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CBRE Predicts Record Investment in 2018

Increase in Activity Will Be Minor, but Company Tells Real Capital Attendees Don't Fear End of Cap Rate Compression
February 28, 2018
The end of cap rate compression may be coming, but the executive managing director of CBRE Ltd. in Canada says there are mitigating factors that may slow the trend.

"Firstly, there is a limit to how high and how fast the Bank of Canada can move," Paul Morassutti told a real estate audience at the Real Capital conference in Toronto, pointing to Canadian household debt. "It means rate hikes pack a very serious punch."

Morassutti, who is also an executive vice president with CBRE, noted 10-year Canada bond yields are now 70 basis points higher than in earlier 2017, after three quarter point movements in the central bank's overnight lending rate.

"With the combination of rising interest rates and compressing rates, we now have spreads at or below the 10-year average across all asset classes," he said, noting every bank in Canada has forecast a minimum of two more rate increases in 2018.

All this comes after what CBRE said was a record year for real estate transactions in 2017, with $43.1 billion changing hands. It was the second straight record-breaking year. The real estate company said the average national cap rate was 5.9 percent.

"This appears to be an inflection point," Morassutti told the audience about the state of the market, noting an inflation economy is not the end of the world because it means job growth and rental growth.

The executive noted so-called "trophy assets" in key markets always drive the lowest cap rates because those properties rarely come to market. "It is much more important than where we are in the cycle," he said.

CBRE is still forecasting investment activity to climb a fraction in 2018 from the 2017 record. The company predicts the central office vacancy rate for the country as a whole will drop to 11 percent in 2018 from 11.1 percent in 2017. Class A net asking rates per square foot are forecast to fall from $21.91 in 2017 to $21.13 in 2018 in those markets.

Morassutti had a specific message for the real estate crowd about shared space or co-working provider WeWork that has been estimated to be worth US$20 billion.

"The common perception," he said of WeWork, "is geared towards startups and entrepreneurs. They have evolved beyond that. Today between 25 percent and 30 percent and up to a third of the revenue comes from enterprise companies, companies that employ more than 1,000 people."

More disconcerting for the industry might be the decision by WeWork to launch what is essentially an outsourcing service, which collects data on how people work. "It's being turned into a product for its enterprise users. You know who else provides those types of services? CBRE and JLL and Colliers and Brookfield Johnson Controls. Our traditional competitors might not be the only ones in the future."

Garry Marr, Toronto Market Reporter  CoStar Group   

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