Managing their existing portfolios will be the primary focus for 49 per cent of the Canadian commercial real estate industry executives who participated in Altus Group’s Q1 2024 Commercial Real Estate Industry Conditions & Sentiment Survey.

After managing existing portfolios, the biggest priorities according to the respondents were: raising capital (18 per cent); deploying capital (15 per cent); de-risking portfolios and divesting (10 per cent); and reassessing (eight per cent).

The cost of capital, development costs and inflation topped the list of expected priority issues over the next 12 months for the third consecutive quarter. Still, the percentage of respondents citing each declined slightly from the Q4 2023 survey. 

Operating costs/expense management and tenant retention rounded out the top-five near-term priorities, while concerns about capital availability experienced a notable drop. Leasing/tenant retention was the only concern among the top five which increased between fourth quarter of 2023 and the first quarter of 2024. 

The Altus research team surveyed 214 industry participants, representing a range of organization types and functional areas, from at least 55 Canadian firms between Jan. 23 and Feb. 9.

Asset pricing, interest rates and cap rates

Half or more of the respondents characterized land/development, hospitality and multifamily properties as “overpriced,” while some viewed retail, office, multifamily and land to be “underpriced.” Most respondents characterized the retail and industrial sectors as being “fairly priced.”

The survey’s findings suggest the bid-ask spread, which contributed to lower transaction activity in 2023, might be compressing. This could lead to increased investment and transaction activity if the trend holds.

Forty-seven per cent of respondents expected interest rates to remain stable over the next 12 months, while another 47 per cent expected them to decrease, with only six per cent anticipating an increase. The percentage of executives expecting rate decreases jumped by 28 percentage points from the previous quarter.

One-third of respondents expected capitalization rates and cap rate spreads to increase over the next 12 months.

Distress and transaction activity

Fifty-eight per cent of respondents expected commercial real estate distress to increase over the next 12 months, down 20 percentage points from the previous quarter. Just 18 per cent had a high conviction in their directional call, a 22 percentage point drop from the fourth quarter. 

Along with the expected increase in distress, 48 per cent of participants anticipated investment transaction activity to pick up in the coming year, up 19 percentage points from the prior quarter.

Seventy-one per cent of respondents planned to either buy, sell or both over the next six months, up from 67 per cent in the prior quarter.

Those from companies with commercial real estate exposure of between $500 million and $1 billion increased their transaction intentions by 26 percentage points; those with between $1 billion and $5 billion in investments increased theirs by 13 percentage points. 

While 29 per cent of respondents indicated no intentions to transact in the near term, that was three percentage points lower than in the previous quarter.

Sixty-three per cent of respondents expected their geographic footprint to be of a similar size a year from now, while 24 per cent anticipated that it would be expanded and 13 per cent believed they would be in fewer markets.

Capital availability

While the overall expectation is that capital availability will be low over the next 12 months, net expectations have broadly improved since the previous quarter. 

Survey participants expected the least amount of capital availability from real estate investment trusts and asset managers. They anticipated greater availability of equity capital from individuals, family offices, private equity and hedge funds. 

Expectations for securitizations, mortgage REITs and insurers were heavily constrained. Canadian commercial real estate professionals expected debt funds and banks to have the greatest amount of capital availability over the next year. 

The expectation for Canadian bank capital availability is in stark contrast to the belief in the United States.

Environmental, social and governance considerations

Thirty-nine per cent of respondents “moderately” factored environmental, social and governance (ESG) considerations into their capital decision-making process. 

Respondents from institutions with greater than $5 billion in commercial real estate under management showed the most ESG consideration, with 67 per cent saying it either “significantly” or “moderately” affected their capital decisions.

Nearly two-thirds of respondents believed ESG needs “investor or market demand” for it to be more widely considered and incorporated by the commercial real estate industry. “Peer adoption or industry standards” and “regulation or legal clarity” were the next top responses. 

Canadian respondents had higher confidence in ESG being adopted into the industry than their American counterparts.