Rethinking Efficiency
As Canada grapples with declining GDP per capita and productivity challenges, Quebec's CRE market faces both obstacles and potential opportunities. Canada's GDP per capita has fallen behind the OECD average, with a 0.1% decline in the second quarter of 2023 marking the fifth consecutive quarterly drop. Furthermore, the construction industry, which accounts for 12.6% of all labor hours in Canada (up from 7% in 1997), has shown no productivity growth over the past forty years. This lack of efficiency in a crucial sector directly impacts CRE development costs and timelines in Quebec.
The multifamily sector in Quebec, long a bright spot in CRE, is experiencing a slowdown in rent growth. However, the fundamental drivers of population growth and low supply remain in place. Montreal, in particular, may see a shift in investment focus towards more affordable submarkets as rents in prime areas reach unsustainable levels. Despite these headwinds, Quebec's CRE market is showing signs of resilience. Transaction volumes across asset classes increased slightly in Q2 2023, indicating a cautious return of investor confidence. This uptick is particularly noteworthy given the broader economic context.?
As for Quebec's industrial market,? it is plateauing after a period of record rental growth. Despite this, the sector continues to perform relatively well, with opportunities still present for savvy investors and strong underlying fundamentals.?
With the Bank of Canada now well into a rate cut cycle, having cut rates by 75 basis points, investors are anticipating further reductions. This expectation is influencing transaction timing, with some players waiting for more favorable borrowing conditions. The provincial CRE market remains sensitive to broader economic performance and the recent uptick in unemployment and weak GDP growth could introduce volatility. The ongoing housing shortage in Quebec continues to drive demand for multifamily investments. However, affordability concerns in major centers like Montreal may shift focus to secondary markets.
While fundamentals remain in the favor of the commercial real estate sector, it must grapple with the broader productivity crisis affecting Canada. Innovations in construction methods and property management will be crucial for maintaining competitiveness. Quebec's changing demographics, including an aging population and increased immigration, will also play a role and influence demand patterns across CRE sectors and the industry productivity.
For CRE investors and professionals in Quebec, a focus on quality assets in resilient sectors will be key. Investors should also consider the potential for adaptive reuse projects as a means of capitalizing on changing market demands and unlocking value of less traditional asset types. Staying attuned to demographic shifts and their impact on housing and retail preferences will also be crucial for long-term success as this will continue impacting the long term value of portfolio assets in Quebec's CRE market.
As we navigate these complex market conditions, it's essential to maintain a balanced perspective. While challenges exist, Quebec's CRE market also presents significant opportunities for those who can identify and capitalize on emerging trends.