The outlook for real estate has changed significantly since the beginning of the year. With interest rates soaring and a looming recession on the horizon, we’ve gone from good weather to ominous gray skies. Investors are taking cover while they wait for the sun to return.
Posted at 8:00 am
New residential projects have been delayed
Construction costs continue to rise, especially labor costs. This lackluster picture has been compounded by rising financing costs. The profitability of high-rise rental housing projects no longer exists. “Most investors put their projects on hold or do less, that’s famous Wait and see which many already adopted in 2002,” said Noémie Lefebvre, director of real estate and land development at Groupe Altus.
She was speaking at the Montreal Market Trends event held at noon on Tuesday. It was organized by the Institut de développement immobilier du Québec.
The result: the peak of 32,000 apartment starts in the Montreal region recorded in 2021 will not be surpassed. The forecast is 26,000 in 2022 and even less for 2023.
No drop in value in sight
The real estate premium, the difference between the yield investors demand on an asset and the long-dated Canadian government bond rate, has fallen 150 basis points in recent months, the lowest premium in 15 years, a prelude to higher yields demanded by investors. Similar to a bond, the yield and value of real estate move in opposite directions. When the yield rises, the price falls.
“It’s no longer a secret, in the apartment rental sector, returns will increase by 25 to 50 points,” said M.me Lefebvre.
In the multi-tenant residential sector, a 25 basis point increase in yield translates into a 6% to 7% decline in value at constant income. Given that rents are expected to increase in the range of 8 to 10% for new buildings that do not fall under the control of the housing court, the value of apartment buildings should stabilize in 2023.
One of four offices vacant in 2025
Remote work is here forever, warned Sylvain Leclair, senior vice president of Altus Group, which shared a platform with M.me Lefebvre. The building availability rate in the Montreal region is 17.5% and has been steadily increasing in recent quarters. “Since the start of the pandemic, there have been 4.4 million square feet of office space available downtown, or 4.4 towers like 1250 René-Lévesque Boulevard,” he said.
After leases end, expect tenants to reduce their leased space by 20 to 40%. At worst, the office availability rate could peak at 28.8% in the city centre, just think about that.