Nick Renton, William Wright Commercial – On October 23, 2024, the Bank of Canada (BoC) reduced the policy rate by 50 basis points, lowering the overnight rate to 3.75%. This marks the fourth consecutive cut by the BoC, reflecting an intent to stimulate the economy as inflation cools. With further rate reductions anticipated into early 2025, the BoC aims to boost economic activity across all sectors, including commercial real estate. With the sheer velocity of rate movements by the BoC over the last 5 years, how has the Canadian commercial real estate market been impacted and what can we expect moving forward?

In March 2020, the BoC’s overnight rate fell to a historic low of 0.25% as we began the long march through the pandemic. By July 2023, rates were increased to 5% to stem the rapid rise of “transitory” inflation and bring household spending down. Now that the BoC appears to have achieved their 1-3% inflation target, they are taking their foot off the gas pedal and consequently, we may see a comparatively high velocity shift in rates downwards.

Unfortunately, I believe this policy change has come too late in the cycle and many good businesses and developers may be consolidated as a result. Moreover, a reduction in rates does not make immediate impacts to economic demand. There will be continued compression on commercial real estate assets, especially products with high supply, such as the industrial and office markets.

As a former commercial lender, the items I discussed with my clients in each financial review were:

1. How can I help you in the current stage of your business/investment planning?
2. How can I help you in the next stage?
3. What is your current access to capital to accommodate 1 and 2?

When interest rates rise, access to the right capital becomes more of a challenge and can limit expansion opportunities, cashflow protections, and inputs into the economy. Those who have available capital will invest it into safer assets with predictable returns as opposed to taking on riskier projects and investments. This can impact commercial real estate dramatically, as developers stop building, factories stop producing, warehousers reduce inventory, and consumer spending declines.

In Kelowna, we saw several projects that had completed initial phases of their developments postpone the build of remaining phases or pull the plug entirely. Specifically, in the industrial market, we saw several projects that had sat vacant throughout 2023 and 2024 re-enter the market with reductions in price and large incentives to draw tenants and buyers into the projects. Additionally, BC has seen a large hit to the hospitality, tourism, and viticulture industries, with sales of assets and closures of businesses leading into the end of 2024. Reports indicate that up to 10-15% of the province’s 15,000 restaurants may shutter by mid-2025.

When interest rates fall, as we’ve seen in the last half of 2024, access to the right capital begins to ease, allowing for more trust in the direction of the economy. Canada’s chartered banks are indicating reductions in rates to as low as 2.25% by the end of 2025, which would be welcome news to most commercial real estate assets. Our William Wright offices throughout BC have already seen increased inquiries across all asset classes. We are also hearing from our development partners across Canada, who are asking for new opportunities and are revisiting sites that may not have penciled out over the last 24 months. What will be important to watch now is how the BoC will manage its expansionary policy decisions to ensure that inflation is not reignited, leading to another rollercoaster of rate decisions over the coming years.

As a commercial real estate broker, the items I discuss with my clients have now shifted to:

1. Is your current property the right fit for your business/investment needs today?
2. How do we protect your business/investment through appropriate planning with your professional team.
3. How do we help you expand your commercial real estate portfolio moving forward?

I am hopeful that with falling interest rates, these questions can be answered with more confidence and predictability, which will encourage stimulus in economic outputs throughout BC and Canada. While headwinds are still prevalent, we expect demand in commercial real estate to increase as free capital moves from safety and into higher performing assets.