Cap Rate Report 2Q09indd by sdaferv


									                                              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

                                             Colliers International’s Q12009 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
                                2009 2009    needed to be restored; REIT and public company unit prices needed to show signs of recovery; and
                                 Q1   Q2     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.There is a growing camp of observers that see the latter occurring, particularly as government
       CONSTRUCTION                          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
           RENTAL RATE                       inflationary environment.

                                             On the positive side, debt availability is slowly increasing, albeit at a higher cost. REIT prices have
      ECONOMIC INDICATORS                    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.

• The Canadian unemployment rate             Canadian REITs have greatly curtailed new acquisitions, though some of the larger REITs are still in
rose by 0.4 percentage points to 8.4%,       acquisition mode. Many of these acquisitions are for strategic purposes or represent opportunities
the highest rate in 11 years. While there    to enter markets that were previously very difficult to access
were pronounced losses in Ontario in
May, employment actually increased in
Manitoba, Nova Scotia and Saskatch-          Another class of investor is the German open market funds. While they are yet to be a proven par-
ewan, while there was little change in       ticipant in most secondary markets, they have been very active in new acquisitions in primary cen-
all other provinces.                         ters 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
• Is the worst of the recession over? The    considered a safe haven for international investors, and cap rates for high quality assets in this coun-
unexpected addition of almost 36,000
                                             try have proven to be very resilient to general deterioration of broad market conditions. As the year
new jobs to the Canadian economy in
April, a surging dollar and rising mar-      progresses, we expect continued interest in good quality assets from these funds; their participation
kets, might mean the worst of the reces-     is reinforcing value multiples in a time where the market is characterized by uncertainty.
sion is past us, say economists.
                                             Picking up from where we left off at end of Q1 2009, Colliers International sees signs of the mar-
• The value of building permits in Can-      ket stabilizing. In addition, capitalization rate support is slowly being established. Results from this
ada surpassed the $5-billion mark for
                                             quarter’s survey demonstrate stability in commercial real estate cap rates in most markets when
the rst time since October. StatsCan
reports the 14.8% increase in May over       compared to our Q1 2009 report. There are indeed “green shoots” evident, but we also believe
April is mostly due to permits issued        there is real risk of a W-shaped recovery. The primary concern is rising interest rate risk that will
for multi-family dwellings in Ontario        undoubtedly result in further uncertainty as we head toward year-end.
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

Sources: Conference Board of Canada,
Metropolitan Outlook Economic Forecast
Spring 2009; Statistics Canada, Ottawa Sun                                                                                     Our Knowledge is your Property
    Cap Rate Report | Second Quarter | 2009

                              AA                      A                    B
      Halifax                 N/A             7.00%   to   7.75%   7.75%   to   8.50%
      Moncton                 N/A             8.00%   to   8.50%   8.50%   to   9.00%
      Montreal        6.75%   to 7.75%        7.50%   to   8.25%   8.00%   to   9.00%
      Toronto         6.75%   to 7.25%        7.25%   to   7.75%   8.00%   to   8.75%
      Winnipeg                N/A             7.25%   to   7.75%   8.00%   to   8.50%
      Saskatoon               N/A             7.00%   to   7.50%   7.75%   to   8.25%
      Calgary         7.00%   to 7.50%        7.25%   to   7.75%   8.00%   to   8.50%
      Edmonton        6.75%   to 7.25%        7.00%   to   7.50%   7.50%   to   8.00%
      Vancouver       6.00%   to 6.50%        6.25%   to   6.75%   6.75%   to   7.50%
      Victoria        6.50%   to 7.00%        6.50%   to   7.00%   7.25%   to   7.50%

                              A                       B
      Halifax         7.75%   to 8.50%        8.25%   to   9.00%
      Moncton         8.25%   to 8.75%        8.50%   to   9.00%
      Montreal        7.50%   to 8.50%        8.50%   to   9.25%
      Toronto         7.50%   to 8.25%        8.50%   to   9.50%
      Winnipeg                N/A             7.50%   to   8.00%
      Saskatoon               N/A             7.75%   to   8.00%
      Calgary         8.00%   to 8.50%        8.50%   to   9.00%
      Edmonton        7.50%   to 8.00%        8.00%   to   8.50%
      Vancouver       6.75%   to 7.50%        7.50%   to   8.00%
      Victoria        6.50%   to 6.75%        7.50%   to   8.00%

                     Downtown High Rise       Suburban High Rise   Suburban Low Rise
      Halifax         6.25% to 7.00%           7.00% to 7.75%      7.25% to 8.25%
      Moncton         7.50% to 7.75%           7.75% to 8.00%      8.00% to 8.25%
      Montreal        6.50% to 7.50%           7.00% to 7.50%      7.50% to 8.50%
      Toronto         5.75% to 6.25%           5.75% to 6.50%      6.00% to 6.50%
      Winnipeg        5.50% to 6.25%           5.50% to 6.25%      5.50% to 6.25%
      Saskatoon       6.25% to 6.75%           6.50% to 6.75%      6.75% to 7.00%
      Calgary         5.75% to 6.25%           5.75% to 6.25%      6.25% to 6.75%
      Edmonton        6.00% to 6.50%           6.50% to 7.00%      6.75% to 7.25%
      Vancouver       5.00% to 5.50%           5.50% to 6.00%      6.25% to 7.25%
      Victoria        5.00% to 5.50%           5.00% to 5.50%      5.00% to 5.50%

                                                                                       Cap Rate Report | Second Quarter | 2009

                  Multi-Tenant A            Multi-Tenant B          Single Tenant A          Single Tenant B
Halifax         8.00% to 8.75%            8.50% to 9.00%           7.75% to 8.50%            8.75% to 9.25%
Moncton         8.75% to 9.25%            9.00% to 9.50%           8.25% to 8.75%            9.00% to 9.50%
Montreal        8.00% to 9.00%            8.50% to 9.50%           7.25% to 8.25%            8.50% to 9.50%
Toronto         7.50% to 8.25%            8.00% to 8.75%           7.25% to 8.00%            8.00% to 9.00%
Winnipeg        7.00% to 7.50%            7.75% to 8.25%           7.50% to 8.00%            7.75% to 8.50%
Saskatoon       7.50% to 7.75%            8.25% to 8.50%           7.75% to 8.00%            8.25% to 8.50%
Calgary         7.75% to 8.25%            8.00% to 8.50%           7.75% to 8.25%            8.00% to 8.50%
Edmonton        7.50% to 8.00%            8.25% to 8.75%           7.50% to 8.00%            8.25% to 8.75%
Vancouver       6.50% to 7.00%            6.75% to 7.50%           6.25% to 7.00%            6.75% to 7.50%
Victoria        7.00% to 7.50%            7.00% to 8.00%           7.00% to 7.50%            7.00% to 8.00%

                    Regional             Power or           Community          Food-Anchored           Small Box
                      Mall             Lifestyle Ctr           Mall               Strip Plaza        (stand alone)
Halifax               N/A            7.50% to 8.25%       8.50% to 9.25%       8.25% to 9.00%       7.75% to 8.25%
Moncton               N/A            7.75% to 8.50%       9.00% to 9.75%       8.50% to 9.25%       7.75% to 8.25%
Montreal         7.00% to 7.50%      7.00% to 7.50%       8.00% to 9.00%       7.50% to 8.50%       7.75% to 8.50%
Toronto          6.75% to 7.25%      7.50% to 8.50%       8.00% to 8.75%       7.75% to 8.50%       8.00% to 8.50%
Winnipeg         7.00% to 7.50%      6.75% to 7.25%       7.75% to 8.50%       7.50% to 8.25%       7.50% to 8.00%
Saskatoon        6.75% to 7.25%      6.75% to 7.25%       7.25% to 7.75%       7.25% to 7.75%       7.75% to 8.00%
Calgary          7.00% to 7.50%      7.50% to 8.00%       7.75% to 8.25%       7.50% to 8.00%       7.50% to 8.00%
Edmonton         6.50% to 7.00%      7.00% to 7.25%       7.25% to 7.75%       7.00% to 7.50%       7.25% to 7.75%
Vancouver        6.25% to 6.75%      6.75% to 7.25%       7.25% to 8.00%       6.50% to 7.00%       7.00% to 7.50%
Victoria         6.50% to 7.00%      6.50% to 7.00%       7.00% to 8.00%       6.75% to 7.50%       7.50% to 8.00%

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 the reported hotel sales so far this year.

                                                                                             COLLIERS INTERNATIONAL       3
Cap Rate Report | Second Quarter | 2009

BENCHMARK DEFINITIONS                                                                                 294 OFFICES IN 61 COUNTRIES

APARTMENT                                         RETAIL                                              USA 94
A Building:                                       Food Anchored Strip:                                Canada 22
Concrete construction. Well maintained            Ten to fifteen years old; major chain
                                                                                                      Latin America 17
with no deferred capital expense. Age is          supermarket; CRU tenants blend of na-
between 0 and 15 years. Good downtown             tional, regional and local tenants. Mature          Asia Paci c 64
location.                                         residential district.                               Europe, Middle East, Africa 97

B Building:                                       Community Mall:                                     $1.6 billion in global revenue
Generally wood frame construction                 Twenty years old; 150,000 to 250,000 SF.            1,1 billion square feet under management
generally. Well maintained with minor             Mix of national and local tenants. An-
deferred capital expense. Age is between          chored by a national supermarket and                12,700 professionals
20 and 40 years. Average quality subur-           department store. Located in a mature
ban location.                                     area.

INDUSTRIAL                                        Regional Mall:                                         CANADIAN OFFICES
Single Tenant:                                    Renovated in past ten years. 300,000 to
                                                                                                      • HALIFAX
Steel frame/pre-cast concrete/tilt-up             600,000 SF. Dominant only locally. Two
panel; 50,000 to 100,000 SF with 10% of-          anchor tenants.                                     • MONCTON
 ce space; modern building with average
lease duration of 10 years. Investment            Power Centre:                                       • MONTREAL (2)
grade covenant strength. Years 1 to 5 at          Dominant for the region. Major arte-                • OTTAWA
market rent with 15% rental growth by             rial position. Five to ten years old. Ten
Year 6.                                           to fifteen year leases. Strong covenant,            • KITCHENER
                                                  National tenants.
Multi Tenant:                                                                                         • TORONTO (2)
Steel frame/pre-cast concrete/tilt-up                                                                 • WINNIPEG
panel; 25,000 to 100,000 SF with 10-20%           OTHER DEFINITIONS
o ce space; modern building with aver-            Overall Capitalization Rate:                        • REGINA
age lease duration of 6 - 10 years. Invest-       Capitalization is the process of convert-
                                                  ing income (as de ned) from a property              • SASKATOON
ment grade covenant strength. Years 1 to
5 at market rent with 15% rent growth by          into an expression of capital value. The            • EDMONTON
Year 6.                                           capitalization rate is the mathematical
                                                  relationship between the income and the             • CALGARY
OFFICE                                            capital value.
                                                                                                      • VANCOUVER
AA/A Building:
Most prestigious buildings competing for          The Overall Capitalization Rate is used             • VICTORIA
premier o ce users with rents above av-           in the Direct Capitalization method, ex-
erage for the area. Well maintained and           pressing the relationship between the
well located. Size 100,000 to one million         current year’s income and the value of              Colliers International Realty Advisors
SF; high quality nishes, state-of-the-art         the property. The applicable formula is:            200 Granville St., 19th Floor
systems, exceptional accessibility and a                                                              Vancouver, BC V6C 2R6
de nite market presence.                          Value =    Net Operating Income                     Direct: 604.692.1449
                                                            Overall Capitalization Rate               Main: 604.681.4111
B Building:                                                                                           Fax: 604.681.2309
Buildings competing for a wide range of                                                               Terry Cox, AACI, P.App
users with rents in the average range for                                                             Managing Director
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 of-                                                             This report has been prepared by Colliers International (At-
                                                                                                      lantic) Realty Advisors Inc. for general information only. In-
 ce asset class in most major centres.                                                                formation contained herein has been obtained from sourc-
                                                                                                      es deemed reliable and no representation is made as to the
                                                                                                      accuracy thereof. Colliers International does not guaran-
 The Colliers International Realty Advisors Canadian Capitalization Rate Report is a compilation      tee, warrant or represent that the information contained in
                                                                                                      this document is correct. Any interested party should
 of results from surveys of the Managing Directors (brokerage and valuation) of each Colliers In-     undertake their own inquiries as to the accuracy of the
 ternational 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.                                                                                      Our Knowledge is your Property

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