REITs Refocus, Commercial Real Estate Market Moves Forward

Bond yield and stock adjustments cause investment market to recalibrate

TORONTO, August 19, 2013 With REIT acquisitions on the decline, investors are responding positively to changing market dynamics. Canadian commercial real estate investment activity is being maintained at healthy levels and overall volume remains near record levels; however, second quarter investment data indicates that falling REIT stock prices and mixed messages on U.S. fiscal stimulus did have an impact on investment activity. While REIT priorities have shifted focus from acquisition to operations, CBRE’s 2Q 2013 Investment MarketView indicates that the investment market appears to be quickly rebalancing. This bodes well for the remainder of the year and CBRE Limited is raising the forecast for total year-end investment volume.

With $14.7 billion of Canadian commercial real estate trading hands in the first half of 2013, in line with $14.8 billion during the same period in 2012, product continues to come to the market and is being greeted by a pool of ready buyers. REITs have exercised restraint for much of the year, but were even more cautious at the close of the second quarter. REITs accounted for 29.3% of the commercial real estate investment volume as of mid-year 2013, compared to a dominant 48.2% of volume in the first half of 2012. REITs took another step back in June as the volume of REIT acquisitions fell 49.7% compared to the prior month.

“Investors exhibited a lot of poise and understanding of the market over the summer. Most appear to have processed recent events and are ready to move forward,” said John O’Bryan, Chairman of CBRE Limited. “Total investment volume is up year-over-year and the outlook remains cautiously positive.”

While REITs have become more hesitant, private equity and pension funds are seizing the opportunity to purchase quality assets. In four of the last six months, private investors outspent all other buyers. In the second quarter, pension funds reacted to the fact that REITs had taken a step back and dominated the market with acquisitions across the country in June. Pension funds look poised to mobilize their significant spending potential. Pension fund allocations to real estate in Canada increased to 10.2% of total assets in 2012, the highest percentage on record, with the total value of their real estate holdings hitting $116.1 billion according to the Pension Investment Association of Canada.

“The pool of buyers for Canadian commercial real estate is deep and this period of opportunity is not being overlooked by those who struggled to complete with the REITs last year. If anything, it is now a more even playing field, but there is no shortage of competition for quality assets,” said O’Bryan.

CBRE Limited initially estimated that the Canadian commercial real estate investment volume would reach $24.0 – 25.0 billion in 2013, but that forecast is being revised upwards to $26.0 - 27.0 billion for the year. While year-end volume is still forecast to fall below the $30.5 billion recorded in 2012, the total forecast for 2013 would  be the third highest year-end volume in Canadian history.

“That isn’t to say that the commercial real estate market has been unaffected by recent bond market movements,” O’Bryan noted. “Deals are not always easy to do, but with the ten-year bond now settling around 2.50% and spreads remaining tight, deals continue to get done.”

Recent transactions have yet to reveal any broad-based, significant upward pressure on capitalization rates (cap rates). As a result, a lot of the assumptions underlying investment decisions in recent months remain substantially in place. CBRE’s Second Quarter Cap Rate Summary indicates that cap rates have not moved much for quality product, but there has been a definite marginal bump for marginal product in less desirable areas.

“The pillars remain in place to support commercial real estate investment activity,” said O’Bryan. “In the near term, the primary limiting factor for commercial real estate investors in Canada will continue to be a lack of quality product, not fiscal policy.”  

 

About CBRE

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 2012 revenue).  The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 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 1,850 people in 24 locations from coast to coast. Please visit our website at www.cbre.ca.