Canadian real estate investors are increasingly turning to the United States market because of lower prices and potentially higher returns, according to Avison Young.
In the first half of this year, purchases of U.S. commercial property by Canadians soared 79% from a year earlier to $5.4 billion, with most of the money from institutional investors, such as pension funds and real estate investment trusts.
Private Canadian investors, however, snapped up $801 million worth of U.S. commercial real estate, most of that suspected to be in multi-family properties.
A big draw is prices. In Lynden, Washington – about four miles from the B.C. border – an acre of zoned and serviced commercial land sells for around $300,000 per acre, according to Dick Vandenberg of Lynden Business Park, or about half the price as in suburban Metro Vancouver.
The other lure is capitalization rates, Avison Young reports. Typical cap rates in U.S. cities are in the 7.5% range and have increased in the past year.
In Vancouver, as a comparison, average capitalization rates are 5.1%, down from 5.3% in 2013 and typical of Canada-wide averages.
Avison Young chairman and CEO Mark Rose said the lower prices in the U.S. will continue to attract more Canadians, but cautioned that Canadian commercial real estate prices could soften.
“I believe that we are at a short-term pricing top in Canada with bigger deals being fewer and farther between,” Rose said. “However, given the compressed yield environment to date, I believe the next wave of deals will more than likely be spurred on by rising interest rates, forcing some over-leveraged owners to sell, while others will find that buyers can’t pay what they used to. With all that anxious surplus capital and limited supply, I think there is sufficient pent-up demand in Canada, with a variety of investors waiting to get in at slightly better pricing. This will ultimately result in a re-pricing of commercial real estate assets.”
A weaker loonie may also keep more Canadian investors from flying south.
The Canadian dollar dropped 0.76 of a cent to 88.82 cents US this week.