Dream Office REIT Announces $135M Sale of 720 Bay Street

On Monday, Dream Office Real Estate Investment Trust (Dream Office REIT) announced the sale of Toronto’s 720 Bay Street, known as the McMurtry-Scott Building, named in honour of two former attorney generals. The fully-leased, single-tenant commercial office building is presently the headquarters of the Ontario Ministry of the Attorney General.

Built in 1989, 720 Bay Street is a Class B building containing 11-storeys and 247,700 sq. ft, including 240,000 sq. ft of total office space. It’s a short distance from Queen’s Park — the site of the Ontario Legislative Building — the provincial courts, the Toronto Eatons Centre, and numerous hospitals, hotels, restaurants, and retailers.

Although Dream Office REIT has yet to release details on the buyer, they have revealed that the transaction will generate gross proceeds of $135M, “which is higher than the Trust’s carrying value as at September 30, 2022,” according to a news release from the Canadian real estate investment trust.

“The transaction is expected to close in the first quarter of 2023, subject to customary closing conditions,” the release goes on to say. “The unmortgaged property is currently pledged as security for the Trust’s $375 million revolving credit facility. The Trust intends to use the net proceeds from the sale to repay debt and to opportunistically repurchase REIT A Units under the Trust’s normal course issuer bid program.”

Dream Office REIT is a premier office landlord with over 3.5M sq. ft of landmark property owned and managed. According to a Q3 2022 update, the Trust’s portfolio contains 27 active investment properties valued at $2,596,815, with 5.4M sq. ft in gross leasable area and an 85.7% portfolio occupancy. The investments are primarily concentrated in Toronto’s Financial District. Dream Office REIT also has two projects in the development pipeline.

Source Storeys. Click here to read a full story

Rental Market Will Tighten in 2023, But Investment Will Remain Strong

As more and more Canadians become renters, interest and investment in multi-family rental properties are expected to remain high, despite an uncertain financial environment.

In a new 2023 Canadian Economic Outlook from real estate and property management firm Morguard, the Ontario-based company says that after a decline in spring 2020, demand for purpose-built, multi-family rental properties strengthened during the second half of 2021, extending to the midway point of 2022.

“Investment transaction volume totalled $7.1B for the first half of 2022, as reported by CBRE,” Morguard points out. “The total was in line with the record annual high of $14.1B in 2021.”

Multiple offers on investment properties were commonplace during that time, the report says, with confident investment in major markets amidst the supply of large portfolios falling short of demand.

The returns on those investments also remained healthy, with a national average return of 7.4% for the fiscal year ending June 30, 2022 — an increase of 2.2% compared to the previous year.

Returns on multi-family investments in Victoria were the highest in the nation at nearly 16%, followed by Halifax at nearly 13% — the only two markets in Canada that saw average returns over 10%.

Meanwhile, in the larger markets such as Toronto and Vancouver, average returns were at about 6%. Calgary and Edmonton saw the smallest returns on multi-family investments in the nation, with both hovering around 4%.

The strength of returns was found to be closely correlated to vacancy rates in their respective markets, particularly at the two ends of the spectrum: Calgary and Edmonton had some of the highest vacancy rates while Halifax and Victoria had some of the lowest.

By transaction volume, in the 18 months leading up to June 2022, Montreal accounted for 30% of total national sales, the most of any market in the country. Second was Toronto at 27%, followed by Vancouver at 16%.

In that same timespan, multi-family properties accounted for 22% of all real estate transactions, second only to industrial real estate sales, which accounted for 30%.

Notable transactions include CAPREIT’s $281M purchase of six properties from JOIA’s portfolio in Montreal, Q Residential’s $165M purchase of the 423-unit Golfview Towers in Toronto, and Centurion Apartment REIT’s $81.7M purchase of a 233-unit development in Surrey, British Columbia. Those three transactions were the largest transactions by price and amount of units in their respective markets.

The Rental Market

The increased investment in multi-family properties came as the national average rent price increased significantly. According to Rentals.ca data, the average listed rent in December across all types of rental unit was up 12.4% compared to a year ago, to $2,024.

And there is no evidence that the increases will be slowing down.

“Several factors contributed to the recent rental demand strengthening,” Morguard says. “Canada’s economic recovery boosted employment levels and rental demand. At the same time, young workers in the 15 to 24 age cohort were able to secure employment and rental accommodation.”

Morguard also pointed to increased international migration as adding to the demand for rentals. Many are concerned about whether the nation’s housing supply can keep up with Canada’s immigration targets, and those concerns will likely remain in place for the foreseeable future.

Vancouver-based Toby Chu, Chairman and CEO of CIBT Education Group — the parent company of GEC Living, which specializes in student rental buildings across Metro Vancouver — previously told STOREYS: “International and domestic students arriving in Vancouver to study, they rent. Migrants moving to Vancouver for work, they rent. New immigrants arriving in Canada, they rent before they buy. Interest rate causes stress test issues for new home buyers, thus they rent. Homeowners downsize from owning to renting, they rent. I think the rental crisis will transform a bad dream into a nightmare.”

Source Storeys. Click here to read a full story

Top-10 CRE Transactions Of 2022 In The GTA, GGH

Commercial real estate transaction activity in the Greater Toronto and Greater Golden Horseshoe areas slowed considerably in the second half of 2022 after an initial strong carry-over from 2021.

This year could see a reversal of that trend, with a slower start and business picking up in the third and fourth quarters, according to Altus Group vice-president of data operations Ray Wong. He believes the amount of deals that happened in 2021 and the first part of last year were unusually high and that a level of normalcy will return to the market in 2023.

“I think investment demand is still there,” Wong told RENX. “The challenge is the product.

“I think that, depending on what happens with interest rates and the availability of product, we’re probably going to see about the same amount of activity — or maybe less — compared to a year ago.”

Wong said there’s a challenge in finding price points that will satisfy both sellers and buyers, given rising interest rates, capitalization rates and carrying costs, as well as a more subdued commercial lending environment.

Riding The Real Estate Roller-Coaster: The Uncertainty Of Inflation

What is inflation? What caused it in 2022? Why is it hard to predict? What are the differences between 2022 and 1970s inflation?

Let’s examine the issue, its impact on real estate and how we can prepare for and attempt to mitigate those effects.

What is inflation and why did it skyrocket in 2022?

Inflation is a general increase in the price of goods and services in an economy over time.

We see it as a percentage and the Bank of Canada has the mandate to keep it at two per cent. The reason it skyrocketed in 2022 is that the cost of raw materials, labour and transportation all shot up.

But why did they become more expensive? We need to explain this if we want to have a chance at predicting what comes next.

It’s demand-driven: Too much money.

The COVID-19 fiscal response injected massive amounts of money into many economies. This explains increases in prices as “demand-driven” inflation. This means that governments, people and businesses had more money and spent more money.

But Europe received only half the fiscal stimulus of the U.S. yet still experienced comparable levels of inflation. Why is this?

It’s supply-driven: Too few goods.

I heard economists in early 2022 vigorously debating the topic of inflation. Most thought it was transitory.

Ben Tal of CIBC suggested it was mainly due to supply-chain problems (shipping, China’s zero-COVID policy, the war in Ukraine, etc.). And so, inflation would self-correct.

At the 2022 Canadian Apartment Investment Conference, Tal said 60 per cent of Canada’s inflation arises from supply-chain difficulties. If true, then a prudent approach for central banks would be to wait until these troubles resolve themselves.

But it gets more complicated.

Inflation is part goods and part services. Goods prices can come down (as some already have) but services can stay high (as most are).

Moreover, on the supply side, nothing is simple or predictable. The war in Ukraine is not ending. China relaxed its zero-COVID policy but then saw the ramifications due to a spike in the spread of infections.

We keep looking in the rear-view mirror and trying to find a model to explain what happened. Yet looking forward we keep getting our predictions wrong.

It looks like 2022’s climbing inflation came from both an increase in demand and a decrease in supply. Is it any wonder no one has a good model to make an accurate prediction?

The central bank and rate hikes

The Bank of Canada reversed fiscal stimulus into a tightening policy and rates went up fast.  Rate hikes lowered the demand for goods and the expectation is that the supply side will work itself out . . . eventually.

The demand for services, however, has not changed drastically even after the hikes. People still want to travel and enjoy entertainment like concerts and sporting events.

But after interest rates go up, the economy tends to do the opposite. We expect a recession.

We have seen a downward trend in the number of total businesses in Canada and there have been recent tech company layoffs. Yet a net 104,000 jobs created in December shows a different story – the expected number of new jobs was only 8,000.

It’s complicated!

What will the Bank of Canada do on Jan. 25? Raise rates by 0.25 per cent or higher?

Real estate lessons from the 1970s

Reality is always more interesting and complicated than any model can address. But we’d be well-served to substitute complex models for simple heuristics.

For those of us in real estate, what do we know about the 1970s? How was business done back then?

The OPEC oil embargo of 1973–’74 drove oil prices up by almost three times in just a year. The cost of goods went up and with it, inflation.

Labour was unionized and wages went up to keep pace with the cost of living. Federal price controls did nothing and only when Paul Volcker raised interest rates to 20 per cent in 1980 did inflation go back down to 3.2 per cent by 1983.

Let that sink in . . . a 20 per cent federal rate! Eventually, in the 1990s the federal rates were back down to mid-single digits.

The point here is that looking back the rates we see are a shock to our system because we’ve enjoyed declining interest rates for decades.

Valuations of real estate are directly affected by the cost of borrowing. The cheaper the debt, the more people can pay for real estate and prices tend to go up.

But how did people do business in the ’70s when debt became more expensive? For one, high inflation meant no pre-sales or pre-leasing.

Some used seller financing. Others used more equity.

When inflation is high, those with cash do not want to hold cash as it is losing value.

We adjust how we work to match our current reality. Once the “shock to the system” wears off, we’ll adjust again.

Where does that leave us?

The key to doing well in an inflationary “roller-coaster” and ever-changing real estate market is resilience and preparedness.

CRE businesses must be nimble and ready to take advantage of opportunities when they arise and protect themselves from short-term losses by keeping an eye out for danger signs.

  • Take advantage of creative acquisition terms such as vendor debt and delayed closing when purchasing.
  • Leverage modestly to ensure liquidity if you are forced to own properties for a longer period of time.
  • Invest only in the best locations.
  • Research, research, research: zoning, environmental, soils, demographics and more.
  • Focus on asset classes most in demand with the least supply (today it seems industrial and multiresidential rental).
  • Stay informed on the latest industry trends.

Being ready and able to swiftly adapt to the market unpredictability can open opportunities that many overlook.

Like a roller-coaster ride, what goes down will eventually come back up again

Source Real Estate News EXchange. Click here to read a full story

Allied Puts Toronto Data Centre Portfolio Up For Sale

Allied Properties REIT has decided to offer its downtown Toronto urban data centre (UDC) portfolio for sale following a review of options for the three properties.

In an announcement Monday morning, Allied reports “selling the portfolio in its entirety now is optimal financially and operationally.” It has retained Scotiabank and CBRE to market the assets and facilitate any transaction.

“Our principal motivation here is two-fold,” said Michael Emory, Allied’s president and CEO, in the announcement. “First, we want to reaffirm our mission and pursue it over the next few years with low-cost capital.

“Second, we want to supercharge our balance sheet and reduce our dependence on the capital markets going forward.”

Proceeds from a sale would be utilized primarily for debt reduction and to finance its development activity, the release states. The REIT could also use some of the proceeds to repurchase units under its NCIB.

Canada’s Office Market Fights On, Industrial Stays Strong

Suburban office vacancy rates were considerably lower than downtown in many markets across Canada, according to Colliers Canada’s 2022 Q4 National Market Snapshot report, which updates trends and statistics in the office and industrial sectors.

The national downtown office vacancy rate was 14 per cent and trending upward, while the suburban rate was 12 per cent and trending downward from Q3, according to the report.

“Three or four years ago, nobody was talking about the suburbs,” Colliers senior director of research Adam Jacobs told RENX. “Every tenant wanted to be downtown, the rents were going up faster downtown and it had one per cent vacancy.

“Now we’re starting to see a lot more evening out, where everything that used to be an advantage of downtown has turned a little bit more to a liability. Like, it’s connected to transit, but nobody wants to ride transit anymore.”

The average asking net rent was $22.34 per square foot for downtown office space and $17.51 per square foot for space in the suburbs.

Best and worst office markets

Of the dozen cities covered in the report, Vancouver had the lowest office vacancy rate at 5.9 per cent, with sublets accounting for 29.6 per cent of that. The average net asking rent in Vancouver was $34.25 per square foot.

Calgary had the highest office vacancy rate at 27.3 per cent, with sublets accounting for 16.9 per cent of that. The average net asking rent in the city was $14.31 per square foot.

Halifax’s office market was the only one in Canada with an office vacancy rate that decreased in every quarter in 2022. Its overall year-end rate was 13.9 per cent.

In general, office markets less dependent on large occupiers and with smaller cores usually performed better than those in larger population centres with higher dependency on public transit. There’s also less new office development happening in these smaller markets, and therefore fewer concerns about absorption.

Toronto’s return-to-office levels continue to lag, with occupancy levels reaching just 36 per cent in Q4. Toronto’s combined downtown and midtown office vacancy rate was nine per cent while the suburban vacancy rate was 11.4 per cent.

Jacobs said there was a flight to quality among tenants who wanted to be in AAA downtown buildings, and were willing to pay higher rents for those properties, but only certain employers can afford that and the trend has slowed.

Return-to-office momentum still slow

Return-to-office momentum continued to be slow throughout the quarter, with many companies implementing full-time hybrid work models. The federal government — one of the last remaining large occupiers working fully remotely — announced a return-to-the-workplace model of three days per week on site starting this year.

“There’s some momentum now of the banks, the insurance companies, the government and the real mega-occupiers starting to move towards — if not 100 per cent back to the office — at least 60 per cent back to the office,” said Jacobs. “I think that’s maybe less than we expected, but still it’s in the right direction, as far as I see it.”

The office job market remains hot and as long as employees continue to have strong leverage in choosing where and how to work, and who to work for, it seems that pre-pandemic office attendance levels won’t be matched.

Subletting was a major issue through 2021 but had been subsiding during 2022. However, an increasing amount of sublet office space came to market both downtown and in the suburbs in Q4 as companies became more accustomed to hybrid and remote-work models. Subletting was especially pronounced in Vancouver.

Adams expects the office vacancy rate to continue to increase in most cities and nationally, as well as for the rapidly rising interest rates of last year to continue to negatively impact the number of property transactions this year.

Industrial leasing remains strong

Industrial leasing remained strong across the country, with high tenant demand and land-constrained markets fuelling continually increasing asking rents.

Colliers tracked 12 markets across Canada and each had industrial asking net rents above $10 per square foot at year-end, with the average being $12.77. The vacancy rate in those cities averaged 0.9 per cent while the availability rate was 2.2 per cent.

The highest industrial vacancy rate was 4.1 per cent in Edmonton – its lowest year-end rate since 2015 – where the average net asking rent was $10.33 per square foot.

The lowest vacancy rate was 0.1 per cent in Victoria, where the average net asking rent was $18.05 per square foot.

“We’re starting to see people say ‘I’ll just take industrial space in Calgary and truck everything 1,000 miles from the Port of Vancouver,’ ” Adams said. “‘It’s so much cheaper in Calgary that, even though it’s expensive to truck things over the Rocky Mountains, I’m still coming out ahead paying $10 per square foot in Calgary instead of $30 in Vancouver.’”

Calgary’s 11.61 million square feet of industrial space net absorption in 2022 was the highest in the country and pre-leasing activity was high.

Toronto’s industrial vacancy rate was just 0.3 per cent. The market had experienced 20- to 30-per cent year-over-year rent increases since 2019 and, although momentum slowed a bit in the last quarter, the annual growth rate was still 35 per cent.

Demand remains for more industrial space

While e-commerce growth has levelled off, fulfillment centres continue to drive industrial leasing demand. Inventory under construction remains very high but still just represents a small fragment of the overall inventory.

“We could finish every industrial development in the country tomorrow and we’d still have a strong market,” said Adams. “As much as is being built, the markets are so tight.

“We’re just so far from a balanced market in terms of vacancy and rents. I just think it’s going to keep going until something really gives. It’s possible the prices will get too high for some tenants, but we haven’t seen that yet.”

Adams said a lot of major industrial leasing is being driven by large, well-financed tenants such as Amazon, Costco, Walmart and Sobeys that can absorb higher rent costs because they’re a relatively small part of their overall costs.

Industrial transaction volume, however, seems to be slowing down — again influenced by the higher interest rates that are expected to remain through most of the year.

Source Real Estate News EXchange. Click here to read a full story

Sandpiper Group, Artis REIT And Embattled First Capital Real Estate Investment Trust (FCR) Appear Headed For A Court Hearing To Determine The Date Of A Shareholder Meeting To Decide FCR’s Future Direction

UPDATED: Sandpiper Group, Artis REIT and embattled First Capital Real Estate Investment Trust (FCR) appear headed for a court hearing to determine the date of a shareholder meeting to decide FCR’s future direction.

A release Monday morning issued by Sandpiper and Artis says the two entities have asked the Ontario Superior Court’s commercial division to compel First Capital to hold the special meeting on March 1, “or as soon as practicable thereafter”.

In response to publicly stated opposition to its management strategy from Sandpiper, Artis, First Capital founder Dori Segal and others, the REIT’s management had scheduled a special meeting on May 16 in conjunction with its annual meeting.

Monday’s release claims that is too long to wait, because the activist shareholders fear management will continue with the REIT’s current business plan, including a publicly stated intention to divest some of the assets it currently holds.

FCR management set May 16 date

First Capital REIT’s management, in announcing the May 16 date, said the timing would allow it to accommodate the annual meeting, normally held in June, so shareholders would not have to take part in two meetings in a short time. It would also provide management time to “consider the implications” of an alternative strategy suggested by the critics in December.

In a response to this latest legal manoeuvre, First Capital stands firmly behind its plan to hold the meeting on May 16 and to move forward with what it calls the REIT’s Enhanced Capital Allocation and Portfolio Optimization Plan.

The plan, which includes an intention to shed up to $1 billion in assets, is one of the key factors which led to the dispute.

First Capital management also takes aim at Sandpiper founder and CEO Samir Manji, who is also the president, CEO and a board member of Artis after his firm led an activist investor campaign which ousted its previous leadership about two years ago.

“FCR will continue to engage constructively with unitholders in a manner that is in the best interests of all unitholders, and not just Samir Manji,” a release issued late Monday states. “First Capital also notes that a significant number of unitholders have expressed their support for the Portfolio Optimization Plan, with numerous sell-side analysts also recognizing its merits in their published research.”

It then states FCR management plans to continue moving forward with the plan.

The critics called for the special meeting in an effort to remove several current board members – chair Bernie McDonell, Andrea Stephen, Annalisa King and Leonard Abramsky – and replace them with trustees of their choosing.

The critics have also called for the resignation or removal of CEO Adam Paul.

The candidates proposed for the FCR board are Sandpiper founder and CEO Samir Manji; K. Adams and Associates Ltd., founder and president Kerry Adams; lawyer and Definity Financial director Elizabeth DelBianco; and Blake, Cassels & Graydon LLP partner Jacqueline Moss.

King High Line a key issue in dispute

Chief among the activists’ concerns are what they call the continued underperformance of the REIT compared to its peers and the markets, and in particular they have criticized the decision to divest a portion of First Capital’s 100 King West high-rise property. That move is part of the optimization plan.

In mid-2022, FCR announced an agreement to divest its interest in the residential portion of the three-tower property, known as King High Line, while retaining the retail and commercial segments. Segal claims the property is a “generational core asset” and has essentially been liquidated at a below-replacement cost for $149 million.

The deal was slated to close in Q4 of 2022.

Sandpiper and its entities have invested about $300 million in First Capital REIT, which Manji said in the release is “almost 30 times more than the cumulative investment held by all nine of the incumbent trustees.” It represents about nine per cent of First Capital units.

Sandpiper has retained Morrow Sodali (Canada) Ltd. as its strategic shareholder services advisor. The Special Situations Group at Norton Rose Fulbright Canada LLP is acting as legal counsel.

FCR has engaged Kingsdale Advisors as its “strategic shareholder advisor”. Gagnier Communications is its communications advisor; Stikeman Elliott LLP is acting as legal counsel to the board; and RBC Capital Markets is its financial advisor.

Source Real Estate News EXchange. Click here to read a full story

HOPA Expands Industrial Inventory At Thorold Port Lands

The Hamilton-Oshawa Port Authority (HOPA) and Bioveld Canada hope to capitalize on the region’s tight industrial real estate leasing market by adding up to 500,000 square feet at the sprawling Thorold Multimodal Hub, Bioveld Complex.

“We have ways of transloading, we have warehouse storage, we have ship repair and maintenance, and on the original site we have a lot of bulk handling,” said Ian Hamilton, CEO of the Hamilton-Oshawa Port Authority.

The Thorold Multimodal Hub, Bioveld Complex, sits alongside the Welland Canal and is zoned for heavy industrial uses. It currently accommodates units ranging from 5,000 to 100,000 square feet, includes over 100 acres of exterior space and has an on-site water filtration plant.

The former automotive plant sits on 170 acres and offers multimodal services, plus greenfield lands for redevelopment and new construction. Its facilities have access to CN’s rail network via a local railway operator.

HOPA partnered with Bioveld Canada subsidiary BMI Group in its latest acquisition.

Q4 2022 Canadian CRE Investment Trends

Q4 2022: Rising interest rates prompt continued caution and scrutiny in investor sentiment The latest results from Altus Group’s Canadian Investment Trends Survey (ITS) for the four benchmark asset classes, show that the Overall Capitalization Rates (OCR) rose to 5.36% in Q4 2022. This compares to the previous quarter which was recorded at 5.17% and 4.95% for the fourth quarter of 2021. According to Statistics Canada, the labour market remained unchanged for the most part in November after adding 108,000 jobs in October. The unemployment rate declined slightly from October, sitting at 5.1% as of November 2022. Gains in employment were noted in the finance, insurance, real estate, rental and leasing, manufacturing, as well as the information, culture, and recreation industries. While these industries saw gains, losses in employment were noted in several industries including the construction, wholesale and retail trade sectors. Figure 1

The Bank of Canada bond rate as of December 2022 was recorded at 3.29%, increasing by over 180 bps since Q4 2021. As the central bank continues to focus on inflationary control measures, the average OCR rates were seen increasing the most in the single-tenant industrial asset class when looking quarter-over-quarter. This may be attributed to the potentially falling demand for industrial assets as demand for product housed by these assets may be impacted by the growing unaffordability and the rising cost of borrowing. However, there is also sentiment that industrial assets have done very well for some time, even during the pandemic, and a slowdown in activity and rise in cap rates is inevitable.

According to Altus Group’s Investment Trends Survey for the fourth quarter of 2022, the three most investor preferred markets across all asset classes were Vancouver, Toronto, and Ottawa (see figure 2) respectively, akin to the previous quarter. Impacted by the anticipation of continually rising interest rates, the location barometer reported a downturn in the momentum ratio (percentage of investors looking to buy/percentage of investors looking to sell) across most markets.

With Q4 concluding, the impact of the rising rates has resulted in a downturn of momentum ratios across all markets except for Edmonton and Calgary, where momentum ratios rose, and Ottawa, which stayed the same as the previous quarter.

Despite a downturn in their momentum ratios, the top four markets, Toronto, Vancouver, Ottawa, and Montreal, have maintained a positive momentum ratio, indicating that investors would prefer to continue buying versus selling in these areas.

Figure 2

The top three most preferred property types by investors in the fourth quarter of 2022 were food-anchored retail strip, industrial land and multi-tenant industrial assets (see figure 3). Despite being the most investor favoured assets, food-anchored retail strip and industrial assets reported a downturn in their momentum ratio. This is a result of the cautiousness in investor sentiment growing amid the continually rising interest rate environment.

Interestingly, downtown class AA office assets reported an upswing in momentum ratio, with investors preferring to buy instead of sell. This occurs as the office asset has more use with people heading back into the office and investors’ sentiment around the office asset begins to shift.

Tier II regional malls were the least preferred investor product, with enclosed community malls taking the second last spot. This occurs as retail assets were already slightly risky investments, especially with their pandemic highlighted vulnerabilities. However, the high inflation and the rising interest rate environment are factors causing investors to be even more cautious as they evaluate their investment decisions.

Figure 3

Looking at the Product/Market barometer (see figure 4), the top three preferred combinations were all food-anchored retail strips – with Vancouver taking the top spot followed by Montreal and Toronto. Meanwhile, the least preferred in Q4 2022 was the tier II regional mall product across the Calgary, Edmonton, Quebec City and Halifax markets. Retail assets continue to remain a risky gamble in investors’ eyes, and this has been further exacerbated by the rising interest rates and their anticipated impact on consumer purchasing power, and in turn, the use and demand for retail assets.

With 2022 coming to a close, investors have gravitated towards assets offering minimal risk, adaptability, and stable returns. As a result, food-anchored retail strips, industrial assets and multi-family assets continue to attract investors. With the cost of borrowing speculated to rise further in 2023, cap rates are expected to go up across all major asset classes.

Figure 4

Market highlights for the quarter include

  • Downtown class “AA” office cap rates increased over the previous quarter, sitting at 6.04% as of Q4 2022. Quarter-over-quarter, all major markets across the country experienced upward pressure in cap rates apart from the Halifax market, which reported a compression.
  • While demand for industrial product remains strong, the cap rate for single-tenant industrial product jumped to 5.23% in Q4 2022. With the cost of borrowing getting higher and construction costs remaining elevated, investors were facing potentially negative leverage when seeking deals in the asset class. As a result, an increase in cap rates was seen across all markets. Industrial assets continue to experience pent-up demand as supply lags, a trend that is expected to continue into 2023. The jump in cap rates for the asset class can be attributed to the anticipation of further increases in interest rates, paired with the perception that these cap rates were too low.
  • Tier I regional mall cap rates increased to 5.79% in Q4 2022. Cap rates trended upwards across all major markets. This occurs against a backdrop of interest rate hikes and talks of a possible recession. Retail assets are expected to feel an impact due to concerns of negatively impacted consumer purchasing power.
  • Cap rates for suburban multi-unit residential assets increased slightly in Q4 2022 to 4.38%. The multi-family family asset class reported the smallest jump in cap rates owing to factors such as increased immigration and consumers turning towards renting as housing affordability remains a concern, with rising interest rates adding another hurdle to purchasing a home. Cap rates were a mixed bag across the major markets – Toronto, Quebec City and Halifax experienced upward pressure, Montreal was unchanged compared to the previous quarter while compression occurred in Vancouver, Edmonton, and Calgary.

 

Other highlights include:
  • 58 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 60 in Q4 2022; and 70 had a “negative” momentum ratio, an increase from 68 in the previous quarter.

The top 15 products/markets, which showed the most positive momentum were:

  • Vancouver – Food-anchored retail strip, industrial land, multi-tenant industrial
  • Calgary – Suburban multiple unit residential
  • Toronto – Food-anchored retail strip
  • Ottawa – Food-anchored retail strip, Suburban multiple unit residential, industrial land
  • Montreal – Food-anchored retail strip, single tenant industrial, suburban multiple unit residential, industrial land
  • Quebec City – Food-anchored retail strip
  • Halifax – Food-anchored retail strip, suburban multiple unit residential

Source AltusGroup. Click here to read a full story

 

$2.7B Concert Fund Gets New Name, Diversifies Into Multires

Concert Properties’ management will diversify the CREC Commercial Fund LP by adding multiresidential rental properties to its mix of industrial and office assets, and has renamed it Concert Income Properties LP to reflect the shift.

The fund was created in 2016 with a billion-dollar portfolio. It has since grown to 77 assets with nearly 12 million square feet of leasable area valued at more than $2.7 billion and leased to more than 500 commercial tenants.

Seventy per cent of the value is comprised of industrial properties with the remainder being office.

Forty-seven per cent of the properties owned by Concert Income Properties are in Ontario, 37 per cent are in British Columbia, 12 per cent are in Alberta and four per cent are in Quebec.

The industrial and office properties have a combined 97 per cent occupancy, but the fund’s pension plan and institutional investors have been interested in broadening the mandate to include high-rise, purpose-built rental apartments.

“In the long run, we think that makes sense,” Concert Properties chief investment officer and Concert Income Properties managing director Andrew Tong told RENX.

Fund is affiliated with Concert Properties

Concert Income Properties is affiliated with Vancouver-headquartered Concert Properties, a diversified Canadian real estate corporation launched in 1989 and wholly owned by union and management pension plans representing more than 200,000 Canadians.

Concert Properties’ overall portfolio includes condominiums, seniors’ active aging communities, industrial, commercial and residential rental properties, and public infrastructure projects across Canada.

The creation of Concert Income Properties was sponsored by Concert Real Estate Corporation and Concert Properties retains a majority interest in the fund. It’s supported by Canadian pension funds and institutional investors and managed by Concert Realty Services Ltd., a wholly owned subsidiary of Concert Properties.

“Our multifamily rental program will come under the wing of the fund,” said Tong. “The idea is this will be the long-term ownership platform for our multifamily rental moving forward.”

No acquisitions to announce yet

It’s very early days for the diversification strategy and no multifamily acquisitions have been announced, but Tong anticipates at least one apartment building to be purchased within the next 18 months.

Acquisitions could also include mixed-use buildings, combining purpose-built rental housing with office or retail space, according to Tong.

Apartments have remained resilient through the pandemic in the fund’s multifamily target markets of Vancouver and Toronto and Tong said it will be open to acquiring both market-priced and affordable housing rental apartments.

“We can do development, but also we have the other entity, Concert Real Estate Corporation, that could build a master-planned community where there may be a condo and a multifamily rental building,” said Tong. “It’s possible that the fund can be involved with development and we can potentially have the opportunity to purchase the completed rental building, once it’s leased up, from the development side of the company.”

It hasn’t yet been determined what ratio multifamily will eventually comprise in the overall Concert Income Properties portfolio. Tong said those decisions will depend on such factors as available locations, returns and risk profiles.

Open-ended fund with cash to deploy

Concert Income Properties is open-ended and has 30 per cent leverage, which could be increased if required.

“We have a fair amount of cash reserves to deploy and can take advantage of opportunities, which we think is advantageous right now in the market,” said Tong. “Because of our current cash-flow position, we probably need to deploy more of that before we go out for more capital raising.”

Concert Income Properties declared a distribution for investors on Sept. 30 at a time when other real estate funds were discussing halting the payments.

There are no plans for any portfolio dispositions at this point. Tong said the Concert Income Properties is in growth mode and well-positioned to make deals in all three of its preferred asset classes.

He noted the company has almost always grown during downturns in the economy during the 28 years he’s been with Concert Properties, as he said vendors want to do business with companies they can trust.

“We’re prepared to buy something at a certain price. It may not be the highest price, but it’s going to be a very fair price and we’re going to treat somebody fairly,” he said.

“That has worked well in a down market where we’re seeing fewer players at the table and that’s why right now we’re very active on multiple potential opportunities.”

The fund acquired a 90 per cent stake in a 519,000-square-foot Amazon distribution centre in Whitby, Ont. from Broccolini last month. Amazon has signed a 15-year lease at the newly built facility.

Source Real Estate News EXchange. Click here to read a full story