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Bayview Village is seen on December 17, 2010.Jennifer Roberts/The Globe and Mail

It appears to be too soon to say that pricing in Canada's commercial property market has turned a corner, with Bay Street buzzing over rumours that a Toronto shopping mall might sell for a new record-low cap rate.

Cap rates, or capitalization rates, measure the return that an owner is likely to receive from a real estate investment, by comparing the operating income (the rent that tenants pay minus the landlord's expenses) to the price that was paid for the asset.

Most industry experts have been saying that the lengthy period during which REITs, pension plans and other real estate players have bid up prices for shopping malls and office buildings (resulting in lower cap rates) is at an end, and that the market is entering a new era of lower prices and steady or rising cap rates. Indeed, that's what executives were saying at a major industry gathering, the RealREIT Conference, in September. "Most speakers and panelists agreed that, with long-term bond yields up 100 basis points from all-time lows, cap rate compression has ended, and the current bias is for higher cap rates," Canaccord Genuity analyst Mark Rothschild wrote in a research note at the time.

The rise in long-term interest rates has caused investors to fret about REITs' mortgage costs, and put a damper on an industry that was recently flying high. At the start of this year, a flood of equity was being issued, shopping mall player Primaris Retail Real Estate Investment Trust was sold in a multi-billion-dollar deal, and IPOs – from small REITs to the one that Loblaw Cos. Ltd. decided to spinoff – were all the rage.

In the months since, pessimism has risen and it's looked like the market is turning a corner. That's why a rumoured deal for north Toronto mall Bayview Village has tongues wagging, with people on the street scratching their heads over speculation that the cap rate could come in around or even below four per cent. In this market, many would have expected it to be closer to five.

One executive of a major Canadian pension plan deemed it to be "nuts," adding that it points to a market that appears to be peaking.

The rumour, which remains unconfirmed, is that Bentall Kennedy – a large real estate player that advises pension plans and other institutional players on their real estate holdings – has bid (possibly in partnership with, or for, British Columbia Investment Management Corp.) more than $500-million for the mall, beating out a number of offers from groups made up of virtually all of Canada's largest pension plans. (Both Bentall Kennedy and Orlando Corp., the presumed seller, declined comment).

To be sure, the high-end mall represents a unique opportunity. Bayview Village sits at Bayview and Sheppard Avenues in Toronto, and comprises 440,000 square feet according to its website. And part of the high price-tag likely relates to the potential to build condos on the site.

"It may just set a record cap rate," said one REIT executive.

Real estate investment trusts are largely hunkering down in the wake of the beating that their units have taken in the market since May, when long-term interest rates started to rise. The rumoured bidders for Bayview Village appear to be almost entirely pension plans; that's consistent with reports that they and other investors such as private equity plans are taking advantage of the market environment by doing more acquisitions.

But the situation might also suggest that REITs' unit prices could continue to benefit for a while longer from cap rate compression.

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