Capitalization rates for commercial real estate in Metro Vancouver have plunged to all-time lows, spooking investors.
A capitalization (cap) rate is the ratio between an asset's net operating income and its original price. For example, a $1 million property that generates $100,000 annually after expenses would give the owner a 10 per cent cap rate.
"If we're worried about cap rates being low everywhere, we have to be really worried about Vancouver because they're the lowest here [compared with other parts of North America]," San Francisco-based president and CEO of Grosvenor Americas Andrew Bibby told the Vancouver Real Estate Forum April 11. Bibby said other North American cities offer worthwhile investment opportunities, but extremely low cap rates "make Vancouver a hard place to justify investment."
An Avison Young Commercial Real Estate Report released in March estimated cap rates for Vancouver multi-family buildings at less than 3 per cent.
Avison Young principal Bob Levine said Vancouver office, retail and industrial properties also have the lowest cap rates that he can remember. One explanation is that cap rates tend to follow mortgage interest rates, and Canadian mortgage rates hit a record low in January. The other is land values.
"The reason Vancouver's cap rate is lower than other cities is that it is so much harder to develop in Vancouver due to the lack of land," Levine said.
"If you look back over the past 30 years in Canada, Vancouver's cap rates have been lower than anybody else's regardless of whether it's a boom or a recession."
Levine estimated that prime downtown office space in Vancouver will likely sell for a cap rate of between 5 per cent and 5.5 per cent. He said six months ago that cap rate was likely between 5.25 per cent and 5.75 per cent. Levine added that the cap rate of prime retail properties such as Oakridge Centre or Coquitlam Centre is likely now between 5.25 per cent and 5.75 per cent. He believes that two years ago those malls would have carried a 7 per cent cap rate.
Industrial real estate properties have followed the same trend, said Ron Bagan, Colliers International executive vice-president of industrial properties.
But Bagan is not concerned that low cap rates will scare investment away. "It shows that demand is high. People want to put their money here," he said. "With the incredible lack of available land for industrial real estate development in Vancouver, there will always be high demand for existing properties."
One potential cure for low cap rates may be industrial development on First Nations lands, which Avison Young notes are not subject to the travails of local zoning or land costs.
An example is the Tsawassen First Nation, which is releasing land for industrial use in South Delta.
from Western Investor June 2012
