Low yields on industrial and multifamily properties had more investors turning to office, retail and alternative asset classes in the fourth quarter of 2021. CBRE Canada’s newly released overview of cap rates and investment trends charts the greatest quarter-over-quarter cap rate compression in the industrial sector, although the multifamily average remains the lowest nationally.
That follows another quarter of what Paul Morassutti, vice chair, valuation and advisory services with CBRE, terms “exceptionally robust” investment activity. “National volumes are poised to set a new annual record in 2021, surpassing the $50 billion benchmark by a significant margin,” he reports.
Ten of the 13 markets CBRE surveys posted declining cap rates for Class A or B industrial properties during Q4. Nationally, the Class A rate rests at 4.38 per cent, down 19 basis points (bps) from Q3, while a 38 bps decline in the Class B rate pulls it down to 5.25 per cent.
The national average for Class A multifamily high-rise properties ended the quarter at 3.69 per cent. Vancouver and Toronto — the markets with the lowest caps — saw a further drops of 13 bps and 5 bps, respectively, over the quarter. That drives cap rates in Vancouver down to the 2 to 2.75 per cent range with Toronto’s now hovering in the range of 2.65 to 3.75 per cent.
Retail properties are now offering more enticement, CBRE analysts conclude. “In particular, essential service retail assets and properties with residual development potential continue to garner significant interest,” the report notes. “It’s expected that liquidity for retail assets will remain healthy as this newest wave of COVID cases subsides in coming months.”
Nationally, cap rates compressed for power centres, neighbourhood malls and non-anchored strip plazas, dipping to 6.45 per cent, 6.36 per cent and 6.52 per cent, respectively. Drilling down farther, cap rates decreased in at least one retail category in seven of the 13 markets: Calgary, Saskatoon, Winnipeg, London-Windsor, Toronto, Ottawa and Halifax. However, Saskatoon is alone in experiencing downward movement in every retail category.
Office was the one sector where cap rates remained stable, ending Q4 with national averages of 4.88 per cent for downtown Class AA and 6.41 per cent for suburban Class B. “Given that much of the growing optimism for the office sector had been driven by the perceived nearing of return-to-work plans for many occupiers, it remains to be seen what impacts the emergence of the Omicron variant and further lockdowns will have on the sector,” CBRE analysts observe.
