Canadian commercial real estate investment volumes on verge of exceeding pre-credit crisis levels, while investors' lingering indecision stymies U.S. recovery
Avison Young releases inaugural Fall 2012 Canada, U.S. Commercial Real Estate Investment Review
TORONTO, Oct. 25, 2012 /PRNewswire/ - The gap between Canadian and U.S. property market fundamentals is not only evident on the leasing side of the ledger, but also on the investment side. Historically low interest rates have Canada on the verge of exceeding pre-credit crisis investment levels, while cautious lenders and investors leave the U.S. with some distance still to cover.
These are some of the key trends noted in Avison Young's inaugural Fall 2012 Canada, U.S. Commercial Real Estate Investment Review, released today.
The report covers commercial real estate investment conditions in 18 regions: Calgary, Edmonton, Montreal, Ottawa, Toronto, Vancouver, Atlanta, Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, New York, Pittsburgh, Reno, San Francisco and Washington, DC.
"Canada's overall economic well-being and stable commercial real estate market fundamentals, characterized by low-to-mid single-digit vacancy rates, along with historically low interest rates, are driving the flow of capital across most regions and asset classes ― something that we have not seen to the same degree in the U.S.," comments Mark E. Rose, Chair and CEO of Avison Young.
"While the leasing and investment stars are aligned in Canada, exhibiting more uniform and robust investment volumes to date, fundamentals remain out of step in the U.S. Even with the lowest interest-rate environment ever, the U.S. economy and commercial real estate market continue to sort themselves out ― restricting the flow of capital and keeping some players on the sidelines."
Rose remains cautiously optimistic. "Notwithstanding all of the lingering distractions abroad that continue to dictate (in varying degrees) business and political decisions in Canada and the U.S., the conclusion of the U.S. presidential election in November should provide some direction, stability and growth going forward," he says.
"Although Canada is stable, further gains are being tempered by fundamental financial and investment issues in the U.S. and Europe and, therefore, Canada may very well be facing a temporary top in pricing and activity. On the other hand, the difficulties in the U.S. are presenting an opportunity to invest at a cyclical trough," adds Rose.
"All one has to do is to look at the commercial real estate investment volumes for the first half of 2012 and compare them to the same period last year, or even prior to the economic downturn, to see how far apart Canada and the U.S. really are," notes Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.
"Of the 18 Avison Young markets surveyed in Canada and the U.S., investment dollar volumes increased in nine markets when compared with the same six-month period in 2011, with sales volumes rising between 5% and 111%. An equal number of markets witnessed falling sales volumes of between 1% and 53% over the same period."
Argeropoulos points out: "A closer look at these figures, however, reveals the clear disparity between the two countries. While five of the six Canadian markets surveyed saw higher investment volumes year-over-year, only four of the 12 U.S. markets experienced a similar increase over the same period."
The report shows that at the Canadian market's peak in 2007, approximately $24 billion (CAD) worth of commercial real estate in the office, industrial, retail, multi-residential and land sectors greater than $1 million transacted across Canada's major markets. With the onset of the recession in 2008, asset sales dropped to $20 billion, bottoming out in 2009 at $12 billion. Since then, buyers have come off the sidelines, deploying $18 billion in 2010 and $21 billion in 2011.
"Canada's commercial real estate investment sector has rebounded strongly from the market trough, with investment sales volumes and pricing reminiscent of pre-credit crisis levels. Through the first six months of 2012, almost $13 billion worth of commercial real estate assets changed hands, an increase of 26% compared with the first six months of 2011," says Argeropoulos. "Given the current deal pipeline, and barring any delays causing deals to be pushed into next year, there is a strong possibility that Canada will exceed its previous market peak. It's also conceivable that a number of markets will either match or exceed their previous highs, including Vancouver and Calgary in the west and Toronto and Ottawa in the east."
"Access to attractively-priced debt capital and nominal borrowing costs, which have never been lower, continue to fuel much of the investment activity ― more so in Canada than the U.S.," states Avison Young mortgage broker Norman Arychuk in Toronto.
Arychuk adds: "Canadian lenders have had another bumper first half of the year, with some filling their quotas. The current lack of available alternative investments to drive yield for lenders will continue to provide a good, competitive supply of debt capital, which in turn will be tempered by asset quality. The U.S. debt capital markets remain distinctly bifurcated, mirroring the characteristics of the real estate market. Quality assets will be the recipients of the best lending terms, while other assets will not, in some cases, have the ability to attract debt at any sensible level. The near term is more of the same."
The report goes on to say that increased competition for assets has generally elevated pricing across Canada ― and in some cases even exceeded pre-credit crisis levels for well-leased, quality-grade properties in prime locations. In almost every asset category, Vancouver yields the lowest capitalization rates, followed by Toronto and Calgary. While the investor profile is varied, real estate investment trusts (REITs) have emerged as aggressive buyers, often competing with and outbidding the pension funds for some of the coveted assets in the country.
Office buildings were the most actively traded asset class in the first half of 2012 ― capturing 39% of the total investment dollar volume. In all, $5 billion worth of office properties transacted (more than doubling (+121%) last year's six-month tally) ― highlighted by the $1.3-billion sale of Scotia Plaza in Toronto, Bentall V ($401 million) in Vancouver, and Calgary Place ($312 million) in Calgary. Coincidentally, Toronto ($2.7 billion), Calgary ($1.1 billion) and Vancouver ($707 million) led all Canadian markets in terms of office sales.
Retail, 2011's most actively traded asset class, registered $2.2 billion in sales in the first six months of 2012 ― down 22% over the first six months of 2011 as the asset class captured 17% of the overall investment dollar volume. Notable retail transactions included Southgate Centre ($264 million) in Edmonton and Marlborough Mall ($137 million) in Calgary. At $671 million, Toronto saw the highest retail sales volume, though this figure is down 61% compared with 2011. This was largely attributed to the lack of product coming to the market, especially in the larger-retail-centre category, which dominated the sales landscape in 2011.
Sales of land followed, with $2.1 billion worth of transactions, securing a 17% market share. Unlike retail, the land sector saw its transaction dollar volume increase by 45% compared with 2011. Land was also the only property type to see a year-over-year rise in investment volumes in each of the six Canadian markets surveyed. Toronto led the way with $656 million in trades; however, Vancouver posted the greatest year-over-year increase (+123%), as land sales more than doubled to $258 million.
The sale of industrial buildings was slightly off (-13%), slipping from $2.1 billion in the first half of 2011 to $1.8 billion in the first half of 2012 ― finishing with a 14% market share. With the exception of Vancouver, investment volume was down in every market, with Edmonton (-58%) and Ottawa (-47%) posting the most notable declines over last year.
Similar to industrial, $1.8 billion (14% share) worth of multi-residential (apartment) buildings changed hands in the six-month period ending June 30, 2012. However, unlike industrial, multi-residential sales were up 7% over the same period in 2011. With $790 million in trades, Toronto was by far the most active multi-residential market in the country. Vancouver ($387 million) was a distant second.
Toronto, Canada's largest city and commercial real estate market, remains the investment market of choice, recording $5.7 billion in sales (44% share) ― matching the 26% national year-over-year growth in sales. Toronto led in every asset category, with Vancouver challenging Toronto's number-one ranking in retail and Edmonton giving Toronto a run for the title in land.
"Everyone wants to own a piece of commercial real estate in the largest and one of the healthiest markets in the country," observes Robin White, Avison Young Principal and Executive Vice-President, Capital Markets Group, in Toronto. "Investors have been served an entrée of product, ranging from trophy office buildings to redevelopment plays and while some investors are buying property for the income stream that it provides, others are looking to take advantage of the growth potential."
White cautions: "While a variety of property types have sold, some are taking longer to sell or have been pulled from the market altogether ― perhaps signaling an inflection point on pricing."
Vancouver had an exceptional first half of 2012 as transaction dollar volume surged to $2.4 billion (+48% / 19% share), which was attributed to a number of significant transactions including the $401-million acquisition of the Bentall V office tower.
"The continuing low interest rate environment and the lack of faith in sustainable stock market returns are driving many investors to further invest in public real estate companies, such as REITs or private limited partnership pools. The outcome of this trend is that going forward, there will be growing amounts of public or private equity available for investment. The macroeconomic factors affecting the Vancouver commercial, industrial and retail markets continue to be relatively positive with little sign of increasing vacancies, abnormal new construction levels or diminished demand from tenants," notes Avison Young Principal Bob Levine in Vancouver.
Calgary's commercial real estate investment market ($2 billion / 16% share) posted an outstanding 111% dollar volume increase in the first half of 2012 compared with the first half of 2011. Office property investment activity was a key driver behind this trend, with transaction count and dollar volume showing major growth.
"The strong activity throughout the first half of the year has only been limited by the availability of product. Despite a slight slowdown in leasing activity in the downtown, rental rates remain firm and vacancy is very low. There continues to be significant optimism about Calgary and Alberta as an economic hub for western Canada, and a great place to invest," says Avison Young Principal Tod Hughes in Calgary.
Edmonton posted a respectable $1.3 billion in sales (+17% / 10% share) with land being the most actively traded asset class, followed closely by retail.
"Vacancy rates in all product classes continue to decline in Edmonton. At the same time, construction costs continue to rise. The result of these two phenomena is that rental rates in existing buildings are going up ― providing ever more attractive returns to owners and landlords, and skewing the hold/sell analysis in favour of keeping assets. As with all other markets, there is continued pressure from investors to place money; the combination of abundant capital and reluctant sellers will result in continued cap-rate compression," explains John Ross, Avison Young's Managing Director of the Edmonton office.
At $825 million (6% share), Montreal was the only Canadian market to see year-over-year investment volumes fall ― a decline of 53%. Apart from land, which saw a moderate improvement in sales over last year, sales volumes fell in the remaining property types.
"Montreal's investment potential, despite a stable real estate market, is hampered by short-term external factors. The summer election of a nationalist government and proposed tax increases, and recent news stories about corruption at the municipal and provincial levels have resulted in some negative publicity for the Province of Quebec," says Avison Young Principal Tom Godber in Montreal.
Finally, in the nation's capital, Ottawa, the sale of commercial real estate assets was up a remarkable 85% compared with the first half of 2011, with $666 million in transactions and a 5% market share. Bolstering the figures were the sale of class AAA downtown core office buildings ― the EDC Building and the Chambers Building ― the latter setting a new high-water mark for price-per-square-foot achieved in an office transaction in Ottawa.
According to Avison Young Principal Michael Church in Ottawa: "Ottawa has continued to attract investment capital at increasingly compressed cap rates through the first half of 2012. We fully expect that trend to continue through the end of the year."
Overall sales volume of U.S. commercial real estate in Avison Young markets slid to $43.4 billion (USD) in the first half of 2012 from $45.2 billion in the first half of 2011. Chicago, Dallas, Houston and San Francisco were the only markets to see their total sales volume increase year-over-year, while New York, Los Angeles, Washington, DC and Chicago led Avison Young markets in overall sales volume through June 30, 2012.
According to Earl Webb, Avison Young's President, U.S. Operations: "Market fundamentals and recovery stalled this summer in many U.S. metropolitan areas; however, the U.S. market continues to be a magnet for foreign investment and, as of October, Canadian investors lead all countries with investments totaling $3.5 billion."
Investor capital has generally focused on core assets in larger metropolitan areas and coastal cities, but this year that appetite has been tempered somewhat due to the unavailability of product.
"Lack of supply moved some institutional players to look for middle-market assets ― a trend likely to continue into 2013," says Webb.
While multi-residential (apartment) and retail sales ticked upward ($10.6 billion to $12.6 billion and $7.6 billion to $8.4 billion, respectively), office sales dominated dollar volume in the first half of 2012 ($17.3 billion) in Avison Young markets.
"The U.S. investment sales market thus far in 2012 is bifurcated with core, well-leased and located properties maintaining their values relative to their respective markets," comments Avison Young Principal Chip Ryan in Washington, DC. "Investors have demonstrated a marked preference for core office assets, if available, and pricing reflects that preference."
The report goes on to say that sales volume for office, industrial, retail and multi-residential sales in the first half of 2012 fell by nearly 20% in Metropolitan Washington (long considered a safe investment haven) compared with the same period in 2011. That trend is unlikely to change course until after the U.S. presidential election in November.
"Office buildings with long-term leases will garner the most qualified buyers; at risk will be those properties dependent on defense and its contractors for leasing," adds Ryan. "We expect that medical office buildings will remain well-positioned this year with an abundance of capital chasing these stable cash-flowing assets." In the Washington, DC area, for example, medical office buildings benefit from limited supply, high barriers to entry, and strong health systems such as Johns Hopkins and Inova.
Meanwhile, U.S. industrial sales in Avison Young markets declined to $5.1 billion in the first half of 2012 from $9.3 billion during the same period last year. "Pure industrial or warehouse are still in demand and that market segment should grow in 2013," points out Ryan.
Two Avison Young markets recorded impressive increases in office sales volume over the first six months of 2011: Chicago sales increased 151% while San Francisco saw its volume jump 88%.
Boston, which saw its industrial sales volume nearly double in the first half of 2012 compared with the first half 2011, was the only Avison Young market to report an increase in industrial sales volume. Reno was the sole market where first-half 2012 industrial sales volume was greater than the volume achieved in the other property types.
Year-over-year, capitalization rates fell an average of 40 basis points for the four product types, with industrial and multi-residential sales witnessing the greatest declines. The overall rates came down to some degree in all markets except Chicago, New York and Pittsburgh, where rates increased marginally.
Recent market trends for multi-residential properties have raised concerns that demand is beginning to abate and development in some U.S. markets will accelerate in 2013. According to Avison Young Principal Matt Tritschler in Atlanta: "Trends that have boosted demand for multi-residential properties suggest a moderate slowdown, although investment capital ― funded with abundant debt for this product type ― continues to keep capitalization rates very low."
He adds: "Multi-residential investment remains a local play based on job growth, supply and other factors." The apartment sector led first-half 2012 transaction volume in four markets: Atlanta, Dallas, Houston and Las Vegas.
Please turn to the following pages of the report for fall 2012 market highlights of the local investment markets. For further info/comment, please contact the Avison Young Principals/Managing Directors listed below. Thank you.
pp. 1-3 Canada & U.S.:
Bill Argeropoulos, VP & Director of Research (Canada), (416) 673-4029 or cell: (416) 906-3072
Margaret Donkerbrook, VP, U.S. Research, (202) 644.8677 email@example.com
p. 11 Edmonton:
John Ross, Managing Director, (780) 429-7564 firstname.lastname@example.org
p. 12 Montreal:
Tom Godber, Principal, (514) 905-5440 email@example.com
p. 13 Ottawa:
Michael Church, Principal, (613) 567-6634 firstname.lastname@example.org
p. 14 Toronto:
Robin White, Principal, (416) 673-4009 email@example.com
Norm Arychuk, Mortgage Broker, (416) 673-4006 firstname.lastname@example.org
Mark Fieder, Principal, (416) 673-4051 email@example.com
p. 17 Boston:
John Fenton, Principal, (617) 776-2255 x100 firstname.lastname@example.org
p. 18 Chicago:
Michael McKiernan, Principal, (847) 849-1903 email@example.com
p. 19 Dallas
Rand Stephens, Principal, (713) 993-7810 firstname.lastname@example.org
p. 20 Houston:
Rand Stephens, Principal, (713) 993-7810 email@example.com
p. 21 Las Vegas
Joseph E. Kupiec, Principal, (702) 472-7979 firstname.lastname@example.org
p. 22 Los Angeles
Christopher Cooper, Principal, (213) 706-6470 email@example.com
p. 23 New York
Arthur J. Mirante, II, Principal, (212) 729-1896 firstname.lastname@example.org
p. 24 Pittsburgh
George (Duke) Kingsley, Principal, (412) 944-2131 email@example.com
p. 25 Reno
John Pinjuv, Managing Director, (775) 332-7300 firstname.lastname@example.org
p.26 San Francisco
Nick Slonek, Principal, (415) 322-5051 email@example.com
Founded in 1978, Avison Young is Canada's largest independently-owned commercial real estate services company. Headquartered in Toronto, Ontario, Avison Young is also the largest Canadian-owned, principal-managed commercial real estate brokerage firm in North America. Comprising more than 1,100 real estate professionals in 40 offices across Canada and the U.S., the full-service commercial real estate 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.
For further information/comment/photos:
• Sherry Quan, National Director of Communications & Media Relations, Avison Young:
(604) 647-5098; cell: (604) 726-0959 firstname.lastname@example.org
• Mark Rose, Chair and CEO, Avison Young: (416) 673-4028
• Earl Webb, President, U.S. Operations, Avison Young: (847) 881-2237
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