Strong Demand for Defensive Assets Pushes Average Canadian National Cap Rate Below 6% for First Time on Record

Toronto – July 07, 2016 – Canada’s ongoing reputation as a safe haven for capital continues to bolster demand for Canadian commercial real estate (‘CRE’) assets.  The strong demand from both domestic and foreign capital for defensive assets is reflected by the record low cap rates achieved during Q2 2016. At 5.99%, the average national cap rate, which has declined steadily since 2009, has dropped below 6% for the first time on record.

According to the findings of CBRE’s Q2 2016 Canadian Cap Rates & Investment Insights report, despite historic low cap rates, the corresponding spread over 10 year Government of Canada Bond yields is the widest in over 25 years at 489 basis points.  “Some commentators have questioned whether cap rates can compress further, but based on these spreads, it is entirely possible.  Even with no further cap rate compression, high-quality defensive Canadian real estate assets provide investors with highly attractive risk-adjusted returns, especially against a backdrop of global volatility,” commented Paul Morassutti, Executive Managing Director of CBRE Canada.


“Flight capital, moving from regions of economic or geopolitical volatility, continues to bolster Canadian commercial real estate.  While we tend to caution against reading too much into national averages, nevertheless the average cap rate dropping below 6% for the first time on record is reflective of the wider and substantial level of investor demand for high quality Canadian assets,” added Morassutti.

Foreign capital has emerged in 2016 as a major participant in the Canadian CRE market. By the end of Q1 2016, foreign investment had already exceeded $1.0 billion and eclipsed the entire 2015 total by 28.3%.  As of June 28, 2016, it comprised $2.0 billion or 19% of a total $10.6 billion in investment volume.  “When you break down the sources of foreign capital in 2016, buyers from China and Hong Kong make up 65% of foreign capital transactions by volume.  However, what is less well known and perhaps even more interesting, is nearly a third of the total foreign investment volume came from European buyers.  This is more than double the historic five-year average and appears to reflect the growing geopolitical uncertainty in the EU.  

“Importantly, we could see European investor appetite for Canadian assets increase further due to the market volatility arising from the Brexit vote and subsequent economic dislocation.  In the first weeks after the vote, we have already seen a wave of UK property funds gating their funds from further redemptions and, once worked through, that capital will be looking elsewhere for redeployment,” added Morassutti.

In line with the overarching trend of capital seeking safety, the national average cap rates for Industrial and Apartment assets, both noted for their defensive attributes, also declined during the quarter.  Of particular note was the decline in cap rates for industrial assets in Calgary, which reflected the pick up in investment activity during the quarter arising from improved buyer sentiment in light of higher, and potentially stabilizing oil prices and the city’s ongoing emergence as a logistics hub for Western Canada. Likewise, a low Canadian dollar and improving industrial fundamentals are driving investor interest in the Waterloo Region, which is increasingly emerging as a destination for mid-market investors who are becoming progressively more challenged to find deals in larger markets.

For further insights and commentary, download CBRE’s Q2 2016 Canadian Cap Rates & Investment Insights report.

​​​​​​​​​

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 2015 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 1,890 people in 20 locations from coast to coast. Please visit our website at www.cbre.ca​.​

​​​​​​​​​​​