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Research Brief

Canada Monetary Policy

December 2023

CAN Money

Third Consecutive Rate Pause Providing Some
Optimism for Commercial Real Estate Investors

Central Bank holds policy rate unchanged. The Bank of Canada maintained its overnight rate at 5.0 per cent at its December meeting, marking the third consecutive rate pause. Stalling economic growth throughout the middle quarters of 2023, softening consumption and easing labour market conditions were the main reasons the Bank held the policy rate unchanged. The BoC did maintain a relatively hawkish tone — stating that it is still concerned about future inflation risks, and that it remains prepared to raise rates further if needed. However, the Bank did indicate that the economy is no longer in excess demand, and past rate hikes are restraining spending. As a result, this still-hawkish tone is likely due to future interest rate expectations, and the fact that policymakers may be wary of driving bond yields lower and prematurely loosening financial conditions. Nonetheless, it is still likely that the BoC’s next move will be an interest rate cut 

Monetary tightening is likely over. Borrowing costs have likely peaked as Canada’s economic backdrop continues to soften. This was seen in GDP contracting in the third quarter, the unemployment rate rising 80 basis points year-to-date as of November and consumption stalling. As a result, money markets are pricing in a rate cut as early as March of next year. Despite this, some risks remain as annual wage growth is still elevated at roughly 5.0 per cent, and historic immigration levels continue to drive near-record high apartment rent growth. However, underlying data suggests further economic easing ahead, which will likely support a rate cut and aid commercial real estate investment over the course of next year.

Commercial Real Estate Outlook

Investment outlook becoming more positive. Commercial real estate transaction activity has stalled as the Bank of Canada has increased its overnight rate 475 basis points in the span of 18 months. Financing capital became limited, and ongoing uncertainty caused many market participants to move to the sidelines. Additionally, price expectation gaps emerged between buyers and sellers, further curbing investment activity. Total dollar volume sold was down roughly 40 per cent annually over the trailing 12 months ending in September. With money markets now pricing in rate cuts as early as March, bond yields have been falling. As a result, positive investor sentiment may begin to build over the course of next year as stabilizing borrowing costs help facilitate more accurate underwriting, as well as price recalibration. Commercial real estate investment activity may also gain momentum as some buyers look to get ahead of the market and capitalize on healthy fundamentals across almost all property types.    

Select property types remain preferred investment options. Despite borrowing costs set to fall, financing capital will still remain relatively scarce compared to the low interest rate environment seen prior to 2022. As a result, industrial, multifamily and essential-based retail are likely to attract the most investment dollars over the coming quarters. While leasing demand may moderate slightly over the coming year amid higher than normal borrowing costs, these property types are forecast to hold healthy underlying fundamentals. Financing capital will remain relatively more available given the sound performance metrics, supporting sales activity.  


* Intra-day as of December 6, inflation through October; ** Forecast 
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada

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