Canadian Commercial Real Estate Market Performs Despite Turbulent International Backdrop

Morguard Corporation released its 2013 Canadian Economic Outlook and Market Fundamentals Research Report at and predicts a repeat of 2012,the second most active real estate investment year on record, with favourable returns for investors in the Canadian commercial real estate market.
"We anticipate strong interest in Canadian real estate from a broad cross section of investors in 2013, with the REIT sector dominating transactions," said Keith Reading, Director of Research at Morguard. "Canadian property values will remain at the peak, given access to low cost capital and attractive yields."
Annual investment capital flow into the Canadian real estate sector is predicted to be close to CDN$30 Billion in 2013.  This is a slight dip from the previous cyclical high of CDN$32.1 Billion in 2007, but above the long term average of CDN$19.3 Billion.
2013 Real Estate Investment Trends to Watch in Canada
Solid fundamentals will continue to characterize Canada's real estate market despite a turbulent backdrop of uncertainty in international economies and financial markets
Property values will continue to range at the cycle peak supported by robust investment demand, low interest rates, and historically low long-term bond yields
Income performance strength will remain a fixture over the near term as rental markets in all sectors post strong occupancy characteristics, positive demand trends, and modest increases in rental rates
Robust purchasing activity in the investment sector will continue to feature a significant REIT sector component, however pension funds and private capital will remain active
Conservative construction volume in the office and industrial sectors over 2013 will ensure rental market conditions improve however, as 2013 ends risk levels will rise with the increase in office development in Vancouver, Toronto and Calgary
The arrival of U.S. retailer Target will continue to impact the retail sector, as the discounting sector adjusts to new competition. The broader retail sector will also govern itself in light of technological and overall shopping behavior changes.
The multi-family residential real estate sector will be the market's most stable sector, with occupancy ranging at or above the 98.0% mark nationally in 2013, given healthy demand supported by demographic trends
Real Estate Investment Overview
In 2012, the Canadian real estate investment market registered strong results across all sectors and jurisdictions, in the face of continued uncertainty outside of the nation's borders and a slowing trend in the domestic economy.
This year, the Canadian real estate market will be forced to continue to contend with the ongoing uncertainty and sluggish results in Europe. At the same, time it will benefit from increased stability in the U.S. economy, assuming the negative impacts of the "fiscal cliff" are negligible at worst. Canada's economy will likely generate moderately healthy expansion, due to a less than firm global growth trend. Consequently, business cycle dependent sectors, like office and industrial, will experience somewhat muted demand. On a national scale however, commercial real estate fundamentals are expected to continue to stabilize. Consequently, investors will continue to allocate funds to Canada's real estate sector, in an effort to attain satisfactory yields in a market that will continue to be characterized by stability and moderate growth.
Owners of Canadian commercial real estate benefited from positive investment market fundamentals over 2012, a trend that is expected to continue in 2013. Volatility in the broader investment market will continue to place real estate in a favoured position for investors. Property values, on the rise for much of the past few years, will test their current peaks. Rising occupancy levels and stable and positive income performance have also benefited investors. Demand will continue to outpace the supply of assets for sale, which will produce strong real estate capital flow in 2013. This will translate into added pressure on what has already been peak pricing for the cycle. Transaction volume will continue to range above the long-term average in 2013, as investors chase yield in a low interest rate environment. The strength of return performances over 2012, which will continue into 2013, will drive robust bidding activity on available asset offerings. In short, Canada's owners of commercial real estate will continue to reap the rewards of strong fundamentals in the coming year, which will draw increased investment from both existing and new entries to the market.
The Canadian office sector is poised for continued strength and stability in 2013, having racked up another year of positive results in 2012.  Returns settled in the mid-teens on an annualized basis in 2012. Next year, slightly less robust results are expected, though they will remain attractive nonetheless. Occupancy levels will remain strong in 2013, in particular for the nation's leading Central Business Districts. At the same time, landlords will continue to achieve rental growth, despite more modest space demand trends. Toward the end of 2013, the first of a number of new developments in market's like Vancouver and Toronto will be delivered to market. This will put pressure on the market, however, the expectation is for business activity to pick up and offset much of the associated leasing risk. Much of the next 12 months will see a continuation of many of the positive trends observed over 2012, which will act as a driver of healthy investor interest and performance for parties with assets in the sector.
Moderately positive trends are forecast for Canada's industrial sector in 2013, with the expectation of outperformance in Western Canada. Economic expansion of 2.0% or less will produce a slow recovery pace in leasing markets. Resource related companies will continue to drive above-average results in Western Canada, while a less robust improvement in Eastern markets is likely. National occupancy will see little change, ranging between 150 and 200 bps above the year end market of 6.3%. Consequently, rents will see only slight increases in most jurisdictions, resting below 2008 levels. Positive demand characteristics will prevail for much for the next year, a less than robust recovery in the U.S. will dampen export related activity. Development will remain below the long term average, though up from the previous few years. Speculative activity will surge in markets like Calgary and Edmonton, with most other markets registering mostly build-to-suit projects. The investment sector will feature continued strength, which will include attractive returns, healthy demand, and limited availability of assets for sale. Pricing is expected to remain at the cycle peak, with the possibility of modest increases. In short, the outlook for 2013 is one of gradual improvement, with most indicators pointing in a positive direction.
Canada's ever-changing and healthy retail fundamentals will be on display once again in 2013 and beyond. Occupancy levels will remain strong, in particular for the country's best regional centres and nodes. Strong interest being shown by U.S. retailers in our nation will translate into positive demand trends. A broadly positive 2013 economic outlook will furnish consumers with the wherewithal to continue to spend, thereby driving the ongoing health of the sector. Record high debt levels will curtail spending activity, but not to a point where it will materially impact the market. The broadly positive rental market outlook will boost investment performance, which will continue to elevate the sector to the top of the investment food chain. As such, pricing will remain at the peak, with strong demand from all purchaser groups. The Canadian retail sector will exhibit continued resilience in 2013, in keeping with recent performances.
Multi-Family Residential
The multi-family residential rental sector will see largely stable and healthy performances in the coming year, as was the case through all of 2012. Steady growth in property values over the past few years may ease in 2013, however values will continue to range at the peak. The strength of the sector will be fuelled by strong demand drivers and constrained supply characteristics. Negligible new construction will also act as a booster of generally tight conditions in the rental market, as occupancy hovers close to the 98.0% mark nationally. Rents will continue to rise, capped to some degree by markets with rental control legislation.  Increased availability of condominium units for rent will have only modest impact on the sector, as the sale market slowly stabilizes in the second half of 2013. Investment demand will remain healthy, given broadly attractive return expectations. Healthy immigration volume and an aging population will ensure stable rental demand. Indeed, the sector's trademark stability and moderate growth will continue to characterize the market in 2013.
Morguard's 2013 Canadian Economic Outlook and Market Fundamental Research Report summarizes economic, demographic and capital market influences, major trends and forecasts for each major commercial real estate property class, both at the national and metropolitan level. The Report provides investors with information and data required to develop investment strategies for 2013 and beyond.
You can download the Report at

on January 27, 2013