Benjamin Tal, the deputy chief economist at CIBC World Markets. (Courtesy CIBC)
“We are not out of the woods yet.” However, the end of the pandemic appears to be in sight, the commercial real estate industry has more data about potential lingering fallouts and when the recovery begins, it is likely to be strong and fast.
Those were key takeaways from Tuesday’s opening presentations at the virtual RealCapital conference, where CBRE’s Paul Morassutti and CIBC World Markets’ deputy chief economist Benjamin Tal provided overviews of the industry and economy.
Tal broke his analysis down into three time periods: The immediate economic impact, the second half of 2021 and the potential for longer-term economic “scarring.” The first two he summed up in short order.
“I believe we are already in the midst of a double-dip recession. The economy as we talk is basically shrinking by one or two per cent in Canada. This is the short term. It’s not great,” he said.
However, “I believe the recovery will be very strong. The second quarter, the spring, will be a transition period and then I am talking about a very strong second half.”
Tal predicted GDP growth of up to six or seven per cent in the second half of 2021. Because relatively few economic sectors have been affected by the pandemic — although those impacted have been hit deeply — he said a recovery can happen very quickly.
Pandemic’s economic impact deep but narrow
The hardest-hit sectors are mainly service-oriented. On the jobs front, those affected have largely been the lowest wage earners, meaning people with higher disposable incomes are banking money for better times ahead.
“The good news is the service industry is very quick to recover,” Tal noted, laying out the basis for his optimism long-term economic “scarring” will be minimal. “This is all about cash.
“For every dollar decline in wages, the Canadian government injected seven dollars into the economy. This is very important. This is the first recession ever where income actually went up. And it went up in a very significant way.”
That bubble of excess savings is about $90 billion and growing, he said.
“You increase your savings. You don’t want to do that, but you are forced to because you cannot spend. So your money is there, your income is there, but you are not spending,” he continued. “(People) are dying to go to a restaurant, but they are not willing to die to do so. So, they are waiting.”
Inflationary concerns
One significant concern is a huge injection of spending into the economy could trigger inflation and higher interest rates.
“Inflation expectations are starting to rise,” he said. “I cannot talk about the economy rebounding by four, five or six per cent without saying that some inflationary pressures will be there.”
Tal called inflation “the No. 1 issue that will impact your business over the next three to four years” but said both the U.S. Fed and the Bank of Canada view it as a short-term issue.
“They are telling you ‘We are going to tolerate that inflation. We are going to allow that inflation to overshoot because we view it as a blip, we view it as a very short-term story’,” Tal said. He believes both central banks will employ strategies to control potential inflation on a longer-term basis.
When consumers do start spending that excess cash, Tal and Morassutti see changes coming to some current trends which affect CRE.
Housing: Sales to stay strong, rents to stabilize
CBRE’s Paul Morassutti. (Courtesy CBRE)
On the housing front, where sales have remained strong despite the pandemic, they both expect rents to also quickly firm up.
“It is true that multifamily fundamentals in Toronto have weakened,” said Morassutti, the vice-chairman of valuation and advisory at CBRE.
“Rents are down and vacancy is up, mainly due to a glut of small condos being added to the long-term rental supply and the disruption to immigration and foreign students. For the most part, we view this as temporary.”
Tal said Canada is underestimating population growth because it is not counting residents repatriating from countries such as Hong Kong, nor is it tracking foreign students whose visas expired but have been allowed to stay under revised government regulations.
“I expect the supply factor in the multiresidential sector will ease and therefore I see some improvement and stabilization in rent,” Tal said. “We are starting to see it right now, also in vacancies.”
Home sales have benefited from the stratified economic impact. A significant group is “not touched financially by this crisis,” mainly in demographics which can afford to purchase homes.
“They are in position to take advantage of low interest rates and that is exactly what they are doing. And that is why the housing market is doing so strongly.”
Higher office vacancy “not cataclysmic”
While the work-from-home situation will continue to some degree, Morassutti said once things return to normal many employees will return to offices, creating shifts in both housing and office trends.
“The future is not binary, it is not one or the other, it is both. It is flexibility,” he said. “The issue is what would, say, a 10 per cent reduction in demand have on long-term vacancy? After all, the retail sector has been completely upended by the movement of just 10 to 15 per cent of sales to online platforms.”
In all of its office projections, Morassutti said CBRE sees vacancy rising. A 10 per cent reduction in office space demand could translate to a vacancy increase of up to 400 basis points, he said.
“Is the office sector becoming the retail sector? The answer is no. Here In Toronto, the real issue over the next few years is new supply. And this shouldn’t come as a surprise since too much new supply coming at the wrong time has always been the office sector’s Achilles heel,” he explained.
“I would also note that we added almost five million square feet of supply in Toronto in 2008 in the midst of the global financial crisis and another six million square feet beginning in 2013 and quite frankly, the market outperformed virtually all vacancy forecasts both times.
“Is it concerning? Yes, of course it’s concerning, but it is not cataclysmic.”
Vancouver and Toronto still have North America’s lowest office vacancy rates, with Ottawa and Montreal also in the top five.
Retail, industrial outlooks
The outlook is similar for hard-hit sectors of retail.
“We would reiterate the view we have held for some time,” Morassutti said.
“The sector is heavily bifurcated with secondary assets bearing a disproportionate share of the operational pain. Some retail assets have fared quite well, notably grocery-anchored centres where you have a strong concentration of essential retailers.”
Retail, particularly hospitality and entertainment, will be a key benefactor once the pandemic eases.
“Many Canadians are sitting on tons of cash and there is a lot of pent-up demand. There are good-news stories in the retail sector.”
Industrial remains a good-news story and Morassutti said the growth potential is wider than just e-commerce, distribution and warehousing.
“For anything logistics- or warehouse-related, we think there is ample runway,” he noted. “But the entirety of the industrial investible universe is not just logistics or distribution centres. A lot of it is manufacturing, a lot of it is small-bay, multi-tenant. A lot of it has nothing to do with the e-comm tailwind that everyone points to.”
This dovetails with an expected expansion of the life sciences sector, which is increasingly seeking office, R&D and manufacturing space.
“We fully expect this sector to follow a similar trajectory that we have witnessed in the U.S., albeit on a smaller scale,” he said.
Challenges remain, but outlook “looks good”
Over the mid- to long-term, Morassutti said challenges remain, but CBRE remains bullish on real estate.
“In a world where there is $18 trillion of negative-yielding debt, the yield provided by real estate looks good,” he said.
“In our opinion, geopolitical stability will be rewarded, transparency will be rewarded, stable banking systems, thoughtful immigration policies and economic growth will be rewarded, resiliency will be rewarded.
“The fastest-growing city in North America is Toronto and many other Canadian cities are on that list. Canadian employment growth is expect to double the G7 average over the next few years.
“So taking all of that into account, we think Canada stacks up very well.”
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
