The Canadian commercial real estate market is facing some structural risk as a result of two major economic changes created unnecessarily by the Liberal Government. These changes, if fully implemented, will most certainly impact real estate values in the commercial and residential markets.
The two major drivers behind the health of the commercial real estate market, particularly on the investment side, have been the availability of low-cost debt financing and an abundance of available equity. Justin Trudeau’s federal government is attacking both of these drivers with its new direction.
The first of these attacks has already begun with the federal government raising interest rates. In July, the Bank of Canada increased its overnight rate by 0.5 per cent to 0.75 per cent. This was the first such rate increase in seven years.
This increase has translated into higher borrowing costs for investors and purchasers alike. This increase in cost results in lower potential returns for investors and higher borrowing costs for end users looking to invest in their own real estate.
This impact is felt swiftly in the cash flow models of all investors. However, the impact thus far has been muted as there continues to be an abundance of available debt financing for commercial real estate opportunities at very attractive rates.
The second potential attack will not be felt as quickly, but has the potential to have severe and long lasting implications. This is the attempt of the federal government to implement proposed changes to taxation. These changes will reduce the amount of capital held within private corporations and as a result, will reduce the amount of equity available to invest in real estate, particularly in markets like Winnipeg.
While the institutional market (REITs and pension funds) are significant investors across Canada, in secondary markets such as ours, private investors make up a significant portion of the market. If the liquidity in this segment is reduced, over the long-term demand will drop.
While slowly rising interest rates seems inevitable, we can only hope that the federal government listens to the concerns being widely expressed by numerous industries and reconsiders its plans, which will only harm our industry and our country in the long term.
(Trevor Clay is the chair of Commercial Division of WinnipegREALTORS®.)