Greater Toronto Area investment market poised for a record year, buoyed by a stellar first-half performance in the retail sector

The Greater Toronto Area (GTA) commercial real estate investment market has rebounded strongly from the market trough of two years ago. Solid property-market fundamentals and record sale volumes in the retail sector signal the GTA is poised to achieve unprecedented investment results by year-end 2011.

Buyers flush with capital and sellers looking to capitalize on escalating values translated into $4.5 billion worth of commercial real estate assets changing hands in the first half of 2011 – matching the previous peak set in the first half of 2007. REITs acquired almost $1.4 billion in assets (30 per cent of total) in the first half of 2011, buying up largely office, retail and multi-residential properties. REITs making headlines included: Artis, CAPREIT, CREIT, H&R, Northwest Healthcare Properties and Primaris, to name a few.

These are some of the key trends noted in Avison Young’s Summer 2011 Greater Toronto Area Investment Review. The semi-annual report tracks GTA office, industrial, retail, land and multi-residential property sales transactions greater than $1 million.

“If the exceptional first-half performance is any indication, we are in for a record-breaking year with investment sales pushing past the $10-billion plateau in the GTA – all driven by the same forces that have been at work since the market began to recover some 18 months ago,” comments Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young.

Argeropoulos continues: “Unlike 12 to 18 months ago, however, there’s simply more product being marketed for sale, and sellers are now more willing than ever to ride the wave of rising property values. Meanwhile, buyers are finally executing on deals, albeit in an even more competitive environment, evident by the increasing number of bids – especially those in excess of $100 million. Investors are entering the market any way they can – buying an asset or two at a time, or making a big splash like the recent $690-million mega deal between Blackstone Real Estate/Slate Properties and Dundee REIT, a portion of which will be added to the second-half investment tally along with Oxford Properties Group’s reported $250-million acquisition of the Metro Toronto Convention Centre complex from Canada Lands Company.”

According to the report, investment sales activity improved by $715 million, or 19 per cent, over the second half of 2010 and by $1 billion (28 per cent) over the first half of 2010. These results contrast with a market trough of $1.4 billion in properties sold in the first six months of 2009.

In the first half of 2011, investors flocked to the retail sector, and it was the only asset class to surpass the $1-billion mark on its way to a record $1.8-billion (up 70 per cent) performance. Office ($935 million, down 6 per cent) and industrial ($902 million, up 74 per cent) properties were a distant second and third, respectively, followed by multi-residential ($566 million, up 50 per cent) and land ($346 million, down 42 per cent).

“The level of activity is evident in the number of assignments that our firm has in the pipeline, not just in Toronto, but elsewhere,” says Robin White, Avison Young’s Executive Vice-President, Capital Markets Group. “While trophy assets remain highly contested, vendors of tier-two assets are starting to cash in on properties they purchased in the past 24 to 36 months and, in some cases, are seeing value appreciations of between 20 per cent and 35 per cent.”

Adds Avison Young’s David Scott, Mortgage Agent, Capital Markets Group: “The market continues to see strong liquidity from institutional and non-institutional lenders alike.”

Scott notes the recent capital-markets turmoil has pushed down Government of Canada (GoC) bond yields to record levels with the five-year GoC bond yield at approximately 1.40 per cent, some 70 basis points (bps) lower than yields of one year ago. This drop has, in turn, reduced top-tier financial institution lending rates by about 40 to 50 bps, as lending spreads have widened.  Quotes for conventional five-year mortgage terms now have all-in interest rates with the best-quality loans being in the low-to-mid 3 per cent range.

“We are of the view that the abundance of lower-priced debt will result in further cap-rate compression moving forward,” says Scott.

Sector Investment Review Highlights:

Office Office property sales amounted to almost $935 million in the first half of 2011, capturing 21 per cent of overall GTA investment volume. Though office sales activity increased by $225 million, or 32 per cent (18 per cent market share), over the second half of 2010, it is below the $992 million (28 per cent market share) that sold in the first half of 2010  – a year-over-year decline of 6 per cent.

Land While investment volume of ICI land in both the first half and second half of 2010 was well over $500 million, sales activity in the first half of 2011 dropped to $346 million – a first-half low. In all, the land sector posted the poorest year-over-year performance – a drop of 42 per cent.  Lower volumes are attributed to inflated vendor pricing expectations. As a result, land’s share of total GTA investment volume over the first half of 2011 was only 8 per cent, down from 14 per cent and 17 per cent in the second and first halves of 2010, respectively.

Retail A record $1.8 billion changed hands between January 1 and June 30, 2011, accounting for 40 per cent of the total investment volume in the GTA. This $1.8 billion also represented an impressive 70 per cent increase in sales volume over the same period in 2010 and a 77 per cent rise since the second half of 2010. By comparison, $2.1 billion worth of retail assets sold in all of 2010.

Multi-Residential The multi-residential sector made a comeback in the first six months of 2011, recording its best first-half since 2004 ($898 million). Over the first half of 2011, total sales amounted to $565 million, a 30 per cent increase over the second half of 2010 ($434 million) and a 50 per cent jump over first-half 2010 ($377 million). Market share improved marginally, climbing from 11 per cent to 12 per cent over the past year.

Industrial A total of $902 million (20 per cent market share) worth of industrial properties changed hands in the first half of 2011. This was not only the sector’s best first-half since 2008 ($919 million), but the industrial sector posted the biggest year-over-year sales growth (74 per cent), outpacing even the hot retail sector (70 per cent).

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