In 2005 Canadian commercial real estate experienced a record $21-billion in sales activity, an 11% year-over-year increase, according to Colliers International 18th Canadian Real Estate Review. The report forecasts that the conditions that have create unprecedented levels of sales activity in 2005 will continue through 2006.
Collier’s attributes record commercial real estate sales volumes to 'a strong national economic outlook, low interest rates, an abundance of debt capital, a mixed equity market performance and strong leasing outlooks for all asset classes and markets.' Furthermore, the report says the level of sales in 2005 was constrained by a limited supply of available property. In 2006 Colliers expects these conditions to persist and, propelled by a 3% growth in the Canadian economy, it is forecasting sales within 5% of the 2005 level.
In 2005, Colliers identifies private groups as the most active sellers motivated to take profits during a time of record high pricing. Pension funds were active purchasers particularly when property portfolios were available for investment or purchase. All sellers disposed of non-core assets taking advantage of peaking values and selling properties in markets that were reaching their prime.
Pension funds were purchasers in the three major transactions during the year; acquisition by the Brookfield Consortium which includes Canada Pension Plan Investment Board (CPP) of the O&Y Portfolio for $2-billion, Oxford Properties Group sale of a 50% interest in a portfolio of 11 core office assets to CPP for approximately $1-billion and the B.C. Pension Fund purchase of Menkes industrial portfolio in Ontario for $400-million.
According to Keith Reading, Vice President, Research Colliers International one of the notable consequences of several years of a robust economy and active real estate market is a geographical leveling of capitalization rates. Where as in the past “CAP rates have been higher in smaller centers, the premium for the most part has disappeared.” CAP rates, which have been on the decline in all asset classes and cities for several years, are expected to bottom out in 2006 according to the Colliers report.
Considering the plethora of media coverage concerning foreign real estate investment, it is surprising that Keith Reading attributes only 5% (approximately $1-billion) of real estate sales in 2005 to foreigners. Reading said that Australians, who were one of the largest investors in the U.S. market in 2005, are looking in the Canadian market but have yet to participate in a significant transaction. In 2006, Colliers expects foreign investors will continue to be drawn to Canada and compete with domestic buyers for available properties.
Colliers expects that as demand for real estate continues to outpace supply in the year ahead, there will be an increase in unsolicited bids and sale-leaseback transactions. The company expects 'buyers will pursue alternative purchasing and investment strategies in an attempt to take advantage of market conditions.' Owners wishing to avoid the public markets and benefit from high prices will consider a range of options for disposing of their property.
While rising interest rates are not going to scare off investors in 2006, they may result in a number of distress sales according to Colliers report. Keith Reading indicated ‘some small players’, such as owners of single office buildings will be unable to meet their financial commitments and be forced to sell. Although rising interest rates may have little affect on demand, the cost of carrying debt may erode return on property investments.
Colliers is forecasting that owners who are struggling to place capital rather than buying in a hot market will develop land and reposition their assets. This might involve developing surplus density, improving properties, developing land and partnering with different groups.
In 2006 the question Reading is asking is “How much better can it get? And if it were going to get worse, where would it come from? Although loss of manufacturing jobs, inflation and rising interest rates are concerns Reading doesn’t expect them to have a significant dampening effect on real estate investment markets . Rising demand for office and industrial space and increased property development suggest that 2006, like 2005, may be better than expected.
For a copy of Colliers International 18th Canadian Real Estate Review visit https://www.colliers.ca or email: [email protected]