Article
Paul Morassutti's 2023 Real Estate Outlook: Short-Term Bumps, Long-Term Positivity
March 7, 2023 4 Minute Read

Paul Morassutti opened his keynote at the CBRE Canadian Real Estate Market Outlook on a cautiously optimistic note.
“We are fundamentally very positive about Canadian commercial real estate but it also undeniable that the short term is going to be very bumpy,” CBRE Canada’s Chairman told a gathering of thousands at the Metro Toronto Convention Centre, the company’s first live in-person Outlook event in Toronto since 2020.
“This intersection of short term changes and longer term fundamentals is where most of the uncertainty lies.”
With better visibility around where interest rates are settling, however, Morassutti said pricing expectations will re-calibrate, deal flow will pick up and by Q3 and Q4, “we expect much more robust investment activity.”
Morassutti went on to explore each commercial property type in detail. He painted a complex, but encouraging picture of the year ahead, drawing attention to data and finer market details, and uncovering trends that don’t grab headlines.
Retail is still standing
The retail market is in good shape considering the ravages that COVID threw at it, Morassutti noted. “Investment activity has been fairly strong. Retail sales are up. Rents are up. Pure digital brands are moving into physical space and new retail concepts are emerging.”
And global sentiment for retail is quite strong. A recent CBRE survey indicates that 7 out 10 shoppers prefer the in-store experience over online.
“While it is widely assumed that younger consumers are highly engaged with e-commerce, Gen Zers are less likely to shop online than millennials,” said Morassutti. “Despite being digital natives, even the youngest consumers are choosing to shop in-store.
“So much for the death of retail.”
Office is evolving
Ditto the death of the office. Companies are learning that remote and ‘in real life’ are not binary choices, Morassutti said, “but in fact each reinforces the other.
“Our internal surveys indicate that offering flexibility provides an opportunity to build trust – a key ingredient of employee emgagement. And whether we are talking about pre-COVID or post-COVID, employee engagement is crucial.”
There will be a greater separation between high quality, highly amenetized office assets for which there will still be demand, and older, dated product. “Some assets, and some owners, will be left behind,” Morassutti said.
Some office buildings will get converted to much-needed residential housing, although Morassutti cautioned “that is no silver buillet. There are many reasons why conversions are difficult and in most Canadian markets government subsidies are required.”
Office buildings will have to include not just physical amenities but also more programming and activation and importantly, more service. “It is easy to change light bulbs and collect rent,” said Morassutti. “It is much harder to provide a differentiated offering that is compelling and engaging to tenants and employees.”
The coming years will see less office development, which is a good thing, Morassutti said, and what does get developed will be aligned with demand and modern sustainability requirements.
“The office sector is not dying it is evolving. We will build less of it. We will refurbish more. Remember that the greenest building there is, is the one already standing.”
Investor sentiment in regards to office assets remains weak and those dark clouds are unlikely to part in 2023. But operationally, things could look quite different a year out, Morassutti told the Outlook audience.
The tech sector will be healthier, recession fears will have abated and interest rates will be closer to coming down than going up. New supply will be less of an issue.
“There will still be challenges but we see an evolution of the sector rather than a revolution which is what some are pricing in,” said Morassutti. “Uncertainty is kryptonite to the real estate industry and unfortunately, the office sector still reflects a lot of uncertainty.”
Industrial Rent-Growth Party is Over
After 11 years of consecutive rental growth and an off-the-charts 2022, Morassutti said that, “many are wondering if the party might be over.” He noted that rental deceleration has begun in five Canadian markets and for the first time in eight years, new supply is finally outpacing net absorption.
In 9 out of 10 Canadian markets, vacancy rates are forecast to increase, a result of new supply completions and weaker economic growth.
However a deceleration in rental growth is not the same as declining rental growth,” Morassutti said, “and we are forecasting a year of growth well in excess of inflation.”
The industrial market is still strong – especially third party logistics leasing activity – and there remains runway for further rental growth, albeit not at last year’s pace. “We won’t see any records set this year – but that is not a bad thing.”
Multifamily Momentum Is Building
After a disruption in multifamily rental growth over the COVID period, rental growth has resumed as students flocked back to cities, immigration began flowing once more, and home affordability worsened.
Affordability is having both a positive and negative effect on the multifamily market, Morassutti said.
“Affordability is currently the worst it has ever been in Canada, with no region spared and with Toronto and Vancouver at the top of the list. Even as house prices have fallen affordability has not improved as interest rates now take a bigger bite of monthly carrying costs.”
While virtually everyone recognizes that new supply is the ultimate solution to this problem Morassutti suggested that the audience shouldn’t bet on a rescue anytime soon. “It is certainly encouraging that virtually every level of government is finally responding and there are good initiatives underway. But the chances of meeting the proposed target of 1.5 million new homes in Ontario over the next decade is somewhere between slim and none.
“We have to do more and there no easy solutions.”
This fundamental supply/demand imbalance is a very real concern to the average Canadian, Morassutti said. “No one wants Vancouver or Toronto to be become the next San Francisco.”
Recent Insights
-
Article
Remove GST To Solve the Housing Crisis, And Other Things Benjamin Tal Told CBRE’s Market Outlook
Eliminate the Goods and Services Tax on purpose-built rental projects and the development charges that go along with them.
Stay In The Know
Subscribe today and join hundreds of professionals who get the latest blogs delivered straight to their inbox.