Canadian Commercial Real Estate: Q4 2023 Overview

Each quarter, the Canadian Real Estate Association (CREA) provides crucial insights into the commercial real estate landscape in Canada. By closely monitoring key economic indicators—including housing starts, non-residential building permits, gross domestic product (GDP), and labour market dynamics—CREA’s economic team aims to forecast trends and upheavals in this vital sector.

In examining the fourth quarter of 2023, the data suggests a consolidated impact across multiple fronts, indicating a possible contraction in commercial real estate activities.

Housing Starts

Despite remaining elevated compared to pre-pandemic levels, Canadian housing starts saw a notable decline of approximately 4.5% in Q4 2023 relative to Q3, and down more than 5.5% compared to the same quarter in 2022. This trajectory is primarily attributed to ongoing affordability issues that hamper the pace of new construction.

Higher interest rates, along with soaring material and labour costs, have further complicated the housing landscape. Government interventions are nearing, with the federal administration proposing new measures to stimulate rental housing development. These include the elimination of GST on new rental apartments and incentives for municipalities to refine exclusionary zoning policies to access the Housing Accelerator Fund.

A concerning report by the Conference Board of Canada mentions a critical need for Canada to fill 12,000 skilled labour vacancies annually in residential construction to meet increasing housing demands over the next decade. Addressing this gap will necessitate tapping into non-traditional sources of construction labour.

Non-Residential Building Permits

The non-residential construction segment has experienced significant challenges, with just over $11.6 billion in building permits issued from October to December 2023. This figure marks a decline of almost 3% year-over-year and a stark drop of more than 13% when compared to Q3 2023. The downturn was most pronounced in provinces including British Columbia, Ontario, New Brunswick, and Newfoundland and Labrador.

All three primary components of non-residential construction reported downward trends in permit values. Tightening financial conditions, coupled with a slowing economy, could exacerbate this issue in 2024, leading to further declines in construction intentions. This downward momentum represents the worst fourth quarter since 2020, revealing ongoing concerns about the viability of new projects amidst rising material and labour costs.

Unemployment Rate

The Canadian labour market showcased a slight easing towards the end of 2023, with the unemployment rate dipping to 5.7% as of January 2024. This reduction was primarily buoyed by an increase of 37,000 jobs, particularly in part-time roles. However, the rise in job numbers is offset by the growing working-age population, leading to a crucial balance issue where the influx of workers exceeds job availability.

According to the Bank of Canada’s recent surveys, while companies are experiencing reduced labour shortages compared to the previous year, they do not feel the urgency to hire more staff. Wage growth, therefore, has been anticipated to remain steady, driven mainly by cost-of-living adjustments rather than productivity gains.

Gross Domestic Product (GDP) Growth

The Bank of Canada maintained its target overnight lending rate at 5% following its March 6, 2024 announcement, marking its fourth consecutive hold after two interest rate hikes in the summer of 2023. The Bank indicated that Canada’s economy showed sluggish performance over the latter half of 2023, forecasting flat growth for Q1 2024, before a slight recovery in the later part of the year.

Treasurer estimates suggest GDP growth in Canada is set at 0.8% for 2024, down from 1% in 2023. Meanwhile, real GDP per capita has stagnated since early 2020, highlighting a troubling trend where output growth has not kept pace with the increase in population. Furthermore, uncertainty surrounding inflation may compel the Bank to maintain higher rates longer than anticipated.

Conclusion

The fourth quarter of 2023 has unveiled a complex landscape for commercial real estate in Canada, characterized by declines in key metrics such as housing starts and non-residential building permits, coupled with a stabilizing labour market. Turning the corner into 2024, uncertainties remain as the economy grapples with persistently high interest rates, inflation targets, and broader affordability concerns.

The next CREA commercial snapshot promises further insights, revisiting economic activity in Q1 2024. As stakeholders navigate these shifting sands, adapting strategies in response to evolving economic conditions will be essential for sustainable growth.

Stay tuned for more updates, as the dynamics of the commercial real estate market continue to unfold in fascinating—and often unpredictable—ways.