The commercial real estate investment market continues to recalibrate following a summer in which interest rate movements spooked REITs and spurred pension fund demand. CBRE Limited’s 3Q 2013 Canadian Investment MarketView indicates that as the year has progressed, private buyers came to the forefront and are now the primary source of demand for commercial property. While large office transactions have become relatively scarce, land sales bode well for the future and retail investment volume is on track to set a new record. Overall, commercial property investment is likely to total $26.5 billion in 2013, one of the top three years for commercial property sales in Canadian history.
“Glass half empty types will look at 2013 and focus on the fact that total investment activity is lower than last year’s near-record pace, but the level of demand and pricing have rarely been better,” said John O’Bryan, chairman of CBRE Limited. “At the bottom of the market in the mid-90s, annual investment volumes in Canada totalled $4 billion – a mere fraction of what we’re going to see in 2013.”
In the third quarter of 2013, $6 billion of commercial property traded hands across the country, $20.2 billion year-to-date (YTD). Total volume was down 19.5 per cent from the third quarter of 2012, but for the year, investment volume is only 9.2 per cent below the first three quarters of 2012.
Private buyers, who had been crowded out of the market as the REITs dominated, are back buying near more normal levels and are taking advantage of still low borrowing costs and their ability to understand and adjust to changing local market conditions.
“The Canadian commercial real estate investment market has cooled slightly, with REITs accounting for a mere 7.5 per cent of transactions this quarter and Canadian pension funds increasingly focused on adding international assets to their portfolios,” said Ross Moore, Director of Research. “Despite this shift and what is turning into one of the quietest years in recent memory for office investment, there has been a year-over-year increase in commercial property transactions in Edmonton and Calgary, and most other markets are proving to be quite resilient.”
Hotel investment volume nearly doubled quarter-over-quarter to $0.7 billion, as a result of Starwood Capital Group’s purchases in Toronto, Calgary, Vancouver, Ottawa and Edmonton. The volume of land transactions in Toronto has surprised many industry followers. Commercial land sales in Toronto rose 13.5 per cent year-to-date to $1.0 billion, bolstering this segment of the investment market nationally. The pace of industrial and multi-housing transactions has held up relatively well this quarter; however, office and retail transaction activity slowed quite significantly.
“The recent slowdown in retail property purchases does little to diminish the strong start to the year. Landmark transactions, including the pending sale of Bayview Village, are likely going to push retail investment volume to an all-time high. $3.9 billion of retail assets have already traded hands,” said Moore. “In comparison, only two office towers have sold for more than $200 million in 2013 – a 50 per cent interest in Place Ville Marie in Montreal and 1 Queen Street East in Toronto. Seven office transactions larger than $200 million took place in 2012.”
“There is every indication that investors remain active and are going to provide a strong finish to the year,” said O’Bryan. “The human condition rarely allows us to enjoy what we have, but this is a good market for commercial real estate investors and the past three years are likely to go down as some of the best for commercial real estate investment in Canada.”