By Kruti Desai, National Research Insights Manager | July 2, 2020

As the economic impact of the pandemic remains uncertain, investors take a more cautious approach amidst lingering risks

The latest results from Altus Group’s Investment Trends Survey (ITS) for the 4 Benchmark asset classes show that the Overall Capitalization Rate (OCR) pushed up this quarter from 5.02% in Q2 2019 to 5.15% in Q2 2020, and up from 4.94% from the previous quarter (Figure 1).

The COVID-19 pandemic caused several economic shocks across various sectors resulting in rising unemployment rates, limitations in workforce productivity, supply chain constraints and shifts in consumer spending. Challenges with rent collection have also impacted how investors are examining certain asset classes, notably for retail. But, for the first time in a number of years, the expectation for Tier I Regional Malls are up materially in terms of IRR. For the most part, the commercial real estate sector remained resilient, withstanding the current economic shock – particularly the industrial sector which maintained its strong fundamentals. Overall investment activity based on preliminary activity indicates transaction volume is down across Canada, primarily because of the pause in the market.  The good news is that deals are continuing to close.

OCR trends – 4 benchmark asset classes
(Figure 1)
National overall capitaliztion rate trends Q2 2020


The Bank of Canada recently noted economic growth is expected to resume in Q3 of this year, but warns the road to economic recovery may be a long and bumpy ride. However, some growth is expected in the near term as restrictions ease up across the country, markets slowly edge towards normalcy, and development activity resumes. With the help of government assistance programs, many businesses may be able to stay afloat. The latest economic forecast from the Conference Board of Canada expects growth to shrink to -8.2% this year and return to 6.7% in 2021 and 4.8% by 2022, granted the country avoids another national pandemic shutdown. The board also projected unemployment to peak at 13.7% at the end of the second quarter and forecasts 1.3 million jobs to be added from July to September pushing the unemployment rate down to 10.5%.  While interest rates may remain low for a more extended period, investors of various sizes still face risks in maintaining traditional income streams and are searching for alternative and more flexible ways to generate yields in the short and long term. Buyer momentum on the location barometer for all markets were down this quarter with the exception of Calgary, which moved up slightly from the previous quarter (Figure 2). However, Vancouver, Toronto, Ottawa and Montreal still showed positive momentum and retained their positions as the top contending markets. It is these larger major markets which remain resilient and are expected to lead the path to recovery upon reopening of the economy and as labour markets mend from the jolt of the pandemic.


Location barometer – all available products (Q2 2020)
(Figure 2)

Q2 2020 location barometer


Market highlights for the quarter include:

    • Overall cap rates shift upwards, tempered by concerns over the pandemic aftermath. Investors and lenders remain diligent and cautious of market opportunities and upcoming challenges in the second half of the year. Overall cap rates moved up to 5.15% this quarter with all markets shifting upwards compared to the previous quarter. This was the first overall increase since Q1 2016. Edmonton, Montreal and Ottawa showed the most increase from the previous quarter and year-over-year; Edmonton and Vancouver had the highest increase over other markets with Montreal remaining stable.
    • The swift transition to a remote work environment has some tenants offloading their excess space, pushing up the sublet market. In a few cases, landlords are also offering to reduce rents to retain existing tenants over a longer period. Downtown Class “AA” Office cap rates rose to 5.53% this quarter, up from 5.30% in the previous quarter and 5.36% in the same quarter last year. Halifax was the only market that had no change from the previous quarter, while all other markets showed an increase. On a year-over-year comparison, all markets shifted upwards with Calgary having the highest increase.
    • Industrial real estate remains a top performing asset and has been almost immune from the virus and is expected to maintain its strong market fundamentals in the long term. The demand for industrial real estate continues to swell in lock-step with the sharp increase in e-commerce and omni-channel operations. Higher-valued quality assets will continue to be in short supply, increasing pressure on rental growth and pricing, while also creating some opportunities for ground-up development. Single-Tenant Industrial cap rates moderately inched upwards to 5.36% from 5.28% in the previous quarter. Compared to the same quarter last year, overall cap rates compressed slightly moving down from 5.46%. Halifax was the sole market that had cap rate compression from the previous quarter, while all other markets moved up. Quebec City and Ottawa were the two markets that had the highest increase in cap rates compared to the same quarter last year.
    • The pandemic has hit the economically-sensitive retail sector in many ways, changing the way retail operates and accelerating consumer trends such as online shopping in an already weak sector. Operators are reassessing their strategies and structural decisions around leases in order to adapt to ongoing challenges and shifts in consumer and tenant expectations. However, the average IRR for Tier 1 Regional Malls moved upwards for the first time in several years. Moreover, food-anchored retail, particularly with necessity-based grocery retailers are expected to perform very well and gained a spot as one of the top 4 preferred asset classes (Figure 3). Overall, the sector will need to remain agile and resilient as it continues to face uncertainties in the near term and prepares for a potential resurgence of the virus. Overall cap rates for the Tier I Regional Malls sector increased to 5.29% with all markets moving upwards from 4.94% in the previous quarter and from 4.84% in the same quarter last year. Montreal had the highest rate increase from the previous quarter and Halifax showed the most increase from the same quarter last year.
    • Demand for multi-res continues to be strong and investors retain a robust appetite for this asset class. However, the multi-residential sector is facing new challenges from increased costs for health & safety processes, threats of rent arrears, restrictions on border controls weakening demand from immigration, and more recently CMHC’s suspensions on re-financing for multi-unit mortgage insurance. Suburban apartment cap rates marginally moved up to 4.43% from the historically low 4.25% in the previous quarter and 4.40% in the same quarter last year. Quarter-over-quarter, Edmonton had the highest increase in cap rates, with Quebec City remaining stable, and all other markets moderately shifted upwards.

Property type barometer – all available products (Q2 2020)
(Figure 3)

Property barometer Q2 2020
Other highlights include:

  • Of the 128 combinations of products and markets covered in the Investment Trends Survey:
    • 48 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), a decrease compared to 69 in Q4 2019; 70 had a “negative” momentum ratio, an increase from 52 in the previous quarter; and 10 were neutral compared to 7.
  • The top 15 products/markets, which showed the most positive momentum (Figure 4) were:
    • Ottawa Multi-Tenant Industrial
    • Vancouver Single- and Multi-Tenant Industrial, Industrial Land and Food Anchored Retail Strip
    • Toronto Suburban Multiple Unit Residential, Food Anchored Retail Strip and Industrial Land
    • Halifax Single-Tenant Industrial
    • Quebec City Multi-Tenant Industrial
    • Montreal Suburban Multiple Unit Residential, Industrial Land, Food Anchored Retail Strip, Single- and Multi-Tenant Industrial


Product / market barometer – all available products (Q2 2020)
(Figure 4)

Product/market barometer Q2 2020

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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