TORONTO, February 21, 2012 – Canada’s commercial real estate market slowed in the fourth quarter with investment volume down 12.7percent from the third quarter, but up 5.6 percent from the same period one year ago. Fourth quarter investment sales volume totalled $5.7 billion and brought full year Canadian dollar volumes to $23.6 billion; 20.5 percent above 2010 levels and the highest yearly total since 2007. A combination of rising investor confidence and the motivation by select owners to sell continued to propel the Canadian commercial real estate back to pre-financial crisis levels.
“It would be dangerous to read too much into the slight dip in the fourth quarter as all indications are the upward trend we’ve witnessed over the last two years is still very much intact,” remarked John O’Bryan, Vice Chairman of CBRE Limited. “A broad spectrum of investors continues to be very aggressive in their pursuit of income producing real estate that meets their investment criteria while keeping a wary eye on the ongoing events in Europe.”
Relative to the third quarter, all property types recorded lower transaction volumes with the exception of hotels. The volume of office transactions fell the most, down 30.4 percent quarter over quarter to $1.4 billion, followed by retail and multi-housing, which dropped 17.7 percent and 2.3 percent to $1.2 billion and $936.5 million, respectively. Lower fourth quarter office investment volumes were recorded despite the sale of Bell Tower and Oxford Tower in Edmonton for $285.0 million. Fourth quarter industrial sales were virtually unchanged at $1.1 billion and land sales dropped by less than 1.0 percent to $865.0 billion.
“The Canadian commercial real estate market looks to be fully priced, but investors continue to see value as the hunt for income only intensifies,” said Ross Moore, Director of Research for CBRE Limited. “In a low interest rate world, capitalization rates which by historic standards look low, appear to appeal to many buyer groups particularly institutional investors, but also private buyers who are anxious to both preserve capital and secure a long-term income stream.”
During the fourth quarter, REITs were again significant buyers of commercial real estate. For calendar year 2011, REITs accounted for 31.4 percent of total acquisitions, which was up substantially from 2010 when REITs accounted for 15.7 percent of total transactions. Life insurance companies and pension funds accounted for 7.5 percent of all sales in 2011, which was largely in line with 2010, but was down from 2008 and 2009 when institutional buyers accounted for approximately 20 percent of all transactions. Private buyers remained the largest buyer group in 2011, at 47.8 percent, dropping just 1.0 percentage point from 2010.
Looking forward to 2012, expect REITs to remain very significant buyers, and sellers, as recently announced deals between Dundee REIT and Whiterock REIT and Cominar REIT and Canmarc REIT will surely lead to culling and dispositions as the year progresses. REITs also raised $5.9 billion in new equity and debt during 2011, $1.1 billion more than in 2010,which leaves many REIT’s with significant capacity to grow their respective portfolios. Pricing is expected to remain very aggressive as a surplus of capital will be seeking out a limited number of properties available to purchase. Full year investment volume will likely be in the $20.0 billion to $25.0 billion range in 2012 depending on the number of portfolio deals that are transacted - not back to 2007 levels, but at or near 2011 levels.
Major Metropolitan Areas:
In Vancouver, 1,485 commercial real estate transactions totalling $3.4 billion closed in 2011, compared to 1,269transactions worth $3.1 billion in 2010.The 10.0percent increase in investment volume was largely due to several large transactions; including the Sutton Place Hotel in downtown Vancouver, Thunderbird Centre in Langley and Lululemon’s new headquarters just outside the downtown peninsula. Mark Renzoni, Executive Vice President and Managing Director of CBRE Limited’s Vancouver brokerage operation said, “Vancouver again demonstrated how it ranks amongst the most active and liquid investment sales market in North America. It’s interesting to note that while dollar volume was up 10 percent, the number of trades was up 17 percent highlighting how smaller deals were a bigger part of the market in 2011” Renzoni continued, “Something to watch in 2012 will be strata and land deals. Both finished 2011 on a high note.”
In Calgary, there were 356 investment transactions in 2011, up 6.2% percent from the prior year. Investment volumes were up a more impressive 53.2 percent to $2.5 billion over the same period. This increase in sales activity was largely due to a near four-fold increase in office investment activity in 2011 relative to 2010. Indeed, all property types registered increased activity relative to 2010 with the exception of industrial. “Improving market fundamentals are encouraging investors to get back in the game after waiting on the sidelines for much of 2009 and 2010,” said Greg Kwong, Executive Vice President and Regional Managing Director for Alberta. “2012 activity is expected to carry on from 2011 as investors from all levels of the capital stack look to purchase a diverse range of asset classes.”
In Edmonton, the rebound in the energy sector served as a key catalyst for the commercial real estate market. During 2011, the number of investment transactions increased 21.3 percent to 416 compared to 2010 levels; however, total investment volume was up a more modest 17.5 percent. Late in the year, the $285.0 million sale of Bell Tower and Oxford Tower helped to propel Edmonton’s numbers. “The increase in volume reflects the fact that investors want to own assets in this market. There is now recognition that Edmonton is a market where you want to own good quality commercial real estate,” said Dave Young, CBRE Senior Vice President and Edmonton Managing Director. “2012 will only bring more of the same.”
London recorded a substantial increase in investment activity in 2011. Investment volume was up 76.8 percent to $541.2 million compared to 2010. With the exception of hotels, all property types registered the same or higher dollar volume in 2011 than in 2010. “London had another good year with all property types in demand and remains a viable alternative to investors who want exposure to Southern Ontario,” said Peter Whatmore, Senior Vice President and Managing Director of CBRE Limited for London and the Waterloo Region. “Land remains sought after with a number of local developers procuring sites for future industrial and residential development.”In Waterloo, investment volumes were down 28.1 percent from 2010 to $437.5 million. The decrease in activity was spread across all asset types except for the office and land sectors, which recorded $7.6 million and $1.0 million increases, respectively, compared to 2010. Whatmore stressed that “investors continue to be attracted to Kitchener Waterloo’s growth and pricing relative to the GTA.”
The Greater Toronto Area (GTA) racked up another very active investment year with $9.6 billion in commercial real estate transactions in 2011, which represented a 25.9 percent increase over 2010. Retail activity was exceptionally strong at $3.0 billion, nearly double 2010 levels. Helping to contribute to this surge in retail investment was the $218.0 million sale of the Sheppard Centre in the fourth quarter. The office sector was the second most active for investors, with activity up 58.6% year-over-year to $2.7 billion. This jump can be partially attributed to Dundee REITs purchase of the 29-property Blackstone portfolio for $831.8 million, with the bulk of this portfolio located in Toronto. “Investors can’t get enough of Toronto real estate – it’s remarkable that the GTA accounted for over 40 percent of investment dollars poured into Canadian real estate in 2011,” said O’Bryan. “The depth and breadth is truly impressive.”
Ottawa’s commercial real estate market witnessed a mild pullback with $886.5 million worth of investment transactions in 2011, down 11.4 percent from 2010. Office and retail were the reason for the drop in aggregate dollar volume, but industrial, multi-housing, hotels and land were all up. “Investors remain attracted to the relative stability that the federal government provides to the Ottawa market and are placing forward bets on the region, which is demonstrated by land sales tripling in 2011,” said Greg Clark, Vice President and Managing Director of CBRE Limited in the National Capital Region.
Investment activity in the Montreal commercial real estate market totalled $3.4 billion in 2011, up 13.5 percent from 2010. “These gains were remarkable because they came about with no blockbuster deals and a great deal of macro-economic uncertainty,” remarked Brett Miller, CBRE’s Executive Vice President and Regional Managing Director for Eastern Canada. Of note was the Montreal office market with investment volume up 89.2 percent over 2010 to reach $754.0 million in 2011. “We expect investment activity to increase in 2012 as vendors are increasingly feeling that now is an opportune time to sell and there are many institutional investors who are anxious to increase their exposure to the Montreal market.”
Investment in Halifax was up relatively sharply with investment activity increasing 53.7 percent over 2010 to $471.1 million in 2011. “Key to driving investment volumes higher in 2011 were retail and multi-housing,” said Bob Mussett, CBRE’s Senior Vice President and Senior Managing Director for Atlantic Canada. “We are starting 2012 with the view that investors will increasingly put Halifax on their short list in an effort to leverage the economic growth that will stem from the $25.0 billion ship building contract.”
2011 Regional Transaction Volume Chart
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 firm (in terms of 2010 revenue). The Company has approximately 31,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide.
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