As the economic road ahead appears to be smoothing out with the end of the pandemic lockdowns, in comes interest rates that are climbing along with inflation. Will this negatively impact the commercial real estate outlook in Canada?
According to some interesting data points, all of this is unlikely to be enough to dampen Canadian commercial real estate investors this year and beyond.
Interest rate hikes to have minimal impact on investment activity
Commercial real estate investment cap rates and volumes aren’t expected to be negatively impacted by Bank of Canada policy interest rate increases in 2022. There is the expectation that the country will see between two and five rate hikes throughout year. But the underlying strength of fundamental investments has strengthened the sector and it remains rather well insulated currently.
This positive outlook is also supported by the rate hikes of the previous period, in 2017 and 2018, when policy interest rates increased by 125 bps over that 15-month period. During this time, the national average cap rate figure compressed by 18 bps while the country set consecutive annual records for national investment volumes. Despite higher inflation and interest rate hikes coming into play, the strong economic backdrop represents an opportunity which is favourable for the real estate environment in 2022. Source: Canada Market Outlook 2022
Canadian GDP Growth
According to the Bank of Canada, this pace of economic growth is set for Canada to lead the Group of Seven (G7) nations in terms of GDP growth over the next five years. This data from the Bank of Canada shows the forecast for GDP growth.
Some Trends to Watch
Interest rate hikes are not expected to significantly impact investment activity and cap rates in the rest of 2022. Current investment fundamentals and the strong performance of the real estate market over the most recent period of interest rate increases each suggest that the sector is well insulated at this time.
While multifamily and industrial will continue to lead investment activity, the retail and office assets classes will see a return of capital and investor conviction, fueling a recovery to pre-pandemic activity levels for those sectors in 2022.
Canada will once again see record levels of investment activity in 2022. The continued strength of the top asset classes, the ongoing recovery in the retail and office sectors, and the return of large trophy asset sales and M&A activity should all contribute to a buoyant investment market going forward. The elevated activity levels will also lead to continued cap rate compression.
Demand and activity are building in cities across the country and capital continues to flow into the sector. Notwithstanding any new risks that may emerge, the main detractors to economic growth in 2022 including inflation, labour shortages and restrictive lockdowns, are all trending toward improvement throughout this year.