Published April 2, 2020

Investors reassess strategies while remaining cautious in their capital allocations in an unpredictable environment

The latest results from Altus Group’s Investment Trends Survey (ITS) for the 4 Benchmark asset classes show that the Overall Capitalization Rate (OCR) continued its downward trajectory, declining from 5.03% in Q4 2019 to 4.94% in Q1 2020 and down from 4.98% from the previous quarter (Figure 1).

Economic conditions have changed drastically shortly after the spread of COVID-19, which has led to market volatility worldwide. A slowdown of the global economy pushed major central banks to ease their monetary policies and lower interest rates. At the same time, the Bank of Canada cut its key interest rates to its lowest level to 0.25%, the third rate cut (second unscheduled) in March. The rate cuts aim to soften the economic shocks from COVID-19 and plummeting oil prices by easing the cost of borrowing in the hope of restoring the economy to near-normal levels.

Governments have also taken actions and stringent restrictions to help mitigate health and economic impacts creating other market disruptions. The Conference Board of Canada readjusted its economic forecast in the wake of the pandemic. It is expected that Canada’s real GDP could fall by 1.1% in 2020 instead of its previous baseline projection of a 0.3% increase. The board also estimates the unemployment rate to climb to 7.7% resulting in 330,000 job losses in the second and third quarters. Business owners, investors and households are facing unprecedented uncertainty, which may last longer than expected. Investors are scrambling to manage the growing impacts of the pandemic and are seeking new contingency plans to weather the storm. Canada remains one of the most sought-after markets for investors that are seeking safe returns. Although Vancouver and Toronto remained as the top markets preferred by investors, buyer momentum declined from the previous quarter, and Quebec City and Halifax showed an upward momentum, Ottawa remained the same, while the remaining markets were down (Figure 2).

OCR Trends – 4 Benchmark Asset Classes
(Figure 1)
Overall capitalization rates Q2 2020

Market highlights for the quarter include:

    • In a continued low-interest-rate environment, real estate markets are likely to remain fluid into 2020 as the impact of COVID-19 has investors reassessing portfolio strategies while keeping a cautious outlook.Overall cap rates continued to compress, moving down to 4.94% this quarter. Compared to Q1 2019, Montreal, Quebec City, and Toronto showed the most compressions, followed by Edmonton and Ottawa. Vancouver and Calgary showed no change in cap rates, and Halifax slightly moved upwards. Quarter-over quarter, Quebec City and Montreal showed the most cap rate compression, Halifax and Calgary saw some upward movement in cap rates while all other markets showed a decline.

Location Barometer – All Available Products (Q1 2020)
(Figure 2)

Q1 2020 location barometer

    • Class A office buildings continue to draw investment activity in core markets. However, pent-up demand for office space may witness a slowdown as companies consider cost reductions, curtail operations, and as market conditions evolve. Downtown Class “AA” Office cap rates were 5.30%, down this quarter both from the previous quarter and the same quarter last year. Calgary was the only market that moderately pushed up from the previous quarter, Toronto, Montreal, and Halifax remained flat, while all other markets marginally shifted downwards. On a year-over-year comparison, Edmonton had the highest cap rate compression followed by Ottawa and Montreal in the top 3. Vancouver remained neutral, and Toronto and Quebec City trended slightly downwards.
    • Increased demand for warehousing and distribution operations from online retailers and logistics companies keeps industrial an attractive asset class amid economic challenges. Single-Tenant Industrial cap rates continued to compress to 5.28%. Compared to the previous quarter, Quebec City had the highest compression, followed by Montreal and Ottawa . Vancouver, Edmonton and Calgary remained neutral. Toronto and Halifax moved slightly upwards. Year-over-year, Quebec City, Montreal, and Ottawa had the highest compression.
    • Retail landlords and tenants will see significant impacts from retail closures and containment measures leaving longer-term economic impacts, revenue shortfalls and a potential rise in vacancies. Overall cap rates for the Tier I Regional Malls sector were 4.94%, up both from the previous quarter and the same quarter last year. Montreal and Quebec City were the only two markets that had a decline in cap rates compared to the last quarter with Toronto remaining flat. Year-over-year, Toronto and Montreal were the only markets that compressed, with Quebec City remaining flat. All other markets continued their upward trajectory.
    • The multi-residential sector continues to remain relatively stable and opportunistic but may face medium-term challenges with deal closures, leasing disruptions due to economic and employment uncertainty and delayed building completions or renovations. Suburban apartment cap rates declined to 4.25%, a drop from 4.41% in the previous quarter and from 4.48% from the same quarter last year. Quarter-over-quarter, Vancouver had the most significant compression, while Quebec City and Halifax remained the same. All other markets showed signs of moderate compression. Year-over-year, Toronto and Montreal cap rates had the largest compressions followed by all other markets also declining.
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Product / Market Barometer – All Available Products (Q1 2020)
(Figure 3)

Product/market barometer - Q1 2020
Other highlights include:

  • Of the 128 combinations of products and markets covered in the Investment Trends Survey (Figure 3):
    • 69 had a “positive” momentum ratio (i.e. a higher percentage of respondents said they were more likely to be a buyer than a seller in that particular segment) compared to 80 in Q4 2019; 52 had a “negative” momentum ratio, an increase from 45 in the previous quarter; and 7 were neutral compared to 3
  • The top 15 products/markets, which showed the most positive momentum were:
    • Vancouver Downtown Class “AA” Office, Single- and Multi-Tenant Industrial
    • Ottawa Single- and Multi-Tenant Industrial, Downtown Class “AA” Office, Suburban Multiple Unit Residential, and Industrial Land
    • Halifax Multi-Tenant Industrial and Industrial Land
    • Montreal Downtown Class “B” Office and Suburban Multiple Unit Residential
    • Toronto Downtown Office Land, Downtown Class “B” Office and Industrial Land
The Report

Every quarter, senior Altus Group professionals reach out to over 200 investors, managers, owners, lenders, analysts and other market stakeholders to survey their opinion on value trends and perspectives. Conducted with the same benchmark properties for more than 15 years, the survey provides valuable insights on investor preferences and valuation parameters for 32 asset classes in Canada’s 8 largest markets.
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