A YEAR FOR CAUTION, WITH BRIGHT SPOTS ON THE HORIZON

A senior economist with Mouvement Desjardins, Hélène Bégin remains cautious in her forecasts, but she sees the clouds gradually dissipating in 2023, which could be beneficial to the entire commercial real estate sector.

"You have to realize the importance of interest rates. They have considerable impact and remain a key factor in understanding the evolution of the market," she said, adding that this means keeping a close eye on upcoming decisions made by the Bank of Canada. For the moment she believes that the outlook is rather positive over the long term, for the moment at least.

She notes that the Canadian economy remains strong, with growth estimated at 3% for the first quarter. At the same time, the labour market is robust, even overheated, with wages rising by an average of 5%. But job creation is expected to slow. The number of job openings is already declining.

In addition, inflation is down. For the Bank of Canada, this is an encouraging signal," said the economist, "especially since energy and transportation costs are lower, which has contributed significantly to the rise in the consumer price index." Does that mean that the BoC may have an incentive to ease rates soon?

"In our opinion, it will keep them at the same level for the next few months, but the first cuts could occur later in 2023 and then continue, which would bring the policy rate down to 2.5% at the end of the following year," said Hélène Bégin. For the record, it is currently at 4.5%.

But all is not rosy. The specialist still foresees a "slight recession" in 2023 and points out that financing will remain difficult for players in the real estate sector. Still, it's important to distinguish between the different categories, whose prospects are far from uniform.

Office Sector Remains Problematic

''We are still feeling the impacts of teleworking," she said. "Remote work is helping to drive up availability rates, especially since tenants are still waiting to vacate space, which may add to the pressure."

That being said, Montréal and Québec City are doing quite well compared to other parts of the country, she noted. Recent data from Altus show that rates for Montréal and Québec City are 17.7% and 10.6% respectively, compared to 25% for Calgary, 14.7% for Toronto and 10.4% for Vancouver.

"The situation has deteriorated across Canada," she added. "Subleasing is up and leases are shorter, as if there is no commitment. That reduces current income for landlords, who are also seeing a decline in parking revenue, which used to account for 10 to 15% of their overall cash flow. The good news, however, is that there is lots of liquidity in the market, particularly for pension funds. Despite rising interest rates, that makes the challenge of funding easier.

Other Sectors In Adjustment Mode

Nonetheless, it is the commercial real estate sector that has been the most affected by the pandemic. Shopping malls have suffered greatly. The economist notes that many investors have had to adjust their strategies. "I think we've hit bottom and the situation will stabilize. Stakeholders are in caution mode right now, especially with the threat of a recession. But the situation will eventually improve."

On the other hand, the industrial sector did well. "We even witnessed an overheating. It should ease, and we're expecting a lull. Land is becoming scarcer and there is a lack of buildings. Here too, we are feeling the impact of interest rate hikes, but most likely that will not lead to a correction in this sector."

As for the multi-residential sector, it is changing. "We have gone from a situation where there were few products for sale, which drove up prices and suggested a quick capital gain for investors, to one where we must now focus on the long term, especially since this sector is more sensitive than others to interest rates. But in the meantime, rental income is available. However, the increased financing costs must be met. At the end of the day there are two camps: buyers with cash and those who need to borrow or renew their loans."

The fact remains that housing starts are down in all major urban areas of Québec, except in TroisRivières which is in the midst of a veritable boom given all the major battery material projects underway on the other side of the river in Bécancour, Québec's so-called Battery Valley.

What Lies Ahead

"The byword for 2023 is patience," said Hélène Bégin, "because of the unavoidable factor of interest rates. It will be more difficult if you have to refinance a property, but conversely, there will be good opportunities if you have liquidity."

For the time being, however, we should forget about quick wins without short-term value gains. "We don't expect many transactions in key sectors such as the office and commercial markets. Major players will stick to their guns."

It is thus a case of wait and see.