Commercial real estate report reveals adjusted expectations, focus on alternative investments
Commercial real estate investors are adjusting their strategies to the possibility that the current high rates may persist beyond the summer months, according to a new report from Avison Young.
Sales volume for income properties fell 20% from the first half to the second half of 2023, leading to a buildup of capital, according to the report. Investors, armed with sidelined capital, are now seeking opportunities amid more predictable debt market conditions.
"Taking early action before the next rate cut can seem risky, but trying to jump on a speeding train too late in the game is just as risky, if not more so," the report noted.
“Investors are coming to the conclusion that the current interest rates could endure past the summer months, and are revising their pricing expectation for acquisitions accordingly,” said Robin White, principal at Capital Markets Group.
This shift comes as inflationary pressures remain heightened due to factors such as persistent US inflation, a weakening Canadian dollar, and substantial government spending.
“The market is adjusting faster than anticipated while buyers and sellers are clearly adjusting to the reality of higher interest rates,” added Mark Fieder, president of Avison Young Canada. “This is evidenced by the larger than anticipated volume of office transactions across the country in Q1 2024.”
Transaction times are increasing due to longer price discovery periods between buyers and sellers, reflecting cautious investment strategies. In the first quarter of 2024, private Canadian investors were particularly active, representing 73% of acquisitions of income-producing properties, while institutional investors accounted for just 8%.
The report also showed that asset class dynamics showed little change from late 2023, with multi-residential, industrial, and retail investors largely aligned on market sentiment. The office market, however, remains divided.
“As we look ahead, projections for stable to decreasing interest rates and an uptick in sale offerings has created some optimism amongst market participants,” Avison Young managing director Matthew McWatters said. “However, a decrease in interest rates in the second half of the year would likely spark further activity.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
