Regardless of whether you’re a Canadian property owner, investor, or tenant, knowing the cap rates for Canadian properties can help you make smart investment decisions. Learn about the different property types, how they compare to each other, and how they can impact your ROI.
Whether you are looking to buy a new apartment building or you are planning to sell your current multi-family building, a multifamily cap rate can help you to determine the financial return that you will be getting from your investment. The rate is calculated by dividing the net operating income (NOI) of the property by its asset value. Cap rates differ depending on the state of the economy, property values, and submarkets.
For example, a high-rise multifamily apartment building in Toronto has a cap rate of 4.25 percent. However, a class A office building in Vancouver has a cap rate of 3.75 to 4.5 percent. This indicates that there are opportunities to earn more than a five percent cap rate.
The highest cap rates in Canada are expected to be in Winnipeg and Vancouver, although Halifax is expected to post the lowest rates in the country. The Q2 report by Cushman and Wakefield Research Canada offers a detailed look at the Canadian commercial real estate market. It also provides an outlook on the market’s performance for 2021.
The first quarter of 2022 marked the lowest multifamily cap rates in Canada. In fact, the average cap rate of 4.1 percent was the lowest for any property type. However, this statistic may not be the best indicator of how to invest. Instead, investors should look for effective ways to manage tenant turnover, leverage higher rents, and maintain elevated cash flow.
Investing in a multifamily asset can be a low-risk proposition, but investors should also look for ways to leverage the income and keep the property’s liquidity high. Karl Innanen, a Managing Director at Colliers in Kitchener, is an expert in understanding client needs in relation to market dynamics. He says that, in a post-pandemic real estate environment, investors should look for ways to rebalance their risk.
Across Canada, the average industrial cap rate is 4.55 per cent. However, in some prime sites, the cap rate can be as low as 3%. The vacancy rate is low, too, at 4.1%.
Canada’s industrial real estate market has been booming. Cap rates are expected to go up to 6.3%, from 6.1% currently. However, as the economy slows, the demand for industrial space will likely decrease. As a result, cap rates will also go up.
Cap rates are a measure of the rate of return of commercial properties. They are calculated by dividing the net operating income by the asset value. Cap rates are also influenced by property condition and lease lengths. In general, assets with shorter leases tend to outperform assets with longer leases.
According to CBRE, Canada’s industrial cap rate is the lowest in North America. Vancouver and Toronto both have cap rates lower than the national average. Montreal and Ottawa are also below the national average. As a result, these cities are attractive to investors looking to buy or develop industrial real estate.
In Vancouver, the cap rate is stable. The multifamily sector is also holding steady. However, it expanded somewhat in Q2. The average cap rate for multifamily class A high rise buildings is 3.83 per cent. The highest cap rates are found in properties located near Rideau Street in Lowertown.
Cap rates are positively correlated to 10-year yields, but they don’t move in lock-step. As a result, investors should keep cap rates in context. For example, a high cap rate in an urban area might indicate a higher risk, while a high cap rate in a rural area might indicate that the asset is older and might not appreciate as quickly as other properties.
Despite the gloom, Canadian hotel capitalization rates are at least modestly up for the year. While the headline numbers aren’t quite in the tens of billions, a few hundred million dollars worth of investment should see a return on investment in the coming months.
A cursory review of hotel sales records suggests a slight slowdown, but that’s nothing compared to the hotel sales numbers of the past. In the hotel industry, some markets are still a ways off from being competitive. The hotel industry has been sluggish over the past several years, but investors remain bullish on the future. Hotel investors aren’t the only ones keeping an eye on Canada’s burgeoning hospitality sector.
The big question remains: what are the most lucrative hotel sales markets to look out for in the coming months? If you’re looking for a new hotel to buy, the next few months will give you plenty of time to make your decision. You’ll also have to consider your budget, as a new hotel may not come cheap. Thankfully, there are many options to choose from, and it’s not all about a pricey location. A hotel investor’s preference is likely to be based on historical cap rates and historical occupancy trends. Lastly, be prepared to negotiate. The hotel sales game has been tough for several years, but the players have been growing a little more confident lately. If you’re looking to make the leap into the hotel industry, there’s no better time to start than now. Lastly, consider that many hotels have a large pool of unsold rooms, and this isn’t a bad thing. In fact, hotel occupancy rates are increasing, which should help to fuel more sales activity in the near future.
Return on Investment (ROI)
Investing in real estate involves much more than just buying a property. There are a variety of metrics that can be used to evaluate property. Some of them include:
The most common method of calculating ROI for commercial real estate is the capitalization rate. This is a ratio of the net operating income of an investment property to its current market value. The higher the percentage, the higher the ROI. However, cap rates vary from city to city.
Other metrics include cash on cash return, debt service coverage ratio, and internal rate of return. Each of these metrics has its own strengths and weaknesses. Using them in conjunction with the other metrics can provide a more complete evaluation of an investment property.
The higher the ROI, the better the investment. However, it’s also important to know the risks associated with investing. If the ROI is too high, it could mean a high risk of losing money. Also, if the ROI is too low, it could mean a lower return.
A property with a higher CAP rate may be more appealing to a buyer. However, it’s important to evaluate the property in depth. It’s also important to consider projected appreciation. This could mean better ROI in the long run.
Cap rates vary depending on the real estate market. For instance, in California, housing prices are higher than those in Tennessee. However, they also vary by asset class. For example, a house rented above market rent will have a higher cap rate.
When evaluating a property, it’s important to consider the cap rate, as well as other metrics. Using the same property, a lower ROI can be calculated if the down payment is lower, or the debt service is higher.
A high CAP rate can mean a higher ROI, but it can also mean a higher risk. Also, if the NOI drops, the value of the property will decrease. If the NOI goes up, the value of the property will increase.
Other factors to consider when investing in real estate include location, property condition, and prop management.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.