Real Estate Values reaching a Peak as Investors Confidence is Slipping

Altus InSite’s Investment Trends Survey results for Q4 2011 report a positive year overall with a run up in values since Q1, but caution is setting in and demand has potentially peaked .Yields have compressed to the point of investor discomfort and confidence is beginning to slip. The combination of the international financial crisis connected to sovereign debt issues in Europe, softening economics in China and political gridlock in the USA, is beginning to have an impact.

When comparing OCR’s for different types of assets in the hub cities across Canada, we note a significant compression over the last 12 months. The largest downward shift was 40 to 60 bps for Downtown Class “AA” Office and Suburban Multiple Unit Residential, followed by Single Tenant Industrial which declined 20 to 40 bps and Tier l Regional Mall by 20 to 30 bps. However, the Q4 2011 results clearly demonstrate a sea change in appetites with 47% of product/locations showing “no change” in OCR since last quarter. The western locations were more bullish overall.


Office Investments
The demand for Downtown Class “AA” Office investments continues to gain strength, on the heels of positive absorption in the key Toronto, Vancouver, and Calgary markets. According to Altus InSite’s Vacancy Barometer, vacancy will tighten during the next 3 months in most downtown locations, particularly in Calgary, which has seen a dramatic decrease in vacancy as the Oil and Gas sector increased output and hiring activity. In the East, caution is expressed within the Downtown Class “B” Office sector in Ottawa and Halifax, as vacancy is expected to increase over the next three months.

Retail Investments
The popularity of retail products is underscored by it being ranked in three out of the top 5 positions on the Product Type Barometer, which measures investors’ most preferred asset class based on a potential buyer/potential seller ratio. The Q4 2011 survey also addressed valuation parameters and outlook for Tier I and Tier II Regional malls and Enclosed Community Malls.  These represent very contrasting retail asset types as demonstrated by the survey responses. Tier I Regional Malls are the top pick on the Product Barometer with 8.0 buyers per seller. It is a “sought after” asset, but is rarely available. OCR’s reported for this prime asset class varied from as low as 5.4% in Vancouver up to 6.4% in Halifax.

Industrial Investments
The slide opposite documents respondents’ opinion of the typical year 1-5 Rental Rate for the benchmark Multi Tenant Industrial Building. The average rates reported are in the higher range in Western Canada, from $7.56 per sq ft in Vancouver to $8.71 per sq ft in Calgary. The Central and Eastern locations report $5.53 per sq ft in Montreal to $7.16 per sq ft in Ottawa. Over the last 12 months all locations except Halifax (-3.5%) and Montreal (0%) reported increases in industrial rents of between 2.9% and 9.81%. Not surprisingly, the largest increase of 9.81% was reported in Edmonton, followed by Calgary at 9.28%.


In terms of yield requirements, the OCRs for Single-Tenant Industrial have compressed by 20 to 50 bps over the last 12 months. The western cities report OCR’s of 6.2% to 6.6% and Toronto is in a similar range. Montreal, Ottawa, Quebec and Halifax report a higher range of OCR’s of 6.7% to 7.9% for Single Tenant Industrial.

Multiple Unit Residential - Apartments
This asset class remains one of the most stable property investment types and usually produces the lowest yield rates in our survey. This product continues to retain its top five position on the product preference barometer. The low OCRs can be attributed to the fact that this asset class remained a “sought after” group and vacancy has been declining nationwide. The unit prices of $168, 657 (Vancouver) to $91,000 (Quebec City) demonstrate a healthy 10% to 15% rebound from values indicated 12 months ago.

In terms of location, Ottawa seems to be the most preferred location followed by Halifax and Toronto as indicated in the accompanying chart.

More Caution from Investors
The Investment Trends Survey reports a positive year with a run up in values, but caution is setting in and demand has potentially peaked. This “sea change” from our last survey, just three months ago, is signaled by a fall in demand on the Investor Outlook barometer and a pause in the 24 month downward spiral of yield rates. On the debt side, the Bank of Canada appears to be holding the line on interest rates for the foreseeable future. However, the direct and measurable correlation between bond rates and mortgage rates is a significant factor causing leveraged investors to exercise more caution in making acquisition decisions. Is this change merely a pause while investors take a “breather” to weigh up the recent fiscal policy changes in the euro zone and US Congress or does it represent a market peak in prices? The results of the next quarterly survey will provide insight into this question.

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 benchmark 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


on February 3, 2012