Canada is on pace for a record-setting year for commercial property deals, but there are signs that lenders are curbing their appetite for the country's real estate market.
Commercial real estate activity this year is poised to exceed the $32-billion record set in 2007, brokerage CBRE said in a new survey.
The country has seen several blockbuster commercial real estate transactions so far this year, including a $1.2-billion deal between pension giants Canada Pension Plan Investment Board and the Ontario Municipal Employees Retirement System, for a portfolio of offices in Toronto and Calgary. KingSett Capital and Alberta Investment Management Corp. acquired a 50-per-cent interest in Toronto's Scotia Plaza from Dream Office REIT and H&R REIT in a deal valued at more than $500-million. In Vancouver, Chinese insurance giant Anbang Insurance Group scooped up the Bentall Centre office complex for a reported $1-billion. Bluesky Hotels and Resorts, a company backed by Hong Kong-based investors, paid $2.1-billion for InnVest REIT, which has a portfolio of more than 100 hotels across the country.
The flurry of big-ticket deals helped boost the volume of commercial deals in Canada, which were up 32 per cent so far this year at the end of the third quarter, the biggest increase of any developed country, according to Jim Costello, senior vice-president of real estate data firm Real Capital Analytics. More than a quarter of the deals have involved foreign investors.
But CBRE found that lenders are starting to take a more cautious approach to financing commercial property deals in Canada next year, thanks to growing concerns about soaring property values and the sheer volume of money flowing into the sector.
"There was a general belief within the industry that it was oversupplied with debt and equity capital and that will moderate" over the next year, said Carmin Di Fiore, CBRE's executive vice-president of debt and structured finance.
Just 57 per cent of lenders told CBRE they were looking to increase the amount of money they lend to the commercial property sector in 2017, down from 73 per cent last year. CBRE's survey includes banks, insurance companies, pension funds, foreign lenders as well as private investors.
Fewer lenders told CBRE they were planning to expand their business in Metro Vancouver, where commercial real estate values have soared and a 15-per-cent provincial tax on residential real estate purchases by foreign buyers has helped cool the housing market.
Instead, lenders are shifting their attention toward Toronto, with 84 per cent of companies surveyed saying they were interested in financing commercial property transactions in the Greater Toronto Area, up from 77 per cent last year. "People are seeing that Toronto represents a far deeper and more diversified base in which to lend in" compared to Vancouver, Mr. Di Fiore said.
The enthusiasm for the GTA has begun spilling over into smaller cities in Ontario, such as Waterloo, London, Hamilton, with 21 per cent of lenders saying they planned to do more business in those markets next year.
Industrial properties such as warehouses and distribution centres, where vacancy rates are sitting at 30-year lows, are most in demand among commercial property investors, CBRE found.
By contrast, lenders are becoming more cautious about financing new high-rise condo developments, driven by concerns over high home prices and rising levels of household debt. Just 5 per cent of lenders said they planned to increase their budgets for condo deals this year, while 12 per cent told CBRE they were most worried about the condo market. "There are signs that lenders are responding to frothy values and heightened risk in this sector," the brokerage wrote in its report.