Dropping oil prices negatively impacting Canadian real estate returns: Colliers

The recent and substantial drop in oil prices, while welcome news for drivers at the gas pumps, is having an adverse and negative impact on Alberta’s real estate market, only beginning to be realized, yet Canada remains one of the world’s safest havens for real estate investment, according to the Colliers International Q1-2015 Canadian Real Estate Capitalization Rate Report.

The Report surveys investors in the top nine major markets across Canada each quarter regarding current market conditions and Q1-2015 showed that despite the general stability in overall real estate returns, there were some notable changes within the last quarter. Other than Alberta, the markets are stabilizing throughout Canada and the country remains an attractive location for global real estate investment.

A leading indicator of market health is the capitalization rate, which measures the rate of income return on any real estate investment, applied as a percentage. A small differential in this rate of return can translate into a large difference in real estate value. According to Colliers Q1-2015 Cap Rate Report, Canada is currently seeing overall stability with respect to returns on real estate.  However, investors are increasingly becoming more cautious as the conditions with regard to world oil prices continue at current levels, potentially creating upward pressure on capitalizations rates as the year progresses.

Nowhere in the country are the dropping oils prices being felt more strongly than in Alberta, the Canadian province most acutely impacted by the rise and fall of international oil inventory and prices.

According to this Colliers report, Canadian oil producers will be hardest hit, losing an estimated (US) $40 billion in revenues in 2015, taking a toll on business investment and corporate profits, with some industry players deciding to cut their capital expenditure budgets this year.

Alberta’s real estate markets most notably impacted in the short term are the office markets in Calgary and Edmonton, and in the industrial market in Edmonton.

Calgary, AB

“The downtown Calgary office market has already witnessed an increase in vacancy to 11 per cent in Q1-2015, up from 8.52 per cent in just the last quarter and 8.13 per cent year-over-year,” said Chris Marlyn of Colliers International.

“The dramatic decrease in oil prices will cause unemployment, and a good portion of the increase in unemployment will be felt in Calgary, which in turn will create an increase in the amount of available office space as oil companies with fewer employees simply need less office space,” he said.

Edmonton, AB

While historically there is a low correlation between oil prices and Edmonton office market absorption, current oil market conditions will result in a reduced demand for the products and services energy related industries operating in Edmonton require.

Vancouver and Victoria, BC

In Vancouver, capitalization continues to compress to lower levels than anticipated and substantial demand from a wide variety of investors, in particular from mainland China, has combined to drive returns and yields to record lows. The Greater Victoria investment market has experienced a general compression in overall cap rates, partly due to rising demand for well-located and maintained assets, with all-time low interest rates and ample availability of financing opportunities continuing to drive demand.

Winnipeg, MN

Winnipeg is coming off a record year for commercial sales in 2014 with investment sales on properties in excess of $1 million topping $969 million. Looking forward in 2015, investment sales are not expected to reach 2014 levels unless some substantial assets are traded.

The Colliers Report shows the eastern half of Canada enjoying more stable real estate market conditions, with one benefit of the current market conditions being felt by Canada’s trade sector, centred largely in Ontario and Québec.

Toronto, ON

The Toronto real estate market is projected by Colliers International to remain active, though likely less robust than in 2014. “Toronto has become an attractive and safe global destination for real estate investments,” said Marlyn of Colliers International. “There is currently an abundance of available institutional and foreign capital pursuing limited investment grade product, and off-market transactions are continuing to grow in frequency.”

Montréal, PQ

Montréal’s real estate development continues to be driven by significant new condominium construction, although there are two new substantial office developments underway. The Colliers International forecast for the balance of 2015 is for a continuation of stable market conditions.

Ottawa, ON

The market in Canada’s capital continues to struggle with high office space vacancy and this will be the wildcard in the office market continuing through 2015. Limited supply of industrial land throughout the National Capital Region will continue to drive down capitalization rates found for this asset class.

Halifax, NS

The Halifax office market is expected to fluctuate before eventually stabilizing throughout 2015. Given its prominent position as a major east coast industrial centre, new ship building contracts will likely result in an increase in rental rates in 2015 throughout the industrial asset class.

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