The Bank of Canada’s newly announced key interest-rate cut will only have a gradual effect on the commercial real estate investment market, say industry leaders.

The BoC reduced its benchmark lending rate by 25 basis points to 4.75% on Wednesday. The reduction was the first in four years.

“One quarter point won’t do much, but it sets a trend,” said Peter Senst, CBRE’s president of Canadian capital markets, in an interview with Connect. “It starts to get people thinking about what’s the art of the possible in the future. So we’ll see.”

With the European Union’s central bank expected to introduce a cut on Thursday, Senst would have preferred that the BoC put off its reduction until July.

“I just don’t know if it’s a great thing to do, frankly,” he said. “But I’ll take any positivity. I’ll take any silver lining right now.”

The BoC had held the overnight rate at 5% for six consecutive periods dating back to July 2023. Now that a long-awaited cut has been introduced, more are expected relatively soon.

“Changes in interest rates will take time before we can feel their full impact, just like the 2022 increases in policy rates, which were felt in 2023’s decline in investment activity,” Marie-France Benoit, Avison Young’s director of Canadian market intelligence, told Connect.

“Moving from the 2023 context of rates either going up or remaining stable, to a context, 2024, where the scenarios are stability or reduction in the coming months will be positive for the market.”

The 5% mark represented a two-decade high and resulted after 10 consecutive rate hikes over a short period. The BoC had held off on introducing cuts until inflation moved closer to the central bank’s 2% target.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” BoC Governor Tiff Macklem said during a news conference after the cut was announced.

“In other words, it is appropriate to lower our policy interest rate.”

Now, that a cut has been introduced, others are expected to follow relatively soon.

Many investors have kept their capital on the sidelines while awaiting proof that BoC interest rates would come down.

“A 25-bps cut may not cause an immediate investment wave, because most commercial mortgages are price off bond yields that have largely been stabilizing around their expected values, said Luke Simurda, Marcus & Millichap’s research director for Canada.

“However, it does signal to the market that borrowing costs are coming down, providing some renewed confidence for many CRE investors,” he added. “Falling interest rates will also stimulate overall economic growth, which will fuel space demand across the property spectrum and help drive already healthy underlying fundamentals.

“Combined, these factors are likely to cause investment activity to gradually gain momentum over the coming quarters.”

In Simurda’s view, development will likely benefit the most, because construction financing tends to be priced around shorter-term yields, such as the one- and three-year bond.

“With the [BoC] policy [interest] rate likely to fall further over the remainder of the year and into 2025, both land sales and development could see the largest uptick in activity as falling interest rates will allow more projects to pencil out,” he said.

The potential increase in construction intentions will be particularly welcomed in the residential sector as buyers look to capitalize on more interest-rate certainty, softening prices and lower variable-rate mortgage costs. But, he added, still restrictive borrowing expenses and the potential for home-price appreciation will prompt many households to remain in the apartment-rental market.

Simurda expects multi-family to remain a preferred investment option as the national vacancy rate stays well below its equilibrium, supporting annual rate growth that outpaces inflation.

James Orlando, a Toronto Dominion Bank director and senior economist, anticipates that the BoC will now take a cut-pause-cut approach to interest rates, with the next reduction coming in September. The BoC will deploy that strategy, to avoid reigniting the housing market.

“We believe that the path forward for the BoC is going to be slow,” Orlando wrote in a research note.

Pictured: Bank of Canada Governor Tiff Macklem

Get Ready for Canada Kick-off

Connect CRE will hold its inaugural Canada Kick-off Event in Toronto on June 11. This will be Connect’s first commercial real estate industry conference in Canada. Panelists will include Syl Apps, managing director and co-country head for Hines; Lindsay Brand, chief investment officer at Concert Properties; Mark Kenney, CEO of Canadian Apartment Properties REIT; and, Marie-France Benoit, Avison Young’s director of Canadian market intelligence. Come and gain insights from industry leaders on such matters as buyer sentiment amid a lower interest-rate environment, cross-border commercial real estate transaction trends, and investors’ outlook for 2024 and beyond. Register today.