Another downward adjustment in the Bank of Canada’s overnight lending rate is touted as a positive signal for commercial real estate even though there is still some way to go to reach what’s considered a neutral level around 3 per cent. The newly announced 0.25 per cent cut takes the overnight rate down to 4.5 per cent and follows one month after a previous 0.25 per cent reduction.
In announcing its decision, the central bank reiterated that the inflation rate is expected to drop to roughly 2.5 per cent in the second half of 2024 and then continue downward to a 2 per cent target next year. With that, ongoing interest rate cuts are foreseen. For now, practical impacts on the cost of debt aren’t expected to flow through to the market for a few more months, but economists suggest the apparent momentum of falling rates should provide a psychological lift for investors.
“An interest rate cut changes expectations for where interest rates are going, which influences the decision-making process,” maintains Peter Norman, vice president and chief economist with Altus Group. “The pace of rate cuts is important. Successive rate cuts signal the Bank of Canada is no longer holding and is moving quickly towards bringing interest rates back into balance, which inspires optimism in the market moving forward.”
Recent results from Altus Group’s second quarter survey of commercial real estate trends in Canada reveal that nearly half of respondents (49 per cent) expect that all-in interest rates will decrease over the next 12 months. As well, 31 per cent foresee greater availability of capital at a lower cost, 36 per cent anticipate an uptick in attractive investment opportunities and 46 per cent expect more investment transactions will occur. Although 55 per cent of respondents predict increasing levels of credit distress in the coming year, that’s a more tempered outlook than during the first quarter of 2024 when 61 per cent foresaw that scenario.
Looking at actual market conditions (during survey dates from late March to the end of April), all-in financing costs were reported to have increased over the previous quarter for industrial, multifamily, retail and office properties, while dropping for hospitality properties. Maximum loan-to-value ratios for debt financing were deemed relatively on par with the previous quarter, but climbed about 5 per cent for office properties, while dropping about 2.5 per cent for multifamily properties.
Half of the respondents suggested their firm would mainly focus on managing its existing portfolio throughout the third and fourth quarters, while 18 per cent expected an emphasis on deploying capital and 15 per cent anticipated a focus on raising capital.
“We have moved from a period of an increasing rate to one of holding rates, and now it looks like to one of lowering rates,” Robert Santilli, a director of valuation advisory with Altus Group, observed during a recent webinar exploring the survey results. “This is going to spur more deal activity. There are some groups that want to get in to ride another cap rate cycle.”
