Real estate players spent a record $4.9-billion buying and investing in commercial property in the Greater Toronto Area in the latest quarter, but some are questioning whether this is the peak.

The total investment in office towers, industrial complexes and shopping centres from April to June was $1-billion higher than the previous high-water mark of $3.9-billion, which occurred in the fourth quarter of 2006, according to data from real estate research firm RealNet Canada Inc. The latest quarterly level was a whopping 74 per cent higher than a year ago and 75 per cent higher than the prior quarter.

Major deals were done for each of the significant property types. The office and industrial sectors hit record levels of investment, at $1.4-billion and $1-billion respectively, while the retail sector recorded its second-highest level of investment, $1.2-billion, according to RealNet.

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A few sizable deals drove the numbers. GE Capital Real Estate sold a large portfolio of Toronto office and industrial buildings to Slate Properties Inc., and H&R Real Estate Investment Trust and KingSett Capital divided up Primaris Retail Real Estate Investment Trust's portfolio of Canadian shopping centres, including notable Toronto-area properties such as the Dufferin Mall.

Big money has been flowing into real estate for some time now, as institutional investors and industry specialists hunt for reliable investments that provide yield. But RealNet president George Carras notes that the big deals that closed in this latest quarter were first conceived last year.

"The question is, with Government of Canada bond rates going up in the last 45 days, what does that do to yield-driven markets like real estate?" he said in an interview.

Canadian bond rates generally follow the trajectory of their U.S. counterparts. Yields on U.S. government bonds began rising in early May after stellar employment data surprised the market, and then shot up again last month after U.S. Federal Reserve chairman Ben Bernanke suggested that the central bank might start tapering back a program that has seen it buy $85-billion (U.S.) of bonds and securities each month to keep their yields low.

Higher rates will pose new challenges for real estate investment trusts (REITs), which have benefited from a benign interest rate environment over much of the past two decades and have been major acquirers of and investors in commercial properties. The changing environment means that investors will have more options to find yield, while REITs will probably have higher mortgage costs down the line.

"I think Toronto has had an amazing ride in the last few years from a real estate perspective. It's been really exciting," said Gunnar Branson, chief executive officer of the Chicago-based National Association of Real Estate Investment Managers, who is in town to speak with local players. "The question is, is it too much excitement? It's difficult to say, but there is certainly heightened sensitivity."

Fears that the market might lose momentum are not limited to Toronto. The Real Property Association of Canada's second-quarter measure of confidence found that senior executives across the country are growing more anxious about the state of the market.

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Land sales down

The volume of land that was bought for future residential development in the Greater Toronto Area fell sharply again in the second quarter, as builders react to declining home sales, according to new data from RealNet Canada Inc.

The dollar volume of residential land that traded hands during the latest quarter was $459-million, down 35 per cent from a year earlier. Condominium developers are buying less land for future development as the number of unsold newly constructed condos grows while sales drop. Meanwhile, builders of detached homes face a scarcity of land available for new projects, in part because of government restrictions designed to encourage density downtown and decrease urban sprawl.

The second-quarter numbers compare with $415-million worth of investments in residential development land during the first quarter, down 40 per cent from a year earlier. RealNet is now calling last year's figures "peak levels."