During the third quarter of 2020, the multi-suite residential and industrial sectors of Canada’s commercial real estate remained resilient despite the economic slowdown resulting from the pandemic. Meanwhile, the office and retail segments witnessed increased vacancy levels in most Canadian cities as restrictions in response to a second wave of COVID-19 kept Canadians working and shopping from home, according to the latest Canadian Economic Outlook and Market Fundamentals Report issued by Morguard Corporation.

“The steady performance of multi-suite residential and industrial assets during the pandemic continued to attract investors during the third quarter of 2020,” Morgauard’s research director Keith Reading said in a statement.

Canada’s job market continued to recoup after the losses seen in the spring, however, office and retail assets are anticipated to underperform in the approaching atypical holiday season. Entering 2021, consumer and investor confidence are anticipated to return, aligned with further developments regarding a COVID-19 vaccine or more effective treatments.”

Commercial real estate

Demand for multi-suite residential assets outperformed the office and retail sectors in the third quarter of 2020, continuing with the trend seen since early 2020. The segment’s stable performance is in part attributed to the uncertainty brought on by the pandemic regarding job losses, as many Canadians who had planned to purchase a home in 2020, have decided to continue renting until the economic landscape becomes clearer. For investors, multi-suite residential assets remained a safe, long-term investment. Looking ahead, investment demand for multi-suite residential assets will continue to outpace the supply of available properties in major centres such as Toronto, Montreal and Vancouver.

Demand for industrial investment properties also exceeded supply during the third quarter of 2020. More than $1.0 billion in industrial property sales was tallied in the country’s major markets combined. Investment sales have exceeded $1.0 billion mark in every quarter dating back to the first quarter of 2014.

In the office segment, downtown vacancy rose sharply in most Canadian cities in the third quarter of 2020 with a spike in sublease availability and a subsequent increase in supply. Tenants were pushed to reduce their footprints in the core of the country’s most expensive markets due to heightened economic and financial uncertainty. Investors applied caution when purchasing office assets and focused on stable investments with financially stable tenants on longer-term leases as a more forward-looking approach.

Looking ahead, institutional investors are expected to target prime properties in Toronto, Montreal and Vancouver most aggressively, which will ensure property values hold firm. The Canadian commercial investment property capital flow is anticipated to remain muted over the near term, barring some form of resolution of the COVID-19 pandemic and a subsequent improvement in the economic outlook.

Economic factors

The proportion of Canadians collecting the Canada Emergency Response Benefit, Canada Emergency Student Benefit or Employment Insurance fell to 13.5 per cent in September, down from 16.1 per cent in August, depicting a moderate improvement in Canada’s economy, combined with a bounce back in the job market.

During the third quarter, the Bank of Canada continued to adapt to the economy’s evolving conditions and responded to support Canadian businesses and borrowers. In the same period, global equity markets strengthened as a result of an improved global economic outlook, however, an increase in the number of COVID-19 cases across the country may impact the global equity market forecast for the near term.

The Consumer Price Index (CPI) increased modestly during the third quarter, due largely to subdued domestic services demand. Inflation levels are anticipated to remain muted over the next few months, as a result of excess economic capacity and an overall weakened labour market.

Retail sales grew at a moderate pace in the third quarter after a strong rebound from the losses as a result of the COVID-19 pandemic closures. Retail sales increased by 2.6 per cent year-over-year as of July. Except for gasoline and clothing, sales were up for all spending sub-categories.