Office Deals Low in Number, High in Dollars

Private investors were the most active buyers and sellers during the period covered by the report, continuing a trend that prevailed through 2008. But institutional investors dominated higher-priced office transactions, Avison Young points out.

Institutional investors spent the most on office properties, investing $379 million as cap rates rose 100 to 150 basis points from the previous year, depending on the asset class and submarket. However, cap rates did not influence pricing significantly in the first half of this year and any rise will be slight in the second half, according to the report.

Avison Young Principal Bob Levine says that the lack of available high-end office properties, and the yield gap between British Columbia and other Canadian markets "may increase the possibility that investors will buy elsewhere in the second half of 2009." Rental rates, interest rates and lower sale prices will have a major impact on the office sales market, but "these effects will not likely be felt until the middle to end of next year," Levine says. He adds that more office product should become available through 2009 as economic conditions improve. "Purchasers will continue to challenge rental assumptions as lease agreements approach post-Olympic renewal dates and tenants in all business sectors continue to review operations," according to Levine.

Levine notes that, despite the prominent position of office deals relative to other sectors, office investors struggled to string together deals in the first half of 2009 because of the dearth of high-quality supply. "The recovering Canadian economy and Bentall V and Grosvenor building sales, which underline investor confidence in the Vancouver office market and provide much-needed benchmark prices for class A office properties, are likely to spur more deals in the second half of this year," Levine states.

One of the deals that helped to push the total higher for the office sector was the sale of the Grosvenor building at 1040 W. Georgia St. in Downtown Vancouver for $84 million. German investor Deka Immobilien Investment GmbH's unsolicited $297-million purchase of Bentall V in Downtown Vancouver earlier this year, the largest deal in Canada this year, accounted for nearly half of the total amount invested in the first half of 2009.

As 2009 continues, cap rates are expected to maintain their current levels in metro markets and increase in secondary and tertiary regions. Continued interest in prime real estate should help stabilize capitalization rates across all categories, according to the report. Avison Young Principal Douglas McMurray notes that REITS are making a comeback as their unit prices improve, with some raising more capital for acquisitions or to shore up their balance sheets. He expects that "Lenders will make financing more easily available as they recover from bad loans and face more pressure from their boards, shareholders, clients, corporate social responsibility advocates and governments to help accelerate economic activity during difficult times."