Canadian commercial real estate holds its appeal as investors remain vigilant and search for opportunities, diversification and steady returns
The latest results from Altus Group’s Investment Trends Survey (ITS) for the 4 Benchmark asset classes show that the overall capitalization rate (OCR) continues to indicate signs of compression dropping from 5.07% in Q2 2018 to 5.02% in Q2 2019 and down from 5.03% from the previous quarter (Figure 2).
In a market with unremitting uncertainty and geopolitical tensions, favourable interest rates, a floating loonie, and low, stable inflation have helped ease tensions in specific sectors. Investors continue to target higher yields by investing capital in undervalued assets in well-serviced areas. To fill the supply and demand gap in quality product in core markets, investors proceed to unlock the potential of distressed assets through repositioning or redevelopment plays. Overall Canadian commercial real estate investments are expected to show steady growth and investors are looking to diversify their risk by chasing quality, income-producing assets with multi-family and industrial leading the way as the top product types (Figure 3). In terms of investment transaction volume, Toronto was the top performing market in the first quarter, while Calgary and Ottawa showed the highest year-over-year increase. Moreover, Calgary and Edmonton exhibited an uptick in investor preference this quarter gaining momentum from the first quarter (Figure 1).
Q2 2019 Location Barometer – All Available Products
Market highlights for the quarter include:
- Canadian commercial real estate market fundamentals remained sound in top-tier markets. Ongoing competition among investors, unwavering demand for quality product, diversification of assets, capital value growth, and lifts in rent prices have kept major markets attractive for investment and redevelopment. Year-over-year overall cap rate trends were similar from the previous quarter with Calgary and Halifax continuing to show marginal increases, Montreal once again showed the most significant decline and slight compressions in all other markets, except for Ottawa which remained flat.
OCR Trends – 4 Benchmark Asset Classes
- Demand for higher-grade office space was met with a short supply of new product coming to market in the coming year, driving up pre-leasing activities and putting pressure on landlords to update older office buildings. All the while, tenant appetite for more modern, amenity-rich office product continues to grow, particularly within the tech sector, and is becoming a requirement to attract and retain talent. Downtown Class“AA” Office overall cap rates have moderately decreased from the previous quarter yet witnessed a moderate increase from the same quarter last year. On a year-over-year comparison, Vancouver and Montreal cap rates trended downwards, while Ottawa and Quebec City remained the same. Overall cap rates for all other markets pushed upwards, with Calgary displaying the most significant increase.
- The Canadian industrial market remains dynamic, primarily due to the expansion in e-commerce and logistics services, and growing demand for alternate uses. Vacancy rates in markets like Toronto and Vancouver remain tight, and demand keeps increasing with no viable land in sight to build out new industrial supply. Overall cap rates for Single-Tenant Industrial product have gone down across most major markets since the same quarter last year. Montreal had the steepest drop followed by Vancouver, with Calgary holding steady.
- The overall retail sector continues to perform well as shopping centres evolve and maintain their relevance with today’s customers amid competition with e-commerce and closures of traditional retailers. Investors are placing their efforts on site-specific, value-added projects by unlocking their potential through retail intensification, improvements, and mixed-use development to unify customers in a single location. Overall cap rates for Tier I Regional Malls sector continued to witness slight cap rate increases across most markets, with Edmonton remaining flat, and Quebec City and Halifax once again as the top two markets with the largest increases since the same quarter last year.
- Growing buyer fatigue due to high prices and higher costs of borrowing in superheated markets continues to retain potential home buyers in the rental market. Rental rates have also crept up in the last few years, and with land-acquisition prices skyrocketing in core markets and rising construction and soft costs, investors are maintaining their focus toward seeking well-priced Apartment product and investing in upgrades. Suburban apartment cap rates have gone down in most markets year-over-year. Montreal and Quebec City cap rates showed the largest compression since Q2 2018, with Toronto and Calgary just behind. Ottawa and Halifax remained the same, while Vancouver took a slightly upward turn.
Q2 2019 Property Type Barometer – All Available Products
Other highlights include:
- Of the 128 combinations of products and markets covered in the Investment Trends Survey (Figure 4):
- 75 had a “positive” momentum ratio (i.e. a higher percentage of respondents said they were more likely to be a buyer than a seller in that particular segment) compared to 69 in Q1 2019; 51 had a “negative” momentum ratio compared to 54; and 2 were neutral compared to 5.
- The top 15 products/markets, which showed the most positive momentum were:
- Ottawa: Multi-Tenant Industrial, Downtown Class “AA” Office, Suburban Multi-Unit Residential, Single Tenant Industrial, and Hotel
- Quebec City: Industrial Land
- Vancouver: Industrial Land and Downtown Class “AA” Office
- Calgary: Multi-Tenant and Single Tenant Industrial, and Suburban Multi-Unit Residential
- Toronto: Industrial Land, Downtown Class “B” Office, and Suburban Multi-Unit Residential
- Montreal: Suburban Multi-Unit Residential
Q2 2019 Product/Market Barometer – All Available Products
Every quarter, senior Altus Group professionals reach out to over 200 investors, managers, owners, lenders, analysts and other market stakeholders to survey their opinion on value trends and perspectives. Conducted with the same benchmark properties for more than 15 years, the survey provides valuable insights on investor preferences and valuation parameters for 32 asset classes in Canada’s 8 largest markets.
Interested in more information or a subscription?