Many people I speak to are surprised to learn we have such a high demand for investment product in Saskatchewan. I am quite often asked the question (possibly due to the high vacancy rate in the industrial and office sectors) whether we believe prices have “bottomed out.”
I will first need to qualify my definition of “quality.”
In the last number of years, there has been absolutely no downward movement in the price of these assets. As a matter of fact there has been some minor cap rate compression in the past year.
Definition of quality
It is important to note the demand from owner occupants remains strong for vacant commercial real estate. My focus here, however, is on investment property which I define as real estate with a reliable income stream.
Investors require a good tenant mix with a national covenant and/or established local businesses with a solid financial history. If remaining leases are due to expire in the near future and vacancy is high in the subject property’s sector, the investment will not be considered a reliable income stream.
Obviously, building condition and location are important points to consider.
Difficult market for new investors to enter
We recently brought a listing to the market with two local tenants who had occupied the property for enough time to have renewed their lease at least once. They had a strong businesses with solid credit histories.
The building was in good condition in an emerging retail zone. We had multiple offers which resulted in a cash sale above list price from an experienced investor with only a five-day due diligence period.
We know that when similar product comes to the market it is likely to result in a somewhat similar sale completion process. It is now almost impossible for new investors trying to enter the market to compete with this much more experienced player.
Where do we go from here?
As long as interest rates stay low and the equities market remains unpredictable, this undersupply will continue. It is difficult to convince a property owner to sell when there are few viable alternatives for placement of the sale proceeds.
Investor frustration is resulting in a diversion of funds to the U.S. market. Saskatoon commercial real estate investors are actively pursuing the Arizona and Texas markets where supply is greater and cap rates are a bit higher.
It will be necessary for any investor serious about entering our market to develop an aggressive negotiation strategy if they hope to be successful securing a quality income producing property.
If you have an interest in selling . . . I’d love to talk to you!