How will the commercial property market shape up in 2024?

Colliers Canada chief executive outlines possibilities for the market this year

How will the commercial property market shape up in 2024?

The most influential market trends last year are likely to see their effects reverberate in Canada’s commercial property sector well into 2024, according to Brian Rosen, chief executive of Colliers Canada.

The Bank of Canada’s 475-basis-point rate-hike campaign had a substantial impact on the sector, particularly when it comes to inflaming “the level of uncertainty in the market in terms of valuations and in terms of finding the price equilibrium where vendors and buyers need to meet.”

“That’s not really surprising because it was a natural outflow of the rapid increase in rates, which was a logical outcome of inflation,” Rosen said in an interview with the Financial Post. “It’s disappointing that the market hasn’t been as strong as it was in prior years, but I wouldn’t say it was terribly surprising.”

Rosen stressed that the remote working revolution is something that the market has to adapt to.

Hybrid working is here to stay,” Rosen said. “Hybrid working existed before COVID, but based on multiple different research sources, we are now at around 70% to 75% of the 2019 level of daily occupancy, depending on what city you’re in Canada. And that is still a bell-curve shape, with higher occupancy during the middle of the week and much lower on Mondays and Fridays. So that trend is definitely going to have staying power.”

At the same time, Rosen is optimistic of occupancy levels rising in the long haul.

“I do think immigration into Canada and the return to GDP growth are creating more jobs, with more people and greater usage of office space,” he said. “So I think the long-term trend for offices is still positive, but hybrid work and the impact it’s having on office utilization will also continue to be a factor.”

Still, the market must remain realistic when it comes to the effects of elevated construction costs and multi-decade-high interest rates.

“I think we will have a slower start to the year from an overall transaction standpoint,” Rosen said. “Construction costs have definitely started to flatten and certain commodity costs and those of the trades have come down. But there is still a stickiness to a lot of those costs.”

Predictions of possible interest rate cuts by the central bank would partly alleviate these concerns, but not as quickly as some might hope.

“[Cuts] will take time to flow through the system,” Rosen said. “And once we start seeing that happen, once we see some debt maturities coming through next year at higher interest rates than where they started in 2020 and 2019, that’s going to create some action in the market.

“There may be distress in the market, but this will take some time to work its way through. So we do expect a pickup in activity in the second half of the year, for sure.”