Mixed views for Canada CRE in Q4: Cost of debt improves, recession fears remain

Improving costs of debt, lingering recession fears

The latest installment of Altus Group’s Q4 Canada Commercial Real Estate Industry Conditions and Sentiment Survey (ICSS) shows a mix of positive and negative views on the market. On the positive side, respondents see a noticeable improvement in the cost of debt and a majority appear committed to being active buyers and/or sellers over the next 12 months.

On the negative side, those who think a recession could emerge in the near term ticked slightly higher from the prior quarter to 51%. That pessimism could be attributed to recent slowing economic growth. According to S&P Global, Canada’s GDP growth is expected to slow to 1.2% in 2024 before accelerating to 2.0% in 2025.

The survey questions explored both current conditions and future expectations, and this article shares additional details from Altus Group’s Research Team on key takeaways from the survey.

Stronger appetite to transact

One of the key findings of the survey is that respondents exhibited a strong desire to do deals. More than three-fourths of respondents (77%) said they plan to buy and/or sell assets over the next six months. That view is consistent with the 75% who held that view in the third quarter and up from 67% a year ago. Respondents also indicated greater interest in selling assets, with the percentage of net buyers that dropped from 26% in the Q3 survey to 19% in the Q4 survey.

Figure 1 – Over the next 6 months, do you anticipate any transactions in your portfolio?

Other notable shifts over the quarter were seen when looking at firm size. More than half of respondents from mid-sized firms (between $500 million and $5 billion) said they intend to buy in the near term. One in five respondents (20%) at the largest firms (greater than $5 billion) noted that they plan on only selling, which is up 11 percentage points from Q3 2024. Respondents from small firms are more likely to hold as 44% said they have no intent to transact at all in the near term.

Multifamily sentiment remains resilient

Respondents continue to favour multifamily. Nearly three-fourths of respondents (72%) expect strong performance in that sector over the next 12 months, a 3% increase quarter-over-quarter. In contrast, optimism for industrial properties has softened. The 55% who predicted that industrial would be a top performer declined 3% from the previous quarter and dropped 25% year-over-year.

Figure 2 – Properties expected to be the best and worst performing in the next 12 months

Respondents are less bullish on positive performance expectations for other property sectors. Trailing behind multifamily and industrial are senior housing (33%), retail (33%), and data centers (30%). Although there has been some improvement, office continues to dominate sentiment as the worst performing sector by a large margin. 83% of respondents have a negative view of the sector. Land and development came in a distant second with 35% who thought it would be the worst performer, followed by retail at 26%.

Cost of debt improves

CRE investors are beginning to see tangible results from interest rate cuts since the Bank of Canada began its rate-cutting cycle in June. According to survey respondents, the average all-in loan rates across the five main property sectors (hospitality, industrial, multifamily, office, and retail) fell by about 150 bps compared to the Q3 2024 survey for both 5-year and 10-year loans. The average interest rate on 5-year floating rate debt fell the most (-169 bps) to 5.95%, while both 5-year and 10-year fixed rate interest rates dropped 147 bps.

Figure 3 – 5-year floating rate (%)

Figure 4 – 5-year fixed rate (%)

Figure 5 – 10-year fixed rate (%)

Low-leverage multifamily loans (< 60% LTV) are securing the best rates at roughly 4.5% on 10-year fixed-rate debt and 5.3% for 5-year floating-rate debt. Higher-leverage retail properties (> 60% LTV) are commanding the highest rates on 10-year fixed-rate debt at 5.9%, while higher leverage office properties are averaging a high of 7.0% for 5-year floating-rate debt.

As context, research was conducted between October 9 and November 5 before the Bank of Canada’s 50 basis point rate cut on Dec. 11. More rate cuts are anticipated for 2025 as the central bank has eight rate announcements scheduled for 2025.

Reemerging recession fears

More respondents think a recession could be on the near-term horizon. Nearly half of respondents (51%) believe a recession could be either “somewhat” or "very likely" over the next 6 months. Although that ticked higher compared to 46% in Q3, it is still down significantly from the 78% who said a recession was likely in the Q4 2023 survey.

Figure 6 – How likely is an economic recession with the next six months?

Across different equity strategies, core fund participants reported the highest probability of a near-term recession, with 24% expecting it to be "very likely" and another 53% saying "somewhat likely". However, if a recession does materialize, most (54%) think it will be shallow and short-lived. Although the percentage who predict a short-lived recession changed little compared to the Q3 survey, those in the “long-lived” camp has been on the rise over the last four quarters. Those with core strategies are the most pessimistic, with 24% of respondents who believe a recession could be both severe and long-lived.

Figure 7 – What will be the depth and length of the next economic recession?

Cost concerns remain top priority

Costs continued to dominate the list of priority issues for Canadian CRE professionals. Cost of capital, development/construction costs, and operating costs ranked as the top three concerns, while housing costs/availability also ranked in the top 10.

Figure 8 – Priority issues over the next 12 months

The potential silver lining is that worries appear to be easing, which could indicate that respondents are either already seeing improvement or expect to see improvement ahead. Notably, the 56% who rated cost of capital as a top priority declined from 62% in the Q3 survey, and worries about development/construction costs as an issue also pulled back from 61% to 50%. Inflation concerns recorded the sharpest decline, down 14% quarter-over-quarter and 24% year-over-year to settle at 21%.

Housing costs and availability, however, saw the largest quarterly rise, with 32% of respondents identifying it as an issue, up 7% quarter-over-quarter. Other issues that gained prominence over the past year are local governance challenges, with concerns about zoning reform, taxation, and state/local regulations each increasing by 11%.

It will be interesting to see how top issues and overall sentiment for commercial real estate may shift in Q1 after President Trump takes office in January. The US is a key trade partner, and it remains to be seen how Trump tariffs will play out, with potential impacts on demand and supply chains.

A request for your participation

Our ability to share valuable market insights depends on the active participation of industry professionals like you. As we gather a diverse range of voices, the richness of the data deepens, allowing us to segment responses and paint a more detailed portrait of the industry’s collective outlook each quarter.

Your participation is instrumental in shaping the narrative of the commercial real estate landscape, please support this survey program by sharing your perspective on our next installment of the ICSS.

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