The outlook for commercial real estate looks "bumpy" in the near term, but CBRE's 2023 forecast predicts a soft landing could still be in the cards.
The Canada Real Estate Market Outlook report, released Tuesday, predicts challenges such as tougher financing conditions and a potential economic slowdown will weigh on investment.
The commercial real estate company said it expects one to two quarters of slowed investment before activity rebounds in the spring.
Over the longer term, CBRE said large investors are targeting real estate and that more certainty for interest rates should be a boon for the industry.
That interest means commercial real estate investment in Canada could reach an all-time high of $59.3 billion this year, spurred by greater merger and acquisitions activity.
The better visibility about interest rates, which the Bank of Canada has paused at 4.5 per cent while it weighs their effect on the economy, should allow pricing expectations to recalibrate in 2023, according to the organization.
CBRE Canada president and CEO Jon Ramscar called 2023 "the correction year" following periods of high inflation and interest rate hikes.
"There is some optimism because we have a huge amount of learnings when we look back on when we were going through the early stages of the pandemic," said Ramscar.
"The optimism is really around the fact that the Bank of Canada is communicating to us all that inflation is starting to taper back, they're done with interest rate rises and that we're expecting kind of halfway through this year that we'll settle with inflation at three per cent and in 2024 that will come down to two per cent."
Office vacancy continues to increase, with demand for older space being replaced by interest in more modern locations. As companies balance their hybrid working arrangements for employees, the report said spaces that help attract workers back to the office will be a priority in 2023.
"Many forward-thinking tenants will use the coming year to relocate to properties with the best amenities, commute times and sustainability profiles," the report said.
While some property owners have considered converting their real estate to residential, office spaces are more likely to be retrofitted or demolished.
"We've been through the pendulum swinging from initial headlines of 'the office is dead' and I think there's now a realization that it's really an evolution of the office," said Ramscar. "Some of these things were happening before the pandemic, it's just COVID has really accelerated, I'd say, some of these changes in the office sector. It really is a flight to quality."
Efforts to boost office attendance has also led to rising demand for urban rental real estate as workers seek to minimize commute times.
The report noted a growing demand for multi-family rental real estate, with Canada's overall vacancy rate falling to a 20-year low of two per cent in 2022. It predicted high demand will continue this year, led by higher immigration targets, driving vacancy even lower in 2023.
Commercial real estate investment totalled $58.5 billion in 2022, which nearly matched the record volume set in 2021.