The Bank of Canada’s latest interest-rate cut is garnering some commercial real estate optimism after the previous two reductions drew a subdued reaction.

The central bank reduced its prime rate to 4.25% last week, marking its third consecutive cut of the summer. The widely expected move came after a prolonged period of rate holds and hikes designed to reduce inflation.

“It will not solve the world’s problems in Canada, but it will provide a little bit of a boost to to consumer confidence,” said JLL Canada CEO Alan Mackenzie in an interview with Connect.

“In our specific industry, hopefully, that turns into a boost of retail sales, and also in our specific industry, hopefully, that that brings some greater velocity in capital markets: Purchases and sales. I’d like to see that happen as well.”

Based on input from an analyst that JLL has consulted, Mackenzie expects two more rate cuts by year-end 2024. The BoC has lowered its key overnight lending rate by 75 basis points since starting its monetary easing program in June.

“This third BoC interest rate cut is meaningful because it signals that rates are trending down and, more importantly, at a more rapid pace than previously expected,” said Peter Norman, a vice-president with Toronto-based Altus Group.

“However, this is also a double-edged sword for the CRE industry, which can benefit from better financing conditions, but will face escalating risks from the deteriorating economic conditions.”

Weak labour market conditions and “anemic” GDP growth point to shelved expansion decisions by office tenants, weaker retail sales by consumers, and delayed homebuying decisions by households, he added.

Mark Goodman, principal of Vancouver-based Goodman Commercial said the BofC cuts have created a “more liquid environment” in the multi-family and development land market compared to 2023.

“We were in the doldrums,” said Goodman. “It was a tough environment. Now, a year later, we can see the light.”

CRE industry leaders, economists and analysts have maintained that more rate cuts are needed before a meaningful investment increase can occur.

Tiff Macklem, the BoC’s governor, continues to display a dovish stance on rates after maintaining a hawkish position that led to several rapid hikes following the COVID-19 pandemic.

Some rare divergence has occurred between Canadian and U.S. interest-rate policies as the BoC introduced cuts and the Fed maintained holds. But both countries’ monetary policies are expected to resume their close alignment, and the Fed is expected to introduce rate cuts this month.

Omar Eltorai, director of research at Altus, said the Fed’s reluctance to introduce cuts earlier could translate into a hard economic impact.

“There is growing frustration that the Fed has waited too long to cut rates, putting the [U.S.] economy in a precarious position,” Eltorai said. “Other countries, like Canada, have already started throttling back on base lending rates. The Fed may have already missed the ideal time to cut, resulting in a not-so-soft landing that ends up disrupting the U.S. economy.”

Last week’s Canadian economic results have left the BoC with a clear case for more rate cuts, said Vikram Rai, a Toronto-Dominion Bank senior economist, in a research note.

TD expects Canada’s central bank to reduce rates by a further 175 bps through the end of 2025.

Pictured: Bank of Canada Governor Tiff Macklem