Commercial: Real Estate Outlook 2024
According to experts and economists, commercial real estate is expected to face continued challenges related to inflation and interest rates throughout the second and third quarters of 2024.
However, there are certain assets that investors should consider due to their potential to outperform the market or offer good long-term prospects.
If we break it down by sector:
Office
The completion of over 16 million square feet of office space nationally between 2021 and 2023 significantly increased vacancy rates, particularly in Toronto, Vancouver, and Montreal. However, the office construction pipeline is expected to nearly halt beyond 2024, providing an opportunity for demand to align with supply and for markets to stabilize. Despite the prevalence of hybrid work models, companies continue to invest in office space to foster connectivity, culture, and collaboration.
- Bifurcation between quality and commodity office space will persist.
- Demand for trophy assets will be sustained by flight-to-quality.
- Landlords must enhance amenity offerings to stay competitive.
Retail Market: Recovery and Rental Growth
As consumers gravitate back to physical retail locations, the retail market is witnessing decreasing availability and increasing rents. Investment volumes have rebounded to pre-pandemic levels. In terms of rental growth, strip centres and power centres are outperforming, although other retail sub-sectors have not seen rental growth keeping pace with inflation.
- Changing consumer behaviour and spending patterns will challenge retailers.
- Limited vacancy among in-demand formats will benefit from churn.
- Innovation will be crucial for retailers to adapt and thrive.
Industrial Market: Record Deliveries and Shift in Demand
In 2023, new industrial space deliveries reached a national record of nearly 40 million square feet, coinciding with a decrease in demand to its lowest levels in several years. Consequently, the national vacancy rate has risen from 1.5% to 2.8% over the past year. This trend benefits tenants and consumers alike, as it is expected to lead to reduced warehousing costs within supply chains.
- The industrial sector is balancing out as rental growth stabilizes.
- New supply is lifting availability rates.
- Market conditions remain healthy compared to historical norms.
Multi-Family Market: Rental Housing Shortage
Rental housing shortages affect all major and medium-sized Canadian cities, with the 16 largest metros experiencing rental vacancy rates below 2.4%. Municipalities are collaborating with the private sector to develop strategies that encourage new housing construction. Construction activity is increasing overall, leading to significant growth in rental rates across each market.
- Significant undersupply persists in the Canadian multifamily sector.
- Unprecedented population growth is driving record demand.
- Sector will continue to grapple with supply-demand dynamics.
Strategic Focus for Canadian Real Estate Companies
Companies must optimize assets and portfolios, invest in digital transformation, and stay abreast of trends like generative AI and ESG performance to create value in a challenging market of high interest rates, capital scarcity, and uncertainty about valuations.
Key Investment Opportunities in 2024
Experts and economists predict that commercial real estate will face ongoing challenges from inflation and interest rates well into the second and third quarters of 2024. Despite this, there are attractive investment opportunities. One of those gems are data centres in Quebec, including those located in rural areas. These centres benefit from the province’s cheap hydroelectric power.
The resilience of tech-friendly assets is underscored by the strong performance of real estate investment trusts (REITs) focused on the tech sector. In contrast, office spaces have faced challenges. Overall, data centres and tech-friendly assets offer promising opportunities amidst the ongoing challenges in the commercial real estate market.
Other alternative investments like retirement homes, student apartments, and laboratory space are also worth considering for diversification, as they are less tied to the overall economy and more influenced by societal trends, such as the increasing online activity driving the demand for data centres.
- Data centre in Quebec (cheap hydro power)
- Industrial real estate – Well-situated small bay warehouses with easy access to major transportation corridors.
- Tech-friendly assets
- Retirement homes
- Student apartments
- Select office spaces (medical offices and offices purpose-configured for lab space will be more resilient because they aren’t subject to the work-from-home trend).
Final Reflections
Canada’s commercial real estate sector presents numerous reasons for optimism. With stable government, robust population growth, disciplined lending practices, sustainable construction, transparent legal frameworks, and a strong banking sector, Canada’s CRE market stands among the most attractive globally. While the office sector remains a concern, there is notable strength in industrial, multifamily, and even retail segments.
In the coming two weeks we will publish more detailed articles about each of the sectors (office, industrial, retail, multifamily) – stay tuned!
Sources:
This article reflects our research of reports and evaluations by CBRE Canada, PWC report, Globe & Mail, Colliers Canada, Avison Young, and JLL Canada.
