Avison Young: Healthy CRE Capital Flows
Capital keeps flowing into commercial real estate at a healthy pace against a backdrop of global economic uncertainty and potential future interest rate hikes, reported Avison Young, Toronto.
“Irrespective of potential future interest rate hikes and the effect they may have on the current velocity of commercial real estate capital changing hands within or between countries, real estate has earned its place as a core portfolio holding and is producing favorable total returns against alternative investment options,” said Avison Young Chair and CEO Mark Rose.
Rose called interest rate increases “pivotal, but not entirely surprising, since it has been debated to death.” He said the initial rate hike will have little effect on near-term pricing because spreads remain wide. “However, the pace of future rate hikes could cause a re-pricing of commercial assets, boosting investment volumes beyond current levels,” he noted.
Avison Young’s Fall 2015 Commercial Real Estate Investment Review said investment sales increased to varying degrees in nearly three-quarters of the 41 U.S. and Canadian markets it surveyed. Most U.S. markets saw increased investment activity on an annualized basis, while sales across Canada’s six major markets fell considerably from 2014’s mid-year mark.
Rose said increased allocations to real estate investment combined with an abundance of capital and historically low cap rates pushed pricing in gateway markets to record levels–in some cases ahead of fundamentals. “There is also much more to come in terms of real estate investment trust mergers and privatizations in both Canada and the U.S.,” he said. “As REITs enter a period of rising rather than declining interest rates, there will be greater efficiencies to be gained and critical mass to be created.”
Sales reached new heights in the first six months of 2015 with $131.8 billion of commercial transactions, a 40 percent increase year-over-year. “At this rate, overall U.S. commercial sales are poised to eclipse 2014 annual investment volume of $225.8 billion,” the report said.
Continuing a five-plus-year trend, Canadian buyers again lead foreign investment in U.S. assets in 2015. “Investors, both foreign and domestic, have continued to look beyond the top investment destination cities,” said Avison Young President of U.S. Operations Earl Webb. For example, he noted that Atlanta moved up on the strength of office sales to record $6 billion in total investment volume–nearly 60 percent of its full-year 2014 total–by mid-year.
And offices will continue to prosper, Webb said: “Improving leasing fundamentals across the U.S. due to generally limited development, lower vacancy levels, rent growth and major occupiers’ shedding of their excess space will continue to support office trades this year.”
