Multi-residential cap rates took a slight upward course in the fourth quarter of 2015, while remaining generally lower than the national averages for other property types. CBRE’s recently released figures for October to December peg the Canada-wide cap rate for Class A high-rise apartments at 4.39 per cent with the average for Class A low-rise buildings at 4.83 per cent.
National cap rates dropped to 5.04 per cent for downtown Class AA office buildings and 6.52 per cent for Class B, while increasing to 5.77 per cent for downtown Class A stock. The Class A industrial cap rate held stable at 5.92 per cent, while the Class B industrial average rose to 6.89 per cent. Hotels exhibited a consistent trend of lower cap rates — dropping to 7.84 per cent for downtown full-service and 9.17 per cent for suburban full-service facilities.
Calgary recorded higher cap rates in all apartment stock, ranging from 4.5 to 5 per cent for Class A high-rise to 5 to 5.5 per cent for Class B low-rise. Cap rates were lowest in Toronto, at 3.25 to 4 per cent for both Class A high-rise and low-rise, and 4.25 to 5 per cent for Class B product — on par with the rates reported at mid-year 2015. With the exception of Calgary, multi-residential cap rates were deemed stable in most other major centres, including Edmonton, which largely shares Calgary’s sensitivity to energy prices.
Analysts see little threat of market meltdown despite current economic trends. Continued attractive spreads between cap rates and the 10-year bond yield are expected to set the tone for the coming year.
“Deal volumes were steady, with both investors and borrowers trying to close deals before the end of the fourth quarter,” observes Carmin Di Fiore, executive vice president, debt and structured finance, with CBRE. “Canadian real estate will benefit from positive capital inflows as we are increasingly viewed as a safe haven in the midst of global economic instability and geopolitical unrest.”
“Economic instability and increased investor caution to start the year will likely drive capital towards major markets like Toronto and Vancouver that have solid track records and produce stable returns,” predicts Peter Senst, CBRE’s president, Canadian capital markets.