Experts warn of ongoing headwinds in the market
While the Bank of Canada’s recent decision to lower interest rates by 25 basis points to 3% offers some relief, experts caution that the commercial real estate market continues to face significant challenges.
The rate cut, announced on Wednesday, was widely anticipated and aligns with the Bank’s efforts to tame inflation. However, the central bank also removed its guidance on future rate changes, citing the uncertainty created by potential US tariffs. This has led to mixed reactions within the commercial real estate sector.
Kevin Meyler, partner and national leader at BDO Canada, expressed concerns about the ongoing uncertainty. He emphasized that while the rate cut might ease some pressures, the commercial real estate market has been struggling for some time.
“There’s still a tremendous amount of uncertainty there. I think commercial real estate has been challenged for some time, so I think that this is kind of built into the pricing. I think commercial real estate is still going to have some headwinds and struggles,” he said in an interview with BNNBloomberg.ca.
“Not only just the general state of consumers in Canada, but also the impact of (a) change in administration in the US, the tariffs, I think probably people are going to still be waiting a bit to understand more fully the impact of that.”
Despite these challenges, some industry players remain optimistic. Mark Fieder, principal at Avison Young Canada, acknowledged the risks but highlighted the potential for increased activity later in the year, particularly in sectors like industrial and multi-family real estate. He noted that while the rate cut is “welcome news,” economic conditions and geopolitical tensions could still dampen investor appetite.
High vacancy rates
The shift towards hybrid work has left many commercial properties, particularly office spaces, struggling with high vacancy rates. Meyler pointed out that even though borrowing costs have decreased, they are still above pre-pandemic levels, creating continued challenges for businesses. Furthermore, he raised concerns that ongoing tariff discussions could impact retail properties, especially if consumer confidence weakens.
On a more positive note, Adam Jacobs of Colliers Canada pointed out that the commercial real estate market is adjusting to smaller deals and an influx of private investors. Despite ongoing rate cuts by the Bank of Canada, borrowing costs have remained relatively stable, signalling that the market is settling into a more normalized state.
For those with capital to invest, opportunities are emerging. Meyler suggested that firms with strong balance sheets might find acquisition opportunities, as some properties are being sold due to the challenges posed by higher-than-normal interest rates.
Looking ahead, Meyler remains cautious but hopeful. “I do think there’s a finite amount of real estate… I have to believe it will rebound. Historically it traditionally has,” he said. “I do think it’s an opportunity. And I think if it’s priced right, they may want to look at it right.”
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