Canadian private investors dominated Q2 commercial real estate acquisitions, representing 82 per cent of transactions according to Avison Young’s new investment trends report. But that recent trend is unlikely to continue.

Private investors had been responsible for 73 per cent of first-quarter transactions, while institutional investors saw their share fall from eight to five per cent through the first and second quarters. Private investors typically accounted for less than 60 per cent of transactions but hit the 70 per cent mark in 2022 and that ratio has continued to grow.

“When there are periods of uncertainty, a lot of these institutional buyers are waiting on the sidelines,” Avison Young principal, managing director and Canadian leader of valuation, advisory and property tax services Matthew McWatters told RENX. “I’m expecting a lot of those players to get back into it.”

Avison Young principal and director of Canadian market intelligence Marie-France Benoit told RENX that institutional investors generally own large, high-quality assets that they tend to sell to each other. They have sufficient capital and the patience to wait out market downturns.

“Institutional investors will do less transactions in number, but the average size of the transactions are larger,” said Benoit. “We account for all transactions above $1 million. If you were going into $10 million and up, maybe that percentage would be a bit different.”

Foreign investment has been low

End-users accounted for 10 per cent of transactions while others — including foreign investors, governments and developers — accounted for three per cent.

Benoit said there were a few very large acquisitions by foreign investors over the past two years, but there haven’t been any similar significant transactions so far in 2024, which is why that last number is so low.

“They look more for large portfolios or large assets that make it worth investing in another country, and Canada doesn’t have a deep pool of products because of our size,” said Benoit.

McWatters believes there will be more acquisition opportunities for foreign investors in the second half of this year and into 2025.

Overall transaction activity picked up slightly

Overall transaction activity was up very slightly quarter-over-quarter and reached $12.4 billion through six months, down from $15.4 billion during the same period last year.

While there have been significant gaps between what sellers are looking for and purchasers are willing to pay over the past few years, McWatters said that’s starting to narrow. This should lead to more deals.

“What we’re seeing is more predictability in the market,” Benoit said, acknowledging the Bank of Canada’s June 5 reduction of the overnight interest rate from five to 4.75 per cent and the anticipation of another rate cut on July 24 as the country’s inflation rate has declined.

“More predictability brings more confidence. More confidence bring more transactions, more velocity and narrower bid-ask gaps.”

Multi-residential

The Canada Mortgage and Housing Corporation (CMHC) recently released an outlook that positioned 2024 as the bottoming of the national downward trend in housing starts from 2021 to 2023 highs. A rebound is anticipated in 2025 and 2026 fuelled by cuts to financing costs.

“Investors are very bullish on multi-res, and that’s remained throughout COVID and that’s going to continue, especially with population growth,” McWatters said. “The large demand for housing makes it a very attractive asset type for investors.”

New product is being built, which means there should be properties available to trade, and CMHC financing alternatives are available to spur further development.

Industrial

Industrial properties accounted for 44 per cent of transaction volume in the second quarter, up from 38 per cent in the previous three months.

A steady increase in vacancy rates and decrease in rents since the start of 2023 is a correction of an industrial real estate market that had overheated. Otherwise, industrial market fundamentals remain sound and the economic drivers of demand for space are pointing in the right direction for 2025.

“Some of the new supply is currently being absorbed, but it was a lot of new supply compared to historical levels,” Benoit observed.

The COVID-related boom in logistics and distribution activity has prompted the development of large fulfillment centres and big-bay projects since 2020. As demand for this market segment cools, there are more lease and sub-lease options across the country.

Vacancy rates for big-bay industrial are now higher than for small-bay. Demand for small-bay is positive, but new supply is limited due to higher construction and land costs, which has spurred investor interest.

Developers are trying to adapt their offerings to meet demands from smaller tenants, either by subdividing larger spaces or developing industrial condominiums.

Office

Office market dynamics present several headwinds to deal activity, which is being led by opportunistic local buyers acquiring assets at a discount.

“The biggest gap right now in terms of pricing between buyers and sellers would be in office,” McWatters said. “There’s just not an appetite right now for people to buy in.”

The hybrid office work model now has more structure with regards to anchor days, minimum days and percentage of time spent in the office, which Benoit said has presented more clarity to landlords, employers and employees.

Some under-utilized office space is being converted to multiresidential or other uses, and that’s expected to continue.

Retail

Demand for retail assets is outpacing supply. While discretionary goods spending continues to stall near November 2022 levels, a growing and diverse population driven by immigration is increasing consumer demand.

“There’s not a lot of new supply for retail, except for necessity-based strip malls in new neighbourhoods, because a lot of people have moved further from the core,” Benoit explained.

“In terms of malls and so on, there’s not a lot of new construction, so there’s limited product and the occupancy rates are good. Sales are at pre-COVID levels, so retail seems to have some interest from certain investors.”

Source Renx.ca. Click here for the full story.