As of mid-2024, Canada’s real estate market navigated through significant economic turbulence. Factors such as high interest rates, inflation, and moderate economic growth have put pressure on the sector. However, despite these headwinds, certain real estate sectors—particularly multi-suite residential and industrial properties—are showing resilience. For investors seeking stability and long-term gains, understanding how to position their portfolios amid these challenges is critical.
Impact of Interest Rate Cuts
Interest rates have been a dominant factor shaping the real estate landscape. Over the course of 2022 and 2023, the Bank of Canada (BoC) raised its benchmark interest rate to 4.75% in a bid to combat rising inflation. However, with inflation easing and the economy slowing, the BoC has shifted its approach, implementing three consecutive rate cuts in 2024, bringing the benchmark rate down to 4.25%.
These rate cuts are a significant relief for investors, as lower borrowing costs improve the financial feasibility of acquiring new properties or refinancing existing ones. Investors in highly leveraged sectors, like multi-suite residential rental properties, benefit directly. While further rate reductions are expected in the latter half of the year, investors should plan for possible short-term fluctuations in borrowing costs and stay updated on BoC’s monetary policy.
Key Takeaway for Investors: With the trend of interest rate reductions, now is a strategic time for investors to lock in favorable financing terms, particularly for high-demand rental properties and industrial assets.
The Strong Performance of the Multi-Suite Residential Market
One of the most promising sectors in Canadian real estate is the multi-suite residential rental market. Investor confidence remains high due to steady demand for rental housing across major cities. Canada’s urban centers, particularly Toronto, Vancouver, and Montreal, have witnessed significant rent growth in 2024.
- Toronto: The average rent for a one-bedroom apartment has increased by 11.3%, with current prices around $2,300. This is driven by a surge in demand from a growing population and high immigration rates.
- Vancouver: Vancouver continues to have one of the highest rental rates, with a one-bedroom unit averaging more than $2,800.
- Montreal: Rental prices in Montreal have risen by 6.5%, a more moderate growth rate, but still indicative of strong demand.
This steady demand is fueled by affordability challenges in homeownership due to high housing prices, making rental properties an attractive option for many Canadians. Additionally, with immigration expected to increase, particularly in urban areas, the demand for rental housing will likely continue to grow.
Key Takeaway for Investors: Multi-suite residential properties offer a stable and growing market with the potential for solid returns, especially in high-demand urban areas. Given the lower interest rates and strong rent growth, now may be an opportune time to expand investments in this sector.
Industrial Real Estate
The industrial real estate sector has also emerged as a top performer in 2024. According to Morguard’s Economic Outlook, transaction volumes for industrial properties valued at $10 million or more increased by 48.1% across Canada’s major markets during the second quarter of 2024. This growth is largely driven by rising demand for logistics and warehousing facilities, as e-commerce continues to expand.
However, there has been a slight softening in leasing demand as new industrial projects come online. The increase in construction activity has led to higher vacancy rates in some markets. Nevertheless, long-term demand for industrial properties remains robust, especially in logistics hubs like Toronto and Vancouver.
Key Takeaway for Investors: The industrial sector continues to offer high growth potential, especially in logistics and warehousing, due to the ongoing rise of e-commerce. Investors should target areas with strong demand for industrial space and consider long-term trends such as supply chain optimization and warehousing automation.
Office and Retail Markets
The office market is gradually recovering from the pandemic-driven shifts in work models. In cities like Toronto and Montreal, office leasing activity has increased due to the pre-leasing of newly constructed office spaces with modern amenities. As more businesses look to attract employees back to physical offices, there is a growing preference for high-quality, amenity-rich office spaces.
However, the recovery is uneven. National office vacancy rates remain high at 17.1%, and the demand for traditional office space continues to evolve with the rise of hybrid work models.
The retail sector faces similar challenges. While leasing activity has improved as retailers seek premium physical spaces, overall retail property investment has slowed. E-commerce’s dominance continues to reshape the retail landscape, pushing brick-and-mortar businesses to adopt omnichannel strategies.
Key Takeaway for Investors: Office and retail markets offer opportunities, but investors should focus on premium, well-located assets that meet modern tenant needs. High-quality office spaces and prime retail locations in urban centers are likely to see stronger demand.
Preparing for the Future
While Canada’s economic growth has slowed due to external factors like forest fires and labor strikes, the real estate market remains resilient. Inflationary pressures are easing, and with further interest rate cuts anticipated, the market is poised for recovery in the second half of 2024.
Tips for Investors
- Monitor Interest Rate Trends: As the Bank of Canada continues to adjust its rates, staying informed on monetary policy changes will be critical for timing investment decisions.
- Focus on High-Demand Sectors: Multi-suite residential and industrial real estate are expected to outperform other sectors in 2024 due to high demand and strong fundamentals.
- Long-Term Strategic Planning: Given the uncertainty in the office and retail markets, investors should adopt a long-term perspective, focusing on premium, well-located assets that can withstand market fluctuations.
Sources:
- Morguard, 2024 Economic Outlook and Market Fundamentals
- Wealth Professional Canada
- Marketscreener, Investor Confidence in Canada's Multi-Suite Residential and Industrial Sectors
