Canadian real estate grows in Q2 as inflation eases and rate cuts loom

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The Canadian commercial real estate industry is expanding, according to Morguard's Second Quarter Update on Market Fundamentals and 2024 Economic Outlook.

While transactions involving industrial investment property increased in the second quarter, the market for multi-suite residential rental properties stayed steady.

According to Morguard President and Chief Operating Officer Angela Sahi, "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."

She pointed out that the Canadian real estate market appears to be recovering due to decreasing inflationary pressures and indications of impending rate decreases.

The report projects that the Bank of Canada will continue to cut rates and that inflationary pressures will decrease in 2024. Despite weaker economic growth, it is anticipated that investor confidence will increase as monetary policy becomes less restrictive.

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"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.

He predicted that once the industry bounces back from the recent economic downturn, this optimism will last.

Throughout the second quarter of 2024, investor trust was upheld in the multi-suite residential rental market. The sector's stability was underpinned by solid long-term fundamentals and a promising forecast for rent increase.

Optimism increased after the Bank of Canada's 25 basis point overnight rate drop in June, even though borrowing rates were still high. It is anticipated that the industry would continue to do well.

The second quarter saw a 48.1 percent increase in industrial property transactions in five main cities, which increased the number of investments made in Canada overall. But as building expanded, the demand for industrial leasing decreased, increasing the country's availability rate.

The market for office leasing advanced thanks to pre-leased spaces in recently built buildings. Positive absorption rates in Toronto and Montreal during the second quarter indicate a desire for premium office space with lots of amenities.

Leasing activity for retail also increased as businesses looked for upscale physical locations. However, because institutional buyers continued to be picky about their purchases, the investment in retail real estate fell.

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Despite the combined effects of high interest rates, inflation, forest fires, and labor disruptions, Canada's economy increased marginally in the second quarter. With the Consumer Price Index dropping below 3.0 percent, inflationary pressures decreased.

The decline in inflation and the sluggish employment market prompted the Bank of Canada to lower interest rates in June. In the second part of the year, more rate reductions are expected.