The market is setting up a potentially stronger second half in 2024
British Columbia's commercial estate market saw significant challenges in the first half of 2024 due to tight financing conditions, interest rate reductions, and changes to capital gains taxation, according to a new report by global commercial real estate services firm Avison Young.
Financing obstacles continue to stifle activity
Buyers faced difficulties securing financing in the first half of 2024, with major banks not showing flexibility in lending – even to well-qualified borrowers, according to the report. This contributed to a slowdown in sales activity early in the year. In addition, high vacancy rates in the office sector pushed landlords to focus on improving their properties instead of acquiring new ones.
Despite these challenges, Avison Young said buyers with capital in hand found opportunities, specifically in distressed sales of development lands. The rise in these sales provided a silver lining in a sluggish market.
Interest rate drops signal renewed optimism
On June 5, the Bank of Canada (BoC) made headlines as the first G7 central bank to cut its policy rates in 2024. This initial 25-basis-point cut was followed by two more in July and September, bringing the overnight rate down to 4.25%. These cuts were in response to cooling inflation, which fell to 2.5% in July, just shy of the BoC’s 2% target.
The cuts caused optimism in the real estate sector, with the possibility of more reductions in the future. Following the US Federal Reserve's unexpected 0.5% rate cut in September, many anticipate that Canada may follow suit with more aggressive cuts before year-end. The Bank of Canada has two more rate announcements scheduled for October and December, leaving room for further adjustments.
Capital gains tax changes drive sales surge
The report noted the federal government’s decision to increase the capital gains inclusion rate from 50% to 66.67% has had a significant impact on the market. The increase applies to gains exceeding $250,000 per year for individuals, all gains for corporations, and most trusts, leading some owners to reorganize or adjust their portfolios.
This led to a surge in real estate transactions in Q2. Deals worth over $5 million accounted for 37.7% of total sales in the first half of 2024. Overall, British Columbia's commercial real estate market saw $5.3 billion in sales during the first six months of 2024.
As the year goes on, the combined effects of relaxed interest rates, tax changes, and selective investment opportunities could be a turning point for British Columbia's real estate market, potentially setting the stage for a stronger second half.
