Navigating the shifting real estate market

March 20, 2023 BDO CANADA

Interest rates have increased at a rapid rate, and there could be more hikes in the future depending on economic developments. With the added inflationary pressure, it can be a trying time for some real estate holders, while others may see new opportunities on the horizon.

Real estate holders, especially those with variable rates might be experiencing cash flow issues and looking for guidance on how to manage the downturn. On the other hand, there are new opportunities as some are now better positioned to acquire properties given the market change.

Across the country, the shifting real estate environment is forcing people to make tough decisions, while some might see it as a time to evaluate their options. Now’s the time to understand the trends, assess the possibilities for your real estate holdings, and navigate a path forward for you and your business.

Increased interest rates coupled with record-high inflation

Canadian investment movement slowed in Q3 2022 with the mounting costs of debt and an ambiguous economic outlook, according to CBRE. Canadian commercial real estate investment activity totaled $11.3 billion, with only 1,914 transactions in Q3 2022—a decline of 31.1% quarter-over-quarter and 28.9% year-over-year.

Interest rates were historically low during the first few years of the pandemic, which increased the borrowing ability for consumers. Even though inflation has fallen to 6.3% (compared to 6.8% for the previous month), it remains high and it’s not clear how long these inflationary challenges might last. And on Jan. 25 the Bank of Canada increased its key overnight rate for the eight straight time. The rate increased by 25 basis points, pushing it to 4.5%. Real estate holders must consider their options amidst a challenging environment.

Some of the pressures in today’s environment include cash flow issues, potential declines in fair market value, refinancing and the costs associated with it, and potentially having to dispose of real estate assets. Owners might have to consolidate their holdings or sell properties so they can ride out the volatility without suffering losses. If you’re on a variable rate, you need to decide to either continue on and manage the increased costs—or if refinancing into a fixed rate is a better decision.

Evaluating the options

An experienced advisor like BDO can assist with each of step of the process, including the valuation of property assets, assembling a team of advisors, navigating regulatory requirements, and selling real estate.

Real estate owners can consider obtaining valuation of their property assets to determine if selling is the best option. Seeking professional advice related to tax expertise, advisory services to help find a buyer, financial lending, and any other options that might apply to your situation could also be prudent. There is no one-size-fits-all approach, and we work with our clients to explore the best avenue.

Establishing a REIT

Another option for investors is to establish a REIT. A REIT is a structure that that allows many investors to invest in real estate in a tax-efficient manner. It can be publicly listed on a securities exchange or privately held. A REIT offers flexibility—allowing some owners to divest of their assets and others to buy in. It can assist business owners with cash flow and can play an important role in your overall investment or retirement plans.

A REIT can offer opportunities for long-term business growth by tapping into value in a formerly static asset—a beneficial option in this tumultuous real estate environment. Business owners should obtain a professional assessment to decide whether forming a REIT is the right choice.

BDO can guide you

It’s a delicate circumstance to navigate but having a strategy can help you make informed decisions regarding real estate holdings. Our advisors will arrange a consultation with you to help assess property assets impacted by interest rates and develop a way forward to address issues or take advantage of opportunities.

Contact us today to learn more about your options so you can start making plans:

Jennifer Agro
Partner & GTA Real Estate & Construction Leader

Jameson Bouffard
National Real Estate & Construction Leader

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