It is important to remember that the Bank of Canada implemented its first interest rate rise in seven years as recently as mid-July 2017. So it’s no surprise that rising interest rates have done little more than scratch the surface of heated demand for Canadian commercial real estate.
That said, a key observation of the quarter is that the narrowing spread between cap rates and the 10-year government of Canada bond yield is putting a lens on markets and asset classes where returns are potentially higher. As a result, markets with greater yield potential could experience further modest cap rate compression, within this rising interest rate environment.
On the other hand, Vancouver and Toronto’s hot CBD office and industrial asset classes are expected to see greater cap rate stability. In addition, strong market fundamentals will act as a counterweight, mitigating the impact of interest rate increases over the near term.
Demand for Canadian commercial real estate will remain robust through 2018. It’s important to remember that while interest rates are rising, they remain near historic lows and fundamentals in gateway markets remain strong. That said, institutional buyers will be diligently scrutinizing returns from potential real estate acquisitions, and generally, we expect cap rates will stabilize.
Source : Cushman & Wakefield