Record low cap rates still look good from a yield spread perspective, Canadian real estate analysts advise. CBRE’s newly released snapshot of second quarter cap rates and investment trends highlights the growing gap between average national cap rates and 10-year bond yields, which is now 493 basis points (bps) in real estate’s favour.
“Canadian real estate should be the beneficiary of continued capital flight from China and increasingly Europe, in light of the turmoil surrounding Brexit and the perception of the U.S. being late in the cycle,” observes Paul Morassutti, CBRE executive vice president, valuation and advisory services. “Defensive Canadian multifamily and industrial assets have seen cap rates compress, while core office and retail remain sought after, but overall bidding pools may be thinning.”
Multifamily cap rates continued to move downward in the second quarter. CBRE pegs the national average in the 4.2 to 4.9 per cent range for high-rise property and at 4.7 to 5.4 for low-rise buildings, but there is wider variation across the 10 urban markets analyzed. Vancouver, Toronto and Ottawa properties were below the national average, with class A high-rise product in Vancouver in the 2.5 to 3 per cent range.
However, Vancouver cap rates were lower than the national average in all 19 surveyed property categories — for example, in the 4 to 4.5 per cent range for downtown class AA office space versus the national average of 5.08 per cent. “Both foreign and domestic investors are showing a continued willingness to pursue significant investments at record level cap rates. Strong demand and compression of multifamily cap rates reflect investor confidence in the B.C. economy and commercial property fundamentals,” says Tony Quattrin, vice chairman of CBRE’s national investment team.
The outlook is not so rosy next door in Alberta, but, with the exception of class B office product in downtown Calgary and Edmonton, values are holding. Cap rates even dropped from the previous quarter for Calgary industrial and Edmonton multifamily properties.
“Investors are also motivated to reconsider Calgary as commercial property in Vancouver and Toronto becomes increasingly expensive and difficult to attain,” notes Garry Beres, executive vice president with CBRE’s national investment team.
Office properties are particularly capturing investors’ interest in Toronto, with cap rates below the national average in all five downtown and suburban categories. Rates declined from the previous quarter for downtown class A and B and suburban class B properties. Downtown class B rates also illustrate the east-west divergence: in the range of 4.75 to 5.25 per cent in Toronto versus 7.75 to 8.5 per cent in Calgary and Edmonton.
“Capital flows from domestic and global capital sources continue to show their conviction for quality assets with the market increasingly fixating on core and urban property,” says Peter Senst, president, Canadian capital markets, with CBRE. “Brexit is the latest question for investors to consider. However, the impact on Canada should be manageable and Toronto could actually benefit as a leading financial centre.”