Real estate conference strikes surprisingly optimistic tone

Since the pandemic screwed up much of the traditional economic dynamics, there is some chomping at the bit going on especially from commercial real estate professionals with the anticipation that companies need to get back to normal planning cycles for the future.

The residential real estate market is obviously very strong with all sorts of pent-up demand. Even the prospect of inflation and rising interest rates is not seen as a major concern for the housing sector right now.

At CBRE’s annual Canadian market outlook conference on Tuesday there was a surprising tone of optimism.

You might think that war in Europe, the imminent rise in interest rates and in-your-face inflationary pressures already present might put a damper on expectations, but that was not the case.

For starters, Benjamin Tal, the deputy chief economist at CIBC, who spoke at the CBRE event, believes that while the war in Ukraine is a major humanitarian and political crisis, it may not turn out to have significant economic impact in Canada.

It is already causing energy prices to rise and will likely add to upward pressures on food commodity prices but he said he does not believe it will stop central banks in Canada and the U.S. from raising interest rates. (He did say, rather ominously, if cyber war breaks out and the U.S. retaliates, then “all bets are off.”)

He and others believe that increasing interest rates is not nearly so worrisome if it is done slowly and modestly especially since, he said, that COVID is responsible for 60 to 70 per cent of inflation.

And if COVID’s impact is now petering out that lessens the need for aggressive Bank of Canada action on interest rates.

“Your enemy is rapidly rising interest rates,” he said.

But he believes the B of C will not repeat past mistakes “and go crazy with interest rates and derail the economy and the housing market. If you do that, you plant the seeds for a recession in 2023-24.”

Wages are going up but so is productivity which would cancel out the inflationary pressure of rising labour costs, Tal said.

That means the return to normal that we have all been waiting for can still play itself out in terms of demand for and development of real estate.

While the late COVID real estate trends saw a bullish market for industrial and multi-family residential investment and uncertainty and avoidance of the retail and office sectors, CBRE’s vice-chairman Paul Morassutti said there is already signs of a shift to the traditionally more lucrative office and retail sector.

While that may be the case in markets like Toronto and Vancouver, Paul Kornelson, CBRE’s Winnipeg vice-president said the pace of new office leasing activity is obviously different in Winnipeg which does not have the presence of international business drivers.

But Kornelson said there continues to be stability here.

CBRE tallies the downtown office vacancy rate at 15.3 per cent in 2021 and is forecasting it to decline slightly to 15 per cent this year.

Morassutti stressed it is technology workers that will drive demand for office space in the coming years. Winnipeg has had its share of technology growth stories like SkipTheDishes and Bold Commerce, but it needs more of that.

In fact, if that doesn’t materialize over the next couple of years, downtown office vacancy rates might be in for a spike in 2024.

That’s when the 300,000-square-foot Wawanesa tower at Graham Avenue and Carlton Street will be ready for occupancy which will vacate three other buildings the insurance company is currently working from.

“We don’t have the momentum to back fill that,” Kornelson said. “Our thinking is that the downtown office market will probably be pretty stable through 2023 but then it will have its share of heartache when they open that tower.”

The heartache would be lessened if demand from the tech sector picks up.

Demand for industrial real estate remains strong across the country and in Winnipeg where land prices continue to increase with steady absorption rates and development of new supply.

CBRE shows retail vacancy holding steady around 10 per cent in Winnipeg. While there is some repurposing of out-dated retail space in some markets in North America, that’s not happening in Winnipeg.

“The retail sector has hung tough,” Kornelson said. “It’s still hard to find good space.”

If Benjamin Tal is right, as the COVID pandemic winds down it will lessen the supply chain misery which will lessen inflationary pressures which will relieve the need for aggressive interest rate hikes which will all lead to the return of normal economic growth.

Martin Cash

Martin Cash

Martin Cash has been writing a column and business news at the Free Press since 1989. Over those years he’s written through a number of business cycles and the rise and fall (and rise) in fortunes of many local businesses.

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