Canadian Treasurer

August 23, 2011

GTA investment market poised for record year, buoyed by retail sector

TORONTO---The Greater Toronto Area (GTA) commercial real estate investment market has rebounded strongly from the market trough of two years ago. Solid property-market fundamentals and record sale volumes in the retail sector signal the GTA is poised to achieve unprecedented investment results by year-end 2011.

Buyers flush with capital and sellers looking to capitalize on escalating values translated into $4.5 billion worth of commercial real estate assets changing hands in the first half of 2011---matching the previous peak set in the first half of 2007. REITs acquired almost $1.4 billion in assets (30% of total) in the first half of 2011, buying up largely office, retail and multi-residential properties. REITs making headlines included: Artis, CAPREIT, CREIT, H&R, Northwest Healthcare Properties and Primaris, to name a few.

These are some of the key trends noted in Avison Young's Summer 2011 Greater Toronto Area Investment Review, released today. The semi-annual report tracks GTA office, industrial, retail, land and multi-residential property sales transactions greater than $1 million.

"If the exceptional first-half performance is any indication, we are in for a record-breaking year with investment sales pushing past the $10-billion  plateau in the GTA---all driven by the same forces that have been at work since the market began to recover some 18 months ago," comments Bill  Argeropoulos, Vice-President and Director of Research ( Canada) for Avison Young.

Argeropoulos continues: "Unlike 12 to 18 months ago, however, there's simply more product being marketed for sale, and sellers are now more willing than ever to ride the wave of rising property values. Meanwhile, buyers are finally executing on deals, albeit in an even more competitive environment, evident by the increasing number of bids - especially those in excess of   $100 million. Investors are entering the market any way they can - buying an asset or two at a time, or making a big splash like the recent $690-million mega deal between Blackstone Real Estate/Slate Properties and Dundee REIT, a portion of which will be added to the second-half investment tally along with Oxford Properties Group's reported $250-million acquisition of the Metro Toronto Convention Centre complex from Canada  Lands Company."

According to the report, investment sales activity improved by $715 million, or 19%, over the second half of 2010 and by $1 billion(28%) over the first half of 2010. These results contrast with a market trough of $1.4 billion in properties sold in the first six months of 2009.

In the first half of 2011, investors flocked to the retail sector, and it was the only asset class to surpass the $1-billion  mark on its way to a record $1.8-billion  (up 70%) performance. Office ( $935 million, down 6%) and industrial ( $902 million, up 74%) properties were a distant second and third, respectively, followed by multi-residential ( $566 million, up 50%) and land ( $346 million, down 42%).

"The level of activity is evident in the number of assignments that our firm has in the pipeline, not just in   Toronto, but elsewhere," says Robin White, Avison Young's Executive Vice-President, Capital Markets Group. "While trophy assets remain highly contested, vendors of tier-two assets are starting to cash in on properties they purchased in the past 24 to 36 months and, in some cases, are seeing value appreciations of between 20% and 35%."

Adds Avison Young's David Scott,  Mortgage Agent, Capital Markets Group: "The market continues to see strong liquidity from institutional and non-institutional lenders alike."

Scott notes the recent capital-markets turmoil has pushed down Government of   Canada  (GoC) bond yields to record levels with the five-year GoC bond yield at approximately 1.40%, some 70 basis points (bps) lower than yields of one year ago. This drop has, in turn, reduced top-tier financial institution lending rates by about 40 to 50 bps, as lending spreads have widened.  Quotes for conventional five-year mortgage terms now have all-in interest rates with the best-quality loans being in the low-to-mid 3% range.

"We are of the view that the abundance of lower-priced debt will result in further cap-rate compression moving forward," says Scott.



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