REITs Are Back! (Were They Ever Really Gone?)

Canadian commercial real estate continues to attract capital in light of global volatility

Most markets recorded increases as total volume rises 19.1% compared to 2010

TORONTO, November 21st, 2011 – Canada’s recent economic strength, fuelled by commodities pricing in the West and the continued momentum of financial services in the East, has helped bolster investor confidence and encourage investment in Canadian commercial real estate. Investment activity surged to $16.3 billion as of the third quarter of 2011, which is up 19.1% over this time last year.

“The rise in the investment volume is even more impressive considering that the number of transactions only increased by 3.5% over the same period,” remarked John O’Bryan, Vice Chairman of CBRE Limited. “This performance took place against a backdrop of increasingly negative economic noise from Europe and beyond.”

The third quarter national investment volume was $6.0 billion, down 1.2% from the second quarter; however, virtually every asset class in the country recorded a strong performance. There were also several significant office transactions completed in the GTA and Calgary this quarter, which accounted for the 38.5% increase in office activity compared to the second quarter of 2011. Only retail and multi-residential investment activity was down. The drop in retail activity was the result of a remarkable second quarter in which several significant retail transactions closed, particularly in the Greater Toronto Area (GTA), including Oakville Place in Oakville worth $202.0 million, Hillcrest Mall in Richmond Hill sold for $185.0 million, and Burlington Mall in Burlington sold for $177.0 million.

“The momentum that built last year intensified as the economic recovery took hold in 2011,” said O’Bryan. “We expected investment activity to be strong this year and Real Estate Investment Trusts (REITs) have played a big part in driving the volume higher.”

REITs, which accounted for approximately 15.0% of commercial real estate investment activity between 2007 and 2010, made up 35.4% of the investment activity year-to-date.  “REITs have been very aggressive buyers for much of 2011, but are starting to become more cautious in light of vacillations in the equity markets,” said O’Bryan.  Even in circumstances where REITs may have slowed down their activity, life insurance companies and pension funds have taken the opportunity to fill the gap. Pension fund investment activity is up 23.0% year-over-year.

As for the remainder of 2011 and 2012, expect a strong rebound in purchases by REITs as investors realize that they continue to provide one of the only viable yield products. 2011 year-end investment volume will likely reach $21.5 billion, up 13.2% from 2010 and 67.9% higher than the recessionary low of $12.8 billion recorded in 2009.

Market Specifics:

In Vancouver, 906 commercial real estate transactions totalling $2.0 billion have occurred year-to-date, compared to 982 transactions worth $2.3 billion at this time last year. The slight decline in the investment volume is largely due to several large retail transactions that were completed in the second quarter of 2010.

Mark Renzoni, Executive Vice President and Managing Director of CBRE Limited’s Vancouver brokerage operation said, “Interest from Canadian institutional investors and private buyers has increased along with demand from private Asian investors.” Renzoni continued, “The level of interest and development activity is expected to be strong in the Vancouver market in 2012 and 2013.”

In Calgary, there were 221 investment transactions in the first three quarters of 2011, down 13.0% from this time last year; however, investment volume was actually up 31.3% to $1.7 billion over the same period. The increase in activity was largely the result of a 250.4% increase in office investment activity in 2011 year-to-date.

Significant transactions include the sale of a fifty percent interest in the 1.1 million SF Gulf Canada office building for $178.0 million. “There has been a remarkable return of optimism to the Calgary market,” said Greg Kwong, Executive Vice President and Regional Managing Director for Alberta. “With real estate fundamentals in Calgary improving as fast as they have, investors are brimming with confidence and we expect that momentum will build further in 2012.”

In Edmonton, the rebound in resource pricing continues to drive the economy. The number of investment transactions has increased 76.4% to 411 year-to-date compared to the same period last year; however, total investment volume was down 7.3%. “The decline in volume is simply due to the fact that investors want to hold onto assets in this market – demand continues to outstrip supply across all product classes. Regardless,  here is a tremendous amount of activity in Edmonton, including a number of new industrial developments currently under construction,” said Dave Young, CBRE Senior Vice President and Edmonton Managing Director. “The outlook for 2012 is very encouraging.”

London recorded a dramatic increase in investment activity in 2011. Year-to-date investment volume was up 138.2% to $468.5 million compared to the same period last year. The largest deal in London this year was the $215.0 million Cherryhill Village multi-residential sale, which accounted for a large portion of the overall increase in volume. “London was the only Canadian market to record increased investment activity for all asset types,” said Peter Whatmore, Senior Vice President and Executive Managing Director of CBRE Limited for London and the Waterloo Region. “The numerous trades in all categories indicate that London remains in favour with investors.” In Waterloo, year-to-date investment volume was down 21.9% from 2010 to $312.3 million as of the third quarter of 2011. The decrease in activity was spread across all asset types except for the office sector, which recorded a 431.7% increase in volume compared to this time last year.

Investment activity in Toronto remains robust with $7.1 billion in commercial real estate investment activity recorded in 2011 year-to-date, which is up 46.6% over the $4.8 billion recorded at this time last year. Retail activity has been exceptionally strong at $2.5 billion year-to-date, which is up 224.6%. “There was robust activity for all property types, which is expected to continue in 2012,” said O’Bryan.

Ottawa’s commercial real estate market has been stable with $651.9 million worth of investment transactions in 2011 year-to-date, up only 3.6% from this time last year. Even though overall volume was relatively flat, ICIland sales were up 180.5%. “Investors are comfortable holding land in preparation for future development in the Ottawa market,” said Greg Clark, Vice President and Managing Director of CBRE Limited in the National Capital Region. There has also been a resurgence in multi-residential trades with activity up 45.3%, highlighting the fact that this reliable property type is even more attractive in a stable market like Ottawa.

Investment activity in the Montreal commercial real estate market totalled $2.3 billion as of the third quarter of 2011, up 8.1% from this time last year. “It is becoming increasingly difficult to find space in the Montreal office market, and as a result, there is new construction in downtown Montreal for the first time in almost a decade. Downtown condominium development is adding to the demand for downtown sites,” remarked Brett Miller, CBRE’s Executive Vice President and Regional Managing Director for Eastern Canada. Investors took notice of the Montreal office market as investment was up 117.4% over this time last year at $710.0 million. “We expect investment activity to increase in 2012 as market fundamentals continue to improve.”

Investment in Halifax was stable with activity increasing 1.2% from this time last year to $270.6 million. The outlook for 2012 is very promising. “The Irving shipyard in Halifax was awarded the federal naval contract, one of the largest outsourcing contracts in Canadian history, worth $25.0 billion, which will have a huge impact on Halifax and the region,” said Bob Mussett, CBRE’s Senior Vice President and Senior Managing Director for Atlantic Canada. “The ongoing issue for investors will be access to product. Halifax’s solid, reliable economy has not gone unnoticed and we expect increased buy side activity going forward, with downward pressure on cap rates. Investors are reluctant to sell, as buying into the market is challenging."

2011 Year-To-Date (as of 3Q 2011) Regional Transaction Volume Chart

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 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.

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. In Canada, CBRE employs approximately 1,850 people in 24 locations from coast to coast.

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