COVID-19 fallout projected to have varying impact in across real estate asset types

CRE investment market on track for “banner year”

Tuesday, October 18, 2016

Canada’s commercial real estate investment market remains healthy as it benefits from global investors, according to Avison Young’s Fall 2016 North America, U.K. and Germany Commercial Real Estate Investment Review. Demand for assets in all six major markets surged 34 per cent compared with the first half of 2015, with proceeds of $14.4 billion in the first half of 2016.

“The abundance of capital in the marketplace continues,” the report states. This is resulting from low-cost borrowing, a favourable exchange rate and demand from both domestic and foreign investors, but activity is restrained by the limited supply of product.

“Some domestic owners are recycling capital by selling assets to crystallize gains, fund new investments and pay down debt, while joint-ventures are increasingly popular as a means of spreading risk,” notes Bill Argeropoulos, principal and practice leader, research (Canada) for Avison Young. “Meanwhile, foreign investors continue to see Canada as a safe place for their money, particularly in gateway markets such as Vancouver and Toronto – often resulting in elevated pricing.”
Key transactions are expected before the end of 2016 or in early 2017 as institutional players think about bringing properties to market to take advantage of high pricing.

“In Alberta, investment volumes were only slightly muted despite challenged leasing fundamentals as pension-fund-backed property owners in Calgary and Edmonton experienced less pressure to liquidate assets at a discount than did REITs,” added Argeropoulos.

“Given the first-half performance and deals currently in the pipeline, 2016 has the potential to be a banner year – with as much as $29 billion in transactions, a figure not seen since 2012 – or at least give a strong head start to 2017.”

Other investment market highlights

  • Toronto remained the top investment market at $5.9 billion in the first half 2016, up 26 per cent year-over-year. Foreign investor interest in “trophy office product” drove Vancouver to keep pace at $4.4 billion, recording the greatest annual sales increase (+118 per cent).
  • Both Toronto and Vancouver had the highest cap rates. Overall, average cap rates were flat or marginally lower across all markets, except Calgary and Edmonton.
  • Office building sales ($4.2 billion) led all asset categories, posting the greatest annual increase. Vancouver and Toronto make up 90 per cent of this amount, but investment was slanted by large single-asset and portfolio sales – Scotia Plaza in Toronto and Vancouver’s Royal Centre and Bentall Centre.
  • Retail increased 22 per cent to $2.5 billion as investors favoured a large range of urban and suburban. Toronto was the only market to exceed $1 billion in sales, while Vancouver posted the greatest year-over-year growth as retail trades more than doubled.
  • ICI land and industrial each had $2.4 billion in sales with land investment growing 14 per cent. Industrial trades slipped 5 per cent from a standout result one year earlier.

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