Toronto CityPlace

GTA cap rate hits new benchmark low

Q3 2015 apartment market summary
Friday, October 9, 2015
by Lorenzo DiGianfelice

The average cap rate in the GTA for the third quarter of 2015 (Q3’15) hit its lowest level in the last 30 years. The cap rate in Q3’15 stood at 3.75 per cent, down from 4.2 per cent in Q2’15 and down almost 50 per cent from the 6.3 per cent posted in Q3’10.

The average price per suite in 2014 was about $140,000. So far in 2015, the price per suite has averaged just under $200,000. This increase has to do with the rise in prices and the higher calibre sales we’ve been seeing so far in 2015.

The average price per suite in Q3’15 was $191,000—down slightly from the previous quarter.

Number of sales

In Q3’15, there were a total of 15 apartment building sales, down from 25 in the previous quarter and 23 one year ago.  Overall the pace of the number of sales in 2015 is comparable to that of 2014.

In 2014, about $900 million in apartment transactions were completed in the GTA.  Looking at year-to-date figures in 2015, it appears that this year will surpass those levels being that we are already over the $1 billion mark.

Cap rate compression

The major reason for the compression in cap rates has been the decrease in lending rates over the past year. In late 2014, the bond yield was around 1.9 per cent and this has fallen to just under one per cent in the fall of 2015. This, along with the imbalance between supply and demand, has pushed cap rates down.

The big story, of course, is the low interest rates, which has created an environment that has pushed cap rates lower. We are at the point today that no one can foresee negative interest rates. The conclusion is that rates will stay low for the short- to medium-term, or that rates will need to go up.  If interest rates go up by even one per cent, soon cap rates will follow. The issue is that when you have really low cap rates, say four per cent, and they move up by one per cent, then the building has lost 25 per cent of its value. This could be the reason that some long-term holders are selling today.

Notable transactions

Homestead was the largest purchaser in Q3’15 with the acquisition of two buildings, totaling $94 million. Akelius was a close 2nd with $91 million, buying four buildings. The next two largest buyers were deals completed through Commercial Focus Realty Inc.:  Times Group purchased 55 Broadway for $44.5 million, and Cromwell acquired 117-127 Broadway for $36.8 million. Both of these deals were purchased for redevelopment.

 Lorenzo DiGianfelice is a member of The Apartment Group and Broker of Record and Commercial Focus Realty Inc. and can be reached at [email protected]

 

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