Credit crunch hits Canada's commercial real estate

Canada's commercial real state sector is the latest victim to be beaten back by the global crunch in capital markets, according to a report by CB Richard Ellis.

Investment in the Canadian commercial real estate market, which includes office towers, shopping centres and industrial properties, fell 24 per cent in the first six months of the year, according to the report.

"Uncertainty on the part of investors as to the Canadian and world economies" has reduced both the pool of potential investors and their ability to secure debt-financing, CBRE Canada said.

As a result, all but one of the country's largest markets witnessed a scaling back in the first half of the year, with investment falling to $10 billion, down $3.1bn nationwide from the record-setting $13.1bn invested in the first half of 2007.

Bleaker still, commercial real estate investment could plummet 40 per cent from 2007 levels by the end of the year.

"We expect the investment market for 2008 as a whole to be about 40 per cent lower, possibly even more, than the record $32.2bn invested last year," said Stefan Ciotlos, president of CBRE Canada.

Historically, commercial activity picks up in fall as new projects become available for bidding.

"However, a strong second half is unlikely to occur this year because what began as a sub-prime credit crisis in the US has become a de-leveraging of all global asset classes impacting Bay and Wall Street's views of real estate in general," she said. Foreign investment was down a "sizable" 39 per cent to $581-million from $947-million in 2007, the report said.

In Calgary, where activity has been torrid in recent years, investment dropped 24 per cent to $2.2 billion from the $2.9 billion invested through the first half of 2007.

Commercial investment fell 17 per cent in Toronto, Canada's largest market, to $3.7bn from a record $4.5 billion last year.

Commercial real estate investment in the United States has fallen by as much as 60 per cent this year, according to New York-based Real Capital Analytics.

The scaling back could mark a return to the norm from the overly exuberant pace seen in 2007, said Kim Mercado, CBRE's Canadian research manager. Canadian commercial real estate investment topped $32bn last year, at the height of the global credit boom.

CB Richard Ellis projects about $20bn will be invested across the country this year as market conditions correct, she said.

That figure is comparable to both 2006 and 2005, when total commercial real estate investment reached $24bn and $19.5bn, respectively.

One bright spot so far this year has been Vancouver, the lone city among Canada's nine major markets where investment was higher, up $1.6bn from $1.5 million last year.

"We're still attractive," Mercado said. "Canada has always been a stable commercial real estate investment, that's not going to change," she added.