{"id":20662,"date":"2022-10-04T10:10:00","date_gmt":"2022-10-04T17:10:00","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=20662"},"modified":"2022-10-02T17:02:52","modified_gmt":"2022-10-03T00:02:52","slug":"commercial-cap-rates-set-to-rise-as-values-reset-following-interest-rate-hikes","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2022\/10\/commercial-cap-rates-set-to-rise-as-values-reset-following-interest-rate-hikes\/","title":{"rendered":"Commercial Cap Rates Set to Rise as Values Reset Following Interest Rate Hikes"},"content":{"rendered":"<p style=\"text-align: justify;\">Metro Vancouver commercial real estate sales were down just 2% in the second quarter versus a year ago, Altus Group data reveals, but recent interest rate hikes by the Bank of Canada could dampen activity in the latter half of the year.<\/p>\n<p style=\"text-align: justify;\">\u201cIt\u2019s pens down,\u201d says Colin Johnston, president of research, valuation and advisory with Altus. \u201cDo you want to buy in this market, knowing that maybe next month you can buy something cheaper? Do you want to sell in this market knowing that you may not get the price that you wanted?\u201d<\/p>\n<p style=\"text-align: justify;\">Johnston believes people are taking stock of the situation, with the result that less capital will be placed this fall while parties wait to see how things shake out.<\/p>\n<p style=\"text-align: justify;\">\u201cWe\u2019ve got this period of price discovery that\u2019s going to happen for a few months,\u201d he said. \u201c[It\u2019s] akin to the early days of the pandemic, where people didn\u2019t know what was going on and it was hard to get some metrics because nothing was trading.\u201d<\/p>\n<p style=\"text-align: justify;\">According to Altus, the uncertainties will deepen in the coming months.<\/p>\n<p style=\"text-align: justify;\">\u201cWith core inflation remaining elevated, ongoing geopolitical volatility and further interest rate hikes from the Bank of Canada continuing to push up financing costs, investor confidence is likely to erode with investment activity in the [Vancouver market] resultantly slowing substantially through the back half of 2022,\u201d it said.<\/p>\n<p style=\"text-align: justify;\">But that wasn\u2019t the case in the second quarter, where $4 billion worth of properties changed hands in 671 transactions. This was a minor decline from $4.1 billion worth of deals in 678 transactions a year earlier.<\/p>\n<p style=\"text-align: justify;\">It added up to a 26 % increase during the first half of the year versus 2021, with nearly $9 billion in assets trading during the period.<\/p>\n<p style=\"text-align: justify;\">Residential land deals led the way, increasing 68% in the second quarter versus a year ago, and 152% in the first half of the year. Retail and industrial assets also performed well, with retail sales up 29% in the quarter while industrial sales increased 4%.<\/p>\n<p style=\"text-align: justify;\">While industrial activity slowed, it was due to a lack of product rather than a lack of demand.<\/p>\n<p style=\"text-align: justify;\">\u201cIndustrial assets were most desired by investors with more than $1.65 billion disbursed for 292 properties in the first half of 2022,\u201d according to an Altus Group analysis.<\/p>\n<p style=\"text-align: justify;\">Demand is driven by strong rental growth and a shift in institutional allocations away from retail and office assets. Metro Vancouver office assets saw a 32% drop in sales value in the second quarter, and acceleration from the first quarter for a total decline in the period of 14%.<\/p>\n<p style=\"text-align: justify;\">\u201cOngoing discussions around hybrid work and a slow and cautious implementation of return-to-office mandates continue to project an aura of uncertainty around office assets in the estimation of some investors, which is applying a hindering effect on transactional momentum,\u201d according to Altus Group.<\/p>\n<p style=\"text-align: justify;\">Suburban office space is outperforming more central office properties, according to Johnston, because people are returning to offices but avoiding commutes where possible. The closer a workspace is to where workers live, the better for occupancy and in turn market value.<\/p>\n<p style=\"text-align: justify;\">But he expects uncertainties around what those values might be until interest rates, occupancies and the economic environment as a whole stabilizes.<\/p>\n<p style=\"text-align: justify;\">\u201cI wouldn\u2019t be surprised to see, November, December, a few deals happening, but in the next six weeks I don\u2019t expect to see a lot of activity,\u201d he said. \u201cI think the fall will be quiet, but the real estate market continues to surprise me with its ability to rebound and I do know that people want to place capital.\u201d<\/p>\n<p style=\"text-align: justify;\">CBRE Ltd.\u2019s recent second-quarter cap rate report indicated little change year-to-date on cap rates, but forecasted increases for later this year.<\/p>\n<p style=\"text-align: justify;\">\u201cVancouver is well positioned to outperform through this transitional economic period,\u201d Jim Szabo reported. \u201cDespite this strong foundation, we expect cap rates will begin trending towards the high side of our ranges, and likely beyond, should interest rates continue to rise.\u201d<\/p>\n<p style=\"text-align: justify;\">The more recent analysis by Altus Group, based on a Canada-wide survey of 126 commercial real estate leaders as well as recent sales data, reinforces this prognosis.<\/p>\n<p style=\"text-align: justify;\">60% of survey respondents \u201cindicated that they had adjusted both their cap rate and internal rate of return (IRR) expectations as a result of interest rate increases by the Bank of Canada.\u201d<\/p>\n<p style=\"text-align: justify;\">\u201cCapitalization rates and internal rates of return are going to have to increase, just because between 2017 and 2022 they fell consistently. So they just have to go up,\u201d Johnston said.<\/p>\n<p style=\"text-align: justify;\"><a href=\"https:\/\/biv.com\/article\/2022\/09\/vancouver-investment-deals-strong-q2-headwinds-increase\" target=\"_blank\" rel=\"noopener\">Vancouver<\/a> Investment Deals Strong in Q2 as Headwinds Increase by Peter Mitham | Western Investor | BIV<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Metro Vancouver commercial real estate sales were down just 2% in the second quarter versus a year ago, Altus Group data reveals, but recent interest rate hikes by the Bank &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2022\/10\/commercial-cap-rates-set-to-rise-as-values-reset-following-interest-rate-hikes\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[],"class_list":["post-20662","post","type-post","status-publish","format-standard","hentry","category-market-updates"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Commercial Cap Rates Set to Rise as Values Reset Following Interest Rate Hikes &#8226; 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