TORONTO — Almost 90 per cent of Canadian commercial real estate leaders believe a recession is likely within the next six months, with more than two-thirds indicating it would be short in duration.
The Altus Group survey, released Sept. 6, was intended to track the impact of rising interest rate increases on real estate assets.
According to the findings, based on a Canada-wide survey of 126 commercial real estate leaders, 60 per cent indicated they had adjusted both their cap rate and internal rate of return (IRR) expectations as a result of interest rate increases by the Bank of Canada in 2022.
The survey was taken before the latest rate announced scheduled for Sept. 7.
Sixty-two per cent of respondents believe the Bank of Canada will raise interest rates by another 50 to 75 basis points by the end of 2022.
There is a strong sentiment among many respondents that assets in core urban markets are better positioned than similar asset types in secondary markets when it comes to the impacts of a recession. In the office market specifically, with the exception of Vancouver, where office vacancy rates are low for both urban and suburban, the suburban office sector has not seen much improvement in vacancy rates.
Altus Group also reported that developers were more decisive about favouring urban markets and leaned more towards multi-family residential assets holding stable, whereas there was an even split among developer respondents regarding secondary markets. In that sector, half of the respondents felt that discount rates for multi-family residential and condominium assets would remain stable while the other half indicated discount rates would increase.
When developers were asked how they would deal with potential further interest rates increases by the Bank of Canada in 2022, their responses generally fell into three camps: increase pricing for their projects; decrease size or quality; or reduce or pause projects.