Commercial real estate leaders remain modestly optimistic

Canada’s commercial real estate leaders remain positive about the health of the sector, but see growth tapering off as the year progresses, according to the Second Quarter 2012 Canadian Real Estate Sentiment Survey produced by the Real Property Association of Canada (REALpac) and FPL Advisory Group.

The quarterly survey 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 Q2 2012 survey released today shows the Overall Real Estate Sentiment Index achieved a ranking of 63, up slightly from 61 in Q1, but down from 71 a year ago. While respondents have seen steady improvements in market conditions, many expect growth to stabilize or slow in the coming year. Scores above 50 reflect positive trends and those below indicate negative trends in questions ranked between 0 and 100. The second quarter marked the eleventh straight quarter in which the overall ranking has been above 50, reflecting the consistently positive outlook of respondents.

The Current Index came in at 66, up from 64 in the first quarter – reflecting more robust economic growth in the first half of 2012. The Future Index also edged up to 61 from 58, but is still down from 69 a year ago. Even though many of the surveyed executives expressed concern about how much room is left for improvement, the majority do not expect drastic changes in the near term. Rather, a more modest positive outlook for the rest of 2012 was a consensus finding.

“What’s interesting about the survey results is that they show how confident Canada’s commercial real estate leaders remain about market conditions in the face of continued global economic uncertainty,” said Paul Morse, CEO, REALpac. “Even though some executives expect a slowing or pause in activity, their outlook remains positive, and improving equity availability is another vote of confidence for future growth.”

Asset prices continued to reflect high demand for commercial real estate, with 91 per cent of respondents reporting improved values over last year. Yet 54 per cent of executives expected pricing to level in the coming year and 37 per cent saw only a modest increase in values going forward. One executive noted that this period of cap-rate compression has been “backed by both availability of debt financing and equity capital.”

Debt capital continued to build on the increased availability seen throughout 2011. Slightly less than half of the survey respondents reported increases in debt availability over a year ago; while a mere two per cent reported a slight decline. As an executive noted, “There appears to be ample capital for quality products, almost an endless supply if the asset class and quality is good enough.” However, a growing group of surveyed leaders (72 per cent) took a neutral stance on debt availability going forward.

Equity capital availability saw an even stronger improvement than that of debt, although it had been lagging debt in recent quarters. 69 per cent of those surveyed reported increased equity availability over the trailing year. Even though half expected availability to remain about the same for the year ahead, this is still beginning to excite many market leaders. As one leader commented, “Equity is plentiful; whether it’s institutions or individuals, there is a demand to be in real estate.”

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