Recent economic insights reveal that past interest rate increases have begun to reshape the Canadian market, with notable effects on the multifamily and broader commercial real estate sectors.
GDP growth, which stands at an average of 1%, is performing at half of its potential rate of 2%. This shift is significantly evident in the multifamily housing sector. As demand for multifamily properties and durable goods contracts, we witnessed a dip of 1.6% in the per capita GDP growth over the past year.
Output gap for Q3 2023 ranging between -0.75% to 0.25%
The dynamics are shifting towards a rebalancing phase. The variance between the actual and potential economic output is narrowing. This shift could directly influence the demand for multifamily units, especially as labour market indicators show a modest surge in demand. As job opportunities rise, so does the demand for multifamily housing, potentially affecting rental rates and occupancy levels.
Inflationary pressures continue to loom over the horizon. Though the Consumer Price Index (CPI) inflation has receded from its apex, its trajectory towards the 2% target remains gradual. This steady inflation rate could influence multifamily rental prices, affecting both property owners and tenants. The broader commercial real estate domain is also not immune, especially when considering the ongoing normalization of inflation expectations, corporate pricing, and wage growth, currently lingering around 4-5%.
Under 1%: GDP growth projected to remain subdued through 2024
By the end of 2023, an excess supply is anticipated in the economy. For the multifamily sector, an excess supply could translate to more available units, potentially affecting rental rates and property valuations. Meanwhile, inflation is poised to hover at 3½% until mid-2024, attributed mainly to the energy and shelter categories. By the close of 2025, a return to the 2% target is forecasted as the excess supply begins to alleviate these pressures.
Investors should brace for both upsides and downsides risks. The tightening labour market and the possibility of deeply rooted high expectations serve as upside risks. Conversely, the spectre of a more pronounced slowdown, either domestically or globally due to rate hikes, forms the downside risk.
Implications for Multifamily Investors
Canada’s economy is pivoting, influenced predominantly by preceding rate hikes. These transitions, most palpably felt in the multifamily sector, emphasize the necessity for comprehensive market analysis and prudence.
How are we positioning our assets and strategies to maximize returns in this shifting economic landscape?
While multifamily remains our focus, Votre Equipe Immobilier remains dedicated to offering insights across the commercial real estate spectrum. To ensure that your investments in multifamily and other sectors remain robust and resilient amidst these changes, reach out to our team today.