Canadian commercial real estate investment market gains traction as
year-to-date sales surpass 2009 totals

TORONTO, Nov. 9 /CNW/ - Due to a strong appetite for retail properties and an active real estate investment trust (REIT) sector, commercial real estate investment sales dollar volume in Canada has already exceeded its 2009 year-end total.

By the end of the third quarter of 2010, over $12 billion in commercial real estate assets had changed hands - up 57% over the same nine-month period one year ago.

While retail has been the most sought-after property type among investors, Toronto has been the most active and Vancouver the most expensive market.

These are some of the key trends noted in an internal study recently completed by Avison Young. The quarterly Investment Market Monitor tracks office, industrial, retail, land, and multi-residential property sales transactions greater than $1 million, as well as capitalization rates (cap rates) and spreads to 10-year Canada bonds.

"With the recent closing of the ING portfolio comprising some 400 industrial properties across the country and the Nortel campus in Ottawa, to name a few, we can expect overall investment volume in Canada to reach the $16-billion range in 2010 - barring any deal closings being pushed into 2011," comments Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.   

"This is a significant improvement over the $11 billion worth of investment sale transactions completed in 2009, but is still shy of the $21 billion recorded in 2008 and the $30 billion in properties that changed hands at the peak of the market in 2007."

According to the study, retail was not only the most actively-traded asset class in Canada in the first nine months of 2010, but it also posted the greatest improvement over the same period in 2009. In all, $3.8 billion (+207%) worth of retail properties changed hands, capturing 31% of the overall investment dollar volume. Office ($2.3 billion / +35% / 19% share), land ($2.1 billion / +7% / 18% share) and industrial ($2.0 billion / +31% / 17% share) trailed, while multi-residential finished at $1.8 billion (+53%) and a 15% market share.

"Compared to last year, the results to date are a welcome sign that the commercial real estate investment market is gaining traction in Canada," continues Argeropoulos. "This upswing is attributed to a number of factors, including stable and improving market fundamentals, historically-low borrowing costs, high availability of debt, a narrowing bid-ask gap and the emergence of REITs as active buyers."

Investors favoured Toronto over any other market as Canada's largest city recorded $4.7 billion in commercial real estate sales, up 92% over the same nine-month period in 2009 - accounting for 39% of the total sales volume. Vancouver, at $2.4 billion (+34%) was second, capturing 20% of the total investment volume. Montreal ($1.8 billion / +56% / 15% share), Calgary ($1.6 billion / +31% / 13% share) and Edmonton ($1.0 billion / +56% / 8% share) followed, while Ottawa lagged behind. The nation's capital was the only market not to crack the $1 billion mark, finishing with $436 million (+22%) and a 4% market share. 

"The uptick in sales volume and the increased competition for assets across the country have certainly placed downward pressure on cap rates, at least for well-leased, quality-grade properties in prime locations," says Argeropoulos. 

The results show that, on a year-over-year basis, the national average cap rate for major property types has declined 50 basis points (bps) to 6.75% at the end of the third quarter of 2010, but is still approximately 80 bps above where it was when the market peaked in the summer/fall of 2007.

Overall, cap rates range from an average low of 5.97% for multi-residential properties to a high of 7.47% for multi-tenant industrial buildings. While multi-residential properties are viewed as the most expensive asset among investors, Vancouver is the highest-priced market in Canada with an overall average cap rate of 6.12%, which is poised to fall further. 

"Given the increased bids for assets lately, coupled with historically low interest rates, ample liquidity and, more importantly, a steady flow of product to the market, we can expect further cap rate compression," notes Robin White, Avison Young's Executive Vice-President, Capital Markets Group.

"Cap rates may also be driven artificially lower out of pure frustration by those buyers who have been shut out and are eager to deploy their capital that has been sitting on the sidelines," adds Argeropoulos.

According to Avison Young Principal Michael Church in Ottawa, investment interest in the National Capital Region continues unabated. "Appetite for solid class A and B product continues to be very strong, with multiple bids being the norm rather than the exception. The entrance into the market by Public Works and Government Services Canada (PWGSC), with its acquisition of the former Nortel campus, should spur interest in west-suburban properties by investors - when or if they are brought to market in the coming year."

In Montreal, "significant amounts of capital are looking for a place to go," notes Avison Young Principal Tom Godber. "With more product coming to market in the last quarter of 2010 than we have seen for several years, Montreal will remain frustrating for value buyers - but great for sellers."

Similarly, Avison Young Principal John Ross says there is an abundance of capital in the Edmonton marketplace, with "good quality assets garnering interest from all investor classes, including private, pension, public and REIT players. Multiple bids are not at all uncommon across virtually every asset class."

Given the robust and sustained turnaround in the Calgary office leasing market, the investment market has followed suit in strong sales activity. "Although many industry people, other than Avison Young, anticipated a damaged Calgary marketplace in 2010 and onwards, the leasing challenges have not developed in any of the commercial markets, and as such, the investment market for all asset types is brisk and getting stronger," notes Avison Young Principal James Miller. "This fact is best articulated in highlighting Canada's largest single asset transaction of 2010, which will be Calgary's high-end regional Southcentre Mall at effectively just over $460 million."

Meanwhile, in Vancouver, "the recent influx of foreign capital from Europe, the Far East and the Middle East, together with competition from local investor capital, has applied further pressure to already declining cap rates for the premier assets," says Avison Young Principal Mike Gill.

Founded in 1978, Avison Young is Canada's largest independently-owned commercial real estate services company and the only national, Canadian-owned, principal-managed real estate brokerage firm in the country. Headquartered in Toronto, Ontario and ranked among Canada's leading national commercial real estate organizations, Avison Young is a full-service commercial real estate company comprising more than 700 real estate professionals in 23 offices across Canada and in the U.S. The company provides value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-residential properties.

Editors/Reporters
∙ Please click on link to view Canada Commercial Real Estate Investment Volume chart:
http://www.avisonyoung.com/library/pdf/Toronto-ResearchFolder/AY_Canada_Investment_Volume_Chart.pdf

For further information:

For further info/comment/photos:

• Bill Argeropoulos, Vice-President and Director of Research (Canada), Avison Young:  [phone]
  
• Robin White, Broker & Executive Vice-President, Capital Markets Group, Avison Young:  [phone]
• Michael Church, Principal, Avison Young, Ottawa: [phone]
• Tom Godber, Principal, Avison Young, Montreal:[phone]          
• John Ross, Principal, Avison Young, Edmonton:[phone]
• James Miller, Principal, Avison Young, Calgary:[phone]
• Michael Gill, Principal, Avison Young, Vancouver:[phone]
• Sherry Quan, National Director of Communications & Media Relations, Avison Young: [phone];cell:[phone]

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