2025 Real Estate Predictions

[00:00:00] Welcome to The Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] As a crazy year comes to an end, we stand at a critical moment in Canada's real estate landscape. And many of us are asking, what lies ahead in 2025?

[00:00:24] Will it be worse? Will it be better? Is this the bottom? Are we still crashing? Are we recovering? What is happening?

[00:00:36] In a market shaped by shifting economics, immigration policy changes and evolving price dynamics, where are the next opportunities and what new challenges will present themselves?

[00:00:49] Canada finds itself navigating multiple crossroads from housing affordability concerns to economic hardships. But despite these challenges, could Canada's position among the G7 nations signal a stronger future than many expect?

[00:01:07] Interest rates are heading down and the Bank of Canada is hinting at even more cuts coming.

[00:01:13] So what does this mean for how people invest and how the market is going to react?

[00:01:20] And with construction slowing down and immigration rules tightening, how's this going to shake things up across different types of real estate from office to industrial to multifamily properties?

[00:01:33] Welcome back to the Canadian real estate investor podcast. And thank you for joining us today. My name is Daniel Foch. I'm a real estate broker and investor and chief real estate officer at Valerie.ca Canada's first AI real estate brokerage, which is a very exciting new role that I'm in.

[00:01:47] And I'm here today and every Tuesday and Friday by Nick Hill. You guys might've heard of him, my buddy Nick on Instagram, who's a mortgage broker and an investor.

[00:01:58] And in this episode, we are unpacking the 2025 outlook for Canadian real estate, where despite near term uncertainties, long term fundamentals paint a compelling picture of growth and opportunity for some people who are observing it.

[00:02:13] Actually, I would say, to be honest, well, we talked about this at our holiday party and thank you to everybody who came up. It was awesome to see everyone's faces.

[00:02:23] You know, the real estate market's been in recession for the past two years. And that HOPE acronym I've always talked about where housing gets hit first, well, it also recovers first as rates come down, right?

[00:02:32] So I don't think we're at a recovery yet, but I think we're heading in that direction faster than the rest of the economy.

[00:02:36] Yeah, exactly. Dan, and look at the end of every year, many of the larger organizations, the JLLs, Cushmans, PWCs, Deloitte's of the world, let's say they release their year end reports.

[00:02:51] It's an array of recaps and outlooks full of charts and data on how different asset classes performed, how interest rates change things and how capital markets fared.

[00:03:03] So the report we're looking at today was put together by the good people over at global real estate giant CBRE.

[00:03:11] Now let's start with their opening statement from the report. It reads, Canada finds itself at an inflection point on many fronts, politically, economically, and on social issues such as housing affordability and congestion.

[00:03:25] In spite of these very real challenges, Canada remains a growth play.

[00:03:32] The country ranks among the top G7 nations in GDP, population, and employment growth over the next five years, all of which are highly correlated with demand for all types of commercial real estate.

[00:03:44] 2025 is poised to be a year of increased activity.

[00:03:47] It's interesting from my perspective because it's so easy for us to sit here and complain about how our figures are bad.

[00:03:52] Well, guess what? They're worse elsewhere.

[00:03:54] So even like when you look at Canadian dollar, it's like, yeah, Canadian dollar versus the USD sucks, but look at it next to the euro or anywhere in the euro zone.

[00:04:02] And it just means you're probably going to go to Italy instead of Florida this year for your warm vacation.

[00:04:07] Don't come to Italy, please. There's already too many people traveling there.

[00:04:10] And Dan, you're completely right. You know, the grass ain't always greener.

[00:04:14] Let's put it that way.

[00:04:15] The cost of capital will finally begin to ease and contingent on global bond market conditions, investment and leasing activity will increase in the year ahead.

[00:04:26] Leasing fundamentals are improving overall through though Canada has seen significant amounts of new supply in office, industrial and residential sectors that will take time to work through.

[00:04:39] And that opening statement is from the managing director of research at CBRE, Mark Meehan.

[00:04:46] So Dan, let's, before we get into the report here, let's, let's just chat on a couple of things.

[00:04:51] 2025 increased activity, easing of capital and Canada as a growth play.

[00:04:58] I agree. Canada is a growth play.

[00:05:00] I think the easing of capital might be optimistic for 2025.

[00:05:05] 2025. And we, I think we'll see increased activity, but will that activity result in transactions?

[00:05:14] Because I know you and I have seen a lot of increased activity recently, but, but, you know, less actual dollars and cents trading hands.

[00:05:22] Yeah. I feel like I, I, well, I think that you, so if you take, there's two ways you can measure like the volume of transactions, right?

[00:05:30] So one is the number of deals and the number of deals is probably up, I would say in both commercial and residential transactions.

[00:05:37] But the value of them, because they've all come kind of come down in value over the past two years is lower.

[00:05:43] So the, if you take the number of deals and multiply it by the value of the deals, the total dollar volume is definitely far below your kind of normal market of like, you know, even early COVID pre COVID.

[00:05:55] And so that's, that's really, you know, we haven't gotten to the point where values have started to recover yet because people are still trying to figure out what the return environment looks like.

[00:06:04] Like a lot of your return expectations are come based on what your interest rates ultimately land at.

[00:06:10] And we don't know, like, cause you, you would have like a discount rate, right?

[00:06:13] Or maybe like, let's call it a risk free rate.

[00:06:16] If I can, if, if GICs ultimately end up landing at 4% or, you know, it's a big difference.

[00:06:22] If I can get risk free 4%, then my expectation of a higher risk asset, like real estate is going to be higher.

[00:06:27] Right.

[00:06:27] Whereas if I can get a risk free or if my GIC rate is like what it was during COVID where it's like nothing or, you know, one or 2%, then I'm not going to be super compelled to put my money into a GIC.

[00:06:39] And I might go look into higher risk investments like a meme coins or fart coin, right?

[00:06:44] That was the good one.

[00:06:45] Fart coin.

[00:06:45] It didn't have like a market gap of like 680 million.

[00:06:48] It's like bigger than the Canadian economy.

[00:06:50] It was a billion.

[00:06:51] Yeah.

[00:06:52] Jeez.

[00:06:53] Yeah.

[00:06:54] We're polite here though.

[00:06:55] We only invest in past wind coin.

[00:06:57] So anyway.

[00:07:00] Okay.

[00:07:00] So let's now look at their executive summary where they kind of go over what they cover in the report.

[00:07:07] They mentioned things like the economy, the capital and debt markets, and of course, asset classes such as office, retail, industrial, and multifamily.

[00:07:18] And it's the world's actually, Seabury is the world's largest commercial real estate services and investment firm.

[00:07:25] So that's why we chose to cover this report.

[00:07:27] They do a lot of good work.

[00:07:29] Dan, we've got some friends over there.

[00:07:31] I used to work there.

[00:07:32] You used to work there.

[00:07:33] So you've got a legacy.

[00:07:34] Work is a very relative term because like I was basically just like an intern.

[00:07:38] You used to have a business card or your LinkedIn was a business card.

[00:07:41] No vice presidents.

[00:07:43] No, no, no.

[00:07:44] Yeah.

[00:07:45] Anyways, Dan, start us off with some of the executive summary in regards to the economy and the debt and capital markets.

[00:07:52] Yeah.

[00:07:52] So in regards to the economy, even with fewer newcomers coming to Canada, their outlook is still strong compared to other G7 countries, especially in the commercial real estate sector.

[00:08:00] As for capital markets, the sentiment has been improving and stronger investment activity is expected in 2025 as more capital is drawn off the sidelines.

[00:08:09] Cap rates for some asset classes are likely to start modestly compressing, but that all depends on the global bond market, which I had mentioned sort of your interest rate environment.

[00:08:21] Totally.

[00:08:21] Totally.

[00:08:22] If you can go get better deals on bonds, then why are you buying two cap office towers?

[00:08:26] I mean, not that that's a realistic example, but you know, why are you buying two cap multifamily in Toronto?

[00:08:32] Now, when we talk about interest rates and bond markets, obviously we need to talk about lending, which is expected to increase, although with selective criteria.

[00:08:43] Credit spreads will normalize as underwriting aligns with market conditions for rents and vacancies.

[00:08:50] Now, I'll just jump in and do a quick dictionary on a credit spread while we are here.

[00:08:56] So a credit spread is the difference in a yield between a treasury security and a corporate bond of the same maturity.

[00:09:02] The spread between the two bonds of equal maturity reflects their credit quality difference with treasury bonds being risk free and corporate bonds carrying more risk.

[00:09:12] Wider spreads signal higher risk while narrower spreads indicate market confidence.

[00:09:17] So let's just say in options trading, it means writing a higher premium option while buying a lower premium on the same asset for profit.

[00:09:27] And if none of that made sense to you, don't worry.

[00:09:30] It didn't really to me either.

[00:09:31] So I broke it down even further.

[00:09:33] So let's put this really simply.

[00:09:35] Imagine renting two cars that both have the same rental period.

[00:09:39] One car is a basic model and is very reliable like a bond.

[00:09:44] And the other car is like a government bond.

[00:09:47] And the other car is a luxury model with more features, but it's more expensive to maintain similar to a corporate bond.

[00:09:53] The price difference per day between renting these two cars because of their differing quality is like that of a credit spread.

[00:10:02] In essence, a credit spread reflects the extra cost or risk investors except for choosing that higher risk asset.

[00:10:11] Yeah.

[00:10:11] Banks do this too, right?

[00:10:12] Like they do.

[00:10:13] They have risk premiums.

[00:10:15] So the bank could either choose between – well, typically a bank is choosing between a GOC bond deal, the Government of Canada bond, which they can get whatever 3% on.

[00:10:23] Or they can lend money to me or you, Nick, where we're going to go YOLO it on rental properties and fart coin.

[00:10:30] And so because they think that we are a little bit riskier, they are going to charge us 1.5% more, 2% more.

[00:10:36] So that's where you get your 5% fixed rates rather than a five-year fixed.

[00:10:41] And if the bank can't find enough Nicks and Dan's to lend it to, then they'll just accept the bond deal, that 3%, right?

[00:10:48] So anyway, Nick, I appreciate the Nick Scherrer working overtime on that explanation.

[00:10:51] It was good.

[00:10:52] No, it wasn't as good as like maybe the big short where they have like Selena Gomez and like Margo Robbie in a bubble bath explaining these complex financial terms.

[00:11:00] Do you want me to take this so that I can go turn the shower on and try to do it again?

[00:11:04] Maybe next time.

[00:11:04] Yeah, we'll try that next time.

[00:11:05] But for office, the growth mindset returns as the market shows signs of recovering, right?

[00:11:11] So the focus is on premium spaces with amenities.

[00:11:14] Like the office asset class really seems to be changing into like lifestyle centers, similar to the way the malls kind of had to reinvent themselves as we saw this urban apocalypse.

[00:11:24] And now I feel like malls are busier than ever, but it's because they've just changed their role in the shopping experience, right?

[00:11:30] And so both the office and retail, the focus is on premium spaces with amenities.

[00:11:36] And as for retail, the supply constraints are pushing retailers into secondary markets with modified store formats, right?

[00:11:43] And you're getting a lot of these stores being purchased almost as like last mile distribution centers as well, right?

[00:11:49] Like Home Depot is like famous for that.

[00:11:51] Or even more like our friend Josh out in Saskatchewan who does development in Regina and in Saskatoon.

[00:11:59] He's building like these like micro office spaces where you'd have like, you know, your Pinterest or Shopify businesses coming in and being able to have that little almost showroom brick and mortar.

[00:12:10] So, you know, it's just basically forced change and some of these kind of legacy industries, you know, office, retail, industrial take a while.

[00:12:21] Now on industrial, the roller coaster that the industrial market has been on faces temporary challenges from softer demand and new supply, but it's expected to normalize soon.

[00:12:34] And then, of course, my personal favorite multifamily there seems to be a little bit of short term uncertainty due to changes in immigration and new supply.

[00:12:45] However, of course, the long term growth outlook is promising for that asset class.

[00:12:51] Yeah, I would agree with that.

[00:12:54] So look at CBRE's take on the economy, immigration and debt and capital markets there.

[00:12:59] Recent immigration restrictions will obviously moderately reduce Canada's economic growth.

[00:13:05] Nobody's really disputing that, right?

[00:13:07] The policy change will reduce both temporary and permanent resident programs.

[00:13:10] And they have a great chart.

[00:13:11] It's actually one of the best charts I've seen on this in like everybody's done this chart, but theirs is really good.

[00:13:18] It's very easy to understand.

[00:13:18] And then temporary residents who drove population growth with 1.5 million new arrivals in 2023, 2024 will see significant reductions.

[00:13:26] You can see this huge drop off.

[00:13:28] And then they have it rebounding, it looks like, by 26, which I guess it should.

[00:13:33] We should get back to a growth scenario by 26.

[00:13:35] So on that note, the government's plan to dial back temporary residents from 7% to 5% of our total population in the next few years.

[00:13:44] But here's another twist.

[00:13:45] Yes, they've slashed permanent resident targets by more than 20% from that 500,000 yearly number.

[00:13:54] And if they actually pull this off, we will see our population numbers dip a little bit over the next two years, Dan, as you said, and then kind of rebounding late 26 and onward.

[00:14:05] Yeah, it's funny.

[00:14:06] Like, I think, you know, all the headlines seem to be calling their bluff, right?

[00:14:10] Like you see it, it's like Better Dwelling says like Canada expects one in 10 people to leave voluntarily.

[00:14:15] Yeah.

[00:14:16] And so I know we chatted about that and the voluntary part is where it fails for me.

[00:14:22] I think that that's really what the scenario we end up with is like some people will go, some people will go because of deportation.

[00:14:28] Some people will go because economic prospects aren't good, but a lot of people will stay and they'll just stop existing here on paper.

[00:14:33] So our population will kind of skew down and we'll end up with like this invisible labor force, like in the US where you have like one, like, you know, like I think something like 10% of their, their economy is like people working cash jobs, right?

[00:14:44] Like the guys hanging out in the Home Depot parking lots, like just willing to crush it for and just, you know, like selling their labor there, right?

[00:14:52] Like I think that, that, that could be a potential outcome of this situation.

[00:14:56] I guess it depends on what, what happens with Pierre's stance on, on immigration, but it seems like he's actually less, like he seems to be more in line with the non-permanent residents, like being a victim of Trudeau's policy and wanting to see them stay.

[00:15:10] So fascinating, kind of like each group is on the, on the side you wouldn't expect them to be of their policy right now.

[00:15:17] But anyway, as a result of this, the economy is changing and experts are lowering their predictions for growth.

[00:15:24] There is some good news though.

[00:15:26] The economists think that government, the government won't be able to quickly put all of their plan changes into action.

[00:15:32] So the impact on growth looks small and they, they have a great chart here from Oxford Economics that shows they only reduce their growth forecast for 24 to 28 by 0.3%.

[00:15:41] And they actually have Canada second in population and real GDP growth and then number one in employment growth.

[00:15:47] So the main long-term worry for Canada is that workers aren't becoming more productive over time.

[00:15:52] Yeah.

[00:15:53] Okay.

[00:15:53] So that's.

[00:15:54] Got to get them back in the office, I guess, right?

[00:15:56] Yeah.

[00:15:56] Need some doge.

[00:15:58] Okay.

[00:15:58] So that's immigration.

[00:16:00] Now what about interest rates?

[00:16:02] Basically everyone's two favorite topics these days.

[00:16:05] So interest rates are expected to continue to decline into 2025 with the Bank of Canada already having cut rates by 175 bips to 3.25% since June with inflation now close to those target levels kind of hovering in and around there bouncing a little bit.

[00:16:22] But the central bank has indicated further rate cuts are likely as it aims for that soft landing of the economy.

[00:16:30] Dan, I'll never forget.

[00:16:31] We're still talking about soft landing.

[00:16:32] Are we on the ground now?

[00:16:34] Like sliding into the forest?

[00:16:36] It doesn't sound like it.

[00:16:37] I'll still never forget the episode where we did the whole soft landing, hard landing, snakes in a plane thing.

[00:16:41] That was a fun one.

[00:16:42] But we're still talking about it.

[00:16:44] He literally just said in the presser that he isn't expecting a recession.

[00:16:47] I mean, I guess like by technical standards, then you have Polo saying basically that we're in a recession.

[00:16:52] And so I don't know.

[00:16:54] And if you are.

[00:16:55] I think most Canadians are in a recession.

[00:16:56] Yeah.

[00:16:57] And if you want more information on that, go check out a recent episode called Rate Cuts and Recession Debates that was out a few weeks ago where we where we talk about the opposing Bank of Canada governor and former governor on their take on whether

[00:17:12] Canada is in a recession or not.

[00:17:14] Yeah.

[00:17:15] So the Bank of Canada aims to bring rates down and keep them in the neutral range of 2.25 to 3.25% where they neither restrict nor stimulate the economy.

[00:17:24] With inflation close to target, the bank has a hard job ahead trying to cut and or hold and manage the economy.

[00:17:33] And I would say especially sentiment moving forward.

[00:17:35] For sure.

[00:17:36] Sentiment, right?

[00:17:37] The invisible hand that really guides the economy.

[00:17:40] So here's the thing, though.

[00:17:41] The Bank of Canada is starting to worry that inflation might actually drop too low if things slow down more than they expect.

[00:17:48] And this would be bad.

[00:17:51] Looking at what the big Canadian banks are thinking, their betting interest rates will drop to around 2.25%, which is pretty much the bottom of the quote unquote normal range.

[00:18:02] Maybe as soon as spring 2020, 2025.

[00:18:07] So in plain English, we're looking at rates dropping by about 1 to 1.25% in the first half of 2025.

[00:18:15] But at the same time, man, honestly, who knows at this point?

[00:18:47] Yeah.

[00:18:49] In the first half of the month, it's going to be a little bit more than 1 to 1.25% in the first half of the year.

[00:18:52] And I do think that once we get off of this kind of political roller coaster that we've been on in the last little bit where policies keep bouncing back and forth, that should help some institutional capital as well.

[00:19:09] Because we did see a big outflow of institutional capital in Canada.

[00:19:12] Yeah.

[00:19:13] Institutional capital likes boring, right?

[00:19:15] Boring is good.

[00:19:17] Drama, political crisis.

[00:19:18] Maybe not even boring.

[00:19:19] It can be exciting, but kind of like predictably exciting.

[00:19:21] Yeah.

[00:19:21] I guess that doesn't really exist.

[00:19:22] Boring is maybe not the right word, but stability, let's say, right?

[00:19:26] Yeah.

[00:19:26] So there will be ongoing price discovery in early 2025, which I'm glad they acknowledge.

[00:19:31] Like they believe that we will still be needing to figure out what's happening up or down.

[00:19:37] Probably like a little bit of down, a little bit of up.

[00:19:40] What's that?

[00:19:40] Sometimes maybe good.

[00:19:41] Sometimes maybe blank.

[00:19:45] But particularly for certain asset classes, a more stabilized pricing environment is expected by mid-year, resulting in increased transactions.

[00:19:52] So again, and you're seeing this in the res side.

[00:19:54] We're going to cover Korea stats on our next episode.

[00:19:56] But like people seem to buy when they start to think prices are going up.

[00:20:00] Everybody says they want to buy the bottom, but they don't actually.

[00:20:02] They want to kind of be like getting in as price increases are just starting again, right?

[00:20:08] So nobody wants to be buying on the way down into the bottom.

[00:20:11] They all seem to want to be buying kind of on that tail end where they can see the predictable.

[00:20:15] Oh, we're stable.

[00:20:17] You know, there's some mild growth happening.

[00:20:19] This seems safe.

[00:20:20] I can step into this.

[00:20:21] Yeah, exactly.

[00:20:23] Okay.

[00:20:23] So just a couple of key points I took from this piece on capital markets is that early 2025, we'll see a bit of price stabilization expected probably mid-year.

[00:20:34] Again, and that will drive more transactions.

[00:20:37] The Class B office sector is likely in trouble.

[00:20:40] These assets will face prolonged pricing challenges due to increased costs.

[00:20:45] Weak demand could result in taking years to stabilize, essentially fill one of these Class B.

[00:20:53] Usually Class B kind of suburban older buildings.

[00:20:58] So though if you're an owner of Class B, you're likely in for a rough road ahead.

[00:21:04] Sector specific trends.

[00:21:05] Let's talk about office.

[00:21:06] There's a growth mindset returning with demand and a big push for sustainable spaces.

[00:21:12] And Dan, as you said, kind of that like live-work balance in the office.

[00:21:17] Retail limited supply is pushing expansion into secondary markets, which is good.

[00:21:24] And industrial, again, roller coaster for the last couple of years.

[00:21:28] It'll normalize this year.

[00:21:30] The overall economic outlook with immigration limitations, temper economic growth forecasts, and Canada's long-term outlook, it still is favorable.

[00:21:41] And it's looking good for commercial real estate overall.

[00:21:47] Yeah.

[00:21:47] So they do have a piece here.

[00:21:49] And this is one of my favorite charts, actually, to be honest with you.

[00:21:53] It reminds me of-

[00:21:54] Wow, you've said that twice.

[00:21:55] Yeah, actually, it's not the one that I have up on my screen right now.

[00:21:59] It's the one.

[00:22:01] Yeah, yeah.

[00:22:01] So they have this piece here about cap rates, right?

[00:22:04] Yeah, I mean-

[00:22:04] And you know I like it.

[00:22:05] That's why it's one of my favorite charts.

[00:22:07] Well, hey, we love a good cap rate.

[00:22:09] So why don't you tell us what CBRE has to say about them?

[00:22:12] Yeah.

[00:22:13] So they basically say that cap rates in Canada are expected to start going down slightly in 2025, which kind of surprises me based on the chart that they've presented.

[00:22:22] But after they've been going up for the past few years, right?

[00:22:25] So remember, if cap rates are going down, that means valuations relative to income are going up, right?

[00:22:30] Because of the lower return on the asset.

[00:22:33] Some areas are already seeing small decreases helped by expected lower government bond rates, though uncertainty in global markets could change this.

[00:22:41] So any of the downside that they're seeing could potentially come from a reduction in the Canada bond yield.

[00:22:46] And the chart that they show basically charts your Canada 10-year bond yield alongside national average of all properties cap rate.

[00:22:56] And right now, the spread is about 355 basis points.

[00:22:59] The 20-year average spread is about 384 basis points.

[00:23:02] So we're kind of in that, like, you know, in that channel.

[00:23:05] Almost back to average, yeah.

[00:23:06] Yeah.

[00:23:06] But the scary part is if you look at, like, the tightest spreads historically, it's, like, right before a huge recession, right?

[00:23:11] So early 1990s, it was 211 basis points.

[00:23:16] 2006, it was 231 basis points, right?

[00:23:19] And during COVID or, like, yeah, 2022, it was about the same.

[00:23:22] I think it was 250, 300 basis points.

[00:23:24] So it was kind of the writing was on the wall there, right?

[00:23:27] So different types of properties will see different changes.

[00:23:29] Obviously, office buildings will likely see lower values, while apartment buildings might need to offer higher returns to attract investors.

[00:23:37] Maybe not if CMHC keeps just pumping that full of cash and people are still lining up to go levered long on multifamilies.

[00:23:44] I still don't know how that one's working now.

[00:23:46] I mean, I thought it was a good play when we were talking about it a lot on the show, like, a couple of years ago.

[00:23:51] It's starting to – I'm not saying it's not a good play, but it's definitely the risk profile of it has grown significantly between that point when we first introduced it to now.

[00:24:01] Yeah.

[00:24:02] And this is obviously likely due to the array of favorable financing options for the multifamily asset class that they've observed in this report.

[00:24:11] Shopping centers with strong anchor stores like grocery and legacy big box stores are becoming more and more popular with investors.

[00:24:18] And increased competition for these properties will likely push returns down slightly in 2025.

[00:24:23] Yeah, really, really interesting stuff.

[00:24:27] Okay, let's move on to the next piece here, Dan.

[00:24:29] Debt markets.

[00:24:30] Now, this is important because debt makes the world go around.

[00:24:33] And if money is too expensive, the ride stops or at the very least slows down.

[00:24:39] Now, CBRE has a bunch of info on debt markets.

[00:24:42] So we condensed it and here are some of my main takeaways from this part of the report.

[00:24:48] The first is on increased debt availability.

[00:24:51] We've said time and time again, the reason why we're seeing lower housing starts and less people doing even small cap development is because it is so hard to get money these days.

[00:25:04] But lenders are expected to provide more financing in 2025.

[00:25:07] Although CBRE predicts they'll still remain selective.

[00:25:11] This includes expansions into previously challenging sectors like retail and office.

[00:25:18] Credit spread normalization.

[00:25:20] Remember the two cars rented.

[00:25:22] The credit spreads are expected to contract toward historic norms.

[00:25:28] So back to a bit of regularity with top assets maintaining current levels while wider spreads begin to compress.

[00:25:35] Here's one that we've been talking about for a while, Dan, is more conservative underwriting.

[00:25:40] And lenders are adopting more cautious approaches by factoring in larger vacancy.

[00:25:46] We just did that episode with ULI and PwC where we looked at office vacancy across the country.

[00:25:53] And we look at stuff like 30% in Calgary, in mid-20s, in Edmonton, and even a low office vacancy at over 10% in Vancouver.

[00:26:03] Underwriting is going to get tighter.

[00:26:05] And that's one of the things that's going to change is vacancy provisions, making more cautious income projections and valuations as well.

[00:26:13] And this practice should also be adopted by all investors, not just if you're buying a class A office space.

[00:26:18] But if you are buying a class B duplex in a secondary market, I urge you to maybe increase vacancy, be more cautious about income and the valuation of your asset class, of your assets.

[00:26:34] Yeah, I'll jump in on that as well.

[00:26:38] Like we've, you know, in realist.ca, which by the way, we do have a monthly option for people who aren't looking for one-on-one coaching and just want to hop on, get a good group setting right now.

[00:26:51] Because we kind of tapped out how many students were able to take on in a one-on-one setting.

[00:26:55] So give us a shout if you're interested in that.

[00:26:57] But we regularly go through reports like this, especially the ones where what's happening with rents and with vacancy rates.

[00:27:07] And while I haven't seen vacancy climbing yet, and it would be like our housing market is so oversubscribed that I don't know if I can imagine vacancies really, really jumping up if rents continue to come down.

[00:27:20] Because so this is the thing.

[00:27:21] So, you know, we went through it with a lot of the realist.ca students who are looking at these rental reports and everybody starts changing their models now saying, okay, well, what if like if rents just went down, you know, two, three percent in some markets, right?

[00:27:33] And in Toronto and on a per square foot basis, maybe they're not.

[00:27:36] But Calgary, you know, you're seeing some rents dropping.

[00:27:40] City of Toronto, you're seeing a little bit, but the unit sizes are shrinking.

[00:27:43] So it's kind of hard to tell.

[00:27:44] But you put that into your model and see.

[00:27:47] And now all of a sudden your income scenario changes and the model becomes less optimistic.

[00:27:51] And deals are becoming harder and harder to pencil, even though prices are getting better and rates are getting better.

[00:27:57] And so there's so many variables that happen in this whole thing.

[00:28:01] And it's like, okay, well, now you have to model it.

[00:28:02] When do I think rents are going to recover?

[00:28:03] Or do I think they're going to be flat for a period of time?

[00:28:06] Or what's going to happen there?

[00:28:08] So for the asset class portion that they have in here, we'll start with the office market with the three trends to watch that CBRE has identified.

[00:28:16] So number one, tenants now prioritize experience over just quality, seeking spaces that offer a lot more than traditional offices, right?

[00:28:24] Because they really, I mean, look, your corporations that employ a lot of people, they need to compel those people to come back to the office if they feel those people are more productive in the office.

[00:28:35] Which I think most corp seem to feel that way.

[00:28:38] And so they need to have good office space to do that.

[00:28:40] We're seeing limited new construction that will help stabilize the market.

[00:28:43] Because we remember, at least in Toronto and a couple of other cities, I know every city that we've been to in Canada now, they all have a bunch of brand new office buildings, right?

[00:28:51] Like I feel like there was definitely a bit of a wave starting pre-COVID.

[00:28:56] People were fired up to put offices in and then it was like, oop, that was a bit of a wild decision heading into this change.

[00:29:04] But, you know, this might create a shortage of modern office buildings later if we're not continuing to fill up that pipeline.

[00:29:10] Vacancy rates are expected to peak in early 2025 with improving market sentiment signaling a potential recovery.

[00:29:16] Which I would argue is maybe a little bit early, but I do expect it to take place next year.

[00:29:20] Like even in a recession, I think you start to get rates come down, people reenter the market.

[00:29:24] That'll happen with rents too.

[00:29:25] That's kind of what I was saying with the vacancy rates.

[00:29:27] You know, offices would be the same.

[00:29:28] It's like, man, you and I would rent an office if the rates became compelling for us again, right?

[00:29:33] So it all becomes a function of that.

[00:29:36] Yeah, well, I mean, we've been to meetings downtown where we've, you know, I'm not going to name the names,

[00:29:40] but there's been a few offices that we've walked in and they've taken, you know, I don't know, 50 or 100, 200,000 square feet.

[00:29:46] And half of it or like a third of it is empty.

[00:29:48] And we're like, when did you guys move in?

[00:29:50] They're like, oh man, we got a killer deal during COVID, like pennies on the dollar.

[00:29:54] And yeah, you know, like so.

[00:29:57] But yeah, a growing divide does exist and is continuing to grow between the premium and standard office buildings as tenants continue to prioritize quality.

[00:30:06] So CBRE's 2024 survey shows that 59% of respondents plan to upgrade their space, even with even class A tenants moving to AAA buildings.

[00:30:18] So that's a lot of tenants that plan to move to better spaces.

[00:30:22] And I'll just provide a quick piece of context here.

[00:30:26] So class A offices are prestigious buildings with premium finishes, modern systems, prime locations, and those obviously command above average rents.

[00:30:36] Wherever you are in Canada, think about the best office space in the most downtown of the biggest city that you're close to.

[00:30:45] That is likely a class A or maybe even a class AA or AAA because office buildings are classified as A, B, or C, but broken up into when you get into the A.

[00:30:54] It can be A, AA, or AAA.

[00:30:56] So class B offices are offered, you know, kind of average rents and finishes usually not in the best part of downtown or maybe removed from a little bit outside of downtown.

[00:31:09] And of course, class C buildings just are basic functional spaces at low or below average rents, often with older infrastructure and less desirable locations.

[00:31:18] So long story short, we'll see premium locations maintain low vacancy rates while other buildings are going to have to figure out a way to upgrade to remain competitive as the quality gap widens.

[00:31:31] Yeah, that's the, that's like kind of a fascinating piece of the puzzle, right?

[00:31:35] Is the quality gap.

[00:31:36] Cause I think you're seeing that take place in, in the res space as well.

[00:31:39] Like, and, and I would say like, I've always catered to more of the lower end of that market.

[00:31:44] Cause I, I just take pride in being able to provide affordable housing.

[00:31:47] I want to be landlords to those people that a lot of other people don't, don't want to be landlords too, but you're seeing a similar thing take place in residential where you have this affordability, like this top end affordability, which is like homeownership.

[00:31:58] And like, and so basically there's a, you know, people who are leaving homeownership, they have a ton of money saved up or, or they're, they're giving up on homeownership.

[00:32:04] They have a ton of money saved up.

[00:32:05] They can usually afford like a full mortgage, et cetera.

[00:32:07] And so that kind of pulled your, your res rental market up a lot from the top as well.

[00:32:12] So you can kind of see that quality gap existing in the red space.

[00:32:15] The next piece compares new construction and office space.

[00:32:18] And it's titled end of construction cycle.

[00:32:20] Good for now, but not for long.

[00:32:21] So high vacancy rates in Toronto and Vancouver are partly due to new supply and lower pre-leasing levels dropping from 75% in 2021, sorry, 2020 to under 50% for upcoming projects.

[00:32:36] So basically our pipeline is all but dried up.

[00:32:38] The current cycle has added 27.2 million square feet to national office inventory since 2020.

[00:32:44] New construction since then slowed significantly due to high vacancy rates, interest rates and construction costs.

[00:32:53] So a lot of factors that you don't want happening all at the same time with construction at a 20 year low now and limited new deliveries expected after 2025, this could help market recovery as existing spaces absorbed.

[00:33:05] So while reduced construction may help short-term stability, it risks creating a shortage of modern office space.

[00:33:11] So similar to the condo market slowdown, we are going to be facing the same problem in this asset class, they state in the report.

[00:33:19] I don't know if this one's a tough one for me, right?

[00:33:21] Because you see what was happening in Calgary, which we talked about in a recent episode.

[00:33:24] It's like, what happens on the old office space?

[00:33:27] If we're saying that it's basically obsolete because people either want to work in AAA or work from home,

[00:33:33] do those just end up like trading at a, you know, a low enough per square foot value that basically people can buy them and convert them to res?

[00:33:43] I don't know.

[00:33:44] Yeah.

[00:33:45] I mean, look, only time will tell.

[00:33:47] Okay, but let's keep moving.

[00:33:49] We'll go on to the next asset class here, which is retail.

[00:33:52] And these are the three trends that CBRE suggests.

[00:33:54] You keep an eye on if you are already in or interested in this space.

[00:33:59] The first one being limited retail supply will force stores to adapt by expanding to secondary markets or adjusting store sizes.

[00:34:07] I think we've seen a lot of that.

[00:34:09] Anecdotally, I have.

[00:34:12] Growth normalizes post-pandemic with success-favorite retailers who are focused on savings, entertainment, and innovation.

[00:34:18] So that is the end users who are going to those retailers, right?

[00:34:23] So let's say like a no-frills, for instance, rather than a Whole Foods.

[00:34:27] Success in 2025 depends on diverse consumer access points and sales channels.

[00:34:33] So again, how creative can you get to attract your customer?

[00:34:38] Yeah.

[00:34:38] The limited new retail construction in Canada has led to low vacancy rates and rising rents with construction costs being the main constraint rather than demand.

[00:34:48] So it's a very similar story across asset classes.

[00:34:52] Construction costs are really prohibitive in getting new supply on board.

[00:34:56] That's what inflation really looks like.

[00:34:58] This trend will continue through 2025, maintaining pressure on vacancy and rents, which is why inflation kind of begets more inflation, right?

[00:35:05] Now all of a sudden you've got these gaps and now rents have to go up.

[00:35:08] And then retailers need to charge more.

[00:35:12] This could result in challenging upcoming year for retailers, especially when layering on potential recession and associated pullback in consumer spending.

[00:35:19] Expect growth to continue, however, in a more conservative manner.

[00:35:25] Shoppers will remain cautious and keep household budgets tight against this backdrop in 2025.

[00:35:29] And you can see that already reflected in household savings increasing.

[00:35:33] Although if you actually look at the stack in data, it's like basically only rich people saving and they've kind of skewed the whole thing up.

[00:35:39] But technically household savings data does look like people are spending less money and remaining cautious.

[00:35:44] Yeah.

[00:35:45] Okay.

[00:35:45] So that's retail.

[00:35:46] Let's move on to industrial real estate.

[00:35:49] Here are the three trends that CBRE wants you to look out for.

[00:35:53] The industrial market faces ongoing demand challenges into 2025, though signs of recovery by mid-year are likely.

[00:36:03] Record new supply levels of outpaced demand with divisible spaces showing resilience.

[00:36:09] Rents will continue moderating until excess supply is absorbed with growth unlikely to resume before late 2025.

[00:36:18] And so it sounds like industrial has kind of peaked and will spend 2025 leveling out a little bit and kind of getting back to its normal.

[00:36:26] Because again, right before the pandemic and after and during and after the pandemic are three very different life cycles for industrial real estate.

[00:36:36] Yeah.

[00:36:36] We mentioned it, I think, in this episode, like the industrial market.

[00:36:40] There's so much construction going on.

[00:36:42] You can still see it.

[00:36:43] And now they're saying the industrial market is facing headwinds after this recent expansion with rising availability due to softer demand and new supply.

[00:36:50] So you've got a ton of new supply.

[00:36:52] It's quicker to build.

[00:36:53] Like it's not like condos where, you know, you got to sell a thousand of them and be able to build a project.

[00:36:57] But, you know, they're in their steel frame.

[00:37:00] They're not concrete.

[00:37:01] They're not tall.

[00:37:01] They're, you know, tall buildings.

[00:37:03] So it could be a little bit more responsive.

[00:37:05] The report does say that unlike the 08-09 crisis, which saw manufacturing losses and company retreats, today's situation stems from retailers and 3PLs adjusting after overexpanding during 2020 and 2023's e-commerce boom.

[00:37:19] While some sectors remain demand, like food and beverage, data centers, obviously, was one we talked about a lot.

[00:37:26] And I still think there's a ton of growth.

[00:37:28] Like I think that's a huge part of Canada's economy moving forward.

[00:37:30] Really, really feel that way.

[00:37:32] Auto EV plants, obviously, in Ontario and local growth in Alberta.

[00:37:35] The activity isn't offsetting the broader slowdown from retailers and logistics companies that they're observing in the market.

[00:37:41] Yeah, exactly, Dan.

[00:37:43] Now on to the final asset class we'll be looking at.

[00:37:46] Yes, we did save the best for last.

[00:37:49] Well, maybe not the best, but likely the most relevant to both you and I, Dan, and to you, our lovely listeners.

[00:37:57] Dan, can you summarize the three trends that CBRE has outlined for multifamily properties in 2025?

[00:38:05] Yeah, so there's no disputing that we are going to see massive immigration changes in Canada.

[00:38:11] And despite these immigration changes potentially impacting rental demand, affordable units should maintain low vacancy rates.

[00:38:17] And that's, again, where you start to see that spread.

[00:38:19] Like anybody who is renting on the luxury side might actually be at risk of losing tenants to homeownership as homeownership becomes more affordable.

[00:38:27] But on the lower end, affordability is always sexy is what I say, right?

[00:38:31] Affordability is always in style.

[00:38:32] People will always need it.

[00:38:34] Multifamily rent growth remains uncertain for 2025, particularly for new luxury units.

[00:38:39] And new construction will likely pause as developers await market stabilization and absorption of current supply.

[00:38:46] Yeah, look, it's no secret here that affordability still remains the key challenge in Canadian real estate.

[00:38:53] Even with falling interest rates, the gap between housing costs and incomes keeps renting as the preferred choice for many,

[00:39:00] even like myself, who I rent my personal, my primary residence and invest in real estate.

[00:39:07] Recent caps on immigration, students and temporary workers may ease rental market pressure, but that is a double-edged sword.

[00:39:16] Now, vacancy rates are expected to rise most significantly in luxury units in 2025.

[00:39:22] High construction costs have pushed rents in these buildings beyond what most households can afford.

[00:39:26] So similar to a lot of the purpose-built rental and office and this kind of flight to quality,

[00:39:36] we're likely going to be seeing a little bit of that in the multifamily space as well.

[00:39:42] Yeah, so they have this great chart here that shows the CAGR of three different things.

[00:39:48] When I say CAGR, I'm not talking about a university party where you have some CAGRs that you got from the beer store

[00:39:53] and you charge people access.

[00:39:55] It says it's CAGR, compound annual growth rate.

[00:39:59] Yeah, and it's a rate of return that an investment would need to have every single year in order to grow

[00:40:07] from its beginning balance to its ending balance over a given time interval.

[00:40:11] So as an example, let's say the two politicians who would be running for prime ministry both believe

[00:40:17] in something called the Century Initiative in Canada,

[00:40:19] that that wants to see the population hit 100 people in Canada by the year 2100.

[00:40:24] To do that, it would have to grow at like 1.5% CAGR, C-A-G-R.

[00:40:29] I don't even know if you're supposed to acronym this one, but I just did.

[00:40:32] This really makes me thirsty to be honest.

[00:40:34] I might just have to go pour myself a pint after this.

[00:40:36] Pour myself a keg.

[00:40:37] Yeah.

[00:40:38] It assumes that any profits were reinvested at the point of each investment period over the investment's lifespan.

[00:40:44] And basically, they show that homeownership costs would require a 5.1% compound annual growth,

[00:40:51] or sorry, grew at a 5.1% compound annual growth rate,

[00:40:55] whereas the average two-bedroom monthly rent grew at 3.3%,

[00:41:01] and the median household income grew at just 2.8%.

[00:41:06] So-

[00:41:06] A little bit of a delta.

[00:41:07] Yeah.

[00:41:08] Yeah.

[00:41:08] So the cost of homeownership vastly outpaced on an annual growth basis,

[00:41:13] both renting and incomes.

[00:41:15] And that's one of the reasons why so many people have been pushed out,

[00:41:18] and why renting becomes a more compelling option for people when you just look at,

[00:41:22] like rents seem to track incomes pretty well in this chart.

[00:41:26] And actually, to be fair,

[00:41:27] house prices also seem to track incomes pretty well in this chart until about 2020,

[00:41:33] when-

[00:41:33] Something.

[00:41:34] We just YOLO'd.

[00:41:35] Half a fact.

[00:41:36] Okay, so on the topics of rent,

[00:41:38] rent prices in 2025 are expected to stay mostly flat.

[00:41:42] Again, this is with multifamily properties.

[00:41:45] Really only expected to rise with inflation,

[00:41:48] but there's one exception,

[00:41:50] and I just mentioned those new luxury apartments.

[00:41:52] Looking back on 2024,

[00:41:54] rent increases slowed down significantly compared to record high increases that we saw in 22 and 23,

[00:42:01] with different parts of the market behaving quite differently from one another.

[00:42:05] High construction costs,

[00:42:07] of course,

[00:42:07] the culprit across all asset classes here,

[00:42:10] drove up rents for newer units,

[00:42:12] but increased supply in 2024 led to higher vacancies,

[00:42:16] and rents actually falling in some major Canadian cities.

[00:42:20] Major cities like Toronto and Vancouver saw significant rent decreases due to oversupply of condos in 2024,

[00:42:26] while affordable-

[00:42:27] It's crazy we're calling it an oversupply now.

[00:42:29] I thought that was just an American term.

[00:42:31] I didn't know we were capable of being oversupply.

[00:42:33] Isn't it crazy?

[00:42:33] We literally went from like,

[00:42:35] you can't oversupply this market,

[00:42:37] to like CBRE saying we're in oversupply of new condos in 2024.

[00:42:41] I know.

[00:42:41] But anyway.

[00:42:42] But it's an oversupply of just one very specific asset class that was built poorly,

[00:42:48] that was not built with the end user in mind.

[00:42:50] So it is the correct use of the word,

[00:42:53] but for a very small portion of,

[00:42:56] I think,

[00:42:56] what we're talking about here.

[00:42:58] Yeah,

[00:42:59] for sure.

[00:42:59] 2025 rent trends remain uncertain,

[00:43:02] influenced by new apartment construction,

[00:43:03] and projected immigration changes.

[00:43:05] So obviously,

[00:43:06] it honestly is anyone's bet at this point.

[00:43:09] Yeah.

[00:43:10] What happens,

[00:43:11] what the outcome of all of that is.

[00:43:12] Yeah.

[00:43:12] And look,

[00:43:13] for affordable apartments,

[00:43:15] rents will likely stay flat,

[00:43:16] or again,

[00:43:17] kind of rise alongside inflation in 2025.

[00:43:21] Cities like the prairie cities,

[00:43:23] like Calgary,

[00:43:24] Edmonton,

[00:43:24] Regina,

[00:43:25] Winnipeg,

[00:43:26] will probably see rents go up,

[00:43:28] because more and more people are moving there to chase that affordability.

[00:43:32] Overall,

[00:43:33] rents across Canada will either stay the same,

[00:43:36] or drop slightly in 2025.

[00:43:38] But it's worth noting that even with these changes,

[00:43:41] rents will still be higher than they were three years ago,

[00:43:45] showing that the rental market remains strong in the long run.

[00:43:48] For the final point,

[00:43:49] a temporary pause in multifamily construction is expected as population growth slows,

[00:43:54] further impacting the already declining construction market in major cities,

[00:43:58] something we've talked about at length on the show,

[00:44:00] so I won't belabor it,

[00:44:01] a decision that delays but doesn't solve future housing needs.

[00:44:05] And I wonder if this trickles over to the places like the Edmontons of the world,

[00:44:09] where everybody and their mother seems to be buying CMHC,

[00:44:13] MLI select deals at 5% down somehow through Toronto pre-con brokers.

[00:44:17] But I,

[00:44:17] you know,

[00:44:18] like I'm just,

[00:44:18] that's where,

[00:44:19] don't want to end up in these,

[00:44:22] seeing these oversupplied scenarios,

[00:44:24] getting kind of ported all around the country,

[00:44:27] because that's where it can end up becoming a big problem.

[00:44:29] Agreed.

[00:44:30] So kind of finally here,

[00:44:32] big cities like Vancouver and Toronto are,

[00:44:34] seem to be facing three major problems.

[00:44:37] They're condo markets right now.

[00:44:38] Too many condos,

[00:44:39] too many new condos are built or being built.

[00:44:42] Very few people are buying them.

[00:44:44] And some construction projects are actually going bankrupt because of these challenges.

[00:44:49] And the negative mood in the market,

[00:44:52] builders will likely stop new projects in 2025,

[00:44:55] waiting to see how many people actually want to buy what they are selling.

[00:44:59] Huh?

[00:45:00] Who would have thought about economics 101,

[00:45:02] I believe.

[00:45:03] However,

[00:45:04] this pause in construction could lead to a shortage of homes in the future,

[00:45:07] especially when more people start moving to Canada again.

[00:45:10] So Dan,

[00:45:11] this is just kicking that proverbial can down the road once again,

[00:45:16] as we do here.

[00:45:18] Yeah.

[00:45:18] So there you have it.

[00:45:19] The summarized version of the 2025 market outlook by CBRE.

[00:45:23] The report itself goes into much greater detail.

[00:45:25] So if you want to know more,

[00:45:26] go check out the report online on CBRE's website.

[00:45:29] Just Google 2025 Canada real estate market outlook.

[00:45:32] It's a great report.

[00:45:33] We read it every single year.

[00:45:34] We read all of the stuff they put out on a quarterly basis.

[00:45:37] In speaking of 2025,

[00:45:39] if you're looking forward to absolutely crushing your goals,

[00:45:41] we do have a little free goal setting challenge that we're going to be running.

[00:45:45] So just head over to realist.ca to sign up for that.

[00:45:48] We'll get,

[00:45:48] make sure that you get registered.

[00:45:50] Basically,

[00:45:50] we're going to have weekly accountability checkpoints.

[00:45:52] We'll put them in your calendar.

[00:45:53] We'll send you a reminder to post in the group and say what you did each week to progress towards your,

[00:46:00] let's call them new year,

[00:46:01] new year's resolutions.

[00:46:04] And at the beginning of the year,

[00:46:06] we're going to have a big group goal setting session together where we talk about what those goals are and how to reverse engineer them into weekly milestones.

[00:46:12] Cause apparently that's a kind of difficult process for people.

[00:46:15] So yeah,

[00:46:15] all this talk about keggers.

[00:46:17] I might be doing new beers resolutions.

[00:46:19] New years,

[00:46:20] new beers,

[00:46:21] man.

[00:46:22] Thanks so much for listening to everybody.

[00:46:24] We'll see you soon.

[00:46:25] The content of this podcast is for educational and informational purposes only.

[00:46:29] It is not intended as financial,

[00:46:30] legal,

[00:46:31] or investment advice.

[00:46:32] Always consult a qualified professional for advice tailored to your unique circumstances.

[00:46:37] The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations.

[00:46:44] Daniel Foch is a real estate broker licensed with Valerie real estate Inc.

[00:46:48] Website is Valerie.ca V-A-L-E-R-Y.ca and a member of the Canadian real estate association,

[00:46:56] the Ontario real estate association and the Toronto real estate board.

[00:47:00] Nick Hill is a mortgage agent and partner at OWL mortgage license number one zero three one seven agent license M two one zero zero four zero three seven.

[00:47:12] You

[00:47:13] You

[00:47:13] You

[00:47:13] Thank you.