While Canadian rate cuts to date have helped contribute a little bit to investor confidence, Reading sees plenty of players and buyers still sitting on the sidelines. Those players know that more cuts are coming, and are therefore still waiting to meaningfully begin their buying activity because while rates are more attractive now, they should be even more attractive when the BoC hits its so-called ‘neutral’ interest rate.
Another area of concern for investors, Reading says, is the strength of the underlying economy. Weak performance over the past six months and an uptick in unemployment may introduce some new volatility into the market. Reading believes, though, that rate cuts should be enough to prompt enough of a rebound which, combined with an eventual stabilization in lending, should be enough to bring investor confidence up from its current cautious state.
Looking at multifamily housing, which was long a bright spot in CRE thanks to low supply and high demand, Reading notes that rent growth has slowed. Rent has hit such a high point as to be unaffordable in cities like Toronto and Vancouver, where rents are now slowing quite a bit. Interestingly, more affordable markets like Calgary and Edmonton are now seeing increased rents as people continue to migrate there from cities like Toronto and Vancouver. While rent growth has slowed, the fundamental drivers of population growth and low supply remain in place.
Industrial is another area where rental growth has slowed. After enjoying record pace of rental growth, Reading says there has been a plateauing. That said, the market continues to perform relatively well and managers are still finding opportunities in industrial. The same could also be daid for retail which Reading describes as ‘fairly healthy’ despite concerns about the job market, inflation, and interest rates.
Office has long been the black sheep of the CRE family but Reading points to some signs of renewal there. Vacancy rates are continuing to rise, but they are rising more slowly than they had in previous quarters. Class A offices are holding in better and Vancouver and Ottawa are currently outperforming. Toronto, Calgary, and Edmonton post less attractive vacancy rates. The hope, Reading says, emerges from the fact that office construction has slowed to a crawl. Some buildings are even being purchased for conversion to residential. That plus some bargain purchases may be enough to bring life back into the office market.