From 2015 to 2023, Canada's commercial real estate market experienced significant fluctuations and transformations. A surge in immigration and shifts in economic policies led to unprecedented growth in the real estate sector, but also introduced numerous challenges. The period from 2015 to 2019 saw a market boom, followed by pandemic-induced overheating in 2020-2021, and culminating in market adjustments due to inflation and rising interest rates in 2022-2023. Each phase showcased unique market dynamics within a complex economic environment, offering valuable lessons for developers, investors, and policymakers. This report provides a chronological analysis of the dramatic changes in Canada's commercial real estate development market, focusing on four key dimensions: supply and demand dynamics, population structure, interest rate fluctuations, and development costs.
Contents
2015-2019: Pre-Pandemic Housing Frenzy and Upward Trend
Population Structure: Between 2015 and 2019, Canada experienced a substantial influx of foreign immigrants, predominantly high-net-worth individuals. This demographic not only increased housing demand but also brought a strong appetite for investment opportunities in the real estate market.
Supply and Demand：
Demand
Rapid Population Growth: The burgeoning population created significant housing demand.
Investor Activity: A revitalized market attracted investors, ending a prolonged period of price stagnation.
Speculative Trading: Rapid price appreciation led to increased speculative flipping of properties.
Supply
Developer Response: Builders actively expanded operations to meet soaring demand.
Construction Metrics: Housing starts and projects under construction saw a notable rise.
Expectations of Price Growth: Developers anticipated continued price increases, widening the gap between units under construction and completed units.
Land Prices: Land values escalated, especially in regions like Ontario and Newfoundland.
2020-2021: Pandemic-Driven Market Boom and Overheating
Interest Rate Changes: The COVID-19 pandemic severely impacted the economy, causing a 5.4% drop in GDP. In response, the Bank of Canada slashed interest rates to historic lows, leading to a significant reduction in mortgage lending rates.
Population Structure: After a brief slowdown due to the pandemic, immigration numbers surged, with a substantial influx of blue-collar workers entering Canada.
Supply and Demand
Demand
Stimulated Investment: Lower interest rates directly boosted investment and speculative demand in the real estate market.
Market Acceleration: Property sales and prices soared rapidly.
Unmet Housing Needs: The existing housing supply struggled to accommodate the growing number of new immigrants.
Supply
Construction Boom: Developers ramped up building activities to capitalize on market trends.
Record Highs: Building permits and housing starts reached unprecedented levels until construction activity began to slow in early 2021.
2022-2023: Consequences of Inflation, Rising Interest Rates, and Increased Development Costs
Interest Rate Changes: The ultra-low interest rates during the early pandemic period led to significant inflation. To combat this, the Bank of Canada initiated a series of eight consecutive interest rate hikes, sharply increasing borrowing costs for both consumers and developers.
Supply and Demand
Demand
Decreased Purchasing Power: Higher mortgage rates doubled borrowing costs, dampening market activity.
Market Slowdown: There was a substantial reduction in property transactions.
Delinquency Rates: Both mortgage and non-mortgage delinquency rates increased.
Price Correction: Housing prices declined by nearly 20%.
Supply
Developer Challenges: Real estate developers faced liquidity risks amid rising costs.
Reduced Construction: Housing starts decreased, particularly for single-family homes.
Supply Cooling: The market saw a general cooling of new housing supply.
Cost Structure
Inflation Impact: Developers contended with significantly higher development costs due to inflation.
Financing Pressures: Elevated interest rates increased debt servicing burdens.
Financial Strain: The combined pressures led some firms to file for bankruptcy or enter foreclosure proceedings.
Pre-Pandemic Housing Mania and Momentum
(2015-2019)
Over the past three decades, Canada has experienced consistent population growth, with a particularly sharp increase from 2015 to 2019. In 2015, annual population growth was 327,518, rising to 381,406 in 2016—a 25-year high. This growth continued, reaching a peak of 487,330 per year in 2019.
Immigration was the primary driver of this population surge. In 2015-2016, Canada welcomed 323,188 new immigrants, the highest inflow in 15 years, accounting for 98% of population growth that year. In the subsequent three years, immigration levels consistently surpassed the previous peak of 270,635.
Between 2015 and 2019, Canada saw significant changes in its immigrant demographics. Immigrants from wealthy countries, such as China, increased from 212,801 to 252,761, a growth of about 18.8%, while those from the UK grew from 61,167 to 76,710, representing a 25.4% increase. Despite these gains, their share of total immigration decreased as immigrants from working-class countries surged. Indian immigrants grew by 31.6%, from 244,776 to 322,111, and those from the Philippines rose by 52.4%, from 174,522 to 265,943. This shift underscored a reduced focus on investment immigration and a stronger emphasis on attracting skilled and semi-skilled labor during this period.
This influx of immigrants significantly increased demand for housing, both for residential and investment purposes. However, the housing market struggled to keep pace. While Canada's population growth exceeded the 20-year average of 356,140, housing starts remained below the 20-year average of 201,167.
As newcomers competed for limited housing, prices surged. After nearly six years of stagnation, the CREA Housing Price Index (HPI) began to recover in 2015. By June 2015, the monthly increase rate exceeded 1% for the first time in five years. The pace of growth accelerated over the next two years, with the composite HPI surpassing 200 in April 2016 and monthly increases approaching 2%. In January 2017, the apartment HPI index jumped 3.23% in just one month, reaching 204.4.
Rising prices attracted speculative investors, leading to a surge in house-flipping activity. The share of homes resold within 6 to 12 months of purchase increased by 40% between 2015 and 2018. This speculative behavior, coupled with genuine demand, further drove up market prices.
Developers quickly captured this market momentum. Between 2015 and 2019, the number of housing units under construction rose from 213,776 to 274,828, a 28.56% increase. New housing starts also grew by 6.7%, from 195,535 to 208,685.
A notable trend during this period was the widening gap between housing units under construction and completions. This gap, which began in 2011, expanded significantly. By 2015, the difference between units under construction and completions was 19,315. Then it grew to 58,045 in 2017 and reached 87,651 by 2019. This increasing disparity indicated that developers were relying more on future prices rather than completing units for sale, reflecting their confidence in the market's continued upward trajectory.
Another important factor was land prices. Prior to 2015, land values remained relatively stable, except in areas like Ontario. However, as developers increasingly bid on land for future development, the market heated up. Post-2015, national land values accelerated, rising from $2,550 per acre to $3,359 per acre—a 31% increase. In Ontario, land prices climbed from $9,289 in 2015 to $11,786 in 2019, a 27% increase, while Newfoundland and Labrador experienced an 84% surge during the same period. This sharp rise in land prices attracted speculative investors, who sought to hold land for value appreciation driven by market momentum, further stimulating land market activity.
Consequently, the market became increasingly speculative. Investors dominated, anticipating further gains in real estate, while developers remained active, driven by confidence in the rising value of land and housing.
This speculative fervor persisted until the COVID-19 pandemic in 2020, which dramatically reshaped the market. Early pandemic-era low-interest-rate policies temporarily sustained the housing bubble, but both investors and developers underestimated the risks of potential rate hikes and rising inflation, leading to increased instability in the post-COVID market.
The Pandemic Boom and Market Overheating
(2020-2021)
In 2020, the COVID-19 pandemic hit the global market in an unexpected and profound way, permanently changing many industries and presenting challenges that caused significant suffering across various sectors. The aggressive fiscal policies and significantly altered macroeconomic environment that followed the pandemic have further contributed to the unpredictability and struggle for survival faced by many industries.
The challenges faced by Canadian housing developers began with the onset of the COVID-19 pandemic in early 2020. The pandemic led to a severe economic contraction, with real GDP shrinking by 5.4%—the steepest annual decline since records began.
To counteract the economic downturn, the Bank of Canada (BoC) implemented aggressive quantitative easing (QE) policies, slashing the prime rate to 2.45%, a historical low even below the levels seen during the 2008 financial crisis.
These low-interest rates sparked a housing market boom. Mortgage rates dropped to unprecedented lows, with the 1-year fixed mortgage rate falling to 2.79% in 2021, down from 3.64% in 2019. The 5-year fixed rate also decreased to 4.79% in 2021 from 5.34% in 2019.
This made borrowing significantly cheaper for homebuyers and developers, fueling a surge in housing market activity. In 2020, home sales increased by 12.6% from the previous year, setting a new record with 551,392 homes sold. The momentum continued in 2021, with sales reaching 667,000 units, 30% above the 10-year average and 20% higher than in 2020.
This increase in sales volume contributed to soaring house prices. The House Price Index, which had experienced 12 consecutive months of negative growth from February 2019 to February 2020, began to recover, accelerating to 15.03% in December 2020 and peaked at a historical high of 32.40% in July 2021.
Furthermore, the country has not had enough housing supply to accommodate the influx of population growth. The gap between annual population growth and new residential units in Canada has historically fluctuated around 400,000 over the past 60 years. However, in 2023, this gap surged to 1,000,000, driven by an unprecedented population increase of over 1,200,000 during the COVID-19 pandemic, mainly due to international migration. This sharp rise has severely strained housing supply, deepening the supply-demand imbalance and intensifying the housing shortage across the country.
Developers responded to favorable market conditions starting in mid-2020, significantly increasing their activity. The value of building permits, which had been at a low of around $6 billion, surged past $8 billion within three months and continued its upward trajectory, reaching a record high of over $11 billion in early 2021. Similarly, housing starts peaked at a historic 271.2 thousand units in 2021. However, this marked the apex of the construction boom, as new housing starts declined by 11.11% to 240 thousand units by 2023, signaling a shift in market dynamics as the initial wave of construction activity tapered off.
The Aftermath of Inflation, Rising Interest Rates, and Rising Costs
(2022-2023)
The boom of 2020-2021 set the stage for significant challenges in the following years. The economic rebound driven by quantitative easing and the global supply chain disruptions caused by geopolitical tensions led to a surge in inflation, prompting the Bank of Canada to shift its focus towards controlling inflation. The base rate was raised eight times from March 2022 to Q3 2023, from 0.25% to 4.50%, eventually pushing the prime rate to 7.20%—a 194% increase from its lowest point of 2.45% in 2020.
This rapid rise in interest rates significantly impacted the housing market. Mortgage rates more than doubled, with the 1-year fixed rate climbing to 6.34% and the 5-year fixed rate reaching 6.49% by 2023.
These higher borrowing costs deterred homebuyers and investors, leading to a sharp decline in market activity. In Q4 2023, credit agency Equifax Canada observed mortgage delinquencies increased by 52.3%, reaching 0.14%, while non-mortgage delinquencies rose by 28.9% to 1.3%. Home prices began to fall, with the National Composite Home Price Index dropping nearly 20%, from a peak of $852,000 in 2022 to approximately $700,000 in 2023.
Developers were also under considerable pressure due to rising interest rates. For developers with construction loans based on floating rates (SOFR + spread), the cost of borrowing escalated, particularly for those engaged in ongoing projects. The unexpected increase in borrowing costs strained budgets, forcing developers to quickly seek additional funds at even higher interest rates through 2nd and 3rd lenders. This financial burden led to significant challenges, with many developers experiencing financial difficulties or eventual bankruptcy.
Notably, AD&C (Acquisition, Development & Construction) loan rates increased across all categories between Q4 2022 and Q1 2023, with land acquisition rates rising from 10.14% to 11.09%, and speculative single-family construction loans climbing from 11.30% to 12.59%. These are the highest rates recorded since 2018, reflecting the challenging financial environment.
The cost of development rose significantly due to increased material prices and energy costs, further exacerbated by geopolitical tensions such as the Ukraine-Russia war. The Residential Construction Price Index increased from 100 in 2020 to 151 by Q1 2023, growing four times faster than the Consumer Price Index.
Prices for key materials like cement, ready-mix concrete, and bricks saw substantial increases, with cement blocks and bricks experiencing a 36.2% year-over-year rise; ready-mix concrete price index increased from 100 in 2021 to 125 in 2023, about 25% increased; asphalt and diesel fuel prices both saw dramatic increases of more than 100% during 2022.
Labor costs also increased by 14.7% from March 2020 to November 2023, adding further financial pressure on developers. From the start of the pandemic in March 2020 until November 2023, nominal wages increased from $29.88 to $34.28, representing a 14.7% rise.
As a result, many developers were forced to seek additional financing at even higher interest rates, further eroding their profit margins and increasing the risk of financial distress. In this high-cost, low-valuation environment, developers faced an increasingly deteriorating liquidity risk.
Due to the challenges, housing starts in 2023 decreased by 7% in centers with populations of 10,000 or more, with 223,513 units recorded compared to 240,590 in 2022, according to the Canada Mortgage and Housing Corporation (CMHC). This decline was largely driven by a 25% drop in single-detached starts in 2023.
Additionally, the six-month trend in housing starts fell in December to 249,898 units, down 2.1% from 255,198 units in November. The trend measure, which is a six-month moving average of the monthly seasonally adjusted annual rate (SAAR) of total housing starts across all areas in Canada, reflects the ongoing challenges in the housing market as the sector faces reduced activity amid rising costs and economic pressures.
These factors, combined with higher interest rates, increased the debt burden on developers, making it difficult to manage cash flow and finance new projects, thereby squeezing profit margins and adding significant financial pressure.
As developers were trapped in a high-cost environment and faced unexpected cash outflows, they sought to alleviate their situation by selling assets. However, due to weak market demand and declining market prices, the sales-to-new-listings ratio dropped below 60%, creating a buyer's market. The year-over-year market price change fell to -8.28% in May 2023.
Developers were then forced to choose between holding onto properties and incurring increasing unrealized losses or selling and realizing actual losses.
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