Canada is on the ’A-list’ for commercial real estate investors, in a world of uncertainty
A new report suggests commercial real estate investors may shun America in favour of Canada because of a Trump effect that is generating concerns about the market south of the border.
“The level of uncertainty that we see globally is at an all-time high. I would include geopolitical uncertainty and economic uncertainty,” said Paul Morassutti, executive vice president and executive managing director for CBRE in Canada. “When you consider the most consequential economy on earth, the United States, we really don’t known at this point what type of foreign policy is coming out of the States, what type of trade policy. There has been no coherent economic strategy since the inauguration.”
CBRE said Canada is coming off a record-breaking year for commercial real estate transactions with $34.7 billion in property changing hands in 2016. It is forecasting investment activity to drop to $31.9 billion in 2017 but the real estate company says the demand from foreign buyers will not slow down.
Foreign capital captured 27 per cent of all sales over $10 million in 2016. Chinese investors accounted for 71 per cent of all foreign transactions in 2016, but could be forced to navigate capital controls when it comes to getting money out of the country in 2017.
Morassutti says European instability also continues to drive capital from that market. “In the European Union you have Brexit, the National Front in France’s election wants out of the EU, Italy might be next, Greece’s debt is bubbling, right-wing governments are on the rise and you’ve got slow growth,” he says. “European capital is looking at its own backyard. A lot of investors saying we want safety and Canada looks really safe. It’s the same thing from Chinese investors.”
The real estate company says “Toronto envy” is driving some of the demand. “Toronto starts 2017 on the A-list of commercial real estate markets. Real estate players from cities across the globe are casting envious glances at its performance. The numbers are truly compelling. It has the lowest downtown office vacancy rate of any major North American city with good rental growth projected for 2017, it has the second lowest industrial availability rate, the second lowest multifamily vacancy rate and its hotels recorded record occupancy levels in 2016,” said Morassutti.
CBRE says capitalization rates, a key valuation for properties, will probably stabilize this year after dropping as low as four per cent in 2016 for what it calls “trophy office product” in Toronto. (The capitalization rate is the ratio of net operating income to property asset value: the lower the cap rate, the more a property is worth. A four per cent cap rate assumes it will take 25 years for a property to pay for itself based on its income stream.)
“It’s hard to believe cap rates can go any lower,” said Morassutti. “We are not forecasting a tightening of cap rates in 2017 but it could happen. The attractiveness of Canada is not going away in 2017.
CBRE says the national vacancy rate for office space is expected to climb to 14 per cent in 2017, up 13.3 per cent but that figure is being driven by some weaker spots in the country. “You have to be careful at looking at national averages because it is skewed entirely by Alberta,” said Morassutti.
The vacancy rate for office space in Calgary is expected to climb to 28 per cent in 2017 from 25 per cent in 2016. By comparison, Toronto’s vacancy rate in its core is expected to climb to 5.1 per cent in 2017 from 4.4 per cent in 2016 while Vancouver’s core vacancy rate is expected to shrink to 7.4 per cent from 7.7 per during the same period.
“There has been office supply additions in Vancouver and Toronto but we’ve dealt with that supply well,” said Morassutti.
Original Article: business.financialpost.com