The office real estate crash will be so sharp and deep that Capital Economics thinks office values are unlikely to recover by 2040 | Canada News Media
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The office real estate crash will be so sharp and deep that Capital Economics thinks office values are unlikely to recover by 2040

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In its original forecast on the impact of the pandemic on the office sector, Capital Economics said that office occupancy would fall by 7% to 8% by 2025, with that, “vacancy would rise markedly and remain elevated” through 2030. And those lower occupancy levels and declining rents would result in a 20% decline in portfolio incomes by 2025, all the while net operating incomes would remain below pre-pandemic levels through the decade.

Now, the research firm suggests that the “35% plunge in office values we’re forecasting by end-2025 is unlikely to be recovered even by 2040,” in a new report published on Thursday. That means that offices are unlikely to regain their peak values in the foreseeable future, or in the next 17 years, per Capital Economics. That’s because of dramatically lower demand following the shift to remote work that emerged from the pandemic.

The report, written by Capital Economics’ deputy chief property economist, Kiran Raichura, likens the reduction in office demand to the experience of malls over the last six years as consumers have leaned into online shopping. There’s been no real recovery in the mall sector that’s been plagued by structural headwinds, Raichura said, and Capital Economics expects the office sector won’t prove to be much different.

“We expect office landlords to face a similar fate over the next few years, with the prospect of a rapid bounce-back in the sector’s relative performance looking slim despite its sharp falls to-date,” Raichura wrote.

As Fortune’s previously reported, all commercial real estate is vulnerable to the Federal Reserve’s aggressive rate hikes because it’s largely built on debt. So with higher interest rates, the cost of borrowing goes up, and that can sometimes result in delinquencies and defaults. But on top of that, the office sector is suffering from a lack of demand because people are working from home—that’s why the sector is considered to be the most at risk.

Raichura said they have the data to support this view, comparing offices to malls. Raichura first pointed to a global survey by Knight Frank Cresa that recently found 56% of firms have adopted a hybrid work model, which he said is consistent with low rates of physical office utilization, like office key card swipes that are close to 50% of early 2020 levels (which were only around 70% to 75%). Because of that, companies are moving to save on physical space. Office vacancy rose from 16.8% in the last quarter of 2019 to 19% in the first quarter of this year, Raichura said, citing the Real Estate Information Standards data. However, that might not be totally representative of the situation at hand.

“The true increase is roughly double that when sublease vacancy is taken into account,” Raichura wrote in the report. “And there’s likely further to go. As a result, office vacancy has already seen a bigger increase than the 3.5%-pts increase seen by malls between H2 2016 and Q1 2023.”

Yet office net operating incomes were actually higher in the first quarter of this year than in the first quarter of 2020, according to the report. Still, office investors are moving forward with caution. Raichura wrote that major landlords have returned stranded office assets to lenders, and that will likely continue over the next couple of years considering the uptick in commercial mortgage backed securities delinquencies seen in May.

“REIT investors are also shying away from offices,” Raichura wrote. “A little more than three years into the downturn, the office REIT total returns index is down by more than 50% relative to the all-equity REIT index. That is roughly on a par with the drop in the regional mall REIT total returns index in the first few years of the retail sector’s correction.”

The office sector hasn’t hit its bottom yet, which is why Capital Economics suggests office values are unlikely to return to their pre-pandemic peaks even 17 years from now. However, if they did, there would be some caveats.

“Demolitions and conversions of the worst assets may partially counteract the impact on valuation-based indices, but ultimately landlords will have to bear those costs, so the road ahead for office owners is set to be an arduous one,” Raichura wrote.

 

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Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

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TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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Homelessness: Tiny home village to open next week in Halifax suburb

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HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.

Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.

Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.

The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.

Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.

They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.

The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.

This report by The Canadian Press was first published Oct. 24, 2024.

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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