Cap rates trended upwards for downtown office, hotels and most retail categories during the fourth quarter of 2020, while compressing further for industrial and low-rise multifamily properties. CBRE’s newly released Q4 statistics and commentary contends: “investors are clearly looking past the next two to three quarters and making decisions based on the longer-term economic landscape”. The national average cap rate held relatively steady just below 6 per cent throughout 2020, ending the year 499 basis points above the 10-year Canada bond yield.
Multifamily cap rates continue to be lowest among asset types, particularly for Class A high-rise product. Q4 finds the national average at 3.75 per cent with rates lower still in Vancouver, Toronto, Ottawa and Montreal. The national cap rate for Class A low-rise compressed to 4.4 per cent in Q4, with lower averages seen in Vancouver, Victoria, Toronto, Kitchener-Waterloo, Ottawa, Montreal and Halifax. Nearly $11 billion in apartment sales in 2020 surpassed 2019 investment by about $1 billion.
“While newly released data from CMHC showed that vacancy rates increased in most markets over 2020, rents have continued to trend upwards and investor interest in rental properties has remained elevated,” maintains David Montressor, executive vice president with CBRE’s national apartment group. “Liquidity for the property type has remained exceptionally strong.”
Investment activity was subdued in the seniors housing sector last year, but CBRE analysts see hints of a possible uptick in the coming months. National cap rates were pegged at 6.2 per cent for Class A independent/assisted living properties and 7.6 per cent for Class B facilities with long-term care homes at 7.5 per cent at year-end 2020. Escalating costs of new development and the perceived spate of global capital waiting to be deployed underlie forecasts for future deal-making.
“It’s expected that 2021 will bring significant capital flows beginning as early as Q2 2021 as groups mobilize early to not miss out on the recovery and to take advantage of all-time low interest rates,” says Mathew Burnett, CBRE’s senior vice president, health care capital markets. “This increased demand, together with the downward pressure on development returns, suggests there may be room for cap rate compression in 2021.”
Analysts have perhaps more certainty in predicting the same outcome for industrial cap rates. The national cap rate dipped lower in Q4 2020 — edging below 5 per cent for Class A properties, while resting marginally above 6 per cent for Class B facilities. Investors have particularly pursued opportunities in Vancouver, Toronto and Montreal, which all posted low-end cap rates below 4 per cent for Class A and below 5 per cent for Class B industrial.
“Insatiable demand fueled by sectoral tailwinds for logistics-related assets pulled cap rates lower and sales prices per-square-foot to record levels,” recounts Paul Morassutti, CBRE’s vice chair, valuation and advisory services.
Turning to the sectors sustaining the hardest hits from COVID-19, Q4 cap rate trends were generally on the incline for hotels and retail. Strip malls were the exception, with the national average remaining steady in the 5.8 per cent range. “Investor appetite for this category has remained elevated due to the continued performance of needs-based retailers,” CBRE commentary states.
As with other sectors, hotel cap rates in Vancouver, Toronto and Montreal are lower than the national average and Montreal uniquely recorded Q4 compression for downtown full-service and focused service properties. Generally, though, it has been a year of dramatically declining revenue and little investor interest.
“As 2020 came to a close, investors acknowledged upward pressure on their return expectations due to the tightening in the lending market, delayed recovery expectations and challenged cash flows in the short term,” notes Mark Sparrow, executive vice president of CBRE hotels. “National RevPAR finished 2020 down by more than 60 per cent as a result of the pandemic. This put significant pressure on operators to make major adjustments to their operating model in order to try to achieve some level of profitability.”