With cap rates low and real estate value high, 2017 was a prosperous year for anyone in the commercial real estate market. And with Canada expected to pass the U.S. to top G7 growth, demand doesn’t seem to be going away anytime soon.
However, if we’ve learned anything from 2008, we know that nothing is guaranteed, especially when it comes to real estate and the economy. And despite there being all of the ingredients for a successful recipe, there is a lingering threat that could cut the party short: interest rates.
“The party’s not ending, but there’s definitely things to look at,” said Vice President at PCI Group and former NAIOP Vancouver President, Jarvis Rouillard. “I think interest rates are going to creep up a little further into next year, and this will affect property values moving forward. [Increased interest rates] will affect our tenants, their income, and the rents they can pay.”
Adam Mitchell, Director of Investments at Bentall Kennedy, shared a similar outlook.
“I don't see a huge interest rates increase in the short term. It only depends on where the general economy goes. Maybe another 50 basis points next year, if I had to make a prediction. At that rate, people are prepared to live with it, though any more of an increase could be a concern.”
If interest rates were to rise by one percentage point over 2018, the average Canadian household would have to spend an additional $130 on debt servicing costs. According to Global News, Canadians currently have $200 or less per month to spare after paying their bills and debt obligations, which only means they could only fall deeper into the red.
“It’s not just commercial real estate; so much of our economy hinges on interest rates,” said Scott Chandler, Senior VP at Colliers International in Toronto. “I hope the government treads cautiously.”
Do you agree that the interest rates will go up 25 to 50 points next year? How will this affect the market? Tweet @naiopvancouver and tell us your thoughts!