Risk will drive cap rates higher

Risk associated with pandemic closures and restrictions will push capitalization rates up, according to Colliers International

By
Western Investor
June 1, 2020





Cap rates rising
— Winnipeg cap rates highest in Canada.

The COVID-19 crisis has created risk and the result could be higher capitalization rates on commercial real estate in Canada, according to Scott Bowden, managing director of valuation and advisory services for Colliers International.

The risk card will be especially noticed in Manitoba, which already has among the highest such rates in the country.

The capitalization rate of a real estate investment is calculated by dividing the property’s net operating income by the current market value. 

“When we see greater risk due to businesses being impacted, due to tenants or property owners having their businesses impacted, capitalization rates are a reflection of that risk,” Bowden told Renx.

“Our expectation is that [cap rates] will start to go up, because people are going to start to see more risks.”

However, he said the greatest factor for cap rates universally is the strength of a landlord’s tenants to pay their rent.

In its Canada Cap Rate Report Q1 2020, Colliers noted that Winnipeg already has some of the highest cap rates in Canada.

The majority of industrial transactions in Winnipeg are occurring in the 6.25 per cent to 7 per cent cap rate range depending on the quality of the tenants and location. Cap rates for retail properties in Winnipeg are typically in the 6 per cent to 6.5 per cent range but Colliers said retail cap rates could increase if “more mid-box retailers close their doors.”

Winnipeg’s office sector is also expected to see higher cap rates, due to an influx of new space in the downtown, according to Colliers,

Cap rates for Winnipeg multi-family property are typically around 5 per cent to 6 per cent, with most new construction projects being valued slightly lower.

 

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