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commercial real estate capital

Despite slowing investment in North American commercial real estate, gateway cities such as Vancouver are expected to be key destinations for investment from foreign investors.Darryl Dyck/The Globe and Mail

According to a recent report from broker Cushman & Wakefield, the amount of capital being deployed into commercial real estate throughout North America is down 9 per cent so far this year compared to 2016.

As of the end of the third quarter, the amount stood at $300-billion (U.S.) compared to $329-billion as of the end of the third quarter last year, with the three-year average standing at $326-billion.

The stated reasons for the reduction are a softening in two categories of buyers: foreign investors and institutional investors.

"With foreign investors, we're starting to see the bite of the increased regulations in China, so with foreign capital flows and in particular from Hong Kong and China into North American real estate, that's where there's big decline," says Brian Kriter, executive managing director for the valuation and advisory team at Cushman & Wakefield.

The Toronto-based executive adds that while he thinks North American gateway cities will continue to be key destinations for investment from foreign investors, overall foreign capital is down 27 per cent year to date compared to 2016 when looking at total cross-border flows.

With institutional investors, Mr. Kriter says that pension funds and insurance companies have been deploying less capital into core real estate, such as marquee downtown office towers.

"Core real estate is almost a victim of its own success in the sense that record pricing is making it more challenging to find investment opportunities that provide an attractive risk-adjusted return," he says.

However, when it comes to dry powder, or undeployed capital, there's currently $152-billion allocated for North American commercial real estate, the highest amount on record. Mr. Kriter attributes the increase to a natural growth in capital, a greater institutionalization of commercial real estate as an asset class, along with foreign capital flows, and it's only a matter of time before it's deployed.

"As this money sits, it burns a hole in the investors' pockets, so they will find a way to spend it," he adds.

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