Retail, multifamily and industrial assets are all on the investment shopping list for 2024, survey data from Avison Young reveals. The firm’s recently released cap rate and investment trend report projects more vendors will come to the market this year and prospective purchasers will move from the sidelines as interest rates stabilize and pricing becomes clearer.
Nationally, cap rates climbed an average of 5 basis points (bps) for all retail formats except street-front locations during the fourth quarter of 2023, with other asset classes generally posting sharper upticks — from 10 bps for industrial and downtown Class A office to 15 bps for downtown Class B and suburban office. It’s a trend that Avison Young analysts suggest could provide “more room for real estate premiums” depending on bond rate trajectory, but they also stress the importance of looking deeper than the macro-level numbers.
“Average national cap rates smooth over underlying pricing challenges as market conditions vary considerably between jurisdictions, between property types and by building quality; especially the durability of the rent roll,” they advise.
Findings from the firm’s market sentiment survey show expectations that industrial and retail cap rates will mostly hold steady in the first quarter of 2024. Office caps are anticipated to rise in Vancouver, Toronto, Ottawa and Montreal, but remain steady in Calgary and Edmonton. Ottawa and Calgary are expected to post lower multifamily cap rates, while they remain stable in other major markets.
Private equity funds and private individuals are tapped to be among the most active buyers of all asset types in the coming year, although pension funds are expected to be active acquirers of multifamily and retail properties. More “motivated sellers” are expected across all asset types as owners come to the end of their debt terms and face tighter credit conditions.
The market sentiment survey shows a heavy predisposition to divest office properties, with pension funds and REITs ranked as the most active sellers. However, that’s in the context of what’s currently a “frozen” downtown office market with a paucity of prospective purchasers for the assets institutional players are looking to unload.
“If a deal gets done, this will likely result in a cascade of writedowns at higher cap rates of portfolios,” Avison Young analysts submit. “All eyes are on the cap rates of office transactions in 2024 to set off a series of more transactions as institutional investors re-evaluate their portfolios.”
The benchmark national cap rate for downtown Class A office currently stands at 7.15 per cent, while, within the regional markets, it ranges from a low of 5.6 per cent in Toronto to a high of 8.55 per cent in Calgary.
