The British Columbia commercial real estate investment market has remained strong in the first half of 2011 after reaching record deal and dollar volume highs last year, according to Avison Young’s Mid-Year 2011 British Columbia Real Estate Investment Review.
The semi-annual report tracks office, industrial and retail investment sales in BC greater than $5 million. The report complemented the CB Richard Ellis Special Report, which projected Latin America as an important destination for both investors and corporate occupiers as commercial real estate conditions are strong in most of the region’s major markets.
During the first half of 2011, $594 million was invested in 36 transactions, which involved office, industrial and retail assets in BC, with a lack of supply hampering deal and dollar volumes in all asset classes leading to lower deal and dollar volumes when compared with the record $1.026 billion in investment sales activity by mid 2010.
Yields with private investors representing the majority of both vendors and purchasers continued to plummet due to the low cost of debt. Industrial and office product represented 75 percent of the dollar volume invested by private buyers.
“It is a perfect storm for vendors in the marketplace right now,” comments Michael Keenan, Senior Vice-President and Managing Director of Avison Young’s Vancouver office.
“With a stable economy and banking system inspiring investor confidence, historic low interest rates, a lack of available quality commercial real estate, and an inordinately high demand for commercial product that doesn’t exist, the combination of those factors has created an aggressive pricing environment and downward pressure on yields. Vendors, should they choose to dispose of assets, will find buyers of all types working to meet their pricing expectations.
“Canada is viewed as a safe haven for investment. We are sought after as a destination, and Vancouver more so than any other city in Canada.”
However, investment sales activity is not on pace to meet the record deal and dollar volumes of 99 transactions/$1.946 billion witnessed in 2010.
According to the report, investment sales fell by $326 million, or 35 percent, over the second half of 2010 and by $432 million (42 percent) over the first half of 2010. Deal velocity during the first half of 2011 also declined with 36 transaction closing compared with 45 and 54 transactions in the first and second halves of 2010, respectively.
Nonetheless, the first-half 2011 saw a successful dollar volume of $594 million, exceeding the 10-year average for investment sales activity before 2010. Between 2000 and 2009, the 10-year average dollar volume for the first six months of the year was $503 million (with a recent low of $316 million in 2007 and a high of $765 million in 2006).
In the first half of 2011, purchasers invested 43 percent more in office product ($270 million) than during the first six months of 2010 ($189 million) despite the same number of transactions (12). The office market posted the highest level of investment seen in any asset class this year to date.
Industrial dollar volume also increased in the first half of 2011, climbing 48 percent to $186 million from $126 million during the first six months of 2010. The number of industrial sales transactions (13) outnumbered both office (12) and retail (11) trades.
Retail investment dropped 81 percent to $138 million in the first half of 2011 compared with $711 million in the first half of 2010. Purchasers remained keen on acquiring BC retail assets, but most owners were unwilling to divest due to the inability to indentify replacement or alternative investments that would obtain similar yields, the report noted.
“People would rather be owners of real estate than sellers of real estate in today’s environment. As it relates to retail, it’s not a case of buyers cooling to retail – there just has not been that much available,” said Avison Young Principal Michael Gill.
“Owners of retail have simply not wanted to sell. It’s too hard to replace.”
Avison Young Principal Rob Gritten added: “Despite low interest rates and significant demand and equity available, sourcing industrial product is hard. Securing prime industrial product is even more difficult and will continue to be so in a supply-constrained market.”
“We are going to see capitalization rate compression in the back half of the year because of recent events in the U.S. and Europe,” noted Gill.
“Interest rates are not going up any time soon and yields on Canada bonds are at historic lows. Cap rates are going to decrease further because there will be more demand to buy real estate as the cost of debt is so appealing and alternative investments are not that attractive.”