U.S. Real Estate Eyes Canadian Rate Cuts as Potential Indicator for Future Market Movements

Photo byGarry Marr and Kristian Gravenor

With the Federal Reserve's first-rate cut in four years, the U.S. real estate sector could look north for clues on what lies ahead. Canada's real estate market, which has seen three consecutive rate cuts this year, offers insight into how lower interest rates might affect investment activity. Canadian real estate professionals, like Brett Miller of Canderel, note that while the cuts have sparked some movement, further reductions are needed to see significant market acceleration.

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As the U.S. welcomes its first Federal Reserve rate cut in four years, real estate executives and investors are speculating how this change may affect market activity. However, just north of the border, Canada's real estate sector, having experienced three consecutive cuts to its overnight lending rate, offers a glimpse into what might come next.

Canada's higher interest rates since 2022 had cooled investor enthusiasm, with borrowing costs contributing to declines in publicly traded real estate investment trust (REIT) values. Canadian pension funds also saw weaker returns from property holdings, heightening the need for rate reductions to re-energize the market. This year's three rate cuts have offered some relief, though many in the industry are calling for further reductions to spur more activity.

Brett Miller, CEO of Canderel, a Canadian property giant, welcomed the rate cuts but remained cautiously optimistic. “It will take a number of successive cuts to impact market velocity,” Miller said, adding that fund managers holding cash in short-term investments will likely begin reallocating capital, especially in the multifamily asset class.

Miller emphasized the need for lower rates to stimulate residential development, particularly for investor condo buyers who need assurance that pre-construction purchases make sense. He anticipates that two or three additional cuts will be required to see significant market movement, with progress expected within six to nine months.

This situation stands in contrast to the explosive growth seen in 2020 and 2021, when lower rates and the shift to remote work fueled real estate transactions. Mark Goodman, principal of Vancouver-based Goodman Commercial, recalled the frenzy of sales during this period. However, as interest rates began to rise in 2022, deal volume slowed, leaving many in the industry unsure of the extent of the downturn.

Goodman described 2022 as a "long dark winter" for Canadian real estate, marked by stalled activity and cautious optimism. “I can safely say things are looking pretty good,” he remarked during a panel discussion, noting a 69% increase in transaction volume and a 59% jump in deals in the first half of 2024 compared to the previous year. He attributed this uptick to the Bank of Canada’s rate pauses and eventual cuts, which began in 2023.

The U.S. may follow a similar trajectory, as the Federal Reserve's decision to cut rates by 0.5% this week is expected to have ripple effects on the American market. Canada's Bank of Canada Governor, Tiff Macklem, acknowledged that interest rates between the two countries can diverge, but assured that this would not constrain Canadian monetary policy.

Some caution, however, remains. Benjamin Tal, deputy chief economist at the Canadian Imperial Bank of Commerce, noted that the real estate sector might not want to celebrate prematurely. He warned that while the cuts have been priced into borrowing rates, long-term yields may not drop as significantly as expected.

“There were days when we said everything below 5% was good, and people have to get used to this,” Tal said, urging real estate professionals to adapt to the current rate environment. Despite these warnings, some real estate executives are already seeing benefits from the cuts. Kevin Henley, CEO of Montreal-based Canadian Net REIT, said the rate decreases are improving business by creating better spreads between interest rates and capitalization rates, which should lead to more deal volume in the coming months.

As U.S. real estate executives monitor these developments, Canada's ongoing experience with rate cuts offers a valuable preview of what might be next for the world’s largest economy. Should the Fed follow a similar path, American investors could see a gradual increase in market activity, especially in sectors like multifamily housing and residential development.