Investor optimism is soaring in Canada's rental market. Here's why
Despite economic challenges, investor confidence in Canada’s multi-suite residential rental market remained strong in the second quarter of 2024.
Stable demand for rental properties and positive rent growth projections are keeping the sector resilient, even as other areas of the economy face uncertainty, according to Morguard’s Economic Outlook and Market Fundamentals report.
"Both the commercial real estate and multi-suite residential rental sector exhibited a measure of resilience in the second quarter, which built on a solid foundation for growth," said Angela Sahi, president and chief operating officer of Morguard. "With easing inflation pressures and encouraging signs of rate cuts, this positive momentum indicates that the Canadian real estate market is set to gradually rebound."
The Bank of Canada’s decision to cut its benchmark rate by 25 basis points in June provided some relief for investors, particularly in the housing rental sector, where borrowing costs had been a concern. As interest rates are expected to decline further, the overall real estate market is anticipated to benefit, boosting investor confidence.
Safe bet for investors
The multi-suite residential rental market continued to attract investor interest in the second quarter, driven by steady demand and a positive outlook for rent growth. Despite high borrowing costs, the sector’s stability made it a safe bet for investors seeking reliable returns.
“Although borrowing rates remained high in the second quarter, investor optimism increased with the Bank of Canada's 25-bps overnight policy rate cut in June,” the report read. “Looking ahead, the multi-suite residential rental property market is expected to continue to exhibit stable and positive performance characteristics.”
In the commercial real estate sector, industrial investment saw a notable increase, with transaction volumes for properties valued at $10 million or more rising by 48.1% across Canada’s major markets. This surge contributed to an overall rise in commercial real estate investment in the second quarter.
However, leasing demand for industrial properties softened as new construction projects ramped up, leading to an increase in national availability. Despite this, the report emphasized that investor interest in industrial properties remains strong.
Canada’s office leasing market also showed signs of improvement, particularly in cities like Toronto and Montreal, where pre-leased spaces in newly constructed buildings boosted activity. This trend highlights the growing preference for high-quality, amenity-rich office spaces.
In the retail sector, leasing activity continued to recover, with retailers seeking out premium physical spaces. However, the pace of retail property investment slowed as buyers remained cautious.
Economic environment
Canada’s economic growth slowed in the second quarter due to the combined effects of high interest rates, inflation, and disruptions from forest fires and labour strikes. Despite these challenges, inflation pressures eased, with the Consumer Price Index (CPI) falling below 3.0%, down significantly from 2022 levels.
The Bank of Canada responded by cutting its policy rate in June, and further rate reductions are expected in the latter half of 2024. These moves are anticipated to provide relief for the real estate sector, which has been grappling with high borrowing costs.
"Despite a weaker near-term economic growth outlook, real estate investors will continue to exhibit a measure of confidence in Canada's commercial real estate sector as evidenced by the uptick in transaction volume in the second quarter," said Keith Reading, senior director of research at Morguard. "This confidence is expected to persist as the real estate sector gradually recovers from the effects of the most recent economic slowdown."
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