Investment Sales Outlook Slows for 2009

The Avison Young report, which tracks office, industrial and retail investment sales in BC greater than $5 million, notes that the majority of the deals that closed in the second half of 2008 were negotiated in the early part of 2008—before Lehman Bros. filed for bankruptcy. Michael Gill, Avison Young principal, points out, "Deals were already firm before the credit markets imploded and, therefore, year-end sale prices did not reflect current values."

Gill says most of 2008's transactions represented sellers who wanted to take advantage of the market at its perceived peak. He says that deal activity is anticipated to decrease significantly in the first half of 2009 due to a slowdown in executive decision-making, market perception versus reality, and as the price expectation gap between buyers and sellers takes time to narrow. "Although the underlying fundamentals of BC are among the strongest in North America, the crisis of confidence has permeated the commercial real estate market. In thefinal two months of 2008, many deals fell apart," he says.

Avison Young principal Robert Gritten observes that values are already falling this year for prime properties as as cap rates trend upward. Values are falling further for less-than-prime properties and troubled properties, he adds.

Office transactions accounted for 50% of the total dollar volume in 2998, with private investors dominating both the buying and selling sides throughout the year. The sale of Crestwood Corporate Centre in Richmond, BC for $203.5 million was the largest deal of 2008 and accounted for 40% of the total value of office deals closed in the second half of 2008.

The report notes that the availability of quality sale product remains light in early 2009 but is picking up as sellers begin to acknowledge buyers' expectations."A price shift is under way, however. Due to the limited number of transactions completed, there are few benchmark prices available," the report states. "As a result, many investors are waiting and watching."

Gill says that while many investors are sitting on the sidelines awaiting economic clarity, many also view the next 12 to 18 months as a great buying opportunity. In addition, sales are anticipated to pick up later in 2009 as sellers become more realistic about valuations. One of the factors driving the market now is that some owners are forced to sell because they need to raise equity to offset debt maturities, thereby placing properties on the market that would otherwise not be available.

According to Gritten, "There is still considerable interest from private buyers and pension funds for prime assets, and the market is expected to witness an increase in funds from private buyers to real estate limited partnerships due to disillusionment with stock market investments." In spite of the tighter lending environment in the US, the Canadian banking system is ranked the strongest in the world and large pools of capital continue to be available to qualified purchasers, the report concludes.