Article
Has Canadian Commercial Real Estate Investment Reached Bottom?
July 25, 2024 4 Minute Read
Residential real estate isn’t the only market seeing buyers and sellers stay on the sidelines due to higher interest rates.
Total Canadian commercial real estate investment volumes fell to $8.7 billion in the first quarter of 2024, a 32.8% quarter-over-quarter decline, according to CBRE’s latest Investment Overview. Relative to the same period last year, Q1 2024 investment volumes were marginally lower by 3.4% when excluding mergers and acquisitions activity.
This slowdown in investment activity brought total quarterly volumes down to their lowest level in over three years. However, we may also have the first clear sign of an inflection point: there were 1,555 transactions in Q1 2024, which is 5.4% higher year over year.
This increase in activity happened prior to the Bank of Canada’s first interest rate cut this cycle.
“It’s not a surprise to see commercial investment volumes muted in the face of sustained high rates coupled with a weak economy as evidenced by a 29-month high unemployment rate, among other challenges,” says CBRE Canada Chairman Paul Morassutti.
“The good news is that while it’s hard to call the bottom of a market it feels like we could be troughing and that investment activity is slowly improving. With interest rates moving downward, buyers and sellers should be in closer alignment and capital could be enticed off the sidelines.”
Here are some other report takeaways:
Office and hotel sectors buck downward trend
The office and hotel sectors recorded quarter-over-quarter increases due to two transactions of significant size. Office investment rose 5.0% quarter-over-quarter to total $947.9 million, stemming largely from the $300 million sale of two high profile Vancouver office buildings to Germany’s Deka Immobilien.
Hotel investment volumes surged to $669.5 million, boosted by the $465 million Morguard hotel portfolio sale, which was also the largest transaction in Canada for Q1, and the biggest hotel portfolio sale in four years.
The industrial sector remained the most active asset class in Q1, however, the pace of investment activity has dropped considerably. Industrial volumes totaled $2.6 billion over the quarter, representing a 45.5% decline from its three-year trailing quarterly average. Investment volumes for multifamily ($1.9 billion), retail ($1.4 billion) and ICI land ($1.2 billion) all moderated in Q1.
Private Canadian investors dominate
Private Canadian Investors were the most active purchaser group in Canada by a significant margin, accounting for 58.9% of acquisitions in Q1. The next most active purchaser group was Foreign Investors, whose share of activity moderated from last year’s elevated levels to make up 15.3% of investment purchases in the latest quarter.
For the third consecutive quarter REITs/REOCs have increased their share of investment activity in Canada, accounting for 14.7% of volumes in Q1. The remaining investment activity was shared among Private Equity (10%) and Institutional groups (1.2%).
Global capital inflows moderate
Global capital investment into Canadian commercial real estate moderated to $587.7 million in Q1 following the record pace set in 2023. Foreign investment activity in the quarter was led by the purchase of the two Vancouver office buildings by Deka Immobilien and InnVest Hotels’ share of the Morguard hotel portfolio sale.
Global capital inflows predominately originated from the EMEA region, which accounted for 52.8% of total foreign investment in Q1 2024. This was followed by the APAC region (34.9%) and the Americas (12.3%).
Most Canadian markets faced slowdowns
Amid softer overall investment activity in Q1, the distribution of investment capital by market remained largely stable. Toronto continued to be the top destination, recording $2.9 billion in volumes for 33.0% of the Q1 total. The next most active markets in Canada were Vancouver ($1.7 billion) and Montreal ($1.3 billion).
Nearly every market recorded quarter-over-quarter decreases in investment volumes in Q1, led by Halifax (-67.8%), Montreal (-41.7%) and Toronto (-37.9%). London was the only market to record a quarterly increase in investment volumes, supported by CAPREIT’s $130 million acquisition of the Alto Towers apartment properties.
“The investment market will continue to be challenged for the short term,” says Morassutti. “While no one expects a V-shaped recovery, we are starting to see some signs of movement that could become positive momentum. Other than office and the condo market, real estate fundamentals across the board are generally holding up.
“This should support higher investment volumes when buyers and sellers get their groove back.”
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