Commercial Real Estate in Canada Outlook

April 13, 2014

By: Sean Werth

The residential real estate market has been heavily covered as the Canadian economy recovers and speculations of another housing market crash has surfaced. Recent news signaling instability in housing prices due to rising interest rates. However, the commercial property sector is under just as much pressure from the interest rate risk.

Commercial real estate includes: office towers, shopping malls and factories. Key players in the commercial sector include pension funds, REITS (real estate investment trusts) and insurance companies.

On March 24th, The Globe and Mail conducted a series of interviews with managing directors with some of the largest real estate asset portfolios to get a sense of industry direction. Quotes from some of the interviews can be found below:

“With most Canadian institutional real estate investment focused on domestic real estate, pension funds could be seriously over expressed in the event of a downdraft in the market” – Richard Johnson, UBS Global Asset Management

“Pricing is a concern. Real estate has been the best-performing asset class since 2000. I’m not sure that will be the case going forward. That said, all asset classes are fully priced, or in the case of bonds, riskier than they have been since 1950-1980 period.” – Leo de Bever, CEO of Alberta Investment Management Corp. (AIMCo)

“The development cycle is working well right now for sure, a lot of us are finding it easier to manufacture profits than to buy them. I don’t think in any way Canada is overpriced. The real estate fundamentals in Canada have remained as strong as any in the world.” – Blake Hutcheson, CEO of Oxford Properties.

Conflicting opinions amongst industry  portfolio managers fogs general direction of the market. However, judging the actions undertaken by some of these funds, it could be concluded that housing prices are over-priced in Canada.

Cushman and Wakefield has recently been selling their older properties (20+ years old) in favour of new office buildings.

Taurus Investment Holdings has sold over $150million worth of shopping centres and office space physical real estate. They cited the reason for liquidating the position was because the risk-premium of investing Canadian real estate does not offer enough profitability.

Avison Young, one of the largest Canadian real estate asset holders, has expanded operations to  Europe for the first time. This can be interpreted as diversification of the Canadian real estate portfolio.

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