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The high interest rate environment of 2023, combined with an uncertain outlook for office space, weighed on the Canadian real estate market, according to a Colliers national investment report released Thursday.

But the report concluded there are hopeful signs ahead, as interest rates appear set to fall and Canada experiences record-high population growth, a strong labour market and above-inflation rent growth for many assets.

“Strong fundamentals underpin the investment market,” the report said, noting that while both the dollar volume and the number of sales have declined from their peaks in 2022, they remain at pre-pandemic levels.

“Canada remains attractive to international investors, who value the combination of political stability, a lower Canadian dollar, and outperformance in certain assets like industrial and housing,” it said.

The report identified shifts in the real estate investing market in three areas: the buyer profile, the asset classes preferred by investors, and the geographic distribution of sales

On the buyer front, it noted that institutional investors, like pension plans and life insurance companies, have found themselves overweight on real estate or are looking to diversify to global markets.

The shift in real estate asset classes is toward industrial and logistics, which now comprises fully half of the sales volume.

As for geography, investment volume remains strong in Quebec and Ontario, but challenged in “markets dependent on development and land,” such as Vancouver, where there are persistent obstacles in financing and the longer timelines required for mixed-use and new developments.

Office vacancy has risen for four years and will likely continue increasing in the short term as hybrid work arrangements persist, the report said. Many projects launched before the pandemic were delivered over the past three years, increasing inventory while vacancy rose.

Dollar volume of office space sales dropped by 24% year-over-year and the number of sales dropped by 11%, Colliers said. Although transactions became smaller in the office market as financing grew tighter, the market still has an appetite for smaller assets.

Retail real estate sales and dollar volumes have declined by about a quarter year-over-year, but the price per square foot has remained the same. Like with office space, private investors have an eye for more affordable retail assets, but far fewer buyers for large assets like malls, the report said.

Investors traditionally look to redevelop or densify the asset into mixed-use neighbourhoods, especially in dense, transit-connected areas. Some retail REITs, such as RioCan, have become housing developers as population and immigration levels increase.

In residential real estate, the demand for apartments has been buoyed by record-high post-pandemic immigration levels and record-low rental market vacancy rates as many were priced out of home ownership. Although the dollar volume and number of sales dropped by 32% and 28% respectively year-over-year, they remain at or above pre-pandemic levels, according to the report.

While multi-family residential investment declined from the record highs of 2021 and 2022, Colliers said it remains an attractive sector for smaller investors and foreign buyers.

However, residential land experienced a sharp downturn in 2023 where dollar volume and number of sales dipped nearly 50% year-over-year. Acreage sold also remained below pre-pandemic levels. High prices for new buyers, unfavourable interest rates and rising unemployment have led developers to pull back from single-family homes.