Two years into the most intense campaign of interest-rate hikes in decades, commercial real estate’s last bastions of support are faltering, with industrial and storage property owners succumbing to oversupply and slowing demand.interest rates
In commercial real estate, property values are measured by a metric known as the capitalization rate, which is a percentage of annual rents relative to a building’s value; the lower the rate, the better, because it means a building is worth a lot. At the height of the e-commerce craze during thepandemic, industrial warehouses in the Greater Toronto Area could sell at 3-per-cent cap rates. Today, they average around 5.5 per cent, according to real estate brokerage CBRE.
“We’re seeing that this sector is not immune to oversupply,” said Fraser McKenna, an industrial real estate broker at CBRE. Within the storage sector, Steven Scott, StorageVault’s chief executive officer, described the recent pain as a normalization in an interview, rather than carnage. Still, the sector’s recent cooling is significant. In Canada, storage property owners have averaged net operating income growth of 13 per cent each quarter since 2017, according to analysts at RBC Dominion Securities. Last quarter, it was 5.2 per cent.
Canada should also benefit from strong immigration in the long run. Prologis, the industrial giant, has estimated that for every new person added, a metro area needs 30 sq ft. of more industrial space. Last year, Canada added 1.3 million people, andLandlords hope this growth will help fill existing property vacancies – and estimate that Canada could even face a shortage of available space in a few years’ time because hardly anything is getting built now.
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