Vendors of commercial real estate assets continue to attract a diverse group of eager buyers, deploying an abundant supply of capital across asset classes and geographical boundaries. In some markets, scarcity of product has resulted in peak pricing, leading some investors to look further afield in a world of shrinking returns – and take on more risk.
These are some of the key trends noted in Avison Young’s fall 2017 North America and Europe commercial real estate investment review.
“The commercial real estate sector remains awash in capital; and despite varying global economic, political and property market conditions, including the ongoing interest-rate scenario, there is no better place to put your money than in hard assets,” says Mark E. Rose, chair and CEO of Avison Young. “In short, real estate has established itself as a real alternative asset class to stocks and bonds.”
The report shows that on a year-over-year basis, Canada recorded an increase in investment sales with higher dollar volumes in five of the six markets surveyed. The majority of the capital went towards the office sector, while the retail sector registered the greatest increase.
In contrast, the U.S. market lagged slightly behind the mid-year 2016 tally with 21 of 40 markets reporting reduced investment activity. Investors coveted U.S. office and multi-family product, while more capital flowed into the industrial sector compared with the same period one year earlier.
Office also reigned in five German markets, with the industrial sector increasing its share of investment year-over-year. Following the Brexit shock in 2016 and a snap national election in June 2017, the U.K. investment market remains robust, while in Bucharest, Romania, deals comprised both single-asset and portfolio sales with the office sector once again producing the majority of investment dollar volume.
“As we go through 2017 and into 2018, the commercial real estate investment market will continue to be characterized by motivated buyers and sellers operating in relatively stable property markets and in a largely still-favourable debt environment,” says Rose. “Despite elevated valuations, in the longer term, interest rates will rise and asset pricing will normalize.”
A closer look at Canada
Investment in the Canadian commercial real estate sector is buoyed by a relatively healthy economy. The commercial property market continues to see varying, but largely healthy, fundamentals across the country’s regions and asset classes, notes the report.
“With record amounts of capital still seeking a home, investors continue to find ways to buy into Canada’s finite investable commercial real estate sector,” says Bill Argeropoulos, principal and practice leader, Research (Canada) for Avison Young. “Capital from domestic and foreign investors continues to be largely directed towards Vancouver and Toronto, while the other major markets are also seeing their share of activity.”
Here are some additional findings in Canada.
- Following a record $28.4 billion in commercial real estate investment sales in 2016, Canada’s six major markets had first-half 2017 sales of almost $19 billion – up $4.3 billion, or 29%, compared with the first half of 2016. Investors coveted office and retail assets, which combined for more than $10 billion in trades, or 55% of the first-half investment tally.
- Vancouver ($7.8 billion/41% share) outpaced Toronto ($6.5 billion/34% share) with investment proceeds surging 75% year-over-year as vendors sought to capitalize on strong demand and peak pricing. With the exception of Ottawa (which saw investment activity plunge 57%), the remaining markets – Calgary, Edmonton and Montreal – all recorded increases year-over-year, and each exceeded the $1-billion mark.
- Supported by notable $200-million-plus transactions, office was once again the top investment sector with $5.3 billion in sales – an increase of 16% year-over-year – and captured 28% of total dollar volume. Toronto and Vancouver made up almost three-quarters of the national office total, as investors poured nearly $2 billion into each market, mirroring the results one year earlier.
- Disrupted by e-commerce, the retail sector was a close second with $5.1 billion in transactions (27% share) as first-half investment more than doubled year-over-year. This result was bolstered by tremendous interest in Vancouver, which saw its country-leading retail investment total nearly quadruple year-over-year to $3.1 billion. Toronto was a distant second, with $1.3 billion in volume.
- First-half investment in industrial product came in at $3.3 billion (17% share) nationwide – up 35% year-over-year. All markets recorded growth in transaction volume with the greatest sales total in Toronto ($1.7 billion/53% of the national total). Accelerating industrial market drivers continue to be tenants’ demands for modern, high-ceiling logistics and fulfilment centres, and for facilities close to major urban centres for last-mile delivery service.
- The multi-family sector was not far behind with $3.2 billion in first-half transactions (17% share). Perhaps the most restrained markets by scarcity of available product, Ottawa and Toronto registered declines compared with first-half 2016; meanwhile, sales in Vancouver increased 146% to more than $1.5 billion, leading the country.
- The least-traded asset class was ICI Land, as $2.1 billion worth of properties changed hands during the first half of 2017. Year-over-year, this was the only sector to record a decline in sales (-11%), as dollar volume decreased in all markets with the exception of Montreal.
- Average capitalization (cap) rates were marginally lower across all markets and all five asset types (with the exception of suburban class A office, which was flat) compared with one year earlier. Multi-family assets commanded the lowest yields – closely followed by retail – while overall rates showed the greatest compression year-over-year in Vancouver and Toronto.