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Commercial property sector in a tug of war Add to ...

Investors have stalled the recovery in Canada’s commercial real estate market as they hold out for bargain-basement prices that sellers insist will never arrive.

A marked summer slowdown in the sector is being attributed to a standoff over the prospects for continued economic recovery – deep-pocketed buyers think things may worsen and expect sharp discounts, while those holding the properties point to improving vacancy rates and refuse to lower their prices.

The weak summer wiped out a year of steady improvements in the Greater Toronto Area market, with both the dollar amount and number of deals slipping to levels last seen in early 2009. The city has been the cornerstone of the country’s recovery, with other Canadian cities tracking its gains.

An active real estate sector is important because commercial and residential property underpins a significant proportion of the assets of banks, pension funds and other institutions.

“Most real estate is held by strong owners who don’t have to sell,” said George Carras, the president of commercial real estate tracking firm RealNet Canada. “The slowdown can largely be attributed to the market finding a new pricing equilibrium.”

Third-quarter investment statistics for the GTA show that the number of deals fell 21 per cent from the second quarter. The quarter marks a sharp step back from the gains of the last year, with both dollar volume and the number of sales falling.

About $150-million in deals were completed, down from $200-million in the prior quarter.

While deals have slowed, the number of distressed sales decreased to 4.5 per cent from 6.1 per cent last year. It’s a sign of stabilization that is now helping owners stay firm on prices, those in the industry said.

Vacancy rates – particularly in the GTA – have been improving and buyers are starting to offer more money. Since September, there are also more players at the table when something becomes available, with pension funds, insurance companies and real estate investment trusts all in the market for cash-generating properties.

“People are starting to feel more secure and interest rates have remained low so deals make sense,” said Michael Cooper, chief executive officer of Dundee Properties Inc., which paid $30.8-million for an office tower in Scarborough and $14.6-million in Mississauga for a similar property in the third quarter.

“Buyers are starting to pay more than they were willing to earlier this year, when things weren’t quite so certain.”

While corporate investors have been hesitant to close deals across the country, retail investors piled into real estate investment trust units in the third quarter. The S&P/TSX capped REIT index, which tracks the sector, gained 17 per cent over the summer as investors chased higher yields.

“The demand for yield-producing investments has been strong,” said Michael Smith of Macquarie Securities. “People ask me if it’s overdone, but in reality, real estate prices have been going up. So intrinsic value is increasing at the same time as unit prices.”

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