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Investors remain cautious amid rising rates and inflationary pressures

Investors are taking a cautious approach to investing in Canada’s commercial real estate market with rising interest rates and inflation continuing as key concerns.

The Altus Group’s Canadian Investment Trends Survey released last week reveals that the Overall Capitalization Rate (OCR) for the four main CRE asset classes rose to 5.62% in the second quarter of 2023, from 5.47% in the previous quarter.

As is generally the case, some sectors of the market are more attractive to investors than others and suburban multiple unit residential, food anchored retail strip and single tenant industrial assets were the top three preferred property types in the second quarter.

“Macroeconomic headwinds have led investors to invest in assets with minimal risk and stable returns; therefore, investment transaction activity favoured residential and industrial real estate,” the report stated.

Preferred markets

Ottawa moved ahead of Toronto as investors’ preferred market with Vancouver completing the top three. Ottawa was the only one of the three to hold-steady in the percentage of investors that are looking to buy vs. those looking to sell (positive momentum ratio).

Along with the top three, Montreal, Quebec City, and Hamilton all had a positive momentum ratio while Calgary and Edmonton had greater shares of investors looking to sell than buy.

A recent note from AGF Investments’ senior analyst Richard Fisher explained why commercial real estate is a safe bet for banks.

Among other takeaways from the survey, which looks at 32 asset classes across Canada’s eight largest markets, include increased cap rates for single-tenant industrial (5.53%) amid tight supply that is outstripped by demand.

Cap rates also increased for downtown class “AA” offices (6.50%) and tier 1 regional malls (6.01%) while there was a slight decrease for suburban multiple unit residential (4.44%).

Source: Wealth Professional