Investor enthusiasm rises as sales activity picks up
Investor interest in commercial real estate is on the rise, with overall sales activity steadily increasing, according to a new report from Avison Young.
The Bank of Canada's June interest rate cut, the first since March 2022, has been a key driver of this recovery.
“The increases to the Bank of Canada policy rate over the past 24 months have caused intense ripple effects throughout the commercial and residential real estate markets – for example, by challenging the industry’s ability to deliver new or renovated product to end users,” Mark Fieder, principal and president of Avison Young Canada, said in the report. “The prospect of meaningful future interest rate cuts cannot come soon enough.”
Another factor boosting confidence is the expectation of decreasing bond yields. Analysts predicted a 50-basis-point drop in 10-year government bond yields by the end of 2024, potentially reaching 2.50% by 2026.
While extended price negotiations between buyers and sellers initially slowed investment activity, signs of a market shift emerged, with overall sales activity increasing, particularly in Toronto and Montreal.
“We are seeing a noticeable increase in activity across all asset sectors, as many investors see the first drop in interest rates as a signal to get capital back into the market,” said Joe Almeida, principal and managing director in Toronto.
Canadian private investors dominated property acquisitions in Q2 2024, accounting for 82% of transactions, up from 73% in the previous quarter. Meanwhile, institutional investors accounted for only 5% of transactions, down from 8%.
Industrial property, which previously led the market, has slowed down due to limited product availability. However, increased activity is being observed in retail and office sectors, suggesting a potential revival in these previously stalled segments.
Read next: High-end office buildings improve in Q2, older buildings not so much
Canada's strong population growth is another factor driving market optimism. The report expects institutional investors to re-enter the multi-residential market in Q3, joining the existing dominance of private buyers.
Overall, the combination of anticipated rate cuts, declining bond yields, and positive market trends are fuelling investor confidence and leading to increased activity in the commercial real estate market.
“We have clear indications that the market is slowly turning, with transactions closing after a long period of price discovery,” said Jeff Flemington, principal of industrial, life science, and office at Avison Young.
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