Is a Recession on the Horizon? What It Means for Commercial Real Estate

The Canadian economy hit a significant stumbling block this past summer, raising questions about a potential recession and what it means for property investors. According to the latest data from Statistics Canada, our economy saw a contraction, but the story isn't entirely negative. For savvy investors in the commercial real estate market, particularly in sectors like multifamily and mixed-use, understanding these dynamics is key to navigating the path ahead.

A Tale of Two Economies

In the second quarter, Canada's real GDP shrank at an annualized rate of 1.6%. This downturn was steeper than many analysts predicted and was largely driven by external pressures.

International trade friction was the primary cause, with the drop in net exports delivering a major blow to overall growth. This uncertainty also made businesses cautious. Business investment in machinery and equipment saw a staggering 32.6% plunge, one of the largest declines on record. This signals that companies are hesitant to expand or invest in new assets amidst the current economic climate.

Economic Indicator (Q2 Annualized)	Growth Rate
Real GDP	-1.6%
Business Investment	-32.6%
Net Exports (Contribution)	-8.1 pts

The Silver Lining: Domestic Strength

While international trade and business investment faltered, the Canadian domestic economy showed remarkable resilience.

• Household Spending: Consumers led the way, with household spending rebounding by a strong 4.5%.

• Government Spending: Public sector spending and investment also provided a significant boost.

• Housing Market: Even the housing sector showed renewed life, with residential investment climbing 6.3%.

  
  

This strength is captured by a measure called Final Domestic Demand (which excludes the impact of foreign trade), which grew by a healthy 3.5%. This suggests Canadians are continuing to spend and invest here at home.

However, a note of caution is warranted. This spending spree was fueled by a drop in the national savings rate, as income growth was a sluggish 0.7%. This trend may not be sustainable in the long term and could impact consumer-facing tenants down the line.

Diverging Paths: Business vs. Household Activity

Economic Driver (Q2 Annualized)	Growth Rate
Household Spending	+4.5%
Residential Investment	+6.3%
Business Investment	-32.6%

The Bank of Canada's Next Move and Your Investments

An official recession is defined as two consecutive quarters of negative GDP growth. With the second quarter already negative, all eyes are on the third-quarter results. The Bank of Canada anticipated this weakness, but the underlying domestic strength could give them a reason to hold rates steady.

However, most market analysts believe this economic slowdown will create "slack" in the economy, putting downward pressure on inflation. This makes interest rate cuts more likely towards the end of the year.

For you as a real estate investor, this has several direct implications:

• Lower Borrowing Costs: Potential rate cuts would make financing more attractive for purchasing or refinancing properties. This could increase transaction volume for multi-family and mixed-use buildings as acquisition costs become more favourable.

• Multifamily Remains Resilient: In times of economic uncertainty, the demand for rental housing typically remains strong or even increases. The multi-family sector is often seen as a defensive asset, providing stable cash flow when other sectors may be struggling.

• Caution in Office & Industrial Leasing: The sharp drop in business investment is a direct warning sign for the office and industrial sectors. Businesses may pause expansion plans, potentially softening demand for new commercial leases. Landlords should prepare for longer vacancy periods and potentially more competitive leasing negotiations.

• A Question Mark for Retail: While consumer spending has been strong, its reliance on savings rather than income growth is a concern. The stability of retail tenants could be tested if consumer confidence wanes in the coming quarters. This makes tenant quality more important than ever for mixed-use property owners.

  
  

In summary, while the headline numbers point to economic challenges, there are clear opportunities for well-positioned real estate investors. The prospect of lower interest rates combined with the inherent stability of the multi-family sector creates a compelling case for strategic acquisitions in the Hamilton market and beyond.