Capitalization rates, or cap rates, are largely stable in Vancouver’s commercial real estate sector, despite rapid economic developments surrounding trade policy, interest rates and the dollar.
Cap rates, which measure a property’s financial performance relative to its purchase price, are steady mainly due to low transaction volumes, says Michael Emmott, capital markets principal with global commercial real estate advisor Avison Young (Canada) Inc.
“The supply is there, but few people are prepared at the moment to sell the assets that people want to buy,” he said. “[Buyers] may be looking for pricing to come down a little more, but there isn’t really a significant volume of trade at the moment influencing a downward pressure on cap rates.”
Cap rates tend to be lower for highly liquid and desirable commercial properties because investors are willing to take on a lower yield based on the lower risk profile. On the other hand, cap rates are higher for properties in non-central locations or with higher vacancies and improvement costs, because investors need a higher yield in terms of income versus price paid.
Across all commercial asset classes, Emmott said grocery-anchored retail, quality industrial, multi-family, data centres and soft storage are the most coveted based on his discussions with institutional investors and clients.
“A lot of the investors are looking for the same kind of product, but volume of trade, the properties that are available on the market for purchase that fit into those categories, are still quite few and far between,” he said.
Despite stable commercial markets, much is transpiring in the broader economy. For example, optimistic investor sentiment has been tempered by the possibility of a recessionary trade war with the United States. President Donald Trump has threatened 25-per-cent tariffs on imports from Canada commencing Feb. 1.
“I think President Trump’s rhetoric, if not making people nervous, does provide some uncertainty,” said Emmott. “I think the wait-and-see period has not quite finished. I think it’s been extended a little bit while some of these issues are clouding the waters.”
Meanwhile, the Bank of Canada cut the key interest rate 25 basis points to three per cent Wednesday, the sixth reduction in eight months. The current easing cycle could motivate investors to increase their real estate exposure relative to stocks and bonds.
“Institutions … are certainly responsive to interest rates, and I think as real estate rebounds a bit in the coming few months, we’ll be seeing them bring up their exposure again,” Emmott said.
This is particularly true for foreign investors, who may be tempted to snap up commercial properties in Vancouver due to a weaker loonie, which has declined versus the greenback from a high of about 83 cents in mid-2021 to about 69 cents Wednesday.
“The weaker dollar certainly, I think, makes it difficult for Canadians to be as competitive in other markets internationally,” Emmott said. “However, it does present some opportunities for foreign investors to come into this market. … We’re still seeing some groups looking for the right kind of product.”
On Jan. 14, Avison Young released its fourth-quarter 2024 report on Canadian cap rate and investment trends. For the Vancouver market, cap rates are expected to further subside in Q1 2025 for multi-residential but remain stable for industrial, office and retail.
