B.C. real estate investment totalled $3.9 billion in 2022, despite a sharp drop in the second half of the year as rising interest rates put the brakes on deal-making.
Deal value for the year was down 26 per cent from 2021 but represented an ongoing rebound from 2020, Avison Young reported. Avison Young tracks office, industrial and retail sales valued at $5 million or more. It does not include land deals among investment sales, which would add a further $6.6 billion to the tally.
While the aggregate value of investment deals was among the lowest of the past decade, the number of deals done was the second-highest for the period as a lack of available product meant smaller transactions dominated.
Many of those were driven by private investors, who accounted for 92% of all capital investment in B.C. real estate in 2022.
“The institutions are basically nowhere to be found. And that’s why the deal sizes are smaller,” Bob Levine, principal, capital markets with Avison Young in Vancouver, said.
Transactions totalled 253 for the year, with two-thirds taking place in the first half. While this pointed to strong momentum as the year began, exceeding 2021 in both value and volume, the series of sharp interest rate hikes that followed pushed down both measures.
It also kept institutional investors, already scarce in the first half of the year, on the sidelines through the second.
“The pension funds in Canada … they have certain percentage allocations to real estate,” he said. “As the value of stocks and bonds dropped, which they did substantially last year, the real estate tends to go up in percentage.”
This meant many were less willing to buy and more likely to shed assets last year. Levine doesn’t expect this to change in 2023.
“Rates are still high, stocks are still volatile,” he said.
A lack of deals has also meant uncertainties around valuations on top of the challenge of determining an accurate purchase and sale price for assets. Without a solid measure on price, institutional investors fear buying a property at one price only to find their appraiser comes in with a lower value a few months after purchase during the annual appraisal.
Ultimately, transactions for the year reflected less an appetite for opportunities than a strategic outlook that prepared for growth following the period of adjustment ushered in by interest rate hikes. This was as true for industrial properties, which are perennially in short supply, and residential land.
“The industrial market benefited most from private investors in 2022,” Avison Young noted, with private buyers accounting for 90 per cent of the $1.95 billion in industrial deals that occurred in B.C. last year. “As pricing expectations fluctuated throughout the year, some groups were more willing to deploy their capital than others who adopted a more conservative strategy.”
The largest deal was Beedie's purchase of 7303 Meadow Avenue in Burnaby from Hungerford Properties in December for $83 million, a late-breaking transaction that also served as a vote of confidence in the resilience of the market for long-term investors.
Demand for residential land remained high, with vendors of these parcels seeing the greatest uptake.
“Residential land vendors accounted for the highest level of completed transactions, accounting for 39% of all deals in 2022,” Avison Young reported.
The purchases reflect the ongoing shortage of housing in B.C. and are primarily for market condos rather than rentals.
“We certainly see developers of residential, particularly in the suburbs, really trying to position for new projects,” Levine said.
However, many vendors held back as the market entered what many have described as a price-discovery phase. While financing costs put downward pressure on pricing, the fundamental strength of demand for assets played a supporting role that put the spotlight on the duration of the rate hikes rather than the intensity.
“Some groups were hesitant to take properties to the open market given the uncertainty with the values that could be achieved, particularly in the latter half of the year,” Avison Young said. “While some vendors forged through with transactions, others remained on the sidelines trying to wait out the storm and internally reassess the changing landscape.”
While the Bank of Canada signalled in January that it was ready to pause, and held off on any rate increase at its most recent announcement on Mar. 8, the latest increase in the U.S. Federal Reserve’s policy rate makes further increases likely given the deep symbiotic relationship of the two countries’ economies.
“When the Fed pushes up rates, it tends to put pressure through exchange rates, it puts pressure on all the other central banks to consider what they’re doing,” Nick Axford, chief economist with Avison Young in London, England, said.
But he said the moves by the Fed, especially against the backdrop of the collapse of Silicon Valley Bank and others in the U.S., show that the impact of the latest tightening cycle isn’t over.
“It has brought back to the front of people’s minds that there are potential risks out there, there are still things that could go wrong, and that’s likely to make people just that bit more hesitant,” he said. “The fact that there is clearly stress coming through in the banking sector to some degree is going to push up the cost of credit. That’s going to represent a tightening which will feed through into the economy in the U.S. and elsewhere.”
The several factors at play make the outlook challenging to forecast, but 2023 promises a turnaround.
In its own review of investment markets at the end of February, CBRE Ltd. forecast national investment sales of $59 billion in 2023, up from $58.5 billion in 2022. All things being equal, this would put B.C. on track for more than $4 billion in deals this year.
“For 2023, the investment market faces headwinds from tougher financing conditions and a potential economic slowdown inhibiting some investors. However, the immense amount of global dry powder targeting real estate, coupled with greater certainty around interest rates, are forecast to outweigh these headwinds and lead to an active 2023,” CBRE reported. “Expectations are for another one or two quarters of softer investment volumes, similar to the levels seen in the latter half of 2022, before activity rebounds to the levels seen in the last couple years. Overall, momentum is forecast build over 2023 for another solid year of investment transaction activity.”
But based on what he’s heard in the market to date, Levine is bullish.
“We’ll wait and see the results, but I certainly sense there’s a lot more activity,” he said. “I think the first half of 2023 is going to be better than the second half of ‘22, in terms of dollar volume and the number of transactions.”