“We have been so fortunate over the last four years with continued activity, capital availability, and good supply of sites but these dynamics are about to change,” Real Property Association of Canada’s fourth quarter report states. “That is not to say that the sky is falling but rather the next few years may be a reality check of asset values and acquisition expectations from, say, late 2009 to the summer of 2014.
“That is not to say that we will not have continued prosperity but I strongly feel that it will not be at the levels of the previous four years. That in itself was not healthy or sustainable.”
A major concern for the organization an abundance of older buildings that report high vacancies, which could lead to oversupply issues.
“The concern regarding new supply is the backfill vacancy. How are the older bank towers going to do? Where is the demand going to come from for these leftover buildings?” the report states. “Who is going to want to lease space in a 40 year old building? Companies are now working in a more collaborative way; in today’s environment we see tenants really trying to cut back on the total amount of space they use.”
The report also notes that foreign investment has heretofore been a major contributor to the real estate market and, as a result, the economy, but that is about to change in all markets except one.
“Vancouver is an incredibly expensive market right now, getting flooded with equity. There is so much money coming from Asia that you are seeing 2.5 to 3 percent cap rates. It is insane,” the report’s authors state. “A bunch of bids came in for one deal at 3.5 to four percent cap rates, and a Chinese bidder stood up and bought it at a sub-3 percent cap.”
Commercial brokers are already forced to put in long hours for each deal and new data suggests that fight may get harder, with the commercial landscape about to change.