National investment activity in first quarter points to strong rebound for commercial real estate this year

The commercial real estate market is on the upswing in Canada, with increasing transaction volume across most major markets and the continued return of investor confidence following the pandemic-related slowdown in 2020. Despite ongoing restrictions and lockdowns in most regions across Canada persisting into the first quarter of 2021, investment volume rebounded and marked an increase compared to the same time last year. The industrial sector remained among the top-performing asset classes this quarter, alongside both land sectors, compared to the previous year as investors continue to seek out opportunities for future growth and development. Especially in the industrial market, this trend is forecasted to continue throughout the year as industrial availability rates remain tight.

Although the market is now shifting towards recovery and the return to some level of normalcy with growing investor confidence and the progression of vaccine rollouts, the office market is still facing challenges, with transaction volume dropping significantly in Q1 2021 compared to the same quarter last year. Conversations continue to revolve around return-to-office plans, with some companies aiming for a partial return by Fall 2021 and others projecting returns in early 2022. Still, as plans for hybrid office models have yet to be finalized amid continued remote work for the near term at least, a level of uncertainty remains in the office market, contributing to high availability rates and holding back investments in the sector. Overall, the commercial real estate outlook is favourable to start the year off, pointing to signs of climbing momentum moving forward.

National investment volume in Q1 2021 increased 25% compared to Q1 2020, reaching a total of nearly $15.0 billion. Once again, the industrial sector saw robust activity this quarter, with $3.5 billion in volume, marking a 46% increase compared to the same quarter last year, and composing 23% of total transaction volume for the quarter. Land sectors also saw substantial increases this quarter, with ICI land reaching $2.4 billion in value and residential land reaching $3.6 billion – up 49% and 54%, respectively, compared to Q1 2020. Together, these two sectors make up 40% of the total Q1 2021 volume. Multi-family has also seen a rise in momentum this quarter, reaching just under $3.0 billion in volume, increasing 23% compared to the same time last year. With continued pandemic-related impacts on the office market, the sector only saw $822 million in transactions in the first quarter, down 50% compared to the same time last year. Despite lockdowns persisting at the beginning of the year, the retail sector marked a 10% increase in transaction volume compared to Q1 2020, reaching $1.7 billion. Against Q1 2020, all major markets in Canada recorded growing investment volume in the first quarter of this year, aside from Edmonton dropping 45%, Ottawa decreasing slightly by 4%, and Montreal remaining relatively stable, with a drop of 0.4%.

According to Altus Group’s Investment Trends Survey results for Q1 2021, single- and multi-tenant industrial assets sit as the top two preferred product types by investors, followed by industrial land. Investors have indicated an interest in all three asset classes, especially in the Ottawa market area as outlined in the product-market barometer this quarter. With ongoing tight availability rates across the industrial sector in most major markets, burgeoning demand continues to leave industrial assets in a position to grow. Food-anchored retail strip has also remained of interest in Q1 2021, despite losing its spot as the top preferred asset class, which it held for most of 2020. While retail assets still face the brunt of pandemic-related challenges early in 2021, food-anchored retail continues to drive traffic and have strong growth potential. With Vancouver and Toronto sitting as the top two preferred markets by investors, Ottawa and Montreal follow as the third most preferred markets as investors have reached a higher comfort level with current economic conditions and prices, returning some activity to these larger markets. National cap rates in Q1 2021 still mark a year-over-year increase compared to Q1 2020, but again compressed slightly compared to the previous quarter. All markets experienced a drop in rates aside from Edmonton, which saw a slight increase and Ottawa, which saw no change over Q4 2020. Nationally, industrial rates saw the most significant drop both compared to the previous quarter and year-over-year, further reflecting investor interest in industrial assets. As e-commerce sales volume is expected to rise even as we emerge from the pandemic fallout, this trend is likely to continue. Overall, the slow but steady decrease in rates between quarters indicates ongoing market recovery.

As most sectors saw strong performance in the first quarter of 2021, even amid continued pandemic-related lockdowns and restrictions across many regions, the commercial real estate market is poised for continued growth throughout the remainder of the year. Investors remain highly interested in industrial assets with strong demand and tight availability across the sector but are also shifting some preference towards land sectors in order to maximize growth potential. With a more robust vaccine rollout plan coming to fruition in Canada, a level of optimism has returned when it comes to retail assets, and could return for office assets later in the year, as the workforce slowly shifts away from fully remote work and back into offices in some capacity. With the imminent easing of restrictions across most major markets as we move into Q2 2021, the outlook is positive for commercial real estate.

Source Altus Group. Click here to read a full story