Snapshot: Investment Trends – Q3 2019
Investors continue to seek assets to diversify income streams, while displaying a degree of caution amid changing economic conditions
The latest results from Altus Group’s Investment Trends Survey (ITS) for the 4 Benchmark asset classes show that the overall Capitalization Rate (OCR) continues to trend downwards, declining from 5.03% in Q3 2018 to 5.01% in Q3 2019, and down from 5.02% in the previous quarter (Figure 1).
Signs of an economic slowdown, risks of trade wars, geopolitical concerns, construction labour shortages, and an imbalance in supply-demand have contributed to the decline in overall investment activity in the first half of 2019. Investors continue to expand their diversification strategies into key markets as well as redeploy capital to improve the quality of portfolios to advance growth. Due to a shortage of products in core markets, some investors are moving capital into certain non-core markets and alternative asset classes, while others are divesting their assets in certain markets to focus on key investment strategies. The top market preferred by investors this quarter was the Ottawa market area which aligned with market activity as Ottawa exhibited the highest year-over-year increase and has shown a continuous stream of positive momentum. All other markets displayed upward momentum, except for Edmonton, which trended downwards this quarter (Figure 2.).
OCR Trends – 4 Benchmark Asset Classes
Market highlights for the quarter include:
- Canadian real estate fundamentals remain strong and major markets continue to be an attractive for investment, acquisitions, and diversification. Overall cap rates trended downwards compared to same quarter last year and the previous quarter. Ottawa and Halifax showed an increase in cap rates from the previous quarter, while Toronto showed the most compression. Year-over-year cap rates for Toronto and Montreal declined the most. Across all product types, Vancouver maintained the lowest cap rates and Halifax positioned at the top with the highest rates.
Location Barometer – All Available Products (Q3 2019)
- New and emerging tech firms are expanding their presence and actively leasing space in major markets helping ease office vacancies, while fostering growth through job creations. With national vacancy rates reaching historic lows, competition for Class A space will continue intensify as new supply lags behind demand pushing lease rates up and forcing tenants to look to alternative locations away from the core. Downtown Class “AA” Office cap rates remained relatively the same in most markets from the previous quarter, apart from Toronto and Quebec City which showed a slight decline. On a year-over-year comparison, Toronto was the only market that showed signed of compression, while Edmonton and Calgary pushed upwards, and all other markets remained flat. Cap rates ranged from 4.0% to 6.5%.
- Industrial product and industrial land continue to be top performers. Demand for larger industrial spaces for warehousing and fulfilment centres intensifies in major markets due to proximity to customers. The demand is primarily driven by the rise in e-commerce, with alternate uses catching up. National vacancy rates remain at their lowest levels and with dwindling supply, land shortages, and strong demand, rental rates are creeping up impacting local occupiers. Some owners look to repurpose or convert non-industrial spaces into industrial uses to provide more options to the market. Overall cap rates for Single-Tenant Industrial product continues to trend downwards compared to the same quarter last year, and a slight decline from the previous quarter. Calgary, Edmonton and Halifax held steady, while all other markets showed signs of compression, with the greatest decline in Montreal compared to last year. Cap rates ranged from 4.1% to 6.5% with Vancouver at the bottom end and Halifax having the highest.
- The retail sector continues to transform across the country as landlords make significant investments in mixed-use development projects combing residential and commercial space as a model of sustainable revenue streams. As disruptions on the retail front continue amid closures, demand from new, and expanding retailers is expected to provide some relief to high retail vacancy rates. Overall cap rates for Tier I Regional Malls sector remained flat from the previous quarter, and a marginal decrease from the previous year. Calgary and Toronto witnessed the most decline from the previous quarter, while Ottawa, Halifax, and Montreal trended upwards. Quebec City and Edmonton remained at a steady rate. On a year-over-year comparison, Vancouver, Edmonton, and Toronto showed signs of compression while Calgary remained flat, and all other markets showed increases.
- High costs of home ownership have pushed potential home-buyers into the rental market across the country. In addition, increased immigration, employment growth, and more specifically flexible, maintenance-free convenient lifestyle preferences have become the primary drivers of the demand in the multi-res market and demand is only expected to rise. However, issues with supply shortages in core areas may pose significant housing challenges, creating opportunities for investors in secondary markets. Investors continue to focus on diversification for stable returns as rents increase and vacancy rates remain low. A shift in capital into older assets have also improved the quality and overall performance of the properties and will help keep up with changing consumer needs. Suburban apartment cap rates maintained a steady rate across most markets from the previous quarter. On a year-over-year comparison, Montreal and Quebec City cap rates continued to trend downwards and Toronto, Calgary and Halifax trailed behind. Ottawa and Edmonton remained the same, while Vancouver took a considerable upward turn.
Q3 2019 Property Type Barometer – All Available Products
Other highlights include:
- Of the 128 combinations of products and markets covered in the Investment Trends Survey (Figure 4.):
- 74 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 75 in Q2 2019; 45 had a “negative” momentum ratio compared to 51; and 9 were neutral compared to 2.
- The top 15 products/markets, which showed the most positive momentum were:
- Ottawa Downtown Class “AA” Office, and Suburban Multi-Unit Residential
- Edmonton Single- and Multi-Tenant Industrial
- Vancouver Single- and Multi-Tenant Industrial, Downtown Class “B” Office, Suburban Multi-Unit Residential, and Hotel
- Quebec City Single- and Multi-Tenant Industrial, Industrial Land, and Suburban Multiple Unit Residential
- Toronto Suburban Multi-Unit Residential
- Halifax Single Tenant Industrial
Q3 2019 Product/Market Barometer – All Available Products
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.