Commercial real estate still facing headwinds amid lower rates: expert

Panellists Earl Davis, Ed Devlin and Warren Lovely share their analysis on the BoC's rate decision amid economic volatility.

Commercial real estate still faces headwinds after the Bank of Canada’s move to lower interest rates, according to some experts, with others expecting the move to spur increased transaction activity.

The Bank of Canada moved to cut its key policy rate by 25 basis points to three per cent Wednesday in a move that was anticipated by markets and economists tracked in a Bloomberg survey, according to Bloomberg News. However, the central bank also dropped its guidance on any future changes to its key policy rate amid tariff threats from the U.S.

Kevin Meyler, a partner and national leader of business restructuring and turnaround services at BDO Canada, said in an interview with BNNBloomberg.ca Wednesday that the rate cut was not a surprise.

“I think the impact is that there’s still a tremendous amount of uncertainty there. I think commercial real estate has been challenged for some time, so I think that this is kind of built into the pricing. I think commercial real estate is still going to have some headwinds and struggles,” he said.

“Not only just the general state of consumers in Canada, but also the impact of (a) change in administration in the U.S., the tariffs, I think probably people are going to still be waiting a bit to understand more fully the impact of that.”

Meyler’s comments come as the central bank has made strides to get inflation within its target range. However, Bank of Canada Governor Tiff Macklem highlighted that a tariff war would push inflation higher in Canada.

Mark Fieder, the principal and president of Avison Young Canada, said in a statement to BNNBloomberg.ca Wednesday that while the rate cut is “welcome news” for commercial real estate, investors considering stepping off the sidelines.

He added he is monitoring economic conditions and acknowledges a “degree of risk and uncertainty ahead due to the possibility of tariffs imposed on Canadian goods by the U.S.”

“We remain optimistic about a longer-term bull run going into the last half of the year, stimulating appetite and capital allocation in such asset classes as industrial and multi-family,” he said.

According to Meyler, the commercial real estate sector faces other headwinds, specifically high vacancies in buildings amid lingering impacts from hybrid working arrangements brought on the by the COVID-19 pandemic.

Meyler also highlighted that while borrowing costs have come down rates are still higher than before the pandemic, which he said still challenges some companies. Additional conversations around tariffs and broader impacts to the economy could also weigh on the retail industry if consumer confidence is shaken, he said.

‘Improving investment landscape’

Adam Jacobs, the head of research at Colliers Canada, said in a statement to BNNBloomberg.ca Wednesday that many potential investors in the commercial real estate industry are taking a “wait-and-see approach” amid the current geopolitical circumstances.

He added that the market is experiencing smaller deals, an increase of private investors and “the return of owner-occupier purchases from governments and hospitals.”

“Borrowing costs have not changed significantly over the last year, despite five, now six, rates cuts from the Bank of Canada. The commercial property investment market has come down from all-time highs in 2021-22, and now is at historically normal levels,” Jacobs said.

Michael Tsourounis, a managing partner and chief investment officer at Hazelview Investments, said in a statement to BNNBloomberg.ca that he is optimistic about the Canadian real estate market due to “favourable foundational fundamentals.”

However, he added that higher short-term interest rates used by the central bank to drive inflation lower weighed on property values.

“This rate cut will continue to support an improving investment landscape we’re starting to see in Canadian commercial real estate. Lower borrowing costs will improve liquidity, and we anticipate increased transaction activity, especially in sectors like multi-family and also help to improve conditions to add much needed housing supply,” Tsourounis said.

Purchasing opportunities

Given the current conditions, Meyler said there is an opportunity for firms looking to acquire real estate.

“I think that there are a number of properties that are coming up for sale, because…the still higher than normal interest rates might not make it economic for a weaker balance sheet company. But (for) companies with significant capital and that are patient, I do think there are acquisition opportunities,” he said.

Long term outlook

Meyler said that while the real estate market faces headwinds over the short and medium term, he thinks investors should look at the longer term and “accept they’re not looking at an immediate run.”

“I do think there’s a finite amount of real estate….I have to believe it will rebound. Historically it traditionally has. So I do think it’s an opportunity. And I think if it’s priced right, they may want to look at it right,” he said.

Meyler said that while he thinks the sector will rebound, he is unsure of where prices will go from here.