The overall pace of Canadian commercial real estate transactions slowed in the second quarter of 2018 but the dip in volume has nothing to do with demand for assets, according to the latest Research Report issued by Morguard Corporation.
“A drop in transaction volume in the second quarter is very much a function of low product availability rather than a drop in demand,” said Keith Reading, Director of Research at Morguard. “With quality office and industrial space at a premium, apartments are a crowd favourite as investors search for yield.”
Multi-suite residential properties bucked the second quarter trend, with transaction volumes growing by 17.5% year-over-year. Persistent rental growth, combined with a positive long-term sector forecast, has led to rising values for apartment properties in most of Canada’s major markets. The U.S. multi-suite residential sector also continued to provide value for Canadian investors, given healthy fundamentals driven by positive demographic trends and stable demand.
The supply-demand imbalance has driven up prices in key markets and asset types to an extent, particularly for Class A, new-build assets. A shortfall of functional space has also been characteristic of the strong leasing activity in the office and industrial sectors, with cycle-low vacancy rates occurring in most regions. Newly built speculative development, while still lower than the long-term average, also saw substantial pre-leasing activity.
“Office and industrial tenants who are looking to expand or move to new premises are being forced to make do with what they have due to a lack of alternatives in the downtowns of certain metros,” said Reading. “Landlords of prime assets are enjoying record occupancy levels and steadily increasing rents as supply remains tight.”
On the economic front, the Bank of Canada’s July interest rate increase was widely anticipated by investors. The rate hike indicates the Bank expects Canadian economic activity to pick up through the balance of the year, despite increasing concerns surrounding escalating Canada/U.S. trade tariffs and a slowdown in the national housing market.
The Second Quarter Update of the 2018 Economic Outlook and Market Fundamentals Research Report is available at www.morguard.com.