Large portfolio deals have been conspicuously rare from the Canadian real estate landscape in 2024 as major domestic players take a breather, but the institutions may not be quiet for much longer.
While individual properties continue to trade, the volume of portfolio transactions for the first nine months of the year was down 68% compared with the same period in 2023, according to data from Colliers.
The drop was greatest in the industrial sector, at 85%, followed by office, at 74%, and retail, at 58%. In contrast, apartment portfolio transactions rose 12% as demand continues to outpace supply.
Sizable trades typically are done by large institutional operators – REITs, pension funds, private equity shops. Those buyers have been relatively quiet over the last two years amid higher interest rates and a dislocation in the debt markets.
“Once you get into those nine-figure deals, there are not that many buyers,” Adam Jacobs, Colliers’ head of Canadian research, told Green Street News. “Private buyers are priced out at that level. The pension plans and the REITs just aren’t transacting [the way they used to]. They haven’t been doing those monster, billion-dollar deals for a few years.“
Jacobs said that high interest rates have kept buyers on the sideline. “They don’t want to buy more real estate in the current pricing environment,” he said. “They’re supposed to be earning a return.”
Many institutions already own all the trophy assets, he said, noting that Ontario Teachers’ Pension Plan, via Cadillac Fairview, owns the Eaton Centre, and Canada Pension Plan Investment Board co-owns First Canadian Place.
“They’re not in distress, they don’t have to transact,” he said. “They’re willing to sell at the right price, but pricing needs to get more realistic.”
Open season
That pause by the domestic behemoths, however, has created an opportunity for others. Private buyers are stepping into individual deals – many for the first time – and foreign investors are dipping their toes into Canadian real estate without ruffling as many domestic feathers.
For example, Deka Immobilien acquired two Vancouver office buildings from Oxford Properties and CPPIB in May, and TPG acquired the majority of Oxford’s GTA industrial portfolio in late 2023.
Historically, multimillion-dollar deals in core Canadian markets would have been “very, very difficult” for an overseas buyer to achieve, said Milos Dajic, Oxford’s new head of Canadian investments.
“It’s not surprising that there has been a decline in portfolio trades,” he said, speaking to Green Street News in his first interview since taking the helm at Oxford.
“Deals are harder to do, they’re more expensive, vendors are not as motivated. The macro environment in the last few years has been challenging. The real estate sector was shocked by the fast spike in interest rates and the cost of capital.”
The way forward
That said, Dajic sees light at the end of the tunnel. “The tone is getting more constructive,” he said. “The capital that’s been on the sidelines domestically is now starting to get ready to be deployed. And the reality is, people can only sit on the sidelines for so long. Money needs to move around.”
To get domestic players like Oxford back on the buy-side in a meaningful way, Dajic says that first there needs to be a more stable and sustainable interest rate environment. Inflation must get under control, and the economy needs to grow at a “decent” pace.
The Bank of Canada has been cutting interest rates since June, delivering a 50 basis-points cut at the end of October. In September, inflation slipped below the BoC’s 2% target, and according to annual revisions released by Statistics Canada last week, real GDP rose 1.5% in 2023, up from the previous estimate of 1.2%. 2022 growth was revised upward to 4.2% from 3.8%.
We’re underwriting a lot more, and we’re getting ready to start actually buying again. I’m cautiously optimistic”
Milos Dajic, oxford properties
“When I think about 2025 and beyond, I think we’re going to start to see more of that rebalance of domestic capital jumping back in on the buy-side. Certainly we’re looking at far more opportunities now than we were 12 months ago. We’re underwriting a lot more, and we’re getting ready to start actually buying again. I’m cautiously optimistic,” Dajic said.
Dajic, who focuses on buying high-quality real estate in high-quality markets, is “particularly bullish” on the apartment and student-housing sectors, and he said the industrial sector continues to be an area of growth.
Oxford’s retail portfolio has been performing well, and there’s potential for diversification down the road, possibly into open-air assets. The company’s office assets also have been performing well, and if a great acquisition opportunity arises, Dajic won’t pass it up.
“I think in the next 12 months there will be some really, really meaningful opportunities coming out,” he said. “The patience will pay off. I think now will be the time to start really getting out there and investing.
“That’s the priority for me – getting the team ready so that we’re able to jump on those opportunities. Because they’re coming, and, in some cases, they’re already here.”
