CBRE Canada President and CEO Werner Dietl recently sat down with Vice Chairman Paul Morassutti and CIBC World Markets Deputy Chief Economist Benjamin Tal for an update on the current state of Canadian commercial real estate and where the market is headed in the second half of the year.
Here are some key takeaways from their discussion:
1. OPTIMISM IS BUILDING
Morassutti noted that REIT performance and Dow Jones indexes are up by double digits over 2020, and that property fundamentals and asset values have been steadily improving. “Everyone is looking forward to the second half of the year.” Capital markets had one of the strongest first halves for investment in five years, “and it looks like we’re tracking towards one of the best years we’ve ever had. That’s remarkable.” Issues remain, Morassutti said, “but the mood is improving and the entire market believes that Q3 and Q4 will be even better.”
2. Consumers are ready to spend
Tal agreed, saying that the second half of 2021 will be “on fire” as cities re-open and pent-up demand is at long last released. Canadian households who had been stuck at home are sitting on nearly $100 billion of excess cash and businesses are sitting on another $130 billion of excess cash, Tal noted. “The finance minister asked me what we can do to get them to spend. I said, ‘Provide them with the vaccine and get out of the way! They don’t need any encouragement.”
3. Inflation is hard to predict
As spending ramps up, the risk of inflation rises too. But it’s hard to predict where inflation will be in six months and Tal said the biggest mistake policymakers could make is taking too long to correct for it. “The risk we’re facing is that the Bank of Canada will wait until inflation goes down to raise interest rates, and then it doesn’t go down, then they realize we’re behind the curve because it’s a lagging indicator. Then they raise rates to catch up to a lagging indicator. That’s the history of real estate crashes: central bankers overshooting. The earlier they move the better.”
4. Industrial demand runs deep
Dietl, an industrial broker years before he was running CBRE in Canada, noted that industrial lease rates and land prices have accelerated over the past year and a half in a way the market has never seen before, with all major markets seeing a supply and demand imbalance. “We’re in uncharted territory when it comes to forecasting for the industrial market,” he said. “We’ve been looking at new models where industrial rental rates could go well into the mid-teens per square foot net. But we do think there’s depth of demand still, given how low vacancy has gone.”
5. Office use will evolve over a decade
There’s been so much talk about the impact of remote work on the future of office, Morassutti said, that observers have become fixated on the issue to the exclusion of almost everything else when most leases are locked in for the next decade. For a major office centre like Toronto, the bigger variable influencing market performance will actually end up being an excess of new supply. “We have 9 million sq. ft. of office space hitting the downtown market in the next few years,” he said. “This will be a far bigger issue than back to work strategies.”
Watch the whole conversation between Dietl, Morassutti and Tal below:
Canadian Market Update 2021 Recording - July 22, 2021
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