Expectedly, the Bank of Canada increased its overnight rate this morning by another 50 basis points to combat inflation. This is the sixth time this year that the Bank has tightened money supply to quell inflation, so far with limited results. 

Specific to existing Variable Rate Mortgage holders, Prime will increase from 5.45%. to 5.95% 

BoC Announcement Highlights: 

• Global inflation remains high and as economies begin to slow down and disruptions in supply chains ease, inflation is expected to follow suit. 
• The Canadian economy continues to operate in excess demand and labour markets remain tight, with a projected GDP growth from 3.25% in 2022 to just under 1% in 2023. 
• Due to recent rate increases, housing activity in Canada has sharply declined, and household spending has softened. 
• The strength of the US dollar is putting additional pressure on inflation in many countries around the globe and the Bank expects no growth in their economy through most of 2023. 
• CPI inflation has declined from 8.1% to 6.9%. Price pressures remain broadly based, yet the Bank’s “preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing.” 

Nest Summary 

“We are getting closer to the end of this tightening phase. But we're not there yet." – Tiff Macklem 

The Bank reiterated its “resolute commitment” to restore price stability for Canadians and said it will continue to take action as required to achieve its 2% inflation target. Achieving this target will take time, and more monetary tightening, such as a 25bpt hike in December, is expected. 

The Bank has offered the observation that CPI inflation is projected to move down to ~3% by the end of 2023, and then return to its ~2% target by the end of 2024. 

Although no crystal ball exists, we are likely nearing the end of the rate increase cycle, and we may see rates flatten in 2023. Should a recession ensue in the near-term, this would apply downward pressure on rates late next year and beyond. 

For variable rate holders specifically – 

• Watch for the BoC to judge further increases based on economic performance between now and the final announcement of the year on December 7th, 2022.   
• We will issue further options and recommendations for existing variable rate holders in the coming days. 

There’s hope in sight after a year of supply chain disruptions and outsized construction cost increases, according to a panel commercial real estate association NAIOP hosted in Vancouver on Oct. 27 focused on the industrial market.

While strong demand earlier this year gave many builders confidence that the market would be able to absorb cost increases, six successive interest rate hikes have put the brakes on deals for space and construction intentions.

“Residential and commercial [builders] have paused projects,” said Ben Taddei, chief operating officer with the Conwest Group, which is both a developer and also operates a contracting division.

Contracting activity has slowed significantly this year with housing starts in Metro Vancouver through September down 10 per cent versus last year with further slowing expected.

“So what does that mean?” Taddei asked. “Some prices have to come down.”

This is what Josh Gaglardi of Orion Construction Corp. of Langley is starting to see. Speaking with Western Investor in July, he said the cost of some materials had doubled since 2020. Orion is now expecting prices to pull back by an average of 10 to 12 per cent over he next year.

“We’re starting to see a very, very slow settling of construction costs,” he told NAIOP. “Right now we’re getting trades calling us more often asking what projects we have going on, do you have work, whereas two years ago you had to call those trades and say, ‘Hey, do you want to work for me? Can you work for me?’”

While labour remains tight, higher financing costs are giving some developers pause, reducing demand and freeing up supplies.

But the long-term outlook remains positive, because of the constrained land supply. This will support asset values, meaning that any pause in the market will eventually become history and activity will resume. 

“Peak land pricing is probably coming down, so when the groups are ready to jump back in, they’ll probably feel a lot more comfortable,” said Ryan Kerr, a principal with Avison Young specializing in industrial properties. “Ideally, land will get to a place where [income-producing properties] can be built and these projects can fulfill the need for new space in the market.”

Metro Vancouver industrial land values peaked at $13 million an acre for the Celtic Shipyards property in South Vancouver, $10 million an acre in Richmond and approximately $8 million an acre in Port Kells, according to Avison Young.

Altus Group reports that the average industrial land prices in Metro Vancouver this year has fallen from a high of $4.7 million an acre in the second quarter to $3.3 million in the third quarter, according to preliminary data.

Kerr feels that any drop in demand for properties from local buyers will be filled by institutional investors, who still have plenty of cash to place. Altus reports that industrial properties have been of particular interest to institutional investors this year as a stabilizing component in portfolios rocked by volatility in the stock market. A moderation in asset values will support investment decisions.

“The land pricing adjustment is a good thing,” Kerr said. “It was becoming a bit drunken college party-exciting, so seeing [prices] come down and normalize a bit, so it’s not so scary, is a great thing.”

The shift should create opportunities, Taddei added.

“Change brings opportunities. When the market is constant, there’s no opportunity,” he said. “If you’re in the game, and you know what you’re doing and you have good relationship and you’re well capitalized and all those good things, you can do well in those markets.”

While demand for strata units has stalled, and other assets are in a price discovery period as sellers realize what today’s buyers are willing to pay, Taddei says Conwest is patient.

“We believe this market is not going to last forever. There is no inventory. We will get our price. We just have to wait for it,” he said.