Will the Bank of Canada’s last interest rate announcement of 2024 have an impact on Canadian CRE?

BoC cuts Canadian interest rates by 50 basis points

At the last Bank of Canada (BoC) interest rate announcement, Governor Tiff Macklem assured Canadians that further policy rate reductions were coming – as long as inflation remained in line with the forecast. In the weeks leading up to the BoC’s decision, economists were aligned on their expectation for a cut – but once again divided on the question of ‘how much?’.

On one hand, October’s inflation data revealed the first increase in the annual inflation rate since May, bringing us back to 2%. On the other hand, Canada’s GDP growth (especially when evaluated on a per capita basis) remains weak, while the labour market continues to show signs of stagnation.

Heading into the last interest rate decision of 2024, the BoC was expected to strike a delicate balance between keeping inflation at bay and breathing life into the broader economy as recessionary indicators continue to materialize. Today’s 50 bps cut appears to affirm the BoC’s commitment to propping up the Canadian economy with a more forgiving monetary policy.

Addressing Canada’s economic headwinds

Today's interest rate announcement comes amidst temporary fiscal stimulation measures introduced by the Federal government in the form of temporary GST relief on selected consumer items and planned stimulus payments to some households. The BoC's decision to cut overnight lending rates by 50 bps clearly signals that, despite a small uptick in CPI to 2.0% in October, the Bank remains worried about the health of the Canadian economy.

The Canadian labour market continues to show signs of strain in the current landscape. While top level job growth remains positive, Canada’s unemployment rate rose to 6.8% in November, a level which hasn’t been seen since January 2017, excluding the pandemic years. The labour force participation rate also fell to 64.8%, reaching its lowest level since December 1997, excluding pandemic years.

Third-quarter GDP numbers also paint a somewhat grim picture. Although Canada's economy grew at an annualized rate of 1% in the third quarter, this increase was less than what the Bank of Canada had predicted, and not enough to offset consecutive quarters of sluggish growth. The components of GDP were likely troubling to the Bank of Canada as declining business capital investment alongside a weakening trade balance all contributed to the Q3 headwinds. “I think one of the most important factors since the last rate adjustment is the fact that GDP numbers for the third quarter were surprisingly weak, which tipped the scales in favour of more – and faster – cuts,” notes Peter Norman, Vice President and Chief Economist at Altus Group. “Yes, the CPI number crept up in October, but not to a worrisome level, so a smaller cut still seemed unlikely heading into this announcement.”

To this effect, Macklem noted that December’s rate decision would depend on incoming economic data, so today’s 50 bps cut is likely an attempt at jump-starting economic activity – even if that stimulus won’t reflect in the market until next year.

Don’t say the ‘T’ word (tariffs)

In recent months, trade tariffs have emerged as the elephant in the room when discussing Canada’s economic future. While any definitive statements about the impact of proposed trade tariffs with the US are speculative at best, it’s worth noting that the potential for tariffs can impact economic sentiment in the interim and, subsequently, the temperature of monetary policy.

“The US is our biggest trading partner, so while we don’t really know yet if trade tariffs will materialize next year, increased trade tensions can affect business investment decisions and investment confidence,” adds Norman. “These are things the Bank of Canada will do their best to head off and, once again, this points to more easing on the Canadian side.”

That being said, a burgeoning divide between the pace of the BoC’s rate-cutting cycle and the interest rate decisions made by the US Federal Reserve could have an increasingly negative impact on the strength of the Canadian dollar. With this in mind, all eyes will be on the Federal Reserve’s interest rate announcement next week, in the hopes that US and Canadian monetary policy will find some degree of alignment.

Does today’s interest rate decision impact the Canadian CRE market outlook for 2025?

If the mantra guiding the commercial real estate (CRE) industry through 2024 was ‘survive until 2025’, is the landscape finally primed for a long-awaited recovery?

It's important to remember that the impact of interest rate reductions – at least initially – is directional in nature. These decisions influence market direction before delivering tangible outcomes. Even with five consecutive cuts this year, the more tangible impact of this rate-cutting cycle will take time to flow through Canadian CRE.

“Even with another decrease, it will take time for companies to get settled again, and not only feel more confident in the market – but start executing in a way that reflects that confidence,” shares Raymond Wong, Vice President of Client Delivery at Altus Group. “Canada is facing a significant challenge on the employment side, and I think that will take some time for the labour market – and the economy at large – to reflect the positive impact of the rate-cutting cycle.”

“The Bank of Canada is a very blunt instrument – the impact of their decisions typically play out slowly over time, so today’s decision may not make an immediate difference to January employment, but will contribute toward a stronger 2025” adds Norman. “However, capital flows respond more quickly to relative interest rates and, when that happens, business confidence is just a step behind.”

Even still, the continued downward trend in Canadian interest rates should bolster optimism amongst borrowers, investors, developers, and consumers alike as we turn the corner into 2025. “The Bank of Canada will continue to cut into 2025, but I think the rate at which they do so will ultimately depend on the Federal Reserve,” notes Wong.

“The bid-ask gap is slowly closing, and I think we’re going to see steady increases in activity next year, as a reflection of this year’s rate decisions. Some owners and investors may try to get into the market a little earlier than their competitors, in which case they may come to the table with a slightly higher price to meet the bid-ask gap to secure certain properties. Of course, core assets will always get attention – but ultimately, I think we are looking at a slow and measured start to 2025.”

In Altus Group’s recent Canada State of the Market webinar, attendees were asked how much they need rates need to be further reduced to see development activity pick up again. According to the poll, most respondents (39%) wanted a further drop of 100 basis points, while 31% wanted to see 200 or more. “I expect the bank rate to settle at around 2.5%, which should lay the groundwork for a long-awaited uptick in transactions and development activity,” adds Norman.

Want to be notified of our new and relevant CRE content, articles and events?