CBRE: Soft Landing for Canada's CRE in 2023

Canada’s commercial real estate market will execute a soft landing later this year, as large investors return to the market in the wake of the Bank of Canada’s pause in interest rate hikes, according to a new report from CBRE.

CBRE projects that Canadian CRE investment could reach a record high of more than $44B in 2023—at the very least it is expected to be equal to or greater than the totals in each of the past two years. However, CBRE cautions that the near-term looks “bumpy.”

Canada’s CRE market took a roller coaster ride in 2022, setting investment records in H1 2022 and then—after eight consecutive rate hikes by the central bank, which had told everyone it wouldn’t raise rates before the end of the year—the pace of CRE investment slowed considerably in H2 2022.

CBRE’s Canada Real Estate Market Outlook report, released this week, predicts headwinds, including tougher financing conditions and a potential economic slowdown, will “weigh on” investment in the short term, but Canada won’t see more than a mild, “technical” recession.

“2023 will see higher costs of capital impact asset values. However, there is likely more good than bad to come,” CBRE’s outlook said.

“A soft landing is expected where the economy should see a technical recession while still being positive on the balance of the year. Capital market volumes are expected to rebound in the spring, interest rates will be closer to going down than up, and the continued growth of the digital economy will only benefit Canada,” the report said.

CBRE defined “technical recession” as “a few quarters of near-zero growth.” Despite their assessment that rates will continue to remain elevated in Canada and a slowdown is developing, CBRE expects that investment volumes will remain brisk.

“Investment volumes for 2023 are anticipated to reach similar levels as seen over the last two years as interest rate and economic uncertainty eases,” CBRE said.

CBRE said cap rates increased in Canada in 2022 for the first time in nearly 14 years, but “the speed and magnitude of the increase so far has been much more muted” than in 2009; the national average all-properties cap rate rose just 49 bps to 6.02, which also is well below the peak in 2009.

“In 2023, cap rates are expected to rise further to accommodate the higher cost of debt and bring real estate spreads closer to historic norms, but the upwards pressure will be mitigated by continued market strength in certain sectors,” the report said.

“The continued yield increases will not be uniform across asset classes as strong market fundamentals in certain segments, namely multifamily and industrial, will offset some of the upwards pressure on cap rates,” the report added.

What the brokerage called a “fragmentation” of CRE markets in 2023 “will likely lead to wider variation in performance among asset classes than ever before,” the report said.

CBRE expects the Bank of Canada to hold interest rates, which rose 425 bps in less than six months in 2022 to a 15-year high of 4.5, at their current elevated levels until inflation—now about 6%–falls to the BOC’s 2% target.

In part, CBRE’s rosy scenario for commercial real estate is a reflection of its assessment of the long-term strength of the Canadian economy:

“Across key indicators including population, GDP and employment growth, Canada is set to lead the G7 nations over the coming five years,” the report said.

Canada’s population is expected to grow 14% over the next five years and its GDP is projected to grow 2.2%, while the projected G7 averages are 0.3% and 1.6%, respectively.