Canadian CRE investment trends – Q2 2024

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The Canadian commercial real estate (CRE) market is off to a moderate start in the first half of 2024, as investors continue to navigate through the residual effects of elevated interest rates and sluggish economic growth

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 at 5.87% in Q2 2024 compared to the previous quarter at 5.83% (Figure 1). The cap rates are reflective of fewer transactions in Canada and the continued bid-ask price gap between buyers and sellers. The slowdown in transaction activity continued due to elevated interest rates and buyer and seller expectations. According to Statistics Canada’s Labour Force Survey, as of June 2024, employment remained virtually unchanged (-1,400, -0.0%). At the same time, the unemployment rate increased by 0.2 percentage points to 6.4% as population growth continued to outpace employment growth and as more people experienced difficulties finding employment in the current labour market. Gains in employment were noted primarily in accommodation and food services, as well as in agriculture. Meanwhile, losses in employment were led by transportation and warehousing, for the second consecutive month, as well as in public administration.

The Bank of Canada’s (BoC) bond rate, as of June 23, 2024, was recorded at 3.47%, increasing by 0.03 percentage points compared to the previous quarter, at 3.43%. As the BoC continued to focus on inflationary control measures with its 2% inflation target, the average OCR increased by 0.02 percentage points to 5.87% from the previous quarter. The average OCR for the 4 benchmark asset classes was primarily down, except for Tier I Regional Mall, which increased by 25 basis points. In 2024, the preference for multi-family, industrial, and food-anchored retail strip assets persisted, as they are supported by strong underlying demographic and economic fundamentals.

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

Commercial investment activity

The top three preferred markets for investors across all asset classes were Halifax, Vancouver, and Toronto, respectively. Vancouver and Toronto remained in the top three from the previous quarter; however, Halifax has claimed the top place after moving from second last in the previous quarter (Figure 2). Unlike the previous quarter, where the location barometer reported a mostly unchanged or negative momentum ratio, the second quarter of 2024 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 (Q2 2024)

The top three preferred property types by investors in the second quarter of 2024 were food-anchored retail strip, multi-tenant industrial, and single-tenant industrial, respectively (Figure 3). Tight market conditions have continued to drive the demand for these three property types, as markets continued to grapple with meeting long-term demand. Unlike the previous quarters, office and retail property types have begun to report positive, specifically with regional shopping centres, power centres, and downtown class “AA” office.

Figure 3 - Property type barometer – All available products (Q2 2024)

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

1. Food-anchored retail strip in Edmonton

2. Suburban multiple unit residential in Edmonton

3. Suburban multiple unit residential in Calgary

The 15 least preferred combinations largely revolved around class B office and office land assets. Challenges created by elevated interest rates and underlying inflationary pressures have led investors to rebalance their portfolios with low-risk assets providing stable returns, such as residential, industrial and food-anchored retail.

Figure 4 - Product/market barometer – All available products (Q2 2024) – Top 15 preferred and 15 least preferred

Market highlights for the quarter include:

• Cap rates for suburban multiple-unit residential decreased to 4.60%. The suburban multiple-unit residential cap rate decreased by 0.04 percentage points quarter-over-quarter (QoQ). Cap rates across all markets were mixed. Vancouver, Edmonton, Ottawa, and Montreal remained unchanged. Calgary and Toronto reported increases, while Quebec City and Halifax reported decreases.

• Cap rates for single-tenant industrial increased slightly to 5.87%. The national industrial availability rate increased to 5.8%, the highest since Q2 2016 at 5.7%. Four of the eight major markets experienced no change in their cap rate QoQ, except for Calgary and Toronto, which saw an increase, and Quebec City and Halifax which saw a decrease.

• Downtown class AA office cap rates decrease to 6.58%. Cap rate trends were primarily mixed across the major markets. Vancouver, Montreal, Quebec City, and Halifax reported increased cap rates. Edmonton, Calgary, and Ottawa cap rates were down, while Toronto remained unchanged.

• Tier 1 regional mall cap rates increased to 6.45%. Most major markets experienced an increase in their cap rates QoQ, except for Edmonton and Toronto, which remained unchanged.

Barometer highlights include:

• Of the 128 combinations of products and markets covered in the Canadian Investment Trends Survey for Q2 2024:

  • 64 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), up fourteen from what was reported in Q1 2024; 64 had a “negative” momentum ratio, down fourteen of what was reported in Q1 2024.

    
    

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

  • Calgary – Suburban multiple-unit residential

  • Toronto – Multi-tenant industrial

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

  • Quebec City – Food-anchored retail strip, multi-tenant industrial, and single-tenant industrial

  • Edmonton – Food-anchored retail strip, suburban multiple-unit residential, and single-tenant industrial

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

  • Vancouver – Food-anchored retail strip, multi-tenant industrial, and single-tenant industrial

View the Canadian CRE investment trends for Q1 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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