Calgary impervious to interest rate uncertainty

By Robert Frank

Optimism is pervasive in Calgary’s commercial real estate market, observes Randy Cameron.

“Calgary has been very active during the past few years and, like the rest of the real estate industry in Western Canada in general, the land development business has been going very, very well,” said Dundee Industrial REIT’s interim CEO.

“It’s incredible how resilient Alberta has been, particularly Calgary, where a lot of new commercial office development is coming on stream,” Cameron continued. “A few years ago, some people were predicting that Calgary would have a 20 per cent plus vacancy rate due to the large amount of new development going on. It never got anywhere near that. Despite all those new projects, that commercial space has been fully absorbed.”

He attributed the city’s long-term strength, in part, to pension funds’ long-term view of real estate assets.

“If you look at any city in Canada where there is downtown or industrial development going on, a lot of it is being done by, or for, pension funds,” he said. “Increased bond yields have driven REITs; which are reluctant to raise debt capital in current market conditions, to the sidelines. Pension funds have, to a large extent, stepped in to fill this void.”

Although investors have priced three-year bonds at about 3 per cent, Cameron cited reports which judge that figure to be too punitive.

“There are credible sources who believe that the ten-year U.S. Treasury yield will decline to about 2.2 per cent and indeed they have recently been declining, this should be good for REIT values,” he reported.

Although Cameron doesn’t anticipate a return to sky-high interest rates any time in the foreseeable future, “even if they rise somewhat in late 2014, I think they’ll need to level off at a level the world economy can sustain.”

“If they do rise because central banks are concerned about inflation,” he concluded, “all prices will rise accordingly—including rents.”

Note: This report appeared on pages 30-31 of the Fall 2013 issue of Canadian Real Estate Magazine.

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