RCA Insights

Canada Leads the Free World

By on November 22nd, 2016

Yes, Canada Leads the Free World is a strong statement and no, it is not a case of liberal sour grapes about the U.S. presidential election. Rather, commercial real estate transaction volume is growing faster in Canada than anyplace else in the developed world. There are a number of internal and external factors driving this growth in deal volume.

Transaction volume for Canada is up sharply in 2016 with a 32% YOY increase for the first three quarters, a reversal from the last three years. Technically, Canada is now tied with South Korea for annual growth in deal volume but U.S. dollar denominated transaction volume in Canada is 2.5 times greater than that in South Korea so, yeah, Canada is in the lead.

Deal activity is up sharply in Toronto with sales such as the Richmond-Adelaide Centre pushing an amazing 45% YOY growth in deal volume. Cross-border activity has helped boost deal volume in 2016, with investors from China in the lead and U.S. investors in the #2 position. In total, cross-border investors have been behind 27% of Canadian deal volume in 2016.

 

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The positive reversal in Canadian deal volume is not just a story of the eastern provinces. There is a stampede of primarily domestic capital moving back into the markets of Alberta.

As the energy markets faltered and the price of a barrel of oil fell from $110 in 2014 to under $30 in early 2016, economic activity tied to the oil sands in Alberta tumbled. Now, however, the worst seems to be over, with oil back up near $50 per barrel. Local economic activity is now trending positive with consecutive months of job growth.

Commercial real estate investment has started to follow these tentative signs of economic recovery. However, as opposed to the globally driven markets of Toronto and Vancouver, more of the capital in Alberta is sourced domestically in Canada.

Cross-border investment in the markets of Alberta has totaled only $209m in 2016 so far, which equates to about 10% of the deal volume in the two major cities of the province. Domestic institutional investors are both large buyers and sellers of assets. A number of REIT portfolios with exposure to Calgary have been sold, but other REITs are significant buyers as well.

Local developers and private investors have been net sellers in Alberta for 2016. As befits a region that grew on the frontier, there is a lot of risk taking that will happen locally across the market cycles. Some investors are now looking to get in on the next hoped-for boom while others cut losses. Either way, deal flow is returning.

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.