Key takeaways - CRE industry conditions conditions & sentiment survey - Canada Q1 2024 results

Perspectives amongst Canadian commercial real estate participants indicate some quarter-over-quarter shifts

Altus Group conducted a survey across Canada to provide insights into the market sentiment, conditions, metrics, and issues affecting the commercial real estate (CRE) industry. We are happy to announce that the Q1 2024 results for Canada are now available for download.

The survey captured the individual practitioner's perspective, representing various functions across the capital stack.

The Q1 installment of the Canada survey was conducted between January 23rd and February 9, 2024. There were 214 respondents, representing at least 55 different firms.

Questions in the survey focused on two main topics: current conditions and future expectations. Percentages used throughout the Canada survey results are representative of the share of all Canada responses received for each question, excluding “blank” or “not applicable” responses.

Download the results of the Canada Q1 2024 survey

View the top takeaways from the Q1 2024 results for the US

Target returns for new funds come down modestly

Targeted gross IRRs marketed for new funds and deals averaged at 10.8% for all property types in Q1 2024. This is a decrease of 78 bps from the previous quarter. The reported average gross IRR for the four main property types - retail, multifamily, office, and industrial - was 10.4%, down 9 bps from Q4 2023.

However, the hospitality sector saw the largest increase in reported midpoint IRRs, moving up by 288 bps to 12.1% in Q1 2024. Conversely, self-storage reported the largest quarterly decline in midpoint IRRs, with a drop of 250 bps to 10.7% .

Figure 1 - Canada survey results: What are typical ranges for the returns you are seeing across the current market for new funds?

Net expectations for capital availability up for all sources except banks

While the overall expectation is that capital availability is expected to remain low over the next 12 months, the net expectations have improved since Q4 2023. This improvement is based on the sum of responses for "extremely available" and "very available" less the sum of responses for "not very available" and "not at all available".

For sources of equity capital, survey participants indicated that they collectively expect the least amount of capital availability from REITs and asset managers – with net expectations of -24% and -16% respectively, a notable improvement from -39% and -24% in Q4 2023. Meanwhile, participants expect greater availability of equity capital from individuals / family offices and PE / hedge funds. The survey also revealed that securitizations, mortgage REITs, and insurers are expected to be heavily constrained, with net expectations of -30%, -21%, and -16% respectively.

Canadian CRE professionals expect debt funds and banks to have the greatest amount of capital availability over the next year, with 32% and 27% of respondents expect that capital will be "extremely" or "very" available, respectively. This is similar to the previous quarter's results. It's worth noting that Canadian bank capital availability expectations are quite different from those in the US (see the US results for more detail).

Figure 2 - Canada survey results: What are your expectations for the availability of capital over the next 12 months?

Capital concerns ease, cost concerns still top of mind

Cost of capital, development costs, and inflation topped the list of expected priorities over the next 12 months for the third consecutive quarter. Still, the percentage of respondents citing each declined slightly from the prior quarter.

Property-specific concerns such as operating costs / expense management and tenant retention rounded out the top five near-term priorities as a result of capital availability concerns experiencing a notable drop in Q1 2024 – from 45% to 36%. Leasing / tenant retention was the only concern among the top five that increased between Q4 2023 and Q1 2024, with the percentage of respondents citing this concern jumping from 30% to 36%.

Note: “Supply chain disruption or interference” and “Natural disaster or extreme weather risk” were added to the Q1 2024 survey, so a comparison to the prior quarter’s results was not possible.

Figure 3 - Canada survey results: Which of the following do you expect will be high priority issues for you professionally in the next 12 months?

ESG in need of investor or market demand

Nearly two in three Canadian respondents (63.2%) believe ESG needs “investor or market demand” for it to be more widely considered and incorporated by the CRE industry. More than half of the respondents identified "peer adoption or industry standards" and "regulation or legal clarity" as the next most popular responses, both with 51.5% of the responses. Overall, Canadian respondents appear to be more confident in the acceptance of ESG in the CRE industry than their American counterparts - as Canadian responses were higher across all options, except for "too much - ESG will never be fully incorporated into CRE", with 13.2% of Canadians and 21.8% of Americans agreeing with this statement.

Figure 4 - Canada survey results: What do you think it would take for "ESG" to be more widely considered and incorporated by the CRE industry