Capitalization rates continued to be relatively stable, although near historic low points, across all sectors in the third quarter of 2014.
The Colliers International Canada Cap Rate Report for the quarter, based on a survey of more than 250 commercial property brokers and 30 registered commercial appraisers covering nine major markets regarding current market conditions, shows that the most movement has taken place in the downtown office market.
Class-A downtown office space in Vancouver is on the upswing, with rates ranging from 4.25 to 5.25 per cent, while the cap rates for class-B space in the city have dropped to between 5.0 and 6.0 per cent. Further west in Victoria, cap rates for both class-A and -B downtown office space showed an upward trend, with the former varying between 6.25 and 6.5 per cent and the latter nestled in from 6.5 to 7.0 per cent.
The highest rates overall are in Halifax, at 6.25 to 7.0 per cent for class A and 7.0 to 7.75 per cent for class B.
Victoria enjoys most positive momentum
Victoria also had the most positive momentum in the suburban office market, with cap rates of 6.25 to 6.75 per cent for class A and 6.5 to 7.0 per cent for class-B space. The biggest returns are in Montreal, where the class-A rates are between 6.75 per cent and 7.75 per cent and class B are even higher at 7.25 to 8.25 per cent.
Cap rates for industrial buildings are generally the steadiest and they remained that way across the board, with only Victoria trending upward with rates of 6.25 to 6.75 per cent for both single-tenant and multi-tenant properties. The highest overall rates, ranging from 6.75 to 7.75 per cent, are in Montreal. The lowest overall rates are in Vancouver, where they’re between 5.0 and 6.0 per cent.
Cap rates for retail properties were up in Victoria for the regional/power, community and strip mall categories, while Montreal has the highest overall rates, ranging from a low of 5.75 per cent for regional/power centres to highs of 7.75 per cent for both community properties and strip malls. The lowest overall rates can be found in Vancouver, where they vary from 4.75 per cent for regional/power centres to 6.0 per cent for community and strip mall properties.
Still lowest in multi-family sector
Cap rates continue to be lowest in the hot multi-family sector. Such units have the lowest overall rates in Vancouver, where they’ve dropped to between 3.0 and 3.5 per cent for high-rises and held steady with a range of 3.75 to 4.75 per cent for low-rise buildings. The best overall rates can be found in Montreal, where they range from 5.0 to 6.0 per cent for high-rise and 6.0 to 6.75 per cent for low-rise structures.
The highest cap rates are in the hotel sector, the only one in which figures reach double digits.
Limited service hotels showed a return of from 7.25 per cent to 8.5 per cent in Vancouver and went up to between 10.0 and 11.75 per cent in Winnipeg. Select service hotels have the lowest rates in Toronto, where they range from 7.0 to 8.5 per cent, while the lowest rates for urban full service hotels are in Vancouver at between 6.0 and 7.0 per cent.
Cap rates are expected to remain rather stagnant due to a relatively strong Canadian economy, healthy investor interest in commercial real estate and the continued high availability of capital for acquisition and development at low interest rates.