The Real Property Association of Canada (REALpac) and FPL Advisory Group have announced the results of the First Quarter 2012 REALpac / FPL Canadian Real Estate Sentiment Survey.
The first quarter of 2012 helped to reinforce many of last quarter’s views on the strength of the Canadian commercial real estate sector. The overall real estate sentiment index came in at 61, slightly up from 60 last quarter but down from 71 a year ago. While respondents have reported improvement in market conditions, many expect the rate of improvement to decline over the coming year. However, it is important to note that the Sentiment Index measures the market trajectory and is scored from 0-100, meaning scores above 50 reflect positive trends and score below 50 reflect negative trends. This quarter is the tenth straight quarter in which the Index has been above 50, reflecting a consistently positive trajectory of the market.
The Current Index came in this quarter at 64, the same as last quarter. The Future Index is now 58, and while this has not seen a material change from last quarter, it has dropped from 71 a year ago. Many executives have maintained this is a direct result of the vast improvement seen over the past couple years. There is now less room for continued progression, leading to a more modest outlook for 2012. As one respondent voiced, it appears the Canadian market has reached a “coasting point.”
Canadian interviewees echoed these beliefs, affirming the current positive market conditions while displaying cautious optimism for 2012. One respondent was pleased with activity levels over the past year, stating, “Last year was our busiest year in terms of acquisitions, and that’s saying something.” Another leader showed further positivity, saying, “Demand is now fairly consistent, and capitalization rates are steady.” Looking ahead, one interviewee said, “Within this low interest rate environment, I cannot see too much change. I expect lots of stability.”
When comparing Canada’s Sentiment Index to that of the United States, a meaningful split has appeared, driven primarily by the Future indices. The Overall U.S. Sentiment Index came in this quarter at 68 (up from 59 last quarter but relatively flat from 69 in Q3 2011). The U.S. Future Index is now 70, in comparison to Canada’s 58. This reflects a widely held belief that the U.S. still has plenty of room for improvement as they continue to emerge from prior economic woes and hope to see more certainty from the European Union.
Canadian real estate asset values have continued their incline, confirmed by a large majority of respondents (87 per cent) who reported increased asset values throughout the last year. All the while, over 50 per cent of survey participants expect level pricing looking ahead to 2012. While a noteworthy group (30 per cent) expects a modest increase in values going forward, only 2 per cent of respondents expect aggressive growth. Much of the recent price increases are due to continued capitalization rate compression. One market leader noted, “I never cease to be surprised by some of the (low) cap rates I am seeing out in the market.”
Over the past year, debt capital has become increasingly available. More than half of the survey participants reported increases in debt availability, while only 7 per cent of our respondents reported a slight decline. Keep in mind that these reflections of 2011 come even after a very positive 2010, where a large improvement in the capital markets was seen as well. Due to the large progress Canada’s debt markets have undertaken, 67 per cent of respondents maintain a neutral stance on debt availability going forward. Reflecting the positivity of many, one real estate leader stated, “Accessing (debt) capital is not much of an issue. Anything that is generating income will be able to get capital going forward. I do not expect this to change.”
The equity market continues to remain even stronger, and with a slight increase from last quarter, nearly 60 per cent of respondents reported increased in equity available over the trailing year. One professional affirmed, “There is a good balance right now. [Equity] capital is available for good products. Nobody is chasing assets irresponsibly, and the availability should stay its course.” Similar to the debt markets, a majority (58 per cent) expect equity availability to remain about the same in 2012. While very few expect any declines in capital availability, it is the availability of product, rather than capital, which may be the cause of stagnation going forward.