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Pricing benchmarks set to be shattered in 2004

By Kate Chappell - The Ottawa Business Journal ­ OTTAWA, Jan. 5, 2004   There was a great deal of activity in all sectors of the real estate market in 2003, predominately in investment property, as well as land for residential development. With a rosy future in store for the local real estate market, Primecorp founding partner Aik Aliferis spoke with OBJ reporter Kate Chappell about his outlook for 2004.

THE BACKGROUND: Key transactions such as the sale of 160 Elgin St. in 2002 for $211 million acted as a catalyst for transactions in 2003.  For example, the sale of the Standard Life Centre for $100 million at $266 per square foot achieved a new pricing benchmark for Ottawa office assets.  This sale along with the sale of the Chambers Property at $52 million as a lease-hold interest, the GWL sale of 155 Queen St. for $52 million and the sale of the Palladium Properties in Kanata to Dundee Realty for $37 million, has clearly demonstrated enormous growth in demand and value in 2003.

All sectors have shown similar trends.  Retail properties have also reached new benchmarks with the purchase by RIO-CAN of two more centres in the region. One property on Merivale Road sold for $25 million, Grant Carmen Drive sold for $7.3 million and First Capital purchased Gloucester City Centre for $42 million. Multi-residential properties have seen cap rates in the seven range, with continued downward pressure because of a lack of available product.  This could force cap rates down to unprecedented levels for the Ottawa region.

The most substantial sale in Ottawa saw 1240-44 Donald St. sold by the Del Group from Toronto to an out-of-town group of international investors.  The property sold for $35 million, or $67,000 per unit.  The activity in the multi-residential sector would have been far greater, but there is simply no quality product available. Industrial and mixed-use properties saw much of the same type of demand over the past year.  Residential developers such as Richcraft Homes and Claridge Developments continued to purchase large tracts of land to fulfill continued strong demand for both the single family and condo housing markets.

"The problem of 2003 will only grow in 2004.  The demand will far outreach supply, frustrating many investors…"

THE GOOD NEWS:  "In 2004, Ottawa should continue to enjoy strong growth in all sectors.  The continued growth and acquisition requirements of Canadian pension, institutional and large private companies shall continue to drive prices up and cap rates down in all sectors.

"While the anticipation of even lower interest rates in 2004, as well as the continued influx of international money wanting to acquire Canadian real estate, the outcome is inevitable: pricing will continue its upward journey."

THE BAD NEWS:  "The problem of 2003 will only grow in 2004.  The demand will far outreach supply, frustrating many investors looking for opportunities in the Ottawa market.  Continued consolidation of the large real estate groups will make it increasingly difficult for smaller players to enter the market.  This consolidation playing out across the country will only continue.  It may be one of the most important real estate trends in our region, creating an oligopoly or monopoly, which will create new and greater challenges in the future for our real estate community."

THE BIG PICTURE:  "As long as current market conditions stay static (low interest rates, strong employment and continued immigration and population growth), 2004 and beyond shall see the competition for investment properties continue to be fierce.  This will elevate the pricing of existing and older product and will start to approach replacement valuations, thus igniting the development of new office, multi-residential, industrial and retail product. "Increased requirements for investors such as pension funds, institutional funds and international money coming into the region, who are all looking to find a home in class A type real estate, will be satisfied by the availability of potential new product and create a strong and dynamic market in 2004.

"Although the real estate game is not an exact science and no one can predict the future with 100-per-cent accuracy, I believe the pricing benchmarks set in 2003 will undoubtedly be shattered in 2004."

Kate Chappell can be reached at kate.chapel@transcontinental.ca

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