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Pension funds breathe new life into the commercial real estate investment cycle


Those expecting the Canadian commercial real estate investment market to come off the boil will continue to wait. Investment volume reached a new first quarter record in 2014. CBRE’s Q1 2014 Canadian investment statistics point to pension fund activity and other factors that are drawing out the investment cycle and maintaining peak pricing, especially for institutional grade assets.

Overall, investors purchased $6.8 billion of Canadian commercial real estate in the first quarter of 2014, up 12.2 per cent from $6.1 billion in the first quarter of 2013. Some of the volume in the first quarter was the result of a particularly active end to 2013 and the closing of some larger transactions was pushed into 2014.

“Each distinct investment cycle is unique and this current cycle stands out for its resilience,” said John O’Bryan, Chairman of CBRE Limited. “The purchaser profile has varied significantly over the past year. REITs were dominant initially, only to have private buyers come to the forefront and now pension funds are moving into an increasingly dominant position. Pension funds will likely remain a force to be reckoned with as they are raising their allocations to commercial real estate and have a pool of cheap capital to draw upon.”

In the first quarter of 2014, pension funds accounted for 33.7 per cent of total investment activity, challenging private investors at 35.2 per cent for the top spot. In Canada, private investors regularly account for more than 45 per cent of commercial real estate purchases. REITs continue to be more conservative, but were the third most active buyer group, accounting for 11.4 per cent of total investment volume.

“The deal process and market sentiment continue to evolve as we get deeper into the investment cycle,” noted Ross Moore, Director of Research for CBRE in Canada. “When you can buy commercial real estate for almost the same price as building it new, there is some hesitation and more financial scrutiny; however, pension funds and other investors are in need of income producing investments and by most metrics, commercial real estate has a very strong track record over the past decade.”

The remarkable start to the year for Canadian commercial real estate investment is largely due to demand for office buildings, land and retail properties, especially in Eastern Canada. Investment volume topped $3.6 billion in Toronto and $1.1 billion in Montréal in the first quarter. Volumes in both markets were up year-over-year and quarter-over quarter. The $505.5 million Bayview Village Shopping Centre transaction and the sale of the Simpson Tower for $410.2 million boosted Toronto’s numbers, while land and retail investment doubled in Montréal compared to the previous quarter.

In Western Canada, Vancouver, Calgary and Edmonton reported investment volumes that were more consistent with historical averages. Some highlights include demand for industrial properties in Vancouver where $162.7 million of industrial assets traded hands, while land sales in Edmonton nearly doubled year-over-year to $285.0 million.

“The sudden rise in bond yields in May of last year caused a temporary dislocation in the investment market and resulted in some deals getting pushed into 2014. This helps explain the record start to the year,” Moore noted. “The timing doesn’t tell us much aside from the fact that the appetite for commercial real estate remains strong and investors are being persistent.”

Even with a record start to 2014, CBRE’s forecast for year-end investment volume remains at $24.0 billion. The second quarter may be a bit sluggish, but the last two quarters of the year are expected to be back near record levels. This is broadly in line with year-end totals from 2011 and 2013, and would be the fourth highest commercial real estate investment volume in Canadian history.




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