Canada Inflation

Positive Momentum to Build for CRE Investors
as Inflation’s Downward Trend Continues

Annual price growth hits 40-month low. Canada’s consumer price index rose by 2.5 per cent in July, down from the 2.7 per cent reading in June and marking the lowest year-over-year print since March 2021. Cooling price pressures were broad-based, as the Bank of Canada’s preferred measures of core inflation — CPI-median and CPI-trim — also eased to 2.4 per cent and 2.7 per cent, respectively. The softer July gains in these core measures suggest that the previous two months reflected normal volatility rather than a stalling of downward momentum. In addition, when stripping out shelter — one of the largest contributors to elevated price growth — inflation sat at a meager 1.2 per cent. With core inflation now on track to be below the central bank’s forecast, along with underlying details showing promising progress, further interest rate cuts are almost all but certain over the remaining three policy meetings of 2024.  

Investors bet on consecutive rate cuts. July’s inflation reading was in line with market expectations. Money market pricing did not change following Canada’s inflation release as a result. Traders continue to price in three further cuts in 2024, bringing the policy rate to 3.75 per cent by year-end. Investors are also currently betting the overnight rate will be close to 2.5 per cent by October 2025. Whether market pricing is correct or not, the future path of borrowing costs is becoming increasingly clear, which will foster growing investor confidence within the commercial real estate sector. Not only will more financing capital become available, but falling borrowing costs will help mitigate negative leverage and narrow the bid-ask spreads that currently exist between many potential buyers and sellers. 

Commercial Real Estate Outlook

Housing imbalance drives multifamily fundamentals. Shelter inflation remains a primary driver in overall price growth. A large share of homeowners have been subjected to higher mortgage interest payments. At the same time, Canada’s population gains hit a historic level of 3.2 per cent annually as of the start of the second quarter. Coupled with limited housing supply, rental inflation has soared, peaking at 8.9 per cent in May. While annual rent growth has been trending down over the past two months, it remained elevated at 8.5 per cent in July, which can primarily be attributed to an apartment vacancy rate of 1.5 per cent amid Canada’s housing supply-demand imbalance. Restrictive interest rates and heightened construction costs — which were up 4.2 per cent year over year as of the second quarter and 60 per cent when compared to the start of 2020 — have caused supply growth to trail that of demand. Consequently, Canada’s apartment rental market is forecast to hold a vacancy rate well below 2.0 per cent by year-end.

Travel-related expenses help pull down inflation. Amid pent-up travel demand, albeit softening, and a weaker Canadian dollar supporting travel from the United States, Canada’s hotel sector is expected to outperform the broader economy in 2024. The nation’s 12-month occupancy rate is forecast to hold stable around 65 per cent, supporting 3.9 per cent growth in the average daily rate and a 3.7 per cent increase in revenue per available room. Nevertheless, a slowing economy is putting some pressure on the nation’s hotel sector, which was highlighted by the 3.7 per cent drop in traveler accommodation inflation in July and easing revenue growth.      

* Through July; ** Through 2Q

Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada