MNI INTERVIEW: More BOC Cuts Needed To Spark CRE- Morguard

MNI (OTTAWA) - Commercial real estate investors need more Bank of Canada interest-rate cuts to boost confidence in an economic rebound and close a recent divide between asking prices and purchase bids, the research director at property manager Morguard told MNI.

“With interest rates coming down just a little bit, it’s not enough to make an appreciable change in the commercial real estate backdrop,” Keith Reading said in a phone interview the week after the BOC made its second quarter-point cut to borrowing costs from the highest since 2001. “It does give investors a little bit of confidence in, I think this is the start of rates coming down, which is a good thing because your cost of capital is coming down.”

Prior Bank hikes from near zero to 5% gave CRE investors less incentive to buy because they could earn higher yields on long-term government bonds, Reading said. Some property owners have also been unwilling to sell in a down market he said, and some of those pricing mismatches are continuing.

“We’re still in it to my mind, there’s a period where vendors and purchasers are trying to negotiate what that price is, what kind of a yield investors will investors take?" Reading said. Morguard reported that commercial real estate deals tumbled to a four-year low in the first quarter.

CONSUMER DEFAULT RISK

Like many economists, Reading sees rate cuts at two or even all three of the Bank's remaining meetings this year. The rate cycle is influencing the re-entry point for some CRE investors and there's a question around when borrowing costs bottom out, he said. “It’s going to be a series of 25 basis point cuts, and I think for the industry to get sort of moving again, we probably need two to three more cuts.” (See: MNI INTERVIEW: BOC Will Cut At Next Three Meetings- Sen Gignac)

Governor Tiff Macklem has said more reductions can be justified as inflation returns to target, he's becoming concerned about undershooting and the economy needs to shift back into more growth.

“You have to be careful that you don’t lower them too quickly in Canada’s case because then all of a sudden you start a new round of inflation. So it’s a real balancing act for the Bank of Canada, to prevent a hard landing,” Reading said.

Borrowing costs won't return to past lows but they need to give enough relief to indebted consumers, he said. “If you don’t get those rates down sooner rather than later, you will probably see debt defaults ratchet up,” Reading said.

APARTMENTS AND INDUSTRIAL

“There’s been a little bit of turbulence in retail, it’s not quite as strong as it was say six to 12 months ago, and a big part of that I think is that retail sales have slowed quite a bit,” he said. 

Much of the affordability squeeze relates to housing and Reading said high rates continue the pressure on builders after decades of weak apartment construction. Record immigration has added to rising rents, alongside people staying in apartments because they can't afford a home, he said. “It’s going to take several years in trying to right that ship,” he said. (See: MNI INTERVIEW: Canada Condo Dip Seen On Migrant Turn-Adviser)

On the bright side, demand for industrial space remains strong and there's little evidence buyers are pulling back in anticipation of a U.S. election followed by new trade restrictions. “I haven’t seen any big issues,” he said, noting the U.S. is also looking for `friend-shoring' amid disputes with China. “We may see some new tariffs and some higher tariffs but I think both sides have a vested interest in both economies thriving.”