Q3 investment trends

Investor interest strong despite lack of product

Tuesday, October 13, 2015

Investor interest in commercial real estate remains strong despite global economic uncertainty, limited product availability and probable interest rate hikes, according to Avison Young’s Fall 2015 Canada, U.S. and U.K. Commercial Real Estate Investment Review.

The report covering commercial real estate investment conditions in 41 cities shows the total sum of investment in Canada’s six major markets for the first half of 2015 was $10.6 billion, down $2.4 billion compared with the first half of 2014. However, real estate is still producing positive total returns against other investment options and a lower volume hasn’t changed investor interest.

There is also more foreign (mainly Asian) capital, which has increased pricing in Vancouver and Toronto. Some investors in Canada are looking to deploy capital abroad, while “the vendor/purchaser profile” covers a range from institutions and REITs to private and developer capital.

“More of the same seems to be the story in Canada, with perhaps greater competition from foreign buyers, particularly China, pushing pricing for select assets to record levels, most notably in Vancouver and Toronto,” notes Bill Argeropoulos, principal and practice leader of research (Canada) for Avison Young. “In general, investors are seeking stable long-term returns, and the commercial real estate sector has been delivering.”

Argeropoulos points to the REALpac/IPD Canada Quarterly Property Index, which shows the annualized total return in the first half of 2015 was 6.8 per cent, comprising 5.2 per cent of income return and 1.6 per cent of capital growth.

“This result is the lowest rate of return that investors have witnessed since the Great Recession,” adds Argeropoulos. “Nevertheless, when you look at the overall 10-year return, including the market trough, it shows a healthy 11 per cent return. In short, real estate has outperformed alternative investments, such as bonds and equities.”

As for the second half of 2015, big transactions in the works signal the belief that some investors trust prices are nearing their peak, says Argeropoulos.

Report highlights include:

  • Toronto more than doubled the sales volume of Vancouver to remain top investment market at $4.7 billion.
  • Industrial was the top investment sector at $2.5 billion and also one of two sectors to record year-over-year growth. Sales dropped in all three Western markets and in Montreal, while Ottawa jumped 50 per cent and Toronto held steady.
  • Multi-residential investment surged to $2.4 billion, accounting for 23 per cent of all investments, and recorded the greatest annualized sales growth.
  • Retail sales at $2.1 billion contracted nationwide as investors evaluated the changing retail landscape, including the failure of Target Canada, among others.
  • Office building trades fell 55 per cent to $1.5 billion (14 per cent share), with considerably lower sales volumes in Calgary, Edmonton, Toronto, Montreal and, to a lesser degree, in Vancouver – due mainly to a lack of product and growing development pipelines.

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