Letter to our Investors and Partners
Although Canadian office vacancy rates remain elevated compared to pre-pandemic levels, market conditions improved during Q3 2022. Downtown vacancy rates within Crown’s primary markets of Toronto and Ottawa continued to be among the lowest in North America.
Physical occupancy in our portfolio grew following Labour Day as more businesses implemented their return to office plans. The GTA West continues to be one of our more active leasing submarkets while renewals in our suburban Ottawa portfolio have exceeded budget expectations.
While the fundamentals of our local office leasing markets slowly recover from COVID, the office market continues to face headwinds. Resiliency and obsolescence issues, geopolitical turmoil, inflation and rising interest rates are all creating uncertainty around where valuations are heading. Recession fears dominate the discourse and investors are consequently being extremely conservative in allocating capital.
In a recent presentation to the real estate community, Mario Lefebvre, the Bank of Canada’s regional director (Economics) pointed to a tight labour market and 5% unemployment rate as factors that are far from predictive of a near-term recession. With banks rushing to de-risk, however, credit spreads have widened rapidly and materially raised the cost of debt. Ultimately this has impacted the feasibility of recent market offerings, where the bid-ask spreads remain too large.
The silver lining is that the current uncertainty, when combined with a good dose of patience and underwriting discipline, should provide excellent entry points for our value-add fund over the coming years.