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Report on Business Skyscraper deals keep heat in Canada’s commercial real estate market

Canada’s commercial real estate market is defying expectations, as investors buy skyscrapers in Vancouver, Toronto and Montreal to capitalize on surging demand by tenants for prime urban space.

The number of deals was expected to ease this year, due to higher interest rates and concerns over a potential economic slowdown.

However, the latest transaction to show that the market is still strong is the sale of Anbang Insurance Group’s massive Vancouver office complex to private equity company Blackstone and a Los Angeles real estate trust. While the sale price was not disclosed, it is believed to be one of the biggest Vancouver property deals in recent history.

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“There is definitely a strong wall of capital for real estate,” said Carl Gomez, a senior vice-president with pension-fund real estate company QuadReal Property Group.

The sale of Anbang’s Bentall Centre, along with other office-building deals and a flurry of equity raises, has kick-started what’s expected to be a strong year of investment activity in the top real estate markets of Toronto and Vancouver and up-and-coming Montreal.

“The pricing is very strong. The capital-markets environment is still supportive to keep that pricing where it is at. There is nothing out there fundamentally to suggest that the pricing will shift,” Mr. Gomez said.

Last year, deal activity hit a record high. There were 7,145 transactions worth a total of $49-billion in the country, according to commercial realtor CBRE, up from the previous year’s 7,074 deals worth a total of $43-billion.

That included the $850-million partial sale of Brookfield Property Partners LP’s Bay Adelaide office complex and the $800-million sale of Bombardier Inc.’s land near Toronto’s international airport.

This year, in addition to Bentall Centre, there have been other sales of high-profile office buildings in Toronto and Montreal.

“While people entered the year a bit nervous as to what the year would hold, I would say we are off to an incredible start. There is still strong interest in Canadian real estate,” said Mario Paura, a Stikeman Elliott partner, who co-heads the law firm’s real estate business.

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Economic growth in Toronto and Vancouver combined with a shortage of office space and housing has underpinned the commercial property boom. The office vacancy rate in both cities has been at record lows for more than a year due to demand from tech companies and other businesses. That has spurred development, with 17 new office buildings under construction in Toronto and two dozen new office properties are being erected in Vancouver, according to CBRE data.

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“The push for urban product is extremely strong,” said Gary Morassutti, managing director with Royal Bank of Canada’s capital markets real estate group.

Even though Beijing has tried to stop Chinese investors from buying foreign commercial real estate, the lack of Chinese buyers did not stem the flow of deals.

In addition to the loss of Chinese players, other big real estate buyers such as Oxford Properties and Ivanhoe Cambridge are spending their capital developing new buildings in Canada and expanding in other regions, such as Britain.

However, other buyers are expanding their Canadian real estate portfolios.

“There is more than enough capital sloshing around to fill the gap,” said Chris Langstaff, LaSalle Investment Management’s head of Canadian research.

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The Los Angeles trust, Hudson Pacific Properties Inc., and New York-based Blackstone bought Bentall Centre to gain access to the Vancouver office market. They will invest funds to refurbish the office complex and potentially build another tower.

The duo beat out competition from Hong Kong tycoon Li Ka-shing’s company, CK Asset Holdings Ltd., which has been actively looking for Canadian property and was one of the unsuccessful bidders for the Bombardier development lands in Toronto, as previously reported by The Globe and Mail.

It is not just office buildings in Toronto and Vancouver. It is apartments, multiresidential property, warehouses and other industrial structures that are being developed and purchased.

Minto Apartment paid more than $200-million for a set of residential rental properties in Toronto and Montreal. Blackstone and Ivanhoe Cambridge spent $3.8-billion to get their hands on a slew of industrial spaces used for e-commerce distribution sites and data centres.

“What is underlying that is the insatiable demand,” said Ashi Mathur, deputy head of investment banking with Bank of Montreal.

The quiet real estate investment trust, or REIT, industry has successfully tapped public markets for capital. There were nine equity raises totalling $1.5-billion from January to March. That was higher than the $1.1-billion raised in the same period last year, according to BMO.

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As for a repeat of last year when there were two multibillion-dollar deals involving REITs? “I wouldn’t be counting on there being eight to 10 REIT transactions,” said Peter Buzzi, co-head of global M&A at Royal Bank of Canada. “Last year was absolutely unusual.”

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