Commercial investors should take advantage of interest rate drop

The Bank of Canada’s interest rate cut offers ‘a perfect storm’ for commercial real estate investors, according to a new report.

“A growing number of savvy investors are looking to take advantage of a declining interest rate environment that provides them with long-term capital at historically low rates, and strong returns that have outpaced the cost of capital,” said Alexandre Sieber, senior vice president, debt and structured finance at CBRE, in the report.

CBRE’s quarterly report, Canadian Cap Rates & Investment Insights, published yesterday, said that commercial real estate investors should focus on core assets in 2015, serving as a reaction to the growing economic uncertainties in the market.

The report also looked back at 2014 as a year of strong demand and stable pricing, since the vast majority of Canadian commercial real estate transactions were completed before the drop in oil prices.

“A rise in Edmonton Class B cap rates reflects adjustments at the fringe of the market to changing oil prices and increased supply,” added Paul Morassutti, executive vice president, valuation and advisory services at CBRE, in the report.

“The broader impact of the energy price correction will depend mostly on the length of the event.”

Here are the commercial real estate outlooks across the country, according to the report:
 
Vancouver:
  • Land development transactions continue to play a major role in commercial sales.
  • Operating incomes in B.C. should benefit from one of the strongest provincial economic outlooks.
Calgary:
  • Investors continue to place capital with confidence despite declining oil prices.
  • 2014 was a record year for commercial real estate in Calgary.
Edmonton:
  • Lower energy prices could hinder exploration activity, but the largest challenge facing Edmonton remains the wave of new downtown office construction.
Winnipeg:
  • The city continued to experience cap rate compression in Q4 as the suburban office market and retail strip malls exhibited signs of strength.
  • Given its stability and strong track record during Canada’s last recession, the city could garner additional investor interest in light of recent economic uncertainties.
Waterloo region:
  • Industrial cap rates fell across Southwestern Ontario in Q4, signaling the continued recovery of tenant and investor demand in this sector.
Toronto:
  • Demand for industrial and multi-family properties has resulted in transactions that have reset pricing expectations and compressed cap rates.
  • Investors are directing more funds to real estate and that capital may focus on Toronto and other markets in Eastern Ontario until uncertainty lifts from energy-driven markets.
Ottawa:
  • Signs of a turnaround in the office sector are apparent with a drop in Class B downtown office cap rates this quarter, in addition to further compression in the suburbs.
  • Smaller transactions dominated the investment landscape at the end of 2014.
Montreal:
  • The city had a very strong year for commercial property investment due to multiple trophy asset and portfolio sales. This is expected to carry into 2015.
  • The city’s cap rate spreads are more in line with other Canadian markets and have largely corrected from increases in 2013.
Do you know a commercial real estate investor worthy of the title Alternative Investor of the Year?

Nominate a colleague, mentor or yourself for the Top Investor Awards on March 28, 2015.


 

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COMMENTS

  • by Realtor 2015-01-27 11:26:57 AM

    The worst advice ever. When capitalization rises next year you can kiss you ass goodbye.

  • by Anti-Realtor 2015-01-27 3:10:17 PM

    I'm not sure why? Locking up a deal today with a 6.5 CAP and 3% interest for 10 year term should give you over 18% ROI. That doesn't sound all that bad even if the sky falls next year and you can buy at 7.5 CAP @ 4.5% interest. Your ROI will be virtually the same. But hey, that's just me, I'm obviously not as greedy as you. I'm quite content making a measly 18%/year guaranteed for 10 years, others I guess want to wait for interest rates to rise?

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