Pension funds drove commercial real estate investment volume to record levels in the first quarter, but private buyers wrestled back control of the market in the second quarter of 2014. CBRE’s Q2 2014 Canadian Investment Statistics reveal that a shift in available product has tilted the commercial real estate market in favour of private buyers.
Overall, $5.1 billion of Canadian commercial real estate traded hands in the second quarter of 2014. That was down from $6.7 billion in the first quarter of the year; however, the number of transactions actually rose 9.7 per cent quarter-over-quarter. More deals, though smaller in size, were completed. There was a notable decrease in the amount of institutional quality property that was listed for sale this quarter. This segment of the market is essential for higher investment volumes to be reached.
“Volume came off a bit in the second quarter, but more deals were processed and the lack of a summer lull bodes well for the remainder of the year,” said John O’Bryan, Chairman of CBRE Limited. “While this investment cycle may seem long in the tooth, an abundance of capital is still waiting to be placed. Any hesitation caused by current pricing is quickly trumped by the promise of healthy, stable returns, which commercial property in Canada continues to offer.”
Pension funds accounted for 11.4 per cent of commercial property purchases in the second quarter of 2014, down from 31.6 per cent of transactions in the first quarter. Private investors logged one of the more dominant performances in recent memory, as their share of the total investment volume surged from 39.6 per cent last quarter to 61.6 per cent in the second quarter. REITs continued to recalibrate and were responsible for a mere 8.7 per cent of commercial property purchases in the second quarter, down slightly from 11.5 per cent last quarter.
“The change in the purchaser profile reflects what is being listed for sale. Fewer institutional quality properties mean that pension funds have less opportunity to exercise their purchasing power. Meanwhile, private buyers benefit most from low interest rates as they are looking to leverage newly acquired assets,” said Ross Moore, Director of Research for CBRE in Canada. “You have to think that the REITs are near the bottom in terms of purchasing activity. I would expect that REITs will be more active going forward.”
Much of the recent demand for commercial property has focused on industrial properties and apartment buildings in Western Canada. Compared to the first quarter of 2014, investment volume climbed 10.0 per cent in Vancouver to $766.7 million, 18.6 per cent in Edmonton to $346.5 million and jumped an impressive 43.0 per cent in Calgary to $772.3 million. Transaction activity in Calgary outpaced all markets except for Toronto, where commercial property sales topped $1.9 billion.
Over $1.0 billion of industrial properties and $1.0 billion of apartment assets traded hands in Canada this quarter, up 21.2 per cent and 73.6 per cent, respectively, quarter-over-quarter. Office and retail asset purchases declined significantly, as these sectors were most impacted by the decrease in the number of high quality, institutional properties that were listed for sale.
“After a raucous start to the year, a lack of quality product has temporarily muted investment activity; however, history tells us that when property values are elevated, transaction activity follows,” Moore said. “Lenders are active and purchasers continue to make the numbers work, so our year-end target for commercial real estate investment in Canada remains unchanged at $24.0 billion.”