TORONTO—Although regional performance varies on a year-over-year basis, “The commercial real estate sector remains awash in capital; and despite varying global economic, political and property market conditions, including the ongoing interest-rate scenario, there is no better place to put your money than in hard assets,” says Mark E. Rose, chair and CEO of Avison Young. “In short, real estate has established itself as a real alternative asset class to stocks and bonds.”

That being said, the six major markets of Canada—including Toronto, where AY is based—saw Y-O-Y sales volume gains of 29% for the first six months of this year, while US lagged the year-ago period by 12%. Yet across the 54 global markets which AY tracks, including 38 in the US, key themes resound.

“Our review of commercial real estate investment activity across diverse markets, countries and continents revealed a continued pursuit of prime assets in gateway markets,” says Rose. “However, as scarcity of product and fierce competition are resulting in peak pricing in some of these markets, investors are continuously looking to diversify across product types and geographies, which means climbing up the risk ladder.”

The firm's president, US operations, Earl Webb, says the 12% annual decline is “significant,” and illustrates “the disconnect between seller expectations and buyer underwriting occurring in many markets.” This disconnect, he adds, “is somewhat in conflict with the broad improvement in market fundamentals that the US continues to register.”

Nonetheless, 'the competition for institutional-quality assets continues to push values higher, and 16 of the 40 Avison Young US markets registered sales volume in excess of $3 billion. Not surprisingly, Los Angeles and New York topped the list.”

Perhaps reflecting Canada's enviable economy, the US' northern neighbor regained the lead for cross-border acquisitions in this country, displacing China. as the largest source of cross-border investment. Amid the overall pullback by Chinese investors, though, investment from other Asian countries, including Japan, Singapore and Hong Kong, increased.

“Valuations have remained high across asset classes, and deals that do execute reflect strong pricing, leading owners looking to balance portfolios to bring deals to market,” says John Kevill, AY principal and managing director, US capital markets. “Generally however, uncertainty in financial markets, macro-economic conditions and increasing geopolitical risk have investors largely satisfied with their real estate portfolios, and those who don't need to transact are increasingly taking a wait-and-see approach.”

The first six months of the year have highlighted “a widening gap between seller expectations and buyer underwriting in properties where there is near-term asset-level risk,” Kevill says. “In many instances, a view that we are late in the cycle is limiting buyers' ability to underwrite steady growth, thus negatively impacting price. As a result, many deals are not getting done, contributing to the decrease in sales volume.”

Rose sums up, “As we go through 2017 and into 2018, the commercial real estate investment market will continue to be characterized by motivated buyers and sellers operating in relatively stable property markets and in a largely still-favorable debt environment. Despite elevated valuations, in the longer term, interest rates will rise and asset pricing will normalize.”

Instant Insights /

CRE Remains 'Awash in Capital'

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