Drop in commercial real estate expected
Chinese investors forecast to be a growing force in the market
Investment in commercial real estate is expected to decline for the fourth straight year in 2016 despite the growing presence of Mainland Chinese investors in the marketplace, according to a new forecast.
In a report out Tuesday, provided exclusively to the Financial Post, real estate firm CBRE predicts investment in commercial real estate will shrink to $23.6 billion in 2016 — down from a forecast $24.4 billion in 2015 and $26.1 billion in 2014.
“It’s part of a global trend,” said Ross Moore, director of research for CBRE in Canada, referring to the Chinese investment here. “It’s not like (Canada) is the only place the Chinese are investing in. We saw it in New York, we saw it in London. What was interesting to me is Chinese capital is highly selective. It’s only going to maybe four or five countries. You look at the ties between the countries, you’ve got a large Chinese population in Vancouver and Toronto, so they go with what they know.”
The overseas investment interest comes as leasing activity continues to soften, with CBRE predicting central vacancy rates will rise next year to 11.1 per cent nationally. The national vacancy rate is expected to climb to 10.1 per cent this year after finishing 2014 at 8.5 per cent.
Overall, Moore said “the magic number is $20 billion” for investment, and anything over that is considered a strong year and above the long-term average. He noted that annual investment activity fell as low as $12.5 billion during the global recession last decade.
“It would be a mistake to say ‘yikes what a terrible year,’” said Moore, adding Alberta might be the one part of the country where investment will continue to be slow. “Alberta office will be deadly quiet. Downtown office there is nothing (in terms of sales).
With pension funds and large institutional players holding a lot of the office property in Calgary, there is no reason for them to blink and sell at a lower price. Still, CBRE’s numbers are ugly for the Calgary office market with a vacancy rate of 18.4 per cent forecast for the central core in 2016, up from 9.8 per cent in 2014.
There are some bright spots in Calgary, though. Even with a rising apartment vacancy rate — forecast to be 3.7 per cent in 2016 — multifamily residential investment is as sought after in the oilpatch as it is in much of the country.
“There is a growing disconnect between REIT pricing and the value of the assets they hold,” CBRE said in its report, noting investors in 2016 will be forced to focus more on individual REIT holdings and portfolio performance to differentiate them.
Moore estimates REITs are trading at about 8.5 per cent below their NAV, but he thinks prices haven’t dropped enough that mergers and acquisition activity is going to pick up. “But people are looking at it,” he said.