Market returns to ‘more normal’
Derrick Penner
Sun
There will be fewer big buyers in Metro Vancouver’s commercial real estate market in 2009, less leverage as banks require buyers to put in more equity as part of the credit squeeze, and lower prices as investors demand higher returns for their capital.
That is the assessment of commercial realtors Avison Young Canada Inc. in the firm’s latest investment review report, which tracks sales during 2008 and trends looking into 2009.
“We’re now coming off very high prices and very low [capital-return] rates,” Bob Levine, a principal in Avison Young’s Vancouver office said. “And [the market] is moving in a direction that might be, if you looked at the last 20 years, considered more normal.”
Levine said large institutional investors — the big public pension plans and insurance firms, whose investments were hammered during the recent stock market crash — are largely out of the market.
That will mean fewer players to support larger deals with values over $100 million. But Levine still sees plenty of potential buyers among private capital funds and mid-tier pension funds for deals of $25 million and under, although credit is harder to come by.
Lenders, Levine said, are asking buyers to put more equity into their purchases, to the order of 35 to 40 per cent of a purchase price. Nine months to a year ago, he said, they would let buyers put down just 20 to 25 per cent on a purchase.
“That all adds up to there being a lot less mortgage money out there,” Levine said. However, buyers who can finance will be able to do so at near record-low interest rates.
Avison Young tracked $1.27 billion in commercial real estate transactions in Metro Vancouver for 2008, a 30-per-cent increase from the $967 million it tracked in 2007. Most of that value, some $734 million, closed in the second half of last year, although the firm noted those deals were negotiated earlier in the year and did not take into account the implosion of credit markets following the bankruptcy of U.S. investment bank Lehman Bros. in September.
“I’d say after the beginning of October, the market was very dead, compared to now,” Levine said. “We’ve seen some activity occurring in the first two months of 2009.”
However, Michael Gill, another of Avison Young’s Vancouver principals, said “in the final two months of 2008, many deals fell apart.”
The Avison Young analysts expect activity in the market to decrease substantially through the first part of this year as executive decision-making slows and the expectations between buyer and sellers readjusts.
Levine said buyers have increased their expectations for return on capital, or cap rate, for what they spend on commercial real estate.
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