Monday Market Minute | Aug 26, 2024

Commercial real estate finds a floor — but the office is still struggling

What Moved

Canadian commercial real estate transaction volume increased in Q3, with industrial and multi-family sectors leading the recovery. Cap rates in prime industrial assets stabilized after a 100+ basis point expansion from 2022 highs. Multi-family remained the most sought-after CRE sector, driven by rental demand and immigration-linked population growth. However, downtown office vacancy rates in Toronto and Calgary remained above 15%, with no clear catalyst for recovery.

Why It Matters

The sectoral divergence within CRE created distinct opportunity sets for private market investors. Industrial and multi-family funds with defensive cash flows were positioned for cap rate compression as the BoC continued cutting. Office-focused funds, by contrast, faced a structural — not cyclical — challenge from hybrid work patterns that showed no signs of reversing.

Signal to Watch

Institutional transaction data from CBRE and JLL would reveal whether pension funds were re-entering the CRE market. Pension allocations had shifted to underweight real estate during the rate spike; a return to target allocations would provide significant buying pressure in favoured sectors.

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