Amongst other things, a cap rate is a measure of the income a property generates compared to its cost. When it comes to real estate, a cap rate is often used to calculate Return on Investment (ROI), which is a measure of how well a property can produce an income.
Multifamily buildings had the lowest cap rates in Canada in Q1
During the first quarter of 2022, multifamily buildings had the lowest cap rates in Canada. A national survey conducted by CBRE showed that the average cap rate for mid/high-rise multifamily properties was 4.1 per cent. In comparison, the average cap rate for Class C multifamily properties was 5.33 percent.
The average cap rate for Class A high-rise buildings was 3.65 percent, while the average cap rate for Class B high-rise buildings was 4.25 percent. This represents a significant decrease in the average cap rate of multifamily properties.
The Federal Reserve’s ongoing efforts to fight inflation are also affecting cap rates, as debt becomes more expensive and becomes harder to get. The upcoming new tax reform act is also expected to have an impact, although it is unclear what effect it will have on the multifamily sector.
The demand for multifamily properties is strong. A shortage of housing units is driving a recent surge in multifamily transaction activity. As a result, investment interest is high in multifamily properties. Investing in multifamily properties is a great hedge against inflation.
Investors should look for effective ways to manage tenant turnover, as well as ways to leverage higher rents. As mortgage rates rise, consumers will cut back on non-essential spending and may find themselves unable to transition to homeownership.
The upcoming holiday season will also be a busy time for e-commerce activity. EA expects retail sales to be up 16% year-over-year, which could benefit lifestyle retailers.
Demand is also strong for single-family apartment units. Rents are up 13% year-over-year. This has led to outsized investment returns for apartment building owners. In addition, rents are booming in almost every market.
While demand is strong, the looming supply overhang can slow rent growth. A large gap between the actual cap rate and the PCR can indicate that market fundamentals may not support the current cap rate. It is therefore important to look beyond cap rates and assess the true market fundamentals.
As of the first quarter of 2019, the total annualized return for the Canadian multifamily sector was 9.8%. This is compared to the national average of 5.33 percent. The long-term outlook for multifamily is favourable.
Single-tenant commercial property is popular in B.C.
Among the commercial real estate options available in Vancouver, single-tenant commercial property is one of the most popular choices. A single-tenant property can offer some of the best attributes of a multi-tenant property, but may also present some unique challenges.
Investing in commercial real estate is time-consuming and complex, especially if you’re a passive investor. But investing in a single-tenant net-leased asset can provide some of the most straightforward management options available in the market, while providing an ideal long-term position in a growing market.
The single-tenant retail product is one of the most popular options available for investors. With its low risk and predictable cash flow, it’s no wonder that so many investors are seeking this type of property.
The single-tenant retail product also has a number of other benefits. For example, many properties are occupied by brand-name retailers. And, unlike with multi-tenant properties, a tenant with a triple-net lease pays the property taxes, maintenance and lease payments directly. Typically, a tenant with a triple-net will also receive annual rent increases.
The average price per square foot for a single-tenant property in Vancouver is around $26 per square foot per year. This is lower than the national average of $28 per square foot. But, the Vancouver market is still limited by supply. There are only about 100 listings.
In fact, the Vancouver commercial real estate market has a record 1.6 million square feet under construction. And, according to CBRE, a record number of small commercial real estate transactions are expected to take place in 2021.
Single-tenant commercial property is also a popular target for foreign investors. A single-tenant freestanding Rexall pharmacy in Stony Plain, Alberta, for instance, sold in December 2021 to a Metro Vancouver-based investor.
The capitalization rate of a single-tenant property may be lower initially. But, as time passes, this property’s value will start to increase. And, if it’s been around for less than seven years, the capitalization rate will be much higher. And, as with any property, the capitalization rate will also depend on the length of the lease.
Return on Investment (ROI) is a measurement of income from the property compared with its cost
Whether you’re a business or an individual, ROI can be an invaluable tool in evaluating various investments. It’s a simple calculation that can provide you with an insight into the profitability of your investment.
Essentially, ROI is a percentage figure. To calculate it, you need to know how much your investment has produced. You can do this by dividing your net income by the cost of your investment.
A positive ROI means that the investment has produced more than its cost. A negative ROI indicates that the investment has produced a loss. The higher the ROI, the better. It’s not always easy to calculate ROI, however. Generally, businesses track it quarterly and at the end of a project.
When calculating ROI, you should take into consideration all costs involved. This includes both the capital costs and the operational costs. A business may also want to consider how much it will cost to support the investment. This can include shipping and installation costs, as well as maintenance and support costs.
The ROI for a project can vary widely depending on the project. For instance, an online store owner may want to know the return on investment for a cloud-based storage service. They might also consider the ROI of their ad campaign.
The ROI for a project may seem complex, but it’s actually not. You can calculate the ROI for a project with the help of several equations. The most basic method involves dividing your net income by the cost of the investment. However, there are a few things to keep in mind when calculating ROI.
First, you should know that there are two basic types of ROI: actual and anticipated. The anticipated ROI is calculated before the project is launched, while the actual ROI is calculated after the project is completed. You can use the anticipated ROI to calculate the ROI for a project and determine whether it will move forward or not.
The anticipated ROI can also be a good indication of whether or not a project will succeed. However, you may not want to use it as a deciding factor.
CBRE’s 2022 Canada real estate market outlook
Earlier this month, CBRE released its 2022 Canada real estate market outlook, which included a number of key insights. In particular, the outlook outlined that the retail and office sectors will continue to dominate the commercial real estate landscape. These sectors should attract investor interest.
The retail market will be driven by innovation and a focus on experience. This will reinvigorate the sector in the coming year. But, despite these trends, the retail sector is still facing supply constraints.
CBRE also noted that investment activity will be robust in 2022, with an expected 10-20% additional net new capital flowing into the Canadian real estate market. This investment volume is projected to surpass the record amount of PS4.4 billion seen in 2021. The retail market is also expected to continue to expand into new sectors, with large institutions diversifying their portfolios.
CBRE also noted that one in two lenders plan to increase their real estate lending allocations in the year ahead. These lenders are more optimistic about the real estate sector than they were two years ago, and they have seen signs that there is a shift away from the office sector.
CBRE surveyed both domestic and foreign lenders from early October to November, and found that one-third of lenders plan to increase their portfolio allocations by 20-30 per cent in the year ahead. The rest plan to maintain their current allocation levels.
CBRE also noted that the demand for industrial and multi-family real estate continues to be strong. The industry is recovering better than many other industries. Demand for this type of asset is also expected to remain strong in large urban communities, which have seen an increase in out-of-province buyers from Ontario.
Overall, the commercial real estate market in Canada has been recovering well from the pandemic. As a result, prices have continued to rise and the sector is expected to continue to attract strong investment.
The outlook for the commercial real estate sector in 2022 is positive. However, rising interest rates and inflationary pressures may pose downside risks to the sector.
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.