The pace of Canadian commercial real estate deals could slow next year, but a collapse is not expected despite higher borrowing costs and investor skittishness stemming from the residential subprime mortgage crisis in the U.S., according to brokerage firm CB Richard Ellis Ltd.
“There are a few known cracks these days but we do not anticipate a meltdown by any measure,” Blake Hutcheson, president of CB Richard Ellis, said in a research report.
Defaults on risky mortgages in the subprime housing market in the U.S. first hit direct lenders, and the fallout has now spread to financial institutions that buy and sell mortgage-related debt. As concern about the crisis spreads, investors have sold off shares of companies directly hurt by these problems and also in the broader financial services and real estate sectors.
Some investors worried about a credit crunch may think twice before investing in real estate as an asset class, Mr. Hutcheson said.
However the fundamentals of the sector in Canada are still strong, fuelled by good economic conditions and interest in commercial real estate assets from a variety of capital sources, he said in an interview.
Pension funds, for example, have been drawn to real estate as a long-term investment to help offset their rising liabilities as the population ages and the number of retirees swells.
The longer the credit market stays tight, the greater the impact on the real estate market, said Frank Mayer, a long-time Canadian real estate analyst.
In Canada those first cracks could appear in higher capitalization rates, or lower sale prices, for properties that are less geographically or functionally desirable, Mr. Mayer said.
For the first six months of the year, investment in the commercial real estate market in Canada totalled $13.1-billion, a 35 per cent increase over the same period the year before, according to the CB Richard Ellis report. For 2007 as a whole, this could rise by up to 30 per cent from a total of $24.2-billion in 2006.
Activity in the second half of the year will be boosted by the sales of all or part of three large Canadian real estate investment trusts, Legacy REIT, Canadian Hotel Income Properties REIT and the eastern assets of Dundee REIT. The value of these transactions, including debt, will top $6-billion.
High transaction activity levels this year could also be sparked by owners who “feel that they should not wait much longer to take some money off the table,” Mr. Hutcheson said.
© The Globe and Mail
