Canada’s investment market remains hot, highlighted by record activity in the Industrial sector, says JLL report

TORONTO, March 7, 2019 – Today, JLL Canada has released its Canada Capital Markets Insight – Q4 2018 report and the results are in. According to the report, Canada saw its second-highest year of total real estate investment in 2018, with over $34 billion in overall trades. While economic fundamentals remain strong, especially in Canada’s largest urban areas, there are mounting risks: commodity prices are low, household indebtedness is high, the yield curve is flattening, and overall economic growth rates have slowed. The report specifies that investors are responding by doubling down on core markets and core assets, and this is driving cap rates down across the country for multiple asset types.

Taking a closer look at the major commercial real estate sectors in Canada, industrial was the top selling asset with over $8 billion in sales volume. This is due to retailers “right-sizing” their supply chain, trading retail space for more distribution space that accommodates their growing e-commerce platforms.

Meanwhile, multifamily investors are seeking more affordably priced assets where there is an opportunity to enhance net operating income by upgrading units and adding amenities. Office vacancies are low in all major markets, except the prairies. This has tenants considering their alternatives: flex spaces, co-working suites, and shorter-term leases. Retail centres, in turn, are seeing massive makeovers as landlords balance proper tenant mix with a more holistic experience. The report also notes that hotel Revenue Per Available Room (RevPAR) was up in 2018 across nearly all major markets.

“We’re seeing capital flows concentrating in Canada’s largest cities, particularly in the multifamily, office and industrial asset classes,” comments Matt Picken, Managing Director and Head of Capital Markets for JLL Canada. “Not surprisingly, the fundamentals of all three of these sectors are as robust as ever, with occupancy levels and rents at near record highs.”

Toronto led Canada with $13.2 billion in total sales, including the country’s top two transactions of 2018: Brookfield’s $850-million sale of a 50% stake in Bay Adelaide Centre to Dadco Investments, and Bombardier’s $825-million sale of Downsview Airport to PSP Investments.

Multifamily continues to be the hottest asset in Montreal, surpassing $1.1 billion in total sales. Investor demand far outpaces supply, with vacancy rates falling sharply over the past 3 years.

In contrast, investment and development activity on the West Coast is slowing down. Rising construction costs, municipal elections, and global geopolitical factors were responsible for a 40% drop in investment volumes in the Greater Vancouver Area since 2017’s record-breaking year.

Investment conditions in Calgary have lagged the other major markets. The difficulties brought about by price and capacity issues in the oil sector have hit Calgary harder than any other market. Rising vacancy has investors in a holding pattern for the time being.

In Edmonton, however, it is a different story. The Greater Edmonton Area saw investment volumes reach a five-year high with over $2.64 billion, boosted by the sale of Edmonton Tower from Katz Group and ONE Properties to AIMco for $400 million.

Ottawa saw about $1.8 billion in real estate investments in 2018, the second-highest year on record. Tech companies are driving tenant demand both in the office and industrial sectors.

While the Canadian economy continues its generally stable performance, JLL also comments on the global capital movements and Canadian investment activity across the border.

“Canadian capital is making aggressive moves internationally,” notes Picken. “Groups such as Brookfield and Oxford alone accounted for over CAD $45 billion in portfolio acquisitions abroad, mainly in the U.S., Brazil and Australia. In turn, many of these same investors have reduced their positions back home, seeing an opportunity to cull their portfolios while pricing and liquidity remain high.”

JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution.