Lower interest rates driving industrial real estate acquisition in Canada

Lower interest rates have helped boost industrial acquisition in Canada in recent months, according to a report from Avison Young, a commercial real estate services firm.

The low-interest environment of 2020 and 2021 saw significant growth in industrial owner-occupier acquisition volume, peaking at nearly $2.5 billion in 2021, the firm says. A series of interest rate increases from March 2022 to July 2023 – aiming to quell runaway inflation – peaked at 5% and drove down sales volume.

Activity has picked up again since the Bank of Canada began cutting rates last June. And although more favorable financing conditions stimulate transactions, a significant rise in industrial rents (82% cumulative since 2018) has made the owner-occupier option more attractive.

The most recent cut brought the BoC interest rate to 3%, which is good news for those looking to finance acquisitions. However, Avison Young says today’s landscape is very different from 2021, with significantly more options to lease quality industrial premises. And although rents are high, they declined 1.7% from last year’s peak.

Critically, the threat of US tariffs – currently on pause but as yet unresolved – would upend Canada’s manufacturing sector. That uncertainty may entice more companies to seek the flexibility of a lease.

As for the trend of interest rates, BMO is forecasting the interest rate to further drop to 2.5% by year-end if there are no tariffs. If American tariffs are enacted, the BoC is projected to drop rates more aggressively to 1.5% to respond to a probable recession. However, broad-based 25% tariffs would also drive a massive increase in prices for the average consumer, leading to a nightmare scenario of economic stagnation paired with inflation – or “stagflation.”