Emerging Trends in Real Estate 2012 - Urban Land Institute

Chapter 5: Emerging Trends in Canada
and require greater equity contributions from borrowers (exhibit
5-7). “The U.S. effect [debt crisis] influences policy and makes
them even more disciplined. In Canada, bankers will always find
something to pick on, no matter what point in the cycle.” But who
can argue with the approach. “Not a single mortgage over $10
million has defaulted.”
Fed up with disappointing stocks and low-yielding bonds,
investors sit on “lots of funds,” “looking for long-term cash-flowing
assets like real estate,” but “have trouble placing the monies
they have.” Pension funds and other institutions “feel pressures
to put dollars out” and condition themselves to accept lower
domestic returns or go overseas to “chase higher yields.” REITs
using “cheap” bank lines of credit have been more aggressive
than institutional investors, pushing up pricing to potentially discomfiting
levels. Some interviewees have raised a concern that
some of the REITs may not have been as rigorous in their underwriting,
and projected cash flows may not pan out. Their lower
cost of capital and easy access to credit allows them to take the
lead on new development as well. To foreign investors, Canada
looks like a reliable bet compared with most other regions, as
well as a highly ethical and transparent country “where it is easy
to do business.” But entrenched REITs and pension funds that
hold on to assets “easily squeeze” offshore institutions out of
markets. The majority of foreign activity concentrates in Asian
flight capital targeting condominiums in the gateway cities.
Transactions. Ample capital scouring markets dominated by
long-term holders signals diminishing prospects for buyers in
ExHIBIT 5-7
Maturing Loans: Preferred Strategy for Lenders
by Mid-2012
ExHIBIT 5-8
Emerging Trends Barometer 2012
good
modestly good
fair
modestly poor
poor
2008
2009
2010
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on Canadian respondents only.
Buy
Sell
2011
Hold
2012
2012, an outlook reinforced by the Emerging Trends buy/hold/
sell barometer (exhibit 5-8). Buying sentiment declines from
2011’s apparent cyclical pinnacle while selling interest spikes
sharply: owners realize they should strike before capital turns
tail. “The smart money takes chips off the table, selling into the
peak, but holds off reinvesting and counts gains.” This portends
a continuing sluggish transactions market where relatively few
deals trade at high (if not outrageous) prices, with most players
backing off and contentedly holding on to what they have.
“Institutions will continue to complain they have nothing to buy,
but won’t sell because it’s too hard to replace.”
Extend with
mortgage modification
69.41%
Extend without
mortgage modification
3.53%
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on Canadian respondents only.
Foreclose and dispose
7.06%
Sell to a third party
20.00%
Cap Rates and Values. The low-trading, core-oriented real
estate market compresses capitalization rates back toward 2007
lows. Some interviewees predict “a permanent shift downward
closer to European levels” based on enduring supply/demand
equilibrium and ownership dominated by institutions. “The days
of 8 percent to 10 percent yields are gone.” But a majority of
interviewees counter that the prospect for higher interest rates
eventually will push cap rates up absent growth in rents, which
historically stay relatively flat. They suggest a leveling to slight
increase in rates for 2012, led by suburban office and power
centers (exhibit 5-9). Under any circumstances, investors should
prepare for lower returns over time, including a modest correction
in commercial values for properties in secondary markets.
Institutional-quality property probably registers modest value
gains in 2012.
Emerging Trends in Real Estate ® 2012
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