Interest rate hikes are the leading threat to Canadian commercial real estate

by Ephraim Vecina15 Feb 2017

In a recent report, TD Economics stated that an increase in interest rates “could be the number one risk” to the Canadian commercial real estate segment in the near future.

“Developments of the past several weeks have highlighted what could be the number one risk facing Canada’s [commercial real estate] outlook over the coming years — the possibility of higher interest rates,” TD’s research department wrote in its Canadian Commercial Real Estate Outlook, as quoted by BuzzBuzzNews.

Among these developments are the upturn in Canadian 10-bond yields and U.S. Treasuries spurred by the global uncertainty amid Donald Trump’s victory in the November presidential elections.

Investors in Toronto and Vancouver commercial properties will begin to feel the pain should these trends continue, TD said. “Spreads in the office sector are now estimated to be below historical averages.”

And the threats do not end there, according to the report.

“Housing markets are likely to lose steam over the next several quarters on the back of recent increases in borrowing rates and tightening in federal mortgage regulations,” TD said. “A housing slowdown will ultimately spill over to demand for office and retail space through reduced employment and household spending.”

Canada’s budget overseer offered a similar warning in its report last December, saying that the country’s cooling real estate sector will lead to a slowdown in investment that would hamper economic growth from 2018 to 2020.

The Parliamentary Budget Officer forecast that approximately 198,900 homes will be completed in 2017, representing the peak of new housing construction. A rapid descent soon thereafter will bring this down to an average of around 170,900 units between 2019 and 2021.

The budget officer also predicted that housing will still manage to slightly boost national GDP in 2017 before beginning to drag down the economy by 0.2 per cent in 2018, 0.4 per cent in 2019, and 0.1 per cent in 2020.


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