Investors dive back into commercial property

Canada's commercial real estate market is rebounding faster than many in the industry projected just a few months ago.

A survey by PricewaterhouseCoopers and the Urban Land Institute, conducted in July, found that executives expected anemic returns and scant activity for at least the next year, as investors licked their wounds and waited for better times in 2011.

But the market unexpectedly caught fire in September as access to capital improved and buyers waded into the depressed market, and a full-blown recovery seems under way in major segments of the market.

"Things have changed," said PwC partner Frank Magliocco as he released the report yesterday. "Things just took off."

Real estate investment trusts are sitting on more than $1-billion of cash raised as their units rebounded from the lows set in March, and private buyers are busily snapping up assets again in a race against public companies that are not as well capitalized.

There have been three deals worth more than $100-million in the past month – an apartment portfolio in Vancouver, as well as residential land and a downtown building in Toronto – which would have been unthinkable in July.

"If I told you in the spring that those deals would happen, you'd have told me I was crazy," said George Carras, president of tracking firm RealNet Canada Inc. "There was no way you'd have believed me, sentiment was just too low."

There have been other signs of recovery, most notably the first quarter of growth in Toronto's commercial real estate sector after 18 months of declining fortunes. Data for Calgary and Vancouver show those markets stabilizing as well, according to RealNet.

"We were coming off a pretty traumatic time when we filled in those forms," Michael Cooper, chief executive officer of Dundee REIT, said of the July survey. "That's human nature for you."

That's not to say that things are completely better. PwC forecasts that the recession has taken commercial real estate prices 20 per cent lower than their 2007 peak, though still better than the 50-per-cent cut predicted in the United States.

Mr. Cooper said the focus has shifted to growth, and he intends to invest the cash he's been hoarding for unexpected emergencies. "We don't have a crisis mentality any more," he said. "We're back to Business 101 – find good deals and make them happen. It's nice not to be feeling so bad every day."

(prepared by Steve ladurantaye/Globe & Mail)

Investment tips

Buy new apartments near primary urban cores. Stable, secondary government/university markets such as Halifax also make sense.

Buy neighbourhood shopping centres anchored by state-of-the-art supermarkets in infill areas for secure income streams.

Grab full-service centre city hotels at cyclical lows, but don't plan to hold forever.

Sell low-yielding Canadian commercial assets, and buy in the United States when the markets hit bottom.

Prepare to buy distressed assets in secondary markets, and then trade out in the up cycle.

(Source: PricewaterhouseCoopers)