Canadian CRE investment trends – Q3 2024

Canadian commercial real estate continues its flat performance in the third quarter

The latest results from Altus Group’s Canadian Investment Trends Survey (ITS) for the four benchmark asset classes show that the Overall Capitalization Rate (OCR) was largely flat, increasing by 30 basis points to 5.90% in Q3 2024 (Figure 1). The cap rates reflected fewer transactions in Canada due to the residual effects of elevated interest rates and the continued bid-ask price gap between buyers and sellers.

According to Statistics Canada’s Labour Force Survey (LFS), employment increased (+47,000, +0.2%) in September 2024 following four consecutive months of minimal change. The unemployment rate decreased by 0.1% to 6.5%, primarily driven by the one-percentage-point decrease in the overall unemployment rate for youth aged 15 to 25. As population growth continues to outpace employment growth, more people have experienced difficulties finding employment in the current labour market. Employment gains were primarily observed in the information, culture and recreation, wholesale and retail trade, and professional, scientific, and technical sectors. Conversely, employment losses were reported in educational services, health care, and social assistance.

The job market in the summer of 2024 was especially difficult for those seeking employment. In August, 1.5 million people were unemployed, a nearly 23% increase year-over-year. Moreover, of those unemployed in July, only 16.7% found employment in August, a 6.5% decrease compared to the share observed in the same period last year. The number of job vacancies has also continued to trend downward, indicating weakened labour market conditions.

The Bank of Canada’s bond rate, as of September 25, 2024, was 3.01%, decreasing by 46 basis points compared to the previous quarter's 3.47%. As the annual inflation rate hit the Bank of Canada’s two percent target in August, further interest rate cuts are forecasted. The average OCR for the four benchmark asset classes was primarily up, except for Tier I Regional Malls, which decreased by 17 basis points compared to the previous quarter.

Figure 1 - Canadian markets - OCR trends for four benchmark asset classes

Commercial investment activity

In the first half of 2024, the Canadian commercial real estate market was muted, with $29.2 billion in dollar volume transacted, a 3% increase compared to the same period last year. The residual effects of elevated interest rates and sluggish economic growth have flattened investment activity. However, the reduction in borrowing costs following the Bank of Canada’s interest rate cuts should lead to steadied improvement in investor confidence and a pick-up in markets towards the latter half of 2024.

As of the third quarter of 2024, Vancouver, Calgary, and Edmonton were the top three preferred markets for investors across all asset classes, respectively. Vancouver remained in the top three from the previous quarter, while Toronto has slipped into fourth place. Moreover, the location barometer has reported a mostly positive momentum ratio (percentage of investors looking to buy/percentage of investors looking to sell) across all markets.

Figure 2 - Location barometer - All available products (Q3 2024)

In the third quarter of 2024, investors' top three preferred property types were food-anchored retail strip, multi-tenant industrial, and suburban multiple-unit residential (Figure 3). Retail centres with grocery or big box store anchors continued to be thriving investment opportunities in response to changing consumer behaviour. Moreover, despite the short-term oversupply in the industrial sector, deal velocity persisted in most major markets, which contributed to an 8% increase in dollar volume transacted year-to-date compared to the same period last year.

Figure 3 - Property type barometer - All available products (Q3 2024)

According to the Product/Market barometer (Figure 4), the top three preferred combinations were:

1. Food-anchored retail strip in Vancouver

2. Suburban multiple-unit residential in Montreal

3. Multi-tenant industrial in Toronto

The 15 least preferred combinations largely revolved around Class-B office and office land assets.

Figure 4 - Product/Market barometer - All available products (Q3 2024) – Top 15 preferred/least preferred

Market highlights for the quarter include:

• Cap rates for suburban multiple unit residential increased to 4.68%. The suburban multiple-unit residential cap rate increased by eight basis points quarter-over-quarter. Cap rates across all markets were mixed. Calgary, Toronto and Montreal remained unchanged. Ottawa, Quebec City and Halifax reported increases, while Vancouver and Edmonton reported decreases.

• Cap rates for single-tenant industrial increased slightly to 5.96%. The national industrial availability rate increased to 6.3% as conditions eased due to a short-term oversupply. Cap rates across all markets were primarily up. Edmonton and Toronto remained unchanged. Vancouver, Ottawa, Montreal, and Halifax reported increases, while Calgary and Quebec City reported decreases.

• Downtown Class “AA” office cap rates increased to 6.70%. The national office availability rate increased to a record high of 18.2%. Cap rates across all markets were primarily down. Calgary remained unchanged. Toronto, Ottawa, and Halifax reported increases, while Vancouver, Edmonton, Montreal, and Quebec City reported decreases.

• Tier I regional mall cap rates decreased to 6.28%. The Tier I regional mall cap rates decreased by 17 basis points quarter-over-quarter. Cap rates across all markets were primarily down. Edmonton was the only market to report an increase. Vancouver, Ottawa, Quebec City, and Halifax reported decreases, while Calgary, Toronto, and Montreal remained unchanged.

Barometer highlights

• Of the 128 combinations of products and markets covered in the Canadian Investment Trends Survey:

  • 51 had a “positive” momentum ratio (i.e., a higher percentage of respondents said they were more likely to be a buyer than a seller in that particular segment), down 15 from what was reported in Q2 2024; and 77 had a “negative” momentum ratio, up 13 from what was reported in Q2 2024.

• The top 15 products/markets which showed the most positive momentum were:

  • Calgary – Food-anchored retail strip, suburban multiple-unit residential, and multi-tenant industrial

  • Toronto – Multi-tenant industrial and food-anchored retail strip

  • Ottawa – Food-anchored retail strip, suburban multiple-unit residential, and multi-tenant industrial

  • Edmonton – Food-anchored retail strip and suburban multiple-unit residential

  • Halifax – Suburban multiple-unit residential

  • Vancouver – Food-anchored retail strip

  • Montreal – Suburban multiple-unit residential, food-anchored retail strip, and multi-tenant industrial

Conclusion

Relatively flat performance across Canadian CRE in Q3 of 2024 indicates that a momentum change can be slow-moving, even as inflation and interest rates trend downward. Nevertheless, the gradual reduction in borrowing costs and increase in investor confidence should lead to increased activity in the coming quarters.

View the Canadian CRE investment trends for Q2 2024

About our Canadian Investment Trends Survey (ITS):

Every quarter, senior Altus Group professionals reach out to over 300 investors, managers, owners, lenders, analysts and other market stakeholders to survey their opinions on value trends and perspectives. Conducted with the same benchmark properties for over 20 years, the survey provides valuable insights on investor preferences and valuation parameters for 32 asset classes in Canada’s eight largest markets.

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