Over the past year, the demand for commercial real estate has continued to outstrip demand. Capitalization suppression for small mixed-use commercial and multiple residential properties has continued downward as investors seek steady income streams for investment purposes. We have seen firsthand many instances where good quality investment properties have received multiple offers and are being purchased above list price. For those approaching retirement or with the means to invest, small commercial real estate offers a steady income and can be self-managed. Recently with the lack of duplexes to 12 unit buildings near impossible to acquire in choice locations, many are seeking alternatives such as condominiums for rental purposes or store and apartment buildings.
For retail, a search of RealNet over the past two years (twelve month trailing) for small retail properties (under $3million) has seen an increase of about 5% in both dollar value and sales volume, yet capitalization rates increased by 20 basis points to 6.4% currently. The average price per square foot of a retail building increased by $17 per square foot or 4% during this same period within Metropolitan Toronto. Similarly for apartments, the average price of an apartment unit increased by 6% from $192,360 to $203,239 per unit. Total sales volume was down considerably by 35% over this period yet capitalization rates remained steady at 5.5%.
Although the data sets are generally not consistent, the overall picture suggests an increase of at least 5% year over year in these real estate categories, on a broad-brush basis. Despite this evidence, we have seen many, many instances of price increases well above 5% year over year and it is our opinion that capitalization suppression continues for small commercial real estate. At best, the evidence suggests that pricing for small commercial real estate remains positive.
According to the Toronto Real Estate Board (TREB) sales volume has increased year over year by over 20%, however this optimism must be tempered with the fact that 2012 was in the doldrums and 2013 is nowhere near former historic highs for transaction volume. The most recent information as obtained from Market Watch indicates an overall appreciation in the average price of about 5% and has pushed the sale price of an average home to above the $500,000 mark.
Re-sale condominium apartments have seen increases of 3.7% overall and now average $340,000 approximately. Urbanation, a consulting firm that tracks new condominium sales volume reports that volumes are currently down by 18% year over year and that pricing remains relatively flat at 2.6% or about $376,000 overall. Sales volume increased in the most recent quarter, but remains under 4,000 units per quarter. The slowdown in retail pricing is now influencing the condominium land market. Developer’s continue to pay top dollar for premium Downtown or Downtown Periphery sites, but in general pricing has flattened somewhat. The overall volume is up about 6%, however pricing remains flat at about $64 per square foot of buildable gross floor area (GFA).
The price per unit rate has declined about 8% over the past year and now remains at about $52,000 per unit buildable on average. Part of the conflict in upward pricing per square foot of GFA versus the downward price per unit rate may be explain in part to the reduction in overall unit size. In effect, developers have kept pricing levels flat but have reduced overall unit size in order to combat onerous development fees and the escalating cost of material and labour.
So what does this all mean? Price levels for most types of real estate continue to escalate but are muted at best. The sales volume for most real estate indictors, are down yet pricing continues to eke out marginal gains. No severe correction only a soft-landing because we can see it coming. Only time will tell – not experts.
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