Real estate prospects have changed considerably since the beginning of the year. With the steep rise in interest rates and the looming recession on the horizon, we have gone from good weather to threatening gray skies. Investors are taking shelter while waiting for the sun to return.
Posted at 8:00 a.m.
New residential projects delayed
Construction costs continue to rise, especially labor costs. Added to this lackluster picture is the increase in financing costs. The profitability of rental housing tower projects is no longer there. “A majority of investors will suspend their projects or do less, the famous wait and see that many have already adopted in 2002,” said Noémie Lefebvre, Director of Real Estate and Land Development at Groupe Altus.
She was speaking at the Montreal Market Trends event, which took place Tuesday noon. It was organized by the Institut de développement immobilier du Québec.
Result: the peak of 32,000 housing starts in the Montreal region recorded in 2021 will not be beaten. The forecast is for 26,000 in 2022 and even less for 2023.
Decline in value in sight
The real estate premium, i.e. the difference between the return required by investors on an asset and the Canadian government bond rate on long-term securities, has contracted by 150 points in recent months, making it the lowest premium in 15 years, a prelude to higher returns demanded by investors. Like a bond, the yield and value of a real estate asset move in the opposite direction. When the yield goes up, the price goes down.
“It’s no longer a secret, yields will increase by 25 to 50 points in the residential rental sector,” said M.me Lefebvre.
In the multi-tenant residential sector, a 25 basis point increase in yield translates into a drop in value of 6% to 7%, at constant income. As rents are expected to increase in the range of 8% to 10% for new buildings that do not fall under the control of the Housing Court, the value of apartment buildings should stabilize in 2023.
One in four offices vacant in 2025
Telework is here for good, warned Sylvain Leclair, senior vice-president of the Altus Group, who shared the platform with Mme Lefebvre. The building availability rate stands at 17.5% in the Montreal region, and has been rising steadily in recent quarters. “There have been 4.4 million square feet of office space available downtown since the start of the pandemic, or 4.4 towers like 1250 René-Lévesque Boulevard,” he said.
As leases come to an end, expect tenants to reduce the area under lease by 20% to 40%. In the worst-case scenario, the office availability rate could peak at 28.8% in the city center, just think about it.