Canadian commercial real estate investment drops 25% in first half of 2023

21 September 2023 Consulting.ca 3 min. read
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Canadian commercial real estate (CRE) investment sales were down 25% from last year’s record figures, reaching $28.5 billion in the first half of 2023, according to a report from CRE services firm JLL.

The firm’s Fall 2023 CRE Outlook report described investment volumes as “buoyant despite high interest rates and a slowing economy.”

In the past year, Canadian real estate demand has weathered high interest rates through heavy immigration and the drawing down of pandemic-era savings. Although the economy has defied expectations of a 2023 recession, a slowdown is likely in 2024, according to a recent RSM report. Meanwhile, interest rates will remain elevated and could yet be raised if the Bank of Canada takes seriously its role of targeting 2% inflation.

Although CRE investment slowed by a quarter in H1 23, sales are still high by historical standards, JLL says. CRE investment has been primarily driven by private investors and family offices, who have accounted for approximately 60% of market liquidity in the past two years.

Canadian commercial real estate investment drops 25% in first half of 2023

The retail and hotel sectors saw strong investor interest in the first half, while office and land have been most challenged relative to their performance in recent years.

The office markets in Canada’s largest cities have seen a reckoning since the pandemic, with a certain amount of stickiness to remote work despite growing back-to-office initiatives. Toronto’s office vacancy rate stood at 14.2% as of Q2 22, up starkly from a pre-pandemic vacancy rate of approximately 2%.

Tenants are currently postponing decisions on office footprint as they wait for the other economic shoe to drop.

JLL’s report notes that predicted distress sales haven’t materialized this year. Distress sales in Canada peaked in the global financial crisis of 2009-2010 at 2.7% of total sales ($525 million) and during the Covid period of 2020-2021 at 2.6% of sales ($920 million). Distress sales in 2023 have been low by historical standards, at a rate of 1.6%.

Canadian commercial real estate investment drops 25% in first half of 2023

Meanwhile, retail investment has seen a rebound in the first half with $3.1 billion in sales, putting it on track to top $6 billion in sales for the second time since 2019. Investors have been putting more money into retail amid returning foot traffic and a desire to diversify beyond industrial and multifamily.

Industrial rent growth is slowing as demand normalizes from the peak of 2021-2022 and the construction pipeline hits record levels of 50.3 million square feet. As a result, the national vacancy rate rose for the third straight quarter to 1.9%.

On the residential front, multi-unit residential construction fell 16.7% year-over-year to $3.6 billion in July 2023 – pressured by high debt financing, material, and labour costs. In hopes of incentivizing more stock amid skyrocketing rents, the federal government announced its intention to drop the GST on future rental housing development.