Canada's largest real estate market is not alone in seeing investment activity weakening amid high rates
Commercial real estate investors are battling with high interest rates and economic uncertainty globally, and that’s reflected in Canada’s largest market.
Data from the Altus Group shows that the Greater Toronto Area experienced a 27% decrease in commercial investment activity in the second quarter of 2023 compared to a year earlier: Dollar volume dropped to $6.68 billion from $9.21 billion.
Industrial remained the bright spot with $3.39 billion in dollar volume, a 36% increase from Q2 2022, and the only segment to see growth. Availability in industrial units tightened to 1.3% from 2.3% a year earlier, putting upward pressure on rents and making the class more attractive to investors.
Although a large chunk of new industrial units hit the market in the quarter, unusually much of it was not pre-leased, but investors remained optimistic about the market.
For residential, there was a 44% year-over-year drop to $563 million and transaction volume was weakened by labour shortages and construction costs. However, demand for rental units is keeping investors’ sentiment positive.
Office investment transactions dropped to $414 million in Q2 2023 from $1.07 billion in Q2 2022, a 61% decrease as investors turned to other less volatile real estate areas and the return-to-office mandates eased, boosting office vacancies to 18.5%.
“The slowdown in market activity in the first half of 2023 will likely persist for the remainder of 2023 due to continued high-interest rates and a growing bid-ask price gap between sellers and buyers,” the report states. “Investment transaction activity is expected to remain low in the foreseeable future as investors continue to navigate a new high-interest-rate environment.”
The slower rate of activity in the GTA is not unique as a global picture of CRE investment activity reveals.
Schroders Capital Global Real Estate Lens August 2023 highlights that investment activity remains very subdued with volumes in major markets around the level last seen during the Global Financial Crisis.
The report shows that occupier demand for office and logistics space has seen a slight slowdown, but high-quality space is still in demand, most notably in the industrial/logistics sector.
Meanwhile, global private real estate fundraising has slowed dramatically during 2023 to date with Preqin registering $88.6billion of new capital raised through to the end of July compared to $188.4billion raised in 2022 and $224.4billion in 2021.