Investment sales dropped by more than 55 per cent across four major asset classes in Canada’s largest markets in Q1 2024, according to Morguard Corporation’s 2024 Canadian Economic Outlook and Market Fundamentals First Quarter Update.

Almost $2.6 billion of transaction volume was reported in the quarter for properties selling for at least $10 million in the Greater Vancouver, Calgary, Toronto, Ottawa and Montreal areas combined. That figure represented a 55.3 per cent quarter-over-quarter decline and a four-year quarterly low.

The slowdown was due primarily to the rising cost of debt and the widening gap between vendor and purchaser pricing expectations.

“Buyers are looking for lower prices to offset higher borrowing costs,” Morguard senior director of research Keith Reading told RENX. 

“They're looking to offset the uncertainty that we're currently dealing with, not just in the commercial real estate market, but in the broader economy.” 

Industrial

While industrial was the most popular asset class with $1.2 billion in property sales, it still experienced a 55 per cent quarter-over-quarter drop.

The biggest transaction was a portfolio of small-bay industrial properties in Montreal totalling 437,214 square feet that was sold by Gestion Jacad Inc. to Vista Properties for $87.7 million.

Despite industrial rent increases moderating somewhat after huge jumps in recent years, a significant amount of properties were purchased by owner/users.

Those coming off of long-term leases are seeing significantly higher prices to renew and view buying as an attractive alternative.

“There's a certain sector of the economy that prefers to own their own assets and operate their businesses in those assets,” Reading said.

“Owner/users have seen that gap in the market and have become increasingly active in terms of being allowed to access properties that are more efficient.”

Private capital groups also accounted for a significant share of industrial property sales as they looked to capitalize on reduced competition.

Institutions and pension funds have been relatively inactive over the past 12 to 18 months as the cost of capital has remained high.

The national availability rate rose 50 basis points to a six-year high of 3.7 per cent in Q1. That was 220 basis points higher than the cycle-low of 1.5 per cent recorded in Q3 2022. 

Roughly 9.6 million square feet of new industrial supply was completed in the first quarter of 2024 following a record high of 16.8 million square feet in the final quarter of 2023.

“We did see a boom in new construction completion but if you look at it as a percentage of the existing inventory of buildings, it's really not anything to be overly concerned about,” Reading explained.

“We definitely have not overbuilt. We’re probably looking at more balanced conditions moving forward which is good for tenants.”

Multifamily apartments

Multifamily residential rental properties were the second most popular acquisition target, which is in keeping with the trend of the past several years. 

The sales total was just over $568 million in 21 transactions, involving more than 2,000 units. That represented a 50.2 per cent quarter-over-quarter drop and matched the four-year low.

The biggest purpose-built rental apartment transaction in the first quarter was Realstar Group’s acquisition of the 131-unit Junction Factory Apartments at 3385 Dundas St. W. in Toronto for $88 million from Terra Firma Homes Corporation.

The quarterly average transaction size dropped to a three-year low and the total number of units sold fell to a five-year low.

Smaller-scale properties selling to private groups have accounted for the largest share of sales activity as institutions and pension funds have increasingly looked outside of Canada for acquisitions.

“We haven't seen a lot of large apartment portfolios come to the market,” Reading said.

“If the product was available, I think we'd see a lot more activity because, through CMHC, you've got a more favourable borrowing environment.”

Office

Office property sales volume plunged to a seven-year quarterly low of just $282.8 million. 

The biggest transaction was Morguard’s sale of a 270,543-square-foot building at 181 Queen St. in Ottawa to the federal government.

“Quite a few vendors are looking to reduce their exposure to office,” Reading said.

“They're not in a panic to get out of office, which is why I think activity levels are pretty low in the office sector, but certainly looking to reduce their exposure.” 

The 18.4 per cent national vacancy rate reported at the end of March was up 10 basis points quarter-over-quarter and 60 basis points year-over-year.

Approximately 439,000 square feet of office space was absorbed during the first three months of 2024, most of which was in Vancouver’s newly constructed B6 and the north tower at The Post, as well as Winnipeg’s Wawanesa Tower. 

Canada’s office leasing market had its first positive result since Q3 2022, but Reading believes it’s more of an outlier than a sign of positive things to come.

Leasing demand remains relatively weak as tenants continue to downsize and shorter leases are becoming more prevalent due to uncertainty about future needs.

“The class-B and -C market segment is very weak, whereas the best buildings in each market are the ones that are generally performing relatively well,” Reading said. 

Retail

Retail asset sales fell by 55.3 per cent, although the quarter-over-quarter drop was due largely to the sale of interests in Vaughan Mills and Pickering Town Centre -- both major properties in the Greater Toronto Area market -- in the previous quarter. 

The biggest retail transaction of the first quarter was Springwood Land Corporation’s sale of the 320,340-square-foot The Quarry in Cochrane, Alta., located 18 kilometres west of Calgary, to MDM Ventures (GP#1) Inc. for $138.7 million.

“Retail has performed better than we anticipated,” Reading noted. “Investors are showing more interest in retail in the last couple of years.”

Retail vacancy levels were generally flat and the national vacancy rate stood at 6.6 per cent at the end of Q1, down 40 basis points year-over-year. 

“Suburban retail has been more resilient in the aftermath of the COVID crisis,” Reading said. “Downtown is a little more challenged.”

Space in prime locations is in relatively short supply as new retail concepts, both domestic and international, continue to look for opportunities to enter the market.