Canada’s Economy Outperforms in 2010

2011 Outlook is for Slower but Continued Growth

The Canadian economy, led by exports and a strong commodity cycle, performed well through 2010. Anchored by a stable banking sector, the Canadian economy out-performed most other economies in the developed world. GDP growth is expected to be 3% for 2010. But the overall economy faces headwinds going forward. In particular, a weak U.S. dollar has driven the Canadian dollar towards parity, slowing our trade with our largest trading partner. And an already slow recovery in the U.S. will keep a lid on Canadian growth prospects for 2011. The result is a slower growth of GDP, now forecast at 2.3% for 2011.

The Canadian economy has gained back all the jobs lost during 2008 and 2009, but the unemployment rate remains steady at 8%. There is modest employment growth forecast for 2011 but also considerable slack in the economy. While the Canadian real estate recovery is not exactly v-shaped, as we enter 2011 the supply-demand characteristics of this sector appear balanced in most markets. Liquidity has normalized. REITS and other publically traded real estate investors raised substantial amounts of equity capital in 2010. While banks and investors are cautious, there is increased investment and construction activity occurring.

The ownership of commercial real estate in Canada, especially the best located real estate, is concentrated in pension funds, REITS and large domestic corporate investors. The best assets remain in relatively strong financial hands with conservative leverage employed. These pools of capital are looking to the U.S., Europe and Asia to satisfy the demand for high quality real estate. With the Canadian dollar close to par with the U.S., there is increasing interest by these investors in U.S. real estate assets.

Land prices firmed throughout 2010 in most markets across the country. Generally, cap rates compressed and interest rates declined slightly. Transaction volumes are no longer constrained by lack of financing but will remain slow due to low supply of good quality product. There is little evidence of distressed real estate in Canada.

Greg McPhie
NAI Commercial, Managing Partner, B.C.