Commercial Real Estate’s Bumpy Road to Progress

CBRE releases 2016 forecast for commercial property fundamentals and investment trends across Canada

Toronto – November 24, 2015 - CBRE Limited has released the company’s annual forecast for commercial real estate in Canada. One factor that will unite commercial real estate investors, landlords and tenants across the country is the fact that they face significant change in 2016 – much of it out of their control. The 2016 Market Outlook​ provides a city-by-city forecast for the office, industrial, retail, apartment, seniors housing and investment sectors.

"More than ever, new technologies are poised to deliver on the promise to alter the way we shop, ship, work and play. This factor, combined with unprecedented capital propelling commercial real estate purchases and new construction, is creating a dynamic environment that will produce winners and losers in 2016," said Paul Morassutti, Executive Managing Director for CBRE Limited.

Real estate is known for a fixation on location, but far-reaching global trends will overtake local details as the basis for many real estate decisions next year. Energy prices, monetary policy and business strategies built around new technology will impact everything from the number of new office towers that are built, the way goods are moved from manufacturers to consumers, to the amount of property that is purchased by foreign investors.

"No building is future proof, no business model is infallible, no lease term is indefinite; however, the fact remains that Canadian commercial real estate fundamentals are some of the healthiest in the world," Morassutti concluded.

For a city-by-city forecast, click here to download the 2016 Canadian Commercial Real Estate Outlook.

Highlights by Sector:

Investment:
  • A low Canadian dollar and relatively strong property fundamentals should produce healthy demand for Canadian commercial real estate in 2016.
  • Investors will become more selective and super prime assets could conceivably attract higher pricing and lower cap rates, while reducing liquidity for everything else.
  • The disconnect between REIT pricing and the value of REIT assets could encourage markets to focus on the location and performance of REIT holdings in 2016.
  • The low cap rate environment will put even greater emphasis on development as a means of enhancing return targets.
  • Low oil prices would likely have to be sustained into 2017 for lease renewals and lender pressure to force the hand of some second tier asset owners in Alberta.
Office:
  • Vacancy rates are climbing following a prolonged landlord’s market and are likely to remain elevated as new supply comes online through 2017.
  • With banks restructuring some operations and office users generally moving to new efficient workplace strategies, there is the potential for absorption to remain below historic norms.
  • A growing tech sector accounted for a record 38.0% of significant office leasing transactions nationally in Q2 2015, which will keep downtown markets more active than the suburbs.
  • The pace of technological change is putting increased pressure on landlords to ensure that their properties are adaptable and remain competitive.
Industrial:
  • The industrial market will outperform from a leasing and investment perspective in 2016, as a responsive development pipeline maintains a healthy balance between supply and demand.
  • Distribution and logistics activities will remain the primary driver of leasing and investment activity. Retailers will attempt to differentiate themselves with supply chain enhancements.
  • Ecommerce is driving demand for ~50,000 sq. ft. buildings within close proximity of major population centres. This could reinvigorate obsolete industrial properties in the inner suburbs.
  • Favourable foreign exchange rates have had a negligible impact on industrial property demand to date. Other manufacturing powerhouses are strong competitors on a number of fronts aside from exchange rates.
Retail:
  • The Canadian retail market will recalibrate following the demise of Target and challenges for mid-market retailers. Foreign retailers will view Canada as a worthy destination, but will be selective.
  • High-end retailers, traditionally located on high streets, will gravitate towards the increased luxury of super regional shopping centres like Yorkdale Mall in Toronto and CF Pacific Centre in Vancouver.
  • Retail leasing will become polarized in 2016. Retailers will fixate on urban locations and high-end malls, while lingering vacancy can be expected in second and third tier malls.
  • As online sales grow, the number of distribution points at which consumers can receive and return goods that were purchased online will increase.
  • Brands will attempt to deliver an overall lifestyle to the Millennial shopper. Online and in person, retailers will appeal to the consumer’s mind, body, and soul.
Apartment:
  • Strong pricing and deferred maintenance are causing owners to strategically re-examine their portfolios. Demand for multifamily product will remain healthy and fundamentals will be stable in 2016.
  • Cap rates for Class A high-rise apartments continue to tighten, which will raise prices for investors and spur rental rate increases and higher fees for ancillary services such as laundry and parking.
  • Empty nesters looking to downsize, an increase in new immigrants to Canada and rising home prices will bolster multifamily demand.
  • Vacancy rates are climbing and rental rates are under downward pressure in Calgary and Edmonton. Rental occupancy rates could firm in Alberta if economic difficulties slow household formation and create challenges in the residential ownership market.
Hotel:
  • Expect more stability in the Alberta hotel market in late 2016. The balance of the country will record positive market and financial performance for the hotel industry next year.
  • The low Canadian dollar will continue to entice visitors, especially from the U.S. and Asian countries. Vancouver, Toronto and Montreal, as well as the resort sector, will be the prime beneficiaries of this trend.
  • Expect the level of investment activity and demand for all hotel types to remain strong in 2016. The typical deal profile will likely involve core markets like Toronto and Vancouver, and a continuation of bundled or portfolio deals.
  • Buyers will also be keen to acquire hotel assets in redevelopment and value-add possibilities. There will also be a diverse buyer pool, with growing interest from private equity and institutional buyers.
Seniors Housing:
  • While it will be a challenge for the market to match the same volume of transactions as 2015, sellers may want to take advantage of current pricing.
  • The sub-7.0% average cap rate for Class A assets signifies the fact that high quality seniors housing is now being viewed as an institutional grade investment. The pricing gap between Class A and Class B/C assets will likely widen slightly in 2016.
  • Recent movements in pricing will result in a period of price discovery in 2016 that will require disciplined disposition processes to identify optimal buyers and maximize pricing.
  • There are opportunities for new projects offering mid-range pricing and services as this segment of the market is expected to grow in the coming years. Merchant developers will be more active and will act as a supply conduit for larger operators.

About CBRE Limited

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

In Canada, CBRE Limited employs approximately 2,079 people in 23 locations from coast to coast. Please visit our website at www.cbre.ca.

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