C O L L I E R S I N T E R N AT I O N A L
2009 Capitalization Rate Report
SECOND QUARTER | 2009
NATIONAL OFFICE BAROMETER
2009 2009 Q1 Q2 VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE
Colliers International’s Q1 2009 Capitalization Rate Report pondered “Where is the Bottom?” At that time, we reported that the market was still searching for a bottom, and that before a recovery could begin, key factors had to occur: debt capital needed to increase; confidence in stock markets needed to be restored; REIT and public company unit prices needed to show signs of recovery; and the denominator effect (the notion that large institutional owners would not liquidate assets at discounts in order to re-align asset mix) needed to be dispelled. During the past quarter, there has been a lot of talk about “economic green shoots.” Translated, is the end of this recession near with a classic V- or U-shaped recovery? Or are these green shoots we hear so much about a false harbinger, with a W-shaped (or double dipped) recovery a more realistic result? A growing camp of observers sees the latter occurring, particularly as government stimulus spending wanes and interest rates begin to rise. Bond yields have been rising and are widely predicted to continue in that direction with concerns mounting that we could be heading into an inflationary environment. On the positive side, debt availability is slowly increasing, albeit at a higher cost. REIT prices have vastly improved, although we still have a way to go. Additionally, there has not been a fire sale of prime institutional assets in this country. Canadian REITs have greatly curtailed new acquisitions, though some of the larger REITs are still in acquisition mode. Many of these acquisitions are for strategic purposes or represent opportunities to enter markets that were previously very difficult to access. Another class of investor is the German open market fund. While they are yet to be a proven participant in most secondary markets, they have been very active in new acquisitions in primary centres such as Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal. For example, Dekabank recently acquired the Bental V complex in Vancouver, a prime Canadian office asset. Canada is still considered a safe haven for international investors, and cap rates for high quality assets in this country have proven to be very resilient to general deterioration of broad market conditions. As the year progresses, we expect continued interest in good quality assets from these funds.Their participation is reinforcing value multiples in a time where the market is characterized by uncertainty. Picking up from where we left off at end of Q1 2009, Colliers International sees signs of the market stabilizing. In addition, capitalization rate support is slowly being established. Results from this quarter’s survey demonstrate stability in commercial real estate cap rates in most markets when compared with our Q1 2009 report. There are indeed “green shoots” evident, but we also believe there is real risk of a W-shaped recovery. The primary concern is rising interest rate risk that will undoubtedly result in further uncertainty as we head toward year-end.
ECONOMIC INDICATORS
• The Canadian unemployment rate rose by 0.4 percentage points to 8.4%, the highest rate in 11 years. While there were pronounced losses in Ontario in May, employment actually increased in Manitoba, Nova Scotia and Saskatchewan, while there was little change in all other provinces. • Is the worst of the recession over? The unexpected addition of almost 36,000 new jobs to the Canadian economy in April, a surging dollar and rising markets, might mean the worst of the recession is past us, say economists. • The value of building permits in Canada surpassed the $5-billion mark for the first time since October. StatsCan reports the 14.8% increase in May over April is mostly due to permits issued for multi-family dwellings in Ontario and institutional permits in Alberta and Ontario. In the non-residential sector, the value of permits rose 15.3% to $2.4 billion following a 12.9% decrease in April.
Sources: Conference Board of Canada, Metropolitan Outlook Economic Forecast Spring 2009; Statistics Canada; Ottawa Sun
www.colliers.com
Our Knowledge is your Property ®
Cap Rate Report | Second Quarter | 2009
DOWNTOWN OFFICE MARKET
Halifax Moncton Montreal Toronto Winnipeg Saskatoon Calgary Edmonton Vancouver Victoria AA N/A N/A to 7.75% to 7.25% N/A N/A to 7.50% to 7.25% to 6.50% to 7.00% 7.00% 8.00% 7.50% 7.25% 7.25% 7.00% 7.25% 7.00% 6.25% 6.50% A to to to to to to to to to to 7.75% 8.50% 8.25% 7.75% 7.75% 7.50% 7.75% 7.50% 6.75% 7.00% 7.75% 8.50% 8.00% 8.00% 8.00% 7.75% 8.00% 7.50% 6.75% 7.25% B to to to to to to to to to to 8.50% 9.00% 9.00% 8.75% 8.50% 8.25% 8.50% 8.00% 7.50% 7.50%
6.75% 6.75%
7.00% 6.75% 6.00% 6.50%
SUBURBAN OFFICE MARKET
Halifax Moncton Montreal Toronto Winnipeg Saskatoon Calgary Edmonton Vancouver Victoria 7.75% 8.25% 7.50% 7.50% A to 8.50% to 8.75% to 8.50% to 8.25% N/A N/A to 8.50% to 8.00% to 7.50% to 6.75% 8.25% 8.50% 8.50% 8.50% 7.50% 7.75% 8.50% 8.00% 7.50% 7.50% B to to to to to to to to to to 9.00% 9.00% 9.25% 9.50% 8.00% 8.00% 9.00% 8.50% 8.00% 8.00%
8.00% 7.50% 6.75% 6.50%
MULTI-FAMILY MARKET Halifax Moncton Montreal Toronto Winnipeg Saskatoon Calgary Edmonton Vancouver Victoria Downtown High Rise 6.25% to 7.00% 7.50% to 7.75% 6.50% to 7.50% 5.75% to 6.25% 5.50% to 6.25% 6.25% to 6.75% 5.75% to 6.25% 6.00% to 6.50% 5.00% to 5.50% 5.00% to 5.50% Suburban High Rise 7.00% to 7.75% 7.75% to 8.00% 7.00% to 7.50% 5.75% to 6.50% 5.50% to 6.25% 6.50% to 6.75% 5.75% to 6.25% 6.50% to 7.00% 5.50% to 6.00% 5.00% to 5.50% Suburban Low Rise 7.25% to 8.25% 8.00% to 8.25% 7.50% to 8.50% 6.00% to 6.50% 5.50% to 6.25% 6.75% to 7.00% 6.25% to 6.75% 6.75% to 7.25% 6.25% to 7.25% 5.00% to 5.50%
2
COLLIERS MCCLOCKLIN
Cap Rate Report | Second Quarter | 2009
INDUSTRIAL MARKET
Halifax Moncton Montreal Toronto Winnipeg Saskatoon Calgary Edmonton Vancouver Victoria Multi-Tenant A 8.00% to 8.75% 8.75% to 9.25% 8.00% to 9.00% 7.50% to 8.25% 7.00% to 7.50% 7.50% to 7.75% 7.75% to 8.25% 7.50% to 8.00% 6.50% to 7.00% 7.00% to 7.50% Multi-Tenant B 8.50% to 9.00% 9.00% to 9.50% 8.50% to 9.50% 8.00% to 8.75% 7.75% to 8.25% 8.25% to 8.50% 8.00% to 8.50% 8.25% to 8.75% 6.75% to 7.50% 7.00% to 8.00% Single Tenant A 7.75% to 8.50% 8.25% to 8.75% 7.25% to 8.25% 7.25% to 8.00% 7.50% to 8.00% 7.75% to 8.00% 7.75% to 8.25% 7.50% to 8.00% 6.25% to 7.00% 7.00% to 7.50% Single Tenant B 8.75% to 9.25% 9.00% to 9.50% 8.50% to 9.50% 8.00% to 9.00% 7.75% to 8.50% 8.25% to 8.50% 8.00% to 8.50% 8.25% to 8.75% 6.75% to 7.50% 7.00% to 8.00%
RETAIL MARKET
Regional Mall N/A N/A 7.00% to 7.50% 6.75% to 7.25% 7.00% to 7.50% 6.75% to 7.25% 7.00% to 7.50% 6.50% to 7.00% 6.25% to 6.75% 6.50% to 7.00% Power or Lifestyle Ctr 7.50% to 8.25% 7.75% to 8.50% 7.00% to 7.50% 7.50% to 8.50% 6.75% to 7.25% 6.75% to 7.25% 7.50% to 8.00% 7.00% to 7.25% 6.75% to 7.25% 6.50% to 7.00% Community Mall 8.50% to 9.25% 9.00% to 9.75% 8.00% to 9.00% 8.00% to 8.75% 7.75% to 8.50% 7.25% to 7.75% 7.75% to 8.25% 7.25% to 7.75% 7.25% to 8.00% 7.00% to 8.00% Food-Anchored Strip Plaza 8.25% to 9.00% 8.50% to 9.25% 7.50% to 8.50% 7.75% to 8.50% 7.50% to 8.25% 7.25% to 7.75% 7.50% to 8.00% 7.00% to 7.50% 6.50% to 7.00% 6.75% to 7.50% Small Box (stand alone) 7.75% to 8.25% 7.75% to 8.25% 7.75% to 8.50% 8.00% to 8.50% 7.50% to 8.00% 7.75% to 8.00% 7.50% to 8.00% 7.25% to 7.75% 7.00% to 7.50% 7.50% to 8.00%
Halifax Moncton Montreal Toronto Winnipeg Saskatoon Calgary Edmonton Vancouver Victoria
HOTEL MARKETS
Based on data available through the second quarter, it appears that transaction volume is down almost 75% when compared to Q2 2008. Given this lack of data, it is hard to draw meaningful conclusions on changes in cap rate parameters. While there have been far fewer receiverships and foreclosures in Canada than the US this year, the variety of sellers bringing assets to market are doing so for one of two reasons. First, some institutions and REITs are paring down their portfolios by selling non-core assets—typically in secondary and tertiary markets. These sales are motivated by a need to de-leverage the company’s portfolio. The second type of transaction that we are seeing is the sale of iconic “city centre” hotels. These are not forced sales, and these sellers are only willing to complete a transaction under the right circumstances. It would appear that these sellers are looking to capitalize on the “flight to quality”, but will only do so under the right conditions. Given this data, although we are in a period of highly volatile operating performance (declining occupancy and ADR), it is hard to find any consistency or trends in the reported hotel sales so far this year.
COLLIERS MCCLOCKLIN
3
Cap Rate Report | Second Quarter | 2009
BENCHMARK DEFINITIONS
APARTMENT
A Building: Concrete construction. Well maintained with no deferred capital expense. Age is between 0 and 15 years. Good downtown location. B Building: Generally wood frame construction generally. Well maintained with minor deferred capital expense. Age is between 20 and 40 years. Average quality suburban location.
294 OFFICES IN 61 COUNTRIES
RETAIL
Food Anchored Strip: Ten to 15 years old; major chain supermarket; CRU tenants blend of national, regional and local tenants. Mature residential district. Community Mall: Twenty years old; 150,000 to 250,000 SF. Mix of national and local tenants. Anchored by a national supermarket and department store. Located in a mature area. Regional Mall: Renovated in past ten years. 300,000 to 600,000 SF. Dominant only locally. Two anchor tenants. Power Centre: Dominant for the region. Major arterial position. Five to ten years old. Ten to 15 year leases. Strong covenant, national tenants.
USA 94 Canada 22 Latin America 17 Asia Pacific 64 Europe, Middle East, Africa 97 $1.6 billion in global revenue 1,1 billion square feet under management 12,700 professionals
INDUSTRIAL
Single Tenant: Steel frame/pre-cast concrete/tilt-up panel; 50,000 to 100,000 SF with 10% office space; modern building with average lease duration of 10 years. Investment grade covenant strength. Years 1 to 5 at market rent with 15% rental growth by Year 6. Multi Tenant: Steel frame/pre-cast concrete/tilt-up panel; 25,000 to 100,000 SF with 10-20% office space; modern building with average lease duration of 6 - 10 years. Investment grade covenant strength. Years 1 to 5 at market rent with 15% rent growth by Year 6.
CANADIAN OFFICES
• HALIFAX • MONCTON • MONTREAL (2) • OTTAWA • KITCHENER • TORONTO (2) • WINNIPEG • REGINA • SASKATOON • EDMONTON • CALGARY • VANCOUVER • VICTORIA Colliers McClocklin Real Estate Corp. 728 Spadina Crescent East Saskatoon, Saskatchewan S7K 4H7 Direct: 306.664.4433 Fax: 306.664.1068 Tom McClocklin, B.Comm. CA Managing Director Tom.McClocklin@colliers.com
This report has been prepared by Colliers International (Atlantic) Realty Advisors Inc. for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information.
OTHER DEFINITIONS
Overall Capitalization Rate: Capitalization is the process of converting income (as defined) from a property into an expression of capital value. The capitalization rate is the mathematical relationship between the income and the capital value. The Overall Capitalization Rate is used in the Direct Capitalization method, expressing the relationship between the current year’s income and the value of the property. The applicable formula is: Value = Net Operating Income Overall Capitalization Rate
OFFICE
AA/A Building: Most prestigious buildings competing for premier office users with rents above average for the area. Well maintained and well located. Size 100,000 to one million SF; high quality finishes, state-of-the-art systems, exceptional accessibility and a definite market presence. B Building: Buildings competing for a wide range of users with rents in the average range for the area. Mix of national, regional and local leases. Size 50,000 to 500,000 SF. Building finishes are good with average systems in place. Usually the largest office asset class in most major centres.
The Colliers International Realty Advisors Capitalization Rate Report is a compilation of results from surveys of the Managing Directors (brokerage and valuation) of each Colliers International office across Canada.These results are based upon a combination of broker/appraiser sentiment, analysis of recently completed transactions, new offerings, and buyer-seller resistance points for current listings of investment grade real estate.
www.colliers.com
Our Knowledge is your Property ®