Real estate investors in 2012 still desperately seeking yield: Part 2

At the Toronto Real Estate Forum held last month Pierre Bergevin the President & CEO of Cushman & Wakefield Ltd. in Canada (shown in the photo) provided a recap of commercial real estate in Canada in 2012. His presentation started with a summary of the Canadian investment market and the major factors influencing the industry. This information is covered in Part 1 of this article. The remainder of Bergevin’s presentation, and Part 2 of the article, provides a sector-by-sector review of 2012. Both parts of the article are supplemented with content from other presentations made at the forum.

Canadian office markets have never been stronger

Fundamentals have never been as strong in the Canadian office market however given uncertainty in the global economic markets and a volume of new supply not seen in 20 years, can the current situation continue? This is the question posed by Pierre Bergevin, the President and CEO of Cushman & Wakefield Ltd. in Canada at the opening session of the Toronto Real Estate Forum.

There is a pipeline of office space under construction not seen for 20 years with 8.8-million square feet of new development underway — most of which is secured through pre-leases Cushman and Wakefield data showed.

The average Canadian central area vacancy rate in Q3 of 2012 is 4.7%, notable when compared to an average of 12.3% in the U.S. It is “by no means a tenant’s market,” according to Bergevin.

In contrast, while central office markets are stronger, suburban office markets are not doing as well. Suburban office vacancy in Canada is more than twice as high as downtown markets at 9.6%, although when compared to 18.5% in the U.S. suburbs, it doesn’t seem that bad. Bergevin attributed the difference between Canadian suburban and downtown markets to the higher proportion of foreign corporations in the urban fringes that are more susceptible to global economic uncertainty.

A majority of the demand for office space is coming from banks (26.1%), communications and multimedia (15.8%) and financial services (14.8%) representing a combined 56.7% of commercial office tenants across the country. These sectors are experiencing a significant change in workplace functionality described by Sheila Botting, National Leader of Deloitte's Real practice as “at a tipping point” that is going to impact the sector in the years ahead (Property Biz Canada, December 4, 2012)

Ian Gragtmans, Colliers International presentation the Toronto Real Estate Forum

Brett Miller, CEO, Jones Lang LaSalle presentation at the Toronto Real Estate Forum

Massive new retail competitors entering the Canadian market

The retail sector, of all the sectors, is under the most pressure to adapt to economic conditions due to changes in demand for goods and services and most notably the entry of massive new competitors into the Canadian market. Bergevin warned that there are retailers in the sector may not be able to adjust to the new circumstances and will very likely not survive.

Canada has become a destination for new retailers not only from the U.S. but also from Europe and Japan as well as new luxury brands and food and beverage concepts. While Canada is not as large an opportunity as China or other emerging markets, the Canadian retail market is outperforming those in other countries. Canadians' healthy appetite for shopping, the country’s retail productivity, is evident by sales that are $580 sq. ft. in Canada compared to $440 in U.S., explained Bergevin.

The Canadian buying spree over recent years, however, has generated consumer debt that Bergevin described as a “huge factor” that is not to be underestimated. Consumer spending accounts for more than two thirds of GDP and is now 163% of household income. Underlining the risk this represents to the economy he said: “We are all dependent on the debt per capital of 163% coming down.”

Industrial sector successfully adapting to change

With the Canadian dollar hovering around parity with the U.S. dollar, the industrial sector has been compelled to adapt to this challenge in recent years. Retooling of the industrial sector has been taking place and with the help of the retail sector, there are a growing number of new logistical centres, explained the Cushman CEO.

Canada has one market in the top 10 in North America, Toronto. The rest are relatively small in comparison. The market has adapted by adding very little supply over the past few years, since 2008 and the vacancy rate has remained essentially steady dropping more than 60 basis points. The sector is a story of rising rental rates, changing demand, inflated development charges and increasing land values.

While some industry watchers consider the industrial sector to be too tight and new supply is required to keep it balanced, Bergevin suggested that it is still not clear how changes in global economic production are going to impact industrial space requirements.

Heated housing market single biggest story of 2012

The multi-residential sector is comprised of two connected, yet fundamentally different markets, rental apartments and condominiums within the rental pool.

Contrary to a conclusion that one might reach, that a glut of available condo units would generate a vacancy in the apartment rental market, the stats would indicate otherwise, explained Bergevin. The apartment rental vacancy rate in major cities across the country is at 3% — its lowest level since it peaked in 2007. Bergevin attributes the trend to urban intensification. By comparison, the condo rental vacancy rate in major cities, based on anecdotal information is less than 5%.

A conspiracy of factors is supporting new construction in the new apartment sector “something we have not seen in this city for the last 40 years,” said Bergevin.

Escalating rental rates, strong demand for housing due to an influx of immigrants, historically low interest rates backed by government financing and demand for affordable housing without the amenities associated with a condo is creating ample justification for new apartment construction.

The attractive fundamentals of multi-residential sector is driving pension funds and public companies to invest in apartment buildings in spite of the sector having the lowest yields of all the asset classes, Bergevin said.

In multi-residential, as in the other sectors, the availability of cheap capital coupled with other factors is making real estate investment a timely and irresistible opportunity.

Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

Read more

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