Here is an update to a graph that has been posted here many times previously. Cap rates are continuing a downward or flat trend across most asset classes amid a continued influx of capital and a continued environment of relatively cheap debt and low interest rates.

Suburban office buildings appear to be the one exception in mid-2014, likely reflecting worsening leasing fundamentals and increasing vacancy in many areas such as Burnaby. While there doesn’t appear to be much room for continued compression in the other asset classes, Vancouver tends to be a market that defies logic.

What do you think? Where do you see capitalization rates trending as we finish 2014 and enter 2015….

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As we’re now well into Q4 2013, a brief look at average cap rates in Metro Vancouver shows (surprise!) no significant change from 2012. Underpinned by an environment of continually cheap debt, cap rates have been flat or remain in slight decline, and now 100 BPS below the rolling 10 year average of 6.2%.

Average Cap Rates 1993-2013

Of course, only in rare cases are Vancouver buyers truly finding yield; it is often more of a ‘safety’ play. With a healthy supply of potential (and anxious) private equity buyers that have amassed significant, undeployed cash reserves in reaction to depressed and uncertain market conditions in recent years, cap rates are being bid down now as much as ever. This, coupled with fiscal authorities in both Canada and the United States continuing to maintain interest rates at historically low levels have resulted in the continuation of historically low cap rates in Vancouver.

The first signs of a shift in this trend may already be occurring with a slight downward trend in transaction activity so far in 2013. A continuation of this trend in 2014 combined with a changing economic/interest rate environment and potentially volatile leasing markets (particularly in office) may finally exert upward pressure on cap rates.

…just don’t tell owners…

As we approach the end of summer, a look at transaction activity in Metro Vancouver at the 2/3 mark of the year shows a fairly significant drop compared to this time last year. Research prepared by Colliers International shows the number of transactions of over $3 Million down slightly for retail and apartment properties, and down almost 50% for office buildings (where supply has been scarce) and land (where demand is down after a busy 2012 that saw many large sites acquired).

An article in the Vancouver Sun mentions Realnet research reflects these numbers and shows even greater declines in Calgary and Toronto during the same period.

Perhaps this indicates the market’s collective belief that valuations are peaking for both investment properties and development sites.

Valuations are getting so high in Vancouver’s commercial market it is starting to affect deal flow, says a new report.

RealNet Canada Inc. says capitalization rates — the implied rate of return on a property — in British Columbia have gone so low that a 13% decline in sales in the first quarter can be attributed to the drop. The lower the cap rate, the more a property is worth.

“Transaction volumes experienced declines as the general market adjusts to changing value expectations in a record low cap rate environment,” said Paul Richter, director of research with RealNet, in the report. “Investment activity experienced a decline, however, demand for quality assets and development sites remains high.”

RealNet said there was 217 transactions of more than $1-million in the Vancouver market in the first quarter which amounted to $1.06-billion in activity. That was sharply down from the more than $1.2-billion in activity in the fourth quarter of 2012 but still 10% above the long-term quarterly average.

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