Static cap rates reflect limited transactions in the second quarter of 2020, but commercial real estate analysts express confidence that asset values are holding under COVID-19-related pressures. CBRE’s recently released Q2 cap rate and investment summary pegs the national average cap rate at just below 6 per cent — roughly on par with 2018 levels, but with a significantly greater 512 basis point spread above 10-year bond yields.
“Defensive asset classes are performing as expected and these sectors have even exhibited lower levels of cash flow volatility than originally anticipated. Long term investment demand for logistics and multifamily assets remains particularly elevated,” notes Paul Morassutti, vice chair, valuation and advisory services with CBRE.
Nationally, cap rates still rest below 5 per cent for downtown Class AA office and all types of multifamily properties. Class A industrial cap rates are also below 5 per cent in Vancouver, Toronto, Montreal and Ottawa. Likewise, the four major markets continue to post cap rates below the national average for downtown office properties. On the flipside, Calgary, Edmonton, Winnipeg and Halifax generally exceed the national average for all property types.
While CBRE analysts conclude investors have switched focus for prospective office acquisitions with “longer term lease profiles and strong tenant covenant” now taking precedence over rent growth potential, industrial fundamentals reflect strong e-commerce performance before and during the COVID-19 lockdown. “Investor demand and asset pricing should hold for the foreseeable future,” they project, and that’s foreseen for both struggling and more robust markets.
“Recent increases in industrial activity have been driven by the logistics sector, specifically by food distribution tenants,” reports Richie Bhamra, CBRE’s senior vice president based in Calgary. Otherwise, cap rates trended upward for most property types except Class A office space and Class A high-rise multifamily buildings.
Nationwide, CBRE analysts concur that industrial and multifamily markets exhibit the most resilience and are poised for investment deal resumption. Demand for other assets is more market-specific.
“We have seen very few discounts applied due to COVID-19, with the exception being assets with pre-existing challenges,” observes Jim Szabo, CBRE’s vice chairman, investment, in Vancouver.
Vancouver registers the lowest cap rates in every property type among the 13 regional markets CBRE surveys. Class A multifamily, both high-rise and low-rise, presents the slimmest yield range of all with cap rates at 2.75 to 3.75 per cent. Downtown Class AA office and Class A industrial post cap rates no greater than 4 per cent, while caps for even the most hard-hit retail properties —power centres, neighbourhood shopping centres and non-anchored strip malls — don’t surpass 5.5 per cent.
The outlook is also presumed to be optimistic in Toronto, Montreal and Ottawa.
“Ottawa is proving to be exceptionally resilient during these turbulent times and has only experienced mild pain in isolated asset classes,” submits Nico Zentil, senior vice president with CBRE investments. “Several sizeable deals are expected to close in Q3 2020 and this should help stem the decline in overall volumes this year.”
“High quality assets have seen less value erosion and more robust investor interest,” reiterates Peter Senst, CBRE’s president, Canadian capital markets, based in Toronto. “The focus for investors has been on industrial, multifamily, land and office assets with term and covenant. Levered returns and development upside in select asset classes are still resonating with investors.”