Uncertainty around asset prices likely to slow transactions
Higher interest rates and slower economic growth is a common theme that extends to the Canadian market. Real estate development, investment, and transaction activity are expected to remain soft intos 2024.
“We’re starting to see cracks that we didn’t see before,” says one interviewee, citing the challenges faced by people feeling the biggest impacts. The Bank of Canada shows no signs of easing back on high interest rates in the coming year, and real estate market participants are approaching all asset classes—even the most favored industrial and residential property categories—with a fair amount of caution.
Most interviewees believed that overall uncertainty about asset prices will remain a key factor in holding back transactions for the time being. Those deals that do proceed will probably be smaller as large investors pull back from the market and the amount of capital available for real estate is more constrained.
Nuanced market. A key theme in recent years has been the growing bifurcation in retail and office real estate. This trend can now be seen moving into other areas of the market, such as the industrial and multifamily segments. Canadian real estate has become more differentiated, with investors and developers needing to be more selective and pay closer attention to exactly how they will create value by optimizing their assets and portfolios.
Access to capital. The Bank of Canada’s monetary policies are not the only factor putting a damper on Canadian real estate activity. Canadian banks have faced tighter regulatory requirements on their capital reserves, which has led to more restrictive lending conditions, reduced availability of debt financing, and even higher borrowing costs. In the words of one individual, “Money is available, but to few people on fewer things.”
Labor shortage. Canadian executives are concerned that labor shortages will affect both productivity and quality of work, and shortages could have longer-term impacts in the construction industry. Research from the Canadian Imperial Bank of Commerce (CIBC) estimates that at least 300,000 construction workers will retire over the next decade, amid efforts to replace those aging workers who are falling short.
Housing affordability. The issue of housing affordability is expected to deepen in 2024. Developers are building fewer units, in part because of higher costs and slower sales in the wake of higher mortgage rates. At the same time, a surge in population coming from increased immigration is expected to put more stress on available housing supply.
ESG reporting requirements. Requirements for reporting on ESG issues have evolved quickly in Canada. The International Sustainability Standards Board (ISSB) finalized two key standards in June 2023 that relate to requirements for disclosure of sustainability-related financial information and climate-related disclosures. The new rules could set a broader baseline of what is expected of any organization reporting on its ESG performance. Also noteworthy is new federal legislation on addressing forced labor in Canadian supply chains. Companies subject to the legislation must report annually, starting in 2024, on steps taken to reduce and prevent the risk of using forced or child labor at any step in the supply chain.
Markets to watch. Toronto topped the list of markets to watch for investment prospects, and the city rated second highest for homebuilding and development. After a slowdown in 2023, its economy is expected to regain momentum in 2024 with a real GDP growth forecast of 2.9 percent. The metro area does face challenges, including housing affordability and record levels of office sublease space downtown. However, the Greater Toronto Area remains a favored sector. One interviewee states, “If I had $100, I’d spend it all in Toronto.”
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