By Renee Slyvestre-Williams
The Canadian and U.S. real estate markets continue to move on distinct but parallel trajectories, shaped by interest rates, investor sentiment, capital structures and local regulation. That distinction is due to the delta between interest rates in both countries, said Jeff Wagner, senior managing director, IPA markets, Marcus & Millichap, during a session this week at NAIOP’s CRE.Converge in Toronto.
“The interest rates in the U.S. are higher, so they’re running a bit hotter, and that impacts yields and developments,” he said. “So, in Canada, yields are going to be a bit lower, and the backstop of that is the stability and strength of the marketplace, our vacancy is generally always lower, and we’re not too overwhelmed.”
Looking at debt market structures, Canada’s strength is in multifamily lending. Wagner noted that the mortgage market had $100 million of new originations each year with a big shift towards the insured, CMHC [Canada Mortgage and Housing Corporation] market. This means apartment developers have government-backed leverage that often approaches 90% of cost.
Dan Levitt, executive vice president, capital markets, Ryan Companies US, Inc. said that the U.S. market was significantly more constrained with funding mostly driven by banks. “We typically look for a joint venture equity partner on a standard 90-10 basis, where, if it’s a 60% bank loan, the 40% will be 36% from an institutional partner, 4% from us,” he said. “That’s a more typical deal if you can only get to 80% on the preferred equity mezz[anine finance] solution, that still requires quite a bit of equity for a developer to come in with.”
Despite the macro factors slowing down both economies, Canadian capital markets remain active. Will Wong, CPA, CFA and managing director, RBC Capital markets, highlighted the surge in unsecured bonds: “What’s interesting is the unsecured, secured mortgage bond market and CMBS markets in Canada have all bounced back,” Wong said. “I think we’re on track for the unsecured markets to finish top three in terms of years for capital raise.” He also pointed out how quickly investors have been absorbing the supply when it comes to mortgage bonds.
The panelists are also seeing the divergence of asset classes. Best-in-class assets continue to attract tenants and investors while older, low-amenity or vacant buildings face obsolescence. Emily Hanna, Ph.D., and managing partner, investments, Crown Realty Partners said return-to-office (RTO) mandates haven’t eliminated any excess supply.
“Return-to-office is primarily happening in the office assets that are good quality across the board. The biggest thing is that there’s a lot of useless space out there, and right now it’s zoned for office. And try as you might, you cannot rezone it to anything else,” Hanna said. The exception is Calgary, which has municipal incentives that support office-to-residential conversions at $45-$50 per square foot of acquisition.
Other assets like data centers, cold storage and manufactured housing are attracting more investors who are looking for yield and alpha beyond multifamily housing. Sarah Esler, CFA, and managing director, Global Head of Mortgage Investments, AIMCo, said that they’ve done some data center lending on a construction loan with an institutional partner with a 15-year lease with a credit tenant, compared to a multifamily deal that might price 200 basis points inside that. She also highlighted office refurbishments in Europe. Some markets have environmental requirements that need to be met by 2030 to preserve their cashflow, which creates lending opportunities.
Despite the differences between the markets, the experts agreed that investors aren’t just looking for a return. What defines value creation is the need for asset quality, sector specialization with a focus on alternative assets and operator expertise.
This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2025. Learn more about JLL at www.us.jll.com or www.jll.ca.
