Commercial Real Estate – Is It Back?

 It is amazing what 2 ½ months and a $180M deal will do to affect people’s perceptions. In August 2009, PricewaterhouseCoopers LLP released a report that Canada’s commercial real estate sector faces “very trying times” that will cause further market corrections and borrower defaults. Holly Allen, managing director for PwC’s real estate practice in Canada was quoted as saying “We think there are going to be foreclosures and default situations on some of the buildings”. Allen may have been thinking of the major problems facing 10 Dundas Street, the unique 10 storey retail project at Yonge and Dundas with over $220M of debt and a value far below that.

"Brace for Commercial Foreclosure: Report "(National Post, Aug 19 2009)

No question that the cost of capital and availability of capital are both significant issues. Lenders have dropped their willingness to finance 75-85% of value to more likely 60-65%. Moreover, values have significantly dropped as a result of increasing cap rates.

The Globe and Mail then reported on October 19, 2009 that “Commercial real estate bounces back”. The article based its prognostication that Canada’s commercial real estate market was on the bend. This was based on RealNet Canada’s statistics that investments in commercial property in the GTA had increased by 46% in the third quarter over the second quarter while the number of transactions had increased by 20%. George Carras, RealNet Canada Inc. President, did comment that the sales were only half of what they were going into the recession.

"Commecial Real Estate Bounces Back "(The Globe and Mail, October 19 2009)

Turn the clock ahead a couple of weeks to October 28, 2009 when our offices closed the second largest real estate deal in Canada on behalf of the vendor, Northam Realty Advisors Ltd., with the sale of 151 Front Street West, Toronto, Ontario, for $180M to Allied Properties Real Estate Investment Trust. Yes, this is a unique commercial property consisting of a data centre with significantly high rents. However, the sale price was dramatically higher than the original purchase price for which Northam paid in 2004. The story is especially noteworthy as it was reported in the Wall Street Journal on the day of closing.

"Toronto Sale Going Against The Grain" (Wall Street Journal, October 28 2009)

So, is the recession over? Has the commercial real estate market returned to normal with a balance of ready and willing purchasers and vendors, as well as conventional lenders to support purchases? Not yet. 151 Front Street West was a very unique building in terms of its high rents profile. The U.S. commercial market is still suffering badly with no immediate relief in site. Commercial activity is still significantly off and availability of capital, although starting to resurface, is not anywhere near the cornucopia that was available 2 years ago. Life companies are now only getting back into the market, pension funds are only starting to dip their toes into the real estate streams and the banks have only so much capital to lend at significantly higher rates for these types of property.

Notwithstanding RealNet’s optimism, PricewaterhouseCooper’s Report from August 2009 is still probably a better prognosticator of things to come. Stay tuned.