Canada Inflation

Confidence in Commercial Real Estate Sector to
Grow as Inflation Returns to Target

Inflation risks largely mitigated. Canada inflation rose 2.0 per cent in August, down from the 2.5 per cent gain in July. Not only was this the slowest pace of increase since February 2021, but August’s inflation print was also back down to the central bank’s target measure. The deceleration in headline inflation was due in part to lower prices and a favourable yet transitory base-year effect for gasoline, which could cause annual price growth to inch up again over the short-term. Nevertheless, the release provides further evidence that the inflation battle is almost won. When excluding gasoline, inflation rose by 2.2 per cent in August, down from the 2.5 per cent mark in July. Additionally, the Bank of Canada’s preferred measures of core inflation – CPI-median and CPI-trim – also eased to 2.3 per cent and 2.4 per cent, respectively. Looking ahead, further rate cuts at the Bank’s remaining two meetings in 2024 are almost all but guaranteed, fueling further optimism for commercial real estate investors.

Outsized rate cut becomes more likely. The Bank of Canada has slashed its policy rate 75 basis points over the span of three meetings, bringing it to 4.25 per cent as of September. Cooling inflation, sluggish GDP growth, fast-rising unemployment and expected rate cuts in the US are increasing the chances of a 50-basis-point cut, based on swap market probabilities. Because August’s metric was due to base year effects, however, such a large cut may not be justifiable in October. If a larger cut were to happen, it could result in a lower-than-anticipated policy rate, generating positive investor sentiment and likely lifting CRE transaction activity in 2025. 

Commercial Real Estate Outlook

Housing continues to drive inflation. Mortgage interest costs and rent remained the largest contributors to the increase in CPI in August, with mortgage interest costs up 19 per cent and rental inflation reaccelerated to 8.9 per cent. When excluding these factors, inflation sat at a meager 1.2 per cent. With mortgage costs being directly linked to monetary policy, the category has been trending down over the course of 2024 and is set to continue on this path for the remainder of the year. While rental inflation could partially be attributed to restrictive monetary policy impeding housing supply growth and creating further homeownership challenges, it is more so being fueled by record population growth amid an influx of temporary residents. These factors combined have created a housing supply-demand imbalance across the country. Consequently, investors continued to favour multifamily properties. Vacancy is forecast to hold near an all-time low of 1.5 per cent in 2024, sustaining elevated annual rent growth in the 5.0 per cent range.

Select retail capturing investor attention. As consumers tighten their budgets amid higher costs, households have been pulling back on discretionary spending. As a result, the price for clothing and footwear declined 0.6 per cent monthly. This marked the category’s first August price drop since 1971, as this month typically benefits from back-to-school shopping putting upward pressure on prices. In contrast, consumers paid 2.4 per cent more on a year-over-year basis for groceries, as households have redirected spending to more essential items such as food. This is one of the main reasons why investors are favouring grocery-anchored, neighbourhood centers.      

* Through August; ** Trailing-12-months through 2Q

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