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“Cautious optimism” is a phrase being heard in plenty of conversations this month, and commercial real estate is no exception.
“While no one would suggest we are out of the woods yet, cautious optimism returned to the Canadian real estate market in Q2, 2020,” wrote CBRE Vice Chairman Paul Morassutti in CBRE’s new Canadian Cap Rates & Investment Insights report.
That’s because Canada’s initial steps towards re-opening the economy have been what he calls “measured and disciplined,” with relatively few stumbles.
That, in addition to strong performances from the industry’s defensive asset classes, have led to some bright spots in these otherwise unprecedented times. Let’s take a closer look.
Industrial Remains Strong
Long-term investment demand for industrial, and particularly distribution and logistics, space remained elevated through the first half of 2020.
As an asset class, industrial has been exceptionally resilient throughout COVID-19, with cap rates remaining relatively stable during Q2 2020.
The pandemic has accelerated the trend of increased ecommerce penetration across the country, with more Canadians shopping online than ever before. This shift in consumer spending is expected to boost industrial demand significantly in the coming months and years.
This, coupled with the tightness of the market entering the pandemic, should ensure that the sector’s underlying fundamentals remain strong as the economic recovery continues. Industry watchers expect investor demand and pricing to hold for the foreseeable future.
Stable Multifamily Performance
Another relatively resilient sector, multifamily, saw cap rates remain largely unchanged in Q2 2020, with only small pricing adjustments in certain markets.
The sector had strong fundamentals entering the pandemic and has seen encouraging rent collection figures thus far. Investors are taking note of these trends, and momentum has been building gradually as the economy has continued to reopen.
Transaction velocity is expected to accelerate in certain markets in the second half of the year.
As of Q2, deal flow remains muted, but commercial real estate remains a desirable investment vehicle with cap rates benefiting from a historical widespread over 10-year Government of Canada bond yields.
This, and the perception that we continue to move closer to a resolution to the COVID-19 crisis, gives some reason for that much vaunted cautious optimism in the second half of 2020.