Canadian Real Estate Market Update – Q4 2022

With the economy continuing to demonstrate unexpected resilience and inflation still stubbornly elevated, the BOC is likely to continue raising rates to push forward on its path to neutral, putting further pressure on risk assets’ valuations. According to Fiera Capital’s most probable scenario (Deep Recession – 55% probability) over the next 12-18 months, persistent inflation that remains elevated could trigger the continuation of aggressive monetary tightening measures by central banks, leading to an economic recession. The severity and duration of the recession would depend on the persistence of inflation and the actions taken by policymakers to bring inflation down to acceptable levels. This scenario is characterized by central banks seeking to restore their credibility in controlling inflation after having delayed addressing rising price pressures and implementing monetary policy tightening too quickly, which could have negative economic consequences. As a result, policymakers may not halt the interest rate hike cycle until they observe clear evidence of decreasing inflation, which could result in continuing to raise interest rates during economic weakness, potentially leading to a “Deep Recession”.

Despite all the changes arising in the commercial real estate market today due to the lingering effects of the pandemic, increasing interest rates and capitalization rates, stubborn inflation and ongoing geopolitical uncertainty, the broad fundamentals underpinning real estate remain unchanged. The land that houses the economy is finite and increasingly scarce relative to fiat currency and financial assets, which can be created at will. Under the current uncertain macro-economic backdrop, it is highly likely that real estate will outperform other traditional assets, such as equities and especially fixed-income investments on a long-term basis. This dynamic is likely to accelerate the trend toward more alternatives, particularly “real assets”, in pension plan portfolios. In addition to being experienced real estate professionals with a strong asset management focus, the Manager’s proprietary Target Markets Model continues to objectively guide allocation decisions with predictive analytics by helping select markets and property types within opportune times in their growth cycles relative to their market prices. Capital allocations to “real assets” with an experienced manager matters more now than ever.

Read our quarterly Canadian Real Estate Market Update, produced by our Strategy, Planning and Analytics team, to learn more about the current state of the office, industrial, retail and multi-residential asset classes, and what to expect for 2023.