Inflation and interest rates will continue to dominate the commercial real estate sector in 2024, say experts in the field.
Those economic forces will keep activity in most classes of commercial property slow at least through the first half of next year, they say.
“Early 2024 is the bottom of the trough of the marketplace,” predicts Alan MacKenzie, chief executive officer for JLL Canada. “As we progress through 2024, we’ll see a reasonably decent uptick of capitalization activity, trades, leasing and by 2025, the start of a full recovery.”
But recovery speeds will vary according to quality, geography and the type of property, says Brian Kriter, executive managing director, valuation and advisory for Cushman & Wakefield Canada.
“Once we get [past] inflation and interest rates,” says Mr. Kriter, investors will be looking for “income resiliency.”
Properties with contracted and durable cashflow will do best, he adds.
The industrial property sector will remain strong, say the experts, even as supply and demand begin to even out.
Allison Marsales, executive managing director and managing principal, Toronto Central, at Cushman & Wakefield Canada, says her firm remains bullish on industrial property for the coming year.
She says the sector is just coming off a supercharged cycle; now, supply and demand are at an equilibrium in Vancouver and supply is starting to meet demand in Toronto. In third quarter 2023, demand outpaced supply in Calgary, the only bright spot in the Calgary commercial sector, says Ms. Marsales.
In the greater Toronto market in early 2023 there were 21 million square feet of industrial space in the pipeline to be delivered over the next 24 months, she adds. With more supply, renters will have some breathing room to make good decisions, she says.
Vancouver, with its geographical limits on industrial development expansion, will see increasing rental rates, says Ms. Marsales.
Mr. MacKenzie also sees the trend toward balancing supply.
“In Canada, 53 million square feet of constructed warehouse has opened up for business in the last 24 months. That has put a little bit of downward pressure on rents….So 2024 will be similar to the second half of 2023 – increased supply, decreased demand, prices will continue to rise but at a slower pace,” says Mr. MacKenzie.
The boom in industrial has resulted in increased activity outside the major metro markets, but that could change in 2024, he says.
For instance, he says, there has been a lot of demand over the past 24 months in the southwest Ontario region, but that demand is now pulling back.
Raymond Wong, vice-president of data solutions client delivery for Altus Group, says vacancies began to flatten out a bit in third quarter 2023 in the office sector. Calgary, the market with the highest vacancy rate, came down slightly to 23.9 per cent.
The troubled sector has continued to struggle as businesses work through post-pandemic office space needs.
Vancouver and Toronto will have some challenges as new office supply comes on in the next 12 to 18 months, says Mr. Wong, which will push vacancies higher. Toronto has six million square feet under construction, with 55 per cent of that pre-leased, and Vancouver has just under five million under construction, also with 55 per cent pre-leased, he says.
Montreal has 1.6 million square feet coming on, with 70 per cent of that pre-leased, he adds.
“Once these buildings are complete, I don’t see a lot of construction commencing in the next 12 to 18 months, especially with business still trying to figure what the right amount of space is needed,” says Mr. Wong.
Mr. MacKenzie says these brand new buildings will not be the ones at risk in 2024, but it will be a year when the owners of B and C class office assets need to decide whether to put money into their buildings to attract and keep tenants or allow the buildings to dilapidate.
Ms. Marsales predicts there will be an increase in the volume of leasing transactions in the coming year.
“The pause button for a lot of companies has been released. Companies are feeling more confident in making decisions,” she says. “They are more confident in what their return to office is going to look like and how they will be utilizing that space.”
That said, she warned this won’t necessarily correlate to growth in the sector because there are so many variables in the office market. There are economic headwinds out there and real estate is a big number on the balance sheet.
There has been a fair bit of discussion about conversion of vacant office space to residential use in Canada, with Calgary leading the way, thanks to municipal subsidies to kickstart developments.
But experts warn that conversion doesn’t work for every building and the cost of conversion to residential may outweigh the rents a residential property can command.
Mr. MacKenzie says there are a number of owners who have been evaluating the potential for conversion in the past 24 months who will make the decision in 2024.
“The high price of capital, high price of conversion and imperfect delivery of the final product oftentimes creates a profitability wedge, he says.
Mr. MacKenzie says the retail sector has been a healthy sales and leasing market, and investors have been active buying and selling assets.
“We predict the capital markets will be active in 2024 in the retail space,” he says.
He notes one recent trend has seen institutional investors selling down their retail assets to private high-net-worth buyers. While 10 to 20 years ago those non-institutional investors were buying assets in the $5-million to $20-million range, they are now buying $100-million portfolios and assets,” says Mr. MacKenzie.
Mr. Kriter says large, enclosed malls in downtown city centres are seeing some improvement and tourism activity is helping that trend.
Mr. Wong adds that retail investment is not far off 2022, with demand for brick-and-mortar shopping opportunities picking up. But he notes there will be some repositioning in 2024, given recent events such as the withdrawal of the Nordstrom department stores from Canada.
Ms. Marsales says retail will be affected by the contraction of discretionary spending created by inflation. Grocery stores will see a net benefit from people cooking at home rather than eating out at restaurants, she says.
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.