Q3 investment trends

What Altus Group’s Q3 investment trends survey tells us

Tuesday, October 6, 2020

The latest results from Altus Group’s Q3 Investment Trends Survey (ITS) for the four benchmark asset classes show that the Overall Capitalization Rate (OCR) was little changed at 5.14 per cent, but grew from 5.01 per cent in the same quarter in 2019.

While multi-res assets still appeal to investors, demand continues to be influenced by pandemic effects, such as enduring international travel restrictions, continued threats of rent arrears, and the projected end of CERB and mortgage deferrals as we move into the final quarter of 2020. Suburban apartment cap rates fell to 4.39 per cent this quarter, down from 4.43 per cent in the previous quarter, but remaining stable compared to the same quarter last year.

Vancouver and Montreal were the lone markets with an increase in cap rates, while Edmonton experienced the largest drop from the previous quarter. The greatest increase year-over-year was recorded in the Vancouver market.

Market conditions

While the impact of COVID-19 on market conditions persists, investors are cautiously optimistic as the end of the year approaches. Strong industrial demand due to the pandemic has allowed that sector to remain resilient, while the office sector continues to face unprecedented challenges.

Despite businesses slowly re-opening over recent summer months, the retail and entertainment sector anticipates additional challenges moving forward as the weather gets colder, leaving less room for outdoor physical distancing. Although there has been a decrease in total transaction volume—down by 20 per cent for the first half of 2020 compared to 2019—overall commercial real estate remains stable as deals continue to close.

With a second wave now declared in some areas, as well as the end of some government assistance programs, the delay in real estate decisions may continue.

Employment trends

As predicted by the Bank of Canada earlier this year, economic growth has resumed, but at a slow rate. Unemployment levels have steadied after reaching a record high in May, but the Conference Board of Canada forecasts that some jobs will not return, requiring the creation of additional jobs in new segments.

The board reports notable employment gains within the accommodation and food services sector as businesses made adjustments to meet new avenues of demand—such as take-out and outdoor dining, as well as in the manufacturing sector which is well in alignment with increasing demand for industrial space across the country. Still, the Canadian unemployment rate sits at 10.2 per cent at the end of August, according to Statistics Canada.

Interest rates

Interest rates continue to remain low and are forecasted by the Conference Board of Canada to stay that way long-term as the Canadian economy is unlikely to fully recover until 2022 or 2023. Food anchored Retail Strip and Single-Tenant Industrial are the top preferred products this quarter.

The location barometer for all available products indicates positive momentum within the Calgary, Montreal and Halifax markets, while momentum has slowed in Vancouver, Toronto, Ottawa and Quebec City, and remains stable in Edmonton. Toronto and Vancouver remained among the top preferred markets, now accompanied by Montreal. With the ongoing struggles in the Alberta economy, Edmonton is the least preferred market by investors.

For the full report on Q3 investment trends, visit: https://www.altusgroup.com/data/insights

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