‘Strong’ Investment Results Await Real Estate Market Ahead

August 24, 2011 / Elizabeth Buckley, Commercial Property Analyst

Investments in Greater Toronto Area’s (GTA) commercial real estate market has rebounded strongly from the market trough of two years ago, with solid property-market fundamentals and record sale volumes in the retail sector signaling the area is poised to achieve investment results never seen before by year-end 2011.

‘Strong’ Investment Results Await Real Estate Market Ahead

This was according to Avison Young’s Summer 2011 Greater Toronto Area Investment Review, a semi-annual report that tracks GTA office, industrial, retail, land and multi-residential property sales transactions greater than $1 million.

The review’s counterpart, The Outlook for Latin America’s Commercial Real Estate Markets prepared by CB Richard Ellis, showed on the other hand that Latin America has emerged 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.

Buyers flush with capital and sellers looking to capitalize on escalating values translated into $4.5 billion worth of commercial real estate assets changing hands in the first half of 2011 – matching the previous high set in the first half of 2007.

REITs acquired almost $1.4 billion in assets (30 percent of total) in the first half of 2011, buying up largely office, retail and multi-residential properties.

“If the exceptional first-half performance is any indication, we are in for a record-breaking year with investment sales pushing past the $10-billion plateau in the GTA – all driven by the same forces that have been at work since the market began to recover some 18 months ago,” said Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.

Argeropoulos observed: “Unlike 12 to 18 months ago, however, there’s simply more product being marketed for sale, and sellers are now more willing than ever to ride the wave of rising property values. Meanwhile, buyers are finally executing on deals, albeit in an even more competitive environment, evident by the increasing number of bids – especially those in excess of $100 million.

“Investors are entering the [real estate] market any way they can – buying an asset or two at a time, or making a big splash like the recent $690-million mega deal between Blackstone Real Estate/Slate Properties and Dundee REIT, a portion of which will be added to the second-half investment tally along with Oxford Properties Group’s reported $250-million acquisition of the Metro Toronto Convention Centre complex from Canada Lands Company.”

According to the report, investment sales activity improved by $715 million, or 19 percent, over the second half of 2010 and by $1 billion (28 percent) over the first half of 2010. These results contrast with a market trough of $1.4 billion in properties that captured the market in the first six months of 2009.

In the first half of 2011, investors flocked to the retail sector, being the only asset class to surpass the $1-billion mark on its way to a record $1.8-billion performance, up 70 percent. Office ($935 million, down 6 percent) and industrial ($902 million, up 74 percent) properties stood at the second and third place, respectively, followed by multi-residential ($566 million, up 50 percent) and land ($346 million, down 42 percent).

“The level of activity is evident in the number of assignments that our firm has in the pipeline, not just in Toronto, but elsewhere,” says Robin White, Avison Young’s Executive Vice-President, Capital Markets Group.

“While trophy assets remain highly contested, vendors of tier-two assets are starting to cash in on properties they purchased in the past 24 to 36 months and, in some cases, are seeing value appreciations of between 20 percent and 35 percent.”

David Scott, Mortgage Agent, Capital Markets Group, noted that the recent capital-markets turmoil has pushed down Government of Canada (GoC) bond yields to record levels with the five-year GoC bond yield at approximately 1.40 percent, some 70 basis points (bps) lower than yields of one year ago. This drop has, in turn, reduced top-tier financial institution lending rates by about 40 to 50 bps, as lending spreads have widened.

Quotes for conventional five-year mortgage terms now have all-in interest rates with the best-quality loans being in the low-to-mid 3 percent range.

“We are of the view that the abundance of lower-priced debt will result in further cap-rate compression moving forward,” said Scott.

“The market continues to see strong liquidity from institutional and non-institutional lenders alike,” Scott added.

Office property sales jumped to almost $935 million in the first half of 2011. This represented 21 percent of overall GTA investment volume. Though office sales activity increased by $225 million, or 32 percent (18 percent market share), over the second half of 2010, it is below the $992 million (28 percent market share) that sold in the first half of 2010 – a year-over-year decline of 6 percent.

While investment volume of ICI land in both the first half and second half of 2010 was well over $500 million, sales activity in the first half of 2011 dropped to $346 million – a first-half low. In all, the land sector posted the poorest year-over-year performance, which is down by 42 percent. Lower volumes are attributed to inflated vendor pricing expectations. As a result, land’s share of total GTA investment volume over the first half of 2011 was only 8 percent, down from 14 percent and 17 percent in the second and first halves of 2010, respectively.

A record $1.8 billion changed hands between January 1 and June 30, 2011, accounting for 40 percent of the total investment volume in the GTA. This $1.8 billion also represented an impressive 70 percent increase in sales volume over the same period in 2010 and a 77 percent rise since the second half of 2010.

By comparison, $2.1 billion worth of retail assets sold in all of 2010.

The multi-residential sector made a comeback in the first six months of 2011, recording its best first-half since 2004 ($898 million). Over the first half of 2011, total sales amounted to $565 million, up by 30 percent over the second half of 2010 ($434 million) and jumping 50 percent over first-half 2010 ($377 million).

Market share improved marginally, climbing from 11 to 12 percent over the past year.

A total of $902 million (20% market share) worth of industrial properties changed hands in the first half of 2011.

This was not only the sector’s best first-half since 2008 ($919 million), but the industrial sector posted the biggest year-over-year sales growth (74%), outpacing even the hot retail sector (70%),” Avison Young said.

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