There is no getting around the rise in capitalization rates of some real estate assets in a high-interest rate environment and the pressure that comes with figuring out what real estate is worth.

Stephen Bryant, vice president and managing director of commercial origination in eastern Canada for CMLS Financial, said that appraisals are coming in "bullish" and "too bullish" and acknowledged the pressure facing those in the industry.

"You think about an appraisal, and most of the time, it is commissioned by a borrower-type entity or a client, and they understandably want the highest possible valuation," said the executive from CMLS, which has a loan portfolio under the administration of more than $20 billion.

Bryant was speaking at a panel about valuations at RealCapital, a Toronto conference held at the end of last month.

"We've heard stories from appraisers, albeit ones they would not acknowledge in a public forum, about the pressures they [face] to get valuations to a certain point," said Bryant.

The statement drew chuckles from the audience and panelists alike, but Bryant empathized that an appraisal reflects a point in time.

"In a down market at a point in time, the appraisal is most likely to be overstated, and in an up market, it is going to be likely understated," he said, adding the tough challenge is trying to forecast into the future.

Cecilia Williams, chief financial officer of Allied Properties REIT, which has 2 million square feet of real estate under development in Toronto and an extensive office portfolio across the country, joked office buildings were the least popular asset class today.

"Our assets, because of their distinctive nature, have performed better than the market in Toronto," she said, referencing the REIT's long history of investing in so-called brick-and-beam buildings converted from industrial space.

Allied Properties has Cushman & Wakefield value its portfolio quarterly for International Financial Reporting Standards purposes for what she called a "second sanity check," and said capitalization rates have gone up because of interest rates.

"But our rental rates have also gone up, so from a total value perspective, we haven't seen any erosion in value in our portfolio," said Williams. "Does that mean it might not change tomorrow? No, it might change, but it hasn't."

For her taste, Williams, who will take over as CEO of Allied on May 2, said a return to office has not happened fast enough. Williams said that in Toronto and Montreal, Canada's two largest metropolitan areas, physical office occupancy averages about 40% on a Monday-to-Friday basis in Allied's portfolio.

"Toronto and Montreal have been lagging," Williams said. "In Toronto, it is driven by the government and the financial institutions. It is increasing but at a slower pace."

However, at Allied's properties in Vancouver and Calgary, occupancy averages closer to 70% during weekdays, she said.

"I can't explain it. Maybe they are more rebellious by nature," joked Williams about Calgary, adding Vancouver may have repopulated offices faster because of earlier lockdown measures.

Scott MacPherson, head of capital markets at Cushman & Wakefield, noted $62 billion in total trades across Canada in 2021 but said volume dropped in the second half of last year.

"Deals became more challenging to do, and the value question kept coming up as people asked how can I get to the same net return with the cost of funds 200 to 300 basis points higher," said MacPherson, referring to interest rates. "Some of the larger portfolios are starting to slow down" when it comes to sales, he said.

Julian Schonfeldt, chief investment officer at Canadian Apartment Properties REIT, the country's largest publicly traded residential landlord, agreed deals are harder to make today.

"It's a bit of a challenge right now, given the backdrop of higher rates. We have still seen pretty good liquidity," said Schonfeldt. "There is a lack of new supply and unprecedented immigration. All geographies [across the country] are picking up. They are not all the same."

The CIO said cap rates are often the most cited on valuations and acknowledged "the headwind" on interest costs, and said the "major tailwind" is rental revenue growth.

"For context, a year when interest rates were super low, our rent growth on [tenant] turnover was in the low single digits," said Schonfeldt. "In our last quarter, we reported 24% growth [in rent] on turnover."