In spite of strong fundamentals, confidence among Canada’s commercial real estate leaders continued to wane as go-forward concerns about the Canadian economy, as well as external factors persist. That was the dominant attitude in the Third Quarter 2013 Canadian Real Estate Sentiment Survey conducted by the Real Property Association (REALpac) and FPL Advisory Group.
“Higher interest rates and higher volatility in the equity markets will likely make for more challenging times in the coming year. Perhaps this will lead to a greater separation in values between higher and lower quality assets. This range compressed significantly during the recent period of high liquidity in debt and equity markets,” commented survey participant Allan S. Kimberley, vice chairman and managing director at CIBC World Markets.
The quarterly survey measures the current and future outlook of Canada’s top commercial real estate executives on overall real estate conditions, values, and availability of capital. Top-line findings for 2013’s third quarter also included:
- Interest rate increases over the coming year are seen as inevitable by most and will have widespread implications throughout the industry;
- Capitalization and interest rate changes are expected to counteract strong demand for real estate, keeping asset values mostly flat;
- Although still seen as available, debt capital is becoming more selective and expensive in response to rising rates;
- Equity capital is accessible for the right kind of assets, though there is a concern that a growing number of investors view opportunities abroad as more attractive.
As participant Larry Dybvig, president of Grover, Elliott & Co., put it: “The expectation of rising interest rates will push capitalization and yield rate requirements up, and that will likely slow transaction activity and flatten asset value trends.”
In addition, “the markets are cooling as the inevitable rise in interest rates starts to materialize. Many long-term asset owners seem to have taken advantage of historically low rates and have stable portfolios and cash flows, but new and future acquisitions will have to contend with rising rates and a slower market,” said Jeff Devins, president of Crestwood Capital Partners Ltd.