Market Commentary

Investment Market Overview

Investment Market Overview
Most participants started the year with the position that it would take a capitalization rate of 10% to pique their interest.  We now have evidence to suggest that cap rates have climbed in some classes, while remaining unchanged in others.

Office capitalization rates for well leased buildings were trading in the 7% range last year.  Some recent trades were in the 8% to 9% range.

Refinancing is now available but with substantially higher spreads, reflecting concerns of both higher risks and limited capital supply. The underlying bank rate has fallen proportionately, so the financing cost to the borrower has remained virtually unchanged.

There has not been much activity on the sales side of the office market. The downtown core has been silenced with respect to sales, with the most visible listing on the market being 155 University Avenue, which as of this writing is being pulled from the market.

The market has made a major shift from value add opportunities to more secure, generally fully leased opportunities, to avert major risk.

Industrial values have remained fairly high as much of the trading has been to user groups. Many of the lower priced sales have occurred in older markets within the limits of Toronto while higher price sales are occurring in suburban markets, such as Mississauga.

Residential land sales have not disappeared as some may have predicted. There have been some substantial sales recorded for high density land in the downtown core. The number of active and potentially active high rise sites is still very high. The limited volume of activity within sales centres is adding years to the potential supply.

The bulk of office buildings are now owned by pension funds, REITs and by other investors who are not over leveraged. The current market pain is different than the 1990s which was due to over leveraging by predominantly private investors utilizing unrealistic expectations of future market rents tied to inflation to justify investment. 

With investment product still very scarce, marginal markets continue to receive attention. Rent proformas are now very tricky to get right with the leasing market shifting daily.
More and more landlords and developers are jumping on the green bandwagon as it gathers momentum.
LEED®, as well as other easier to achieve green standards are now common, although tenants resist paying more for it.