Commercial real estate leaders begin to express caution

Though still in positive territory, the third quarter Current Canadian Real Estate Sentiment Index has dropped to its lowest level since 2009, as Canada’s commercial real estate leaders express caution and less optimism today than a year ago in regard to the broader Canadian economy and the prospects for sustained real growth. Sentiment stemming from an unstable international economy has Canadian senior executives taking cautious approaches and wondering if Canada will be next to face financial consequences.

The Canadian Real Estate Sentiment Survey, produced by the Real Property Association of Canada (REALpac) and FPL Advisory Group, measures the current and future outlook of Canada’s top commercial real estate executives on overall real estate conditions, real estate asset values, and availability of capital. A broad spectrum of owners and asset managers, financial services providers, building operators and related service providers across Canada are surveyed for this comprehensive report, which includes both qualitative and quantitative findings.

The Q3 2012 survey results show the Overall Real Estate Sentiment Index achieved a ranking 58, down from 63 in Q2, and 66 a year ago. Scores above 50 reflect positive trends and those below indicate negative trends in questions ranked between 0 and 100. The third quarter marked the twelfth straight quarter in which the overall ranking has been above 50.

This quarter, the Current Index is at 60, down from 66 in the second quarter and 64 in Q1. The Future Index also dropped to 56 from 61 in Q2 2012, and in fact, is one of the lowest response rankings since REALpac and FPL began publishing the Index in Q3 2009. The Q3 2012 survey results and interviews with leading industry executives highlight the belief that current commercial real estate market conditions will continue in a balanced and orderly fashion. However, the sentiment expressed was one of caution due to global economic uncertainty. Even as the market begins to plateau, general sentiment is still positive as respondents continue to note solid market conditions. Markets are liquid and healthy, capital is available and well-priced, and the low interest rate environment and aggressive pricing of capital has resulted in a lot of activity in the market.

Capitalization rates have reached extremely low levels and many respondents believe that they may have finally bottomed. Real estate is perceived as a relatively safe investment and given the low interest rates environment investors are driving demand for quality assets.

Though some banks and institutional lenders are looking at tightening their debt requirements and becoming more cautious with their lending guidelines, there continues to be an abundance of debt capital available at low interest rates. One industry CEO indicated that while “debt is very cheap … people are still forced to put up equity and make disciplined decisions”.

Industry leaders surveyed for the Q3 Index noted the abundance of equity capital. Allocations to real estate by major pension funds continue to be significant and are rising. One executive surveyed captured the sentiments of a majority of others in saying “Too many large players are chasing too few quality assets with lots of money”.

As REALpac’s 2012 Policy Briefing outlines, the federal government could increase sentiment by finalizing REIT legislation, originally announced on December 16, 2011, thereby instilling confidence into one of Canada’s strongest industries throughout the economic downturn.

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