Prospects appear to be improving after a bumpy few years
Conditions in the Canadian commercial market are stabilizing, with that improvement likely to continue through the opening two quarters of the year – but much of the outlook for 2024 will still depend on what happens with interest rates and when they come down.
That’s according to Mark Fieder (pictured), president, Canada, at global commercial real estate services firm Avison Young, who told Canadian Mortgage Professional that price discovery on the commercial front appears to be waiting to see when rate cuts will arrive.
“It’s starting to happen in anticipation of rates coming down,” he said. “But we’re not quite there yet.”
Encouraging transactions over the past month for office buildings appear to have taken place at a cap rate higher than the market was anticipating, which could offer something of a benchmark for price discovery going forward.
Industrial, multi-residential and grocery-anchored retail, meanwhile, are also set to see strong demand continue, with “sustainable” markets for each of those segments at play.
“I wouldn’t say in industrial, for example, that you’re going to see the same level of rental increases,” Fieder said. “There’s a lot of space being delivered to the market across Canada and I think you’re going to see rental rates stabilize a little bit as we work through the new supply.
“But there’s going to continue to be a strong market because what we’re building is going to get absorbed and vacancies are going to stay relatively low going forward. And I would say the same for multi-res.”
Where multi-res is concerned, the “elephant in the room”, according to Fielder, is the cost of building and delivering to market – no surprise, given recent high-profile issues with construction costs and supply challenges.
Those difficulties are likely to boost the profile of existing multi-residential units and projects. “High interest rates, red tape in City Hall, and high construction costs are the impediments to building. So existing multi-res rental is going to be quite strong going forward because you can’t build it,” Fielder said.
“That’s the truth – even people that have sites are having a very hard time pencilling returns that would allow them to take the risk of building.”
Overall prospects strong despite uncertain future for office space
The office market is another story entirely, with little indication that the “fog” that’s enveloped that asset class since the pandemic is set to clear. Tenant demand remains the biggest concern in that space – although there’s some reason for cheer in what Fieder described as a “return to office that’s building every day.”
On the whole, prospects are looking rosier for the commercial space in 2024 than they have for quite some time, Fieder said.
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— Canadian Mortgage Professional Magazine (@CMPmagazine) February 16, 2024
“Generally speaking, our industry has come through a very difficult time, and I think we’re actually at the bottom and will see a swing upwards going forward,” he said. “You see news and you talk to clients that are raising capital and they’re seeing it as well.
“There’s a lot of capital out there to take advantage of the market. There will be dislocations, no question – you’re seeing it big time in land and development deals, reading the papers every day about ownership structures changing and receivers stepping in and taking over – and to a large degree, that’s because of financing, the cost of capital and construction costs going up.”
Construction costs remain a challenge – for now
Some evidence suggests that those prohibitively high construction costs may be beginning to level and come down in certain cases. On the condo construction side there may be a lag in supply lasting between 12 and 18 months, Fieder said, with inventory potentially dipping noticeably.
“It’ll be interesting to see how that impacts the market when people come in buying condos,” he said. “Not saying they’re not going to be available or they are going to be available, but in a growing population, you take supply out of the chain for 12-18 months – well, it could have a fairly significant impact on the market.”
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