Special to Canadian Design and Construction Report
The Canadian real estate market experienced a year of adjustments and mixed performance in 2024, as interest rate cuts and fluctuating economic growth influenced various sectors.
According to the Morguard Canadian Economic Outlook and Market Fundamentals 26th Annual Edition, the Bank of Canada accelerated its interest rate cutting cycle in the fourth quarter, responding to weaker-than-anticipated economic performance. However, the real estate sector demonstrated resilience in several areas, with some sectors outperforming others.
The policy rate stood at 3.25% at the end of 2024, following significant cuts in October and December. The policy rate was reduced by 1.75% between June and the end of 2024. The accelerated rate-cutting pace was driven by weaker economic performance, with Canada’s economy expanding at an annualized rate of 1.0% in the third quarter, lower than the bank’s forecast.
These lower interest rates were intended to stimulate consumer spending and residential investment. The report anticipated that housing sales and home renovation spending would increase, and business investment and export activity would also rise.
Canadian consumer price inflation stabilized in the fourth quarter, with the Consumer Price Index (CPI) rising by 2.0% year-over-year in October, followed by a slight decline in November. Excluding the volatile gasoline spending category, CPI rose by 2.2% and 2.0% in October and November, respectively.
However, the high cost of food remained a challenge, with prices for food purchased from stores rising by 2.7% in October and 2.6% in November. While shelter costs continued to rise, mortgage interest costs saw a more modest increase, and rental prices increased by 7.7% in November. Looking ahead to 2025, consumer price growth is expected to increase with the implementation of U.S. tariffs.
Canada’s S&P/TSX Composite Index posted a modest gain in the fourth quarter, capping off a strong year. The index posted a 3.0% gain for the fourth quarter and an 18.0% return for 2024. Information Technology outperformed with a 2024 return of 32.5%. Financials and Consumer Staples also posted bullish results. Real Estate eked out a 1.7% gain for the year.
Investment market activity in Canada’s commercial real estate sector remained moderate in the fourth quarter. Approximately $3.8 billion of total transaction volume was reported, down approximately 8.0% quarter-over-quarter and 34.5% year-over-year. Changes in transaction volume varied by property type. Office sector investment sales rose by 89.0% quarter-over-quarter to $811.7 million, while industrial property investment sales increased by 27.0% to $1.6 billion. Multi-suite residential rental asset sales fell by 45.0% quarter-over-quarter to $966.7 million.
Institutional groups were relatively inactive, with private capital continuing to account for a large portion of investment property sales. Bid-ask spreads remained relatively wide in certain market segments, reducing sales volume. Industrial, retail, and multi-suite residential rental property values were relatively stable, while office valuations continued to fluctuate. High-quality investment offerings with tenants on long-term leases were generally well-received.
Sector-specific highlights
Multi-Suite residential: Investment sales volume dipped in the fourth quarter, following a 10-quarter high in the previous quarter. Approximately $966.7 million of transaction volume was recorded. The decline was mainly due to product availability rather than reduced demand, with investors remaining confident in the sector.
Industrial property: Sales increased modestly, with fourth-quarter transaction volume of $1.6 billion, up 27.0% quarter-over-quarter. Industrial property investment offerings have been well-received, with buyers focused on high-quality warehouse and logistics space.
Retail investment: The retail property investment market remained relatively subdued. Sales volume was $424.6 million, lower than the medium- and long-term quarterly average. Institutional owners focused on value creation in existing portfolios, with a small number of significant sales reported.
Office leasing: The office leasing market’s performance was underwhelming, with activity levels falling short of pre-pandemic peaks. A second consecutive quarter of negative net absorption was recorded, offsetting gains from the first half of the year. The national vacancy rate remained at a more than two-decade high of 18.7%. Tenants preferred premium-quality towers with strong amenity offerings, and landlords offered incentives to attract tenants.
Industrial leasing: New industrial supply continued to exceed demand. Almost 14.6 million square feet of new supply was delivered, while demand, measured by total net absorption, was 4.9 million square feet. The national availability rate stood at 4.8%.
Residential rentals: Average monthly asking rents leveled off in the fourth quarter. The average asking monthly rent reported by Rentals.ca for December was $2,070, a 0.3% year-over-year increase. Rental demand had slowed, and Federal government immigration targets had been reduced.
Retail construction: Construction activity in the retail property sector remained muted. A modest 828,000 square feet of new supply was projected for completion, following 2.0 million square feet delivered in the previous quarter. Financing challenges, high construction and labor costs, and an uncertain economic outlook have negatively impacted retail development activity.
Economic activity and labour markets
Canada’s economy began the fourth quarter with a growth uptick, with economic growth rising 0.3% month-over-month in October. Goods-producing output rose by 0.9% in October, with modest advances in manufacturing and construction.
Canada’s labor market ended 2024 on a high note, with employment rising by 51,000 and 91,000 positions in November and December, respectively. The national unemployment rate edged down to 6.7% in December 2024. Wages continued to rise, with the average hourly rate increasing by 3.8% year-on-year in December.
Housing market performance
Canada’s resale housing market performance was uneven in the fourth quarter. BofC interest rate cuts supported increased sales activity in the fall, with transactions climbing to a near all-time high in Edmonton and positive sales momentum in Montreal. However, resale transaction volume fell in Calgary and Toronto between November and December. Despite reduced activity in some markets, modest upward pressure on values was reported in several major urban centers.
This story was developed with Artificial Intelligence assistance from Gemeni.Google.com. Mark Buckshon edited it.
