Canada’s commercial real estate market put in its best showing ever in the first half of 2012 with sales transactions reaching $13.9 billion, according to a report by CBRE Limited. This represented a 23.4 per cent increase from the same period last year and also outpaces the first six months of 2007, when Canada’s commercial real estate market went on to record its best 12 month period ever with $32.1 billion in trades. While the $1.3 billion sale of Scotia Plaza in downtown Toronto skewed the first half 2012 numbers to the upside, the underlying trend is still of robust activity and a further demonstration by a wide variety of real estate investors to increase their exposure to Canadian commercial real estate if and when opportunities arise. All of the ingredients required for an active real estate market are in place and promise to propel full year numbers to an estimated $28.0 billion. This would represent a nearly 20.0 per cent increase over 2011 and would be the second best year on record.
“It is quite rare to have all the ducks lined up in a row like we have now, but we have active investors, active lenders and very solid leasing fundamentals that have gone on to produce one of the strongest markets I’ve ever seen in my career,” remarked John O’Bryan, Vice Chairman of CBRE Limited. “Equally impressive is the depth and breadth of market activity in every region of the country and is highlighted by every investor type eager to buy if they can. There are always risks and concerns, and we have an abundance including the ongoing debt crisis in Europe, but the view shared by many investors is Canadian commercial real estate is something they want to hold and they are prepared to pay up for an asset that promises to offer a steady cash flow.”
Relative to the first half of 2011, the various property types enjoyed mixed results in the first half of 2012, with half recording higher transaction volumes and the other half lower. The volume of office transactions increased the most, up 84.4 per cent year-over-year to $4.7 billion, followed by land and multi-housing, rising by 57.0 per cent and 44.6 per cent to $2.1 billion and $2.4 billion, respectively. Lower first half transactions were recorded in industrial falling 11.9 per cent to $1.8 billion, hotels down 13.3 per cent to $514 million and retail dropped 24.1 per cent to $2.30 billion.
“Interestingly while the Canadian commercial real estate market just recorded its best six month period ever, the U.S. by comparison recorded $111.6 billion (USD) in transactions in the first half of the year which is just 36 per cent of 2007 levels, highlighting the marked difference between the two countries,” said Ross Moore, Director of Research for CBRE Limited. “Canada continues to benefit from few distressed sales, values that support any debt that might be on the property and the prospect of rising rents and increasing occupancy. This has the effect of making for a very liquid market just as we’re seeing now.”
During the first half of 2012, REITs were again significant buyers of commercial real estate. This was demonstrated by the acquisition of Scotia Plaza by Dundee REIT and H&R REIT and is confirmation that Canada’s REIT’s can now claim to be major players in the Canadian marketplace. This recent transaction should be viewed as a “game changer” and a sea change for the sector. Canada’s REIT’s have been on a winning streak since 2008, with the S&P/TSX Capped REIT index up 113 per cent versus the S&P/TSX Composite index which is only up 34 per cent. During the January – June period, REITs accounted for 46.9 per cent of total acquisitions, which was up substantially from 2011, when REITs made up 31.4 per cent of total transactions for the entire year. Life insurance companies and pension funds accounted for 12.4 per cent of all sales in the first half of the year, which was down from 2011 when these two groups totalled 17.1 per cent of all transactions. Private buyers remained a significant buyer group in the first half of the year, at 37.9 per cent; however, this was nearly 10 per centage point below 2011 levels.
The back half of the year is usually the busier of the two halves, but with a number of blockbuster deals occurring in the first six months of the year, 2012 is more likely to be an exception and will be a more balanced year. Full year investment volume is expected to reach $28.0 billion, despite a number of portfolio sales that are expected to close before year-end. The cost of capital is expected to remain exceptionally low and, coupled with still improving fundamentals, should keep investors very interested in commercial real estate. With Canadian real estate seemingly fully priced, however, increasing numbers of investors will be looking outside Canada. Still, the upward trend in investment volume is expected to stay intact until well into 2013.