The federal government’s new housing initiative, highlighted by an extensive commitment to increase housing availability and address affordability, introduces profound implications for our market. With plans to build nearly 3.9 million homes by 2031, including substantial investments in homelessness solutions and incentives for home construction, the stage is set for a dynamic shift in both demand and supply dynamics across the country.
This aggressive push toward increasing the housing stock, particularly through enhanced tax incentives, is not just a response to current shortages but a proactive strategy to stave off future crises. For commercial investors, the implications are twofold. Firstly, the increased capital cost allowance for apartment buildings—from 4% to 10%—presents a significant tax break that could spur new developments. Secondly, the commitment to make more public land available for housing construction could lead to new opportunities in areas previously off-limits due to zoning restrictions or lack of availability.
Turning our gaze to Montreal, the local narrative is equally compelling. In 2022 and 2023, the city grappled with a tumultuous residential market due to inflation and high interest rates, leading to a drop in housing starts and a tightened rental market. The anticipated gradual decrease in interest rates and a more modest increase in construction costs heading into 2025 suggest a favorable environment for renewed residential investment. However, the projected slight upturn in housing starts will likely fall short of fulfilling the escalating demand, particularly as Montreal continues to attract a significant share of Quebec’s immigrants and non-permanent residents.
The rental sector in Montreal is set to remain under intense pressure. With population growth outpacing the availability of new rental units, we’re seeing a sustained decrease in vacancy rates, expected to drop to near 1% by October 2024. This scarcity is poised to drive rents higher, continuing a trend of steep increases fueled by rising operating expenses. For commercial real estate investors, these conditions underline the importance of investing in or developing well-positioned rental properties that can capitalize on these trends.
Moreover, the federal push to restrict large corporate investors from purchasing existing single-family homes might redirect large capital flows into the commercial and multifamily sectors, potentially inflating prices and reducing yields in these areas. This could reshape investment strategies, prompting a shift toward development projects or alternative markets within the province.
In light of these shifts, commercial real estate stakeholders in Quebec should consider several strategic moves:
Reevaluate the portfolio mix to ensure it aligns with the expected increases in rental demand and tightening supply conditions.
Explore opportunities in new development projects, encouraged by federal tax incentives and potential availability of public lands.
Monitor the ongoing policy changes and market responses closely, as these will determine the medium to long-term landscape of the housing and rental markets.
The question for us, as investors and professionals, is how will we adapt our strategies to not only mitigate the risks presented by these market dynamics but also to seize the opportunities they may bring?