Central bank has cut by 125 basis points, but home builders looking for 200-300 bps to gain some confidence
“Even with a cut of this magnitude, CRE transactions will likely remain on the sidelines until there is confidence that we have more or less returned to balanced monetary conditions.”
Norman also noted that while rate cuts are designed to stimulate the economy, their effects typically take time to materialize, especially in sectors like real estate. He doesn’t expect a noticeable uptick in activity until mid-2025, when investors may feel more confident about market stability. “Investors want a relatively stable rate environment before they start transacting again,” he explained.
For developers, the outlook is even more cautious. Norman highlighted that many are waiting for deeper rate cuts before moving forward with major projects.
“Developers have told us before that we will need to see cuts of 200 to 300 basis points to really move the needles on pro formas. We are now 125 basis points into a cutting cycle, so once again, I think we can expect a surge in confidence sometime in 2025.”
Despite the cautious sentiment in the CRE market, Wong sees a glimmer of optimism.
“We are seeing increased activity across the Canadian commercial real estate market, but not in the tangible sense,” he noted. “There is an uptick in interest, and there is more stability in the bid-ask expectation between buyers and sellers. Right now, it’s still costly to borrow money, but with each consecutive cut, investor sentiment improves in anticipation of future transactions.”
The impact of the latest rate cut may be more evident in the residential market.
Soper anticipates that more homebuyers will come off the sidelines, leading to an early spring market — a trend seen in previous turnarounds.
On a related note, Ralph Del Duca, president of Chestnut Hill Developments, suggested that the lower borrowing costs could positively impact construction. “It does move the needle because our cost of borrowing money is going down,” he said. “The cost of financing for construction is part of building a house, so lower rates will improve affordability.”
Adrienne Lake, managing broker at Corcoran Horizon Realty, shared insights on the pre-construction market and the expected impact of yesterday’s announcement.
“We do a lot of pre-construction, and that market has just been dead. Many builders have gone into receivership, and projects are being vacated. With this drop in interest rates, I believe buyers will start to invest again, allowing that market to regain some of its lost strength.”