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Avison Young has released its Q1 Canadian cap rate and investment trends report, forecasting that although lenders will remain conservative in 2024, capital from lenders remains strong for qualified assets and strong borrowers.

Industrial will serve as the preferred class, representing 47 per cent of Q4 2023 investment sales, stated the report.

“The question of where are cap rates trending echoes consistently in discussions throughout the commercial real estate industry, gaining heightened importance during periods of market uncertainty,” said Matthew McWatters, a principal with Avison Young, in a statement. “It’s on everyone’s mind, yet answering this question isn’t always straightforward, particularly amid a scarcity of recent investment trades.”

The report suggests markets with affordable living costs and rents offer upside on the demand side and potential savings on operating costs, which makes for attractive proformas. Immigration and inter-provincial migration is likely to drive cap rate volatility. This includes compression of cap rates in affordable markets with rental upside.

CMHC approval timelines for financing and insurance products have improved heading into 2024, in terms of catching up on backlog and minimizing the review times on new applications to increase the velocity of underwriting, said Avison Young. The federal government has increased the Canada Mortgage Bond issuance limit by $20 billion annually, and pledges $15 billion in new loan funding starting in 2025-26 under the Apartment Construction Loan Program.

Access to favourable financing via CMHC is instrumental with current interest rates to make the numbers work on new purpose-built rental product, the report said.

Source: Daily Commercial News