Investment Market Close to Pre-recessionary Conditions
Altus InSite’s Investment Trends Survey results for Q2 2011 confirm that the Canadian commercial property market continues to successfully weather the global turmoil and has for the most part rebounded back to a healthy level if not yet to pre-recessionary conditions. Major property owners are highly motivated to buy because the Pension Funds, Life Companies and REITS are awash with cash and private investors again have access to low cost mortgage money. The lack of listings is causing multiple bids in all asset classes, which has again fueled significant and rapid compression in OCRs and IRRs. As a result, in Q1 2011 and Q2 2011, reported yields for most asset classes have decreased to within 10 bps to 30 bps of that experienced in the last cycle which peaked in late 2007.
The graph of OCRs compares different types of assets in locations across Canada. In the second quarter of 2011 some compressions in OCRs and IRRs was seen across nearly all the major sectors. The replies in Q2 2011 indicate that, for OCRs, 44% of respondents believe rates have decreased, 53% believe rates have remained the same, and only 3% believe that rates have increased.
The “band width” of opinions of rates has remained the same for the most part, 5.0% to 8.0% for most regions. Outliers were observed within multi-tenant residential in the Vancouver market with the lowest rate indicated at 4.0%. This can be attributed to the continued increase in cost of home-ownership in that market, which results in increased demand for rental properties.
In contrast, highest rates were observed consistently among single tenant industrials in the eastern market of Montreal, Quebec City, and Halifax, which were above 8.0%. This is expected since the manufacturing sector in the eastern Provinces are still in recovery stage, especially in light of the strong Canadian dollar, increased trade barriers under the current US administration and sluggish economic recovery in the United States.
The retail sector exhibits a cautionary stance from investors surveyed this quarter after a continuous stream of strong demand and increased valuations in past quarters. This does not imply that this sector is headed for trouble or values are expected to fall, but rather that the rate of return on these choice assets has moderated due to slow growth in retail sales. It may also indicate that retail product has reached a plateau and that investors are currently seeking out higher returns in the Office, Multi Unit Residential, and Multi-Tenant Industrial asset classes.
The product gaining traction after a period of extended slump is Downtown Class “AA” Office. The Investor Outlook results shown above indicate that 54.5% of respondents forecast an increase in values for this asset class in the next 12 months, while 40% anticipated “no change”. This reveals a more positive outlook for this asset class since it suggests stability with potential for increased asset values.
In spite of this quarter’s indications of further cap rate compressions, nearly 77% of the respondents are of the opinion that OCRs would increase by 25 – 50 basis points in the event of a 1.0% interest hike. But for the moment, the commercial market has again moved into imbalance, due to a supply issue and a high level of investor confidence. Overall, this quarter’s Investment Trends Survey points to an orderly rebound in commercial market fundamentals.
Every quarter, senior Altus Group professionals reach out to over 300 investors, managers, owners, lenders, analysts and other market stakeholders to survey their opinion on value trends and perspectives. Conducted with the same benchmarks properties for over 10 years, the survey provides valuable insights on valuation parameters for 32 asset classes in Canada’s 8 largest markets. For more detailed survey results, please contact support@altusinsite.com