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.”
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.
The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.
Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.
Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.
Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.
In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.
This report by The Canadian Press was first published Nov. 5, 2024.
