Recently, Colliers looked deeply at the phenomenon of negative bond yields globally and their potential impact on real estate investment. This research has led to the realization that, in Canada, there is ample statistical evidence that cap rates and a lagging 5-year bond yield are strongly correlated. Specifically, the cap rates trail changes in this bond yield by approximately two years. This points to a strong near-term buying opportunity for those interested in purchasing commercial real estate in Canada.
While the next two years may offer price weakness and a buying opportunity based on the yield indicator alone, we see little reason for increased risk or value depreciation in Canadian commercial real estate over the longer term. Vacancy is low, immigration is high and developable industrial land in key geographies is scarce. Therefore, once past the coming period of expected weakness, we anticipate lower bond yields, lower cap rates and higher real estate prices to endure for some time. In other words, now is a good time for those looking to buy Canadian commercial real estate on any perceived drop in value.
