Cap rates opened up and investment activity slowed across every Canadian property sector during the second quarter of 2022. CBRE’s newly released quarterly overview reports both the highest national average cap rate since the pre-pandemic period and the tightest cap rate spread since the global financial crisis in 2007. The latter margin of 244 basis points (bps) between the cap rate and 10-year bond yield is 255 bps narrower than it was two years ago.
“While top tier assets in the best performing sectors — namely industrial, multifamily, and necessity-based retail — are continuing to garner interest, it’s expected that overall activity will remain muted until later in the year,” projects Paul Morassutti, CBRE’s vice chair, valuation and advisory services.
Rising inflation and unsettling world events played into both investor and lender decision-making this spring. “Coming out of a historically low interest rate realm, those requiring debt saw a continued material increase in the cost of capital with diminished loan proceeds and valuations,” observes Carmin Di Fiore, CBRE’s executive vice president, debt and structured finance.
Nationally, the average cap rate for downtown class AA office is pegged at 5.21 per cent. The average industrial class A cap rate is 4.55 per cent, marking the first quarter of decompression since the fall of 2013, and the national average cap rate for multifamily class A high-rise stands at 3.83 per cent. Cap rates in Vancouver, Toronto, Montreal and Ottawa are generally below the national average for most property categories.
Vancouver’s office, retail and industrial cap rates actually held steady during Q2. Multifamily cap rates expanded somewhat, but remain the lowest in North America, in the range of 2.25 to 3 per cent for class A high rise buildings. “Given the strength of market at this time, Vancouver is well-positioned to outperform through this transitional economic period,” asserts Jim Szabo, vice chair with CBRE’s national investment team.
Cap rates stayed flat for most categories of retail in Toronto, while edging up for office, industrial and multifamily properties. CBRE analysts express confidence in continued strong investor appetite for trophy assets. Elsewhere, industrial and multifamily are deemed the consistently favoured assets.
“While cap rate guidances have increased, leasing fundamentals for the industrial asset class remain exceptionally strong and the sector is well positioned relative to other commercial real estate asset classes. Assets offering rental upside through shorter WALTs (weighted average lease terms) are outperforming those with long-term leases and limited upside opportunities,” the quarterly overview notes.
Meanwhile, in the multifamily sector, David Montressor, executive vice president of CBRE’s national apartment group, maintains: “a shortage of large-scale acquisition opportunities remains the primary impediment to increased activity levels.”
