticipated economic and job market performance continue to present significant potential inflationary risks. Consequently, the possibility of further interest rate hikes remains under consideration.