According to Altus Group’s first quarter Investment Trend Survey for commercial real estate, investment in the GTA is down 29 per cent to $4.1 billion from Q1 2018, and down 13 per cent from the previous quarter.
In markets like Toronto, Vancouver and Montreal, strong demand for core assets has ensured overall cap rate compression for the four benchmark asset classes, from 5.10 per cent in Q1 2018 to 5.03 per cent in Q1 2019.
Total investments were down for the fifth straight quarter, and deal count was the lowest recorded since Q1 2015. Quality asset supply issues continue, which translated to a decline in overall investment activity.
Demand for these assets has driven Toronto to a year-over-year decline in overall cap rates at 4.25 per cent to 4.15 per cent in Q1 2019.
The land markets accounted for 45 per cent of total investments. Residential land sectors accounted for $1.3 billion or 32 per cent of the total volume, marking an eight per cent increase from the previous quarter.
Land acquisitions remain a significant leader of the GTA market as housing needs persist due to population growth, strong demand, and supply constraints.
Although there is a shortage in land and products, investors remain particularly confident in industrial and office assets.
Cap rates in Toronto for the downtown class “AA” office showed moderate fluctuations throughout the year holding at 4.30 per cent in Q1 2019, while single-tenant industrial continued to fall.
This quarter, the office and industrial sectors each accounted for 19 per cent of total capital flow. The office sector saw an eight per cent increase from the previous quarter, but decreased by 55 per cent compared to the same period last year.
Down nine per cent compared to last quarter, and down three per cent compared to the same period last year, the industrial sector was the most traded asset.
With GTA industrial vacancy rates currently at 0.8 per cent, and with the need for warehouse space, industrial product continues to attract investors as an asset offering long and short-term growth.
The retail sector was the second most active asset class, however, Altus Group’s Investment Trends Survey reports that it was down 34 per cent from the previous quarter.
Overall cap rates for the Tier I Regional Malls sector remained relatively stable throughout the year with a slight year-over-year increase from 4.10 per cent in Q1 2018 to 4.20 per cent in Q1 2019.
The largest drop witnessed this quarter was the apartment sector, which recorded 39 transactions worth $234 million — a decrease of 61 per cent from the previous quarter and 19 per cent from the same period last year.
Altus Group’s survey reports that the persisting housing affordability issue has made housing apartment the most desired and stable assets.
The competitive market — combined with a lack of supply — has resulted in investors seeking opportunities in secondary and tertiary markets.
According to the Investment Trends Survey, in the last three quarters the average cap rates in suburban apartment stocks in Toronto remained unchanged and showed a decline from 3.90 per cent to 3.70 per cent in Q1 2019.