Empty office

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Call it long Covid for the office real estate market.

Tenancy and rental rates for office space in Canada continue to be affected by the rapid close of offices in 2020, and the work-from-home culture that emerged from it, says Steve Marino, executive vice-president of portfolio management with GWL Realty Advisors.

“Canadian [office] attendance is significantly trailing the balance of the globe, suggesting that Canada’s extended Covid lockdowns are continuing to take longer to unwind relative to our global counterparts,” he said.

While some recent return-to-office mandates — particularly at financial services, consulting and government tenancies — are “constructive” for landlords, he believes the path forward for office real estate will continue to be choppy, especially as a spate of new office towers approaches completion.

“The Canadian market is continuing to welcome the final phase of new office development projects, which were launched pre-Covid, contributing to that elevated vacancy rate,” he said.

With tenants firmly in the driver’s seat, Marino said, there has been a “flight to quality.” Tenants are prioritizing well-located, high-quality buildings and using amenities such as proximity to parking, food and entertainment as a critical tool in their talent-attraction and retention strategies.

“The result is making a market that is bifurcated, with better-quality buildings materially outperforming on occupancy and rent, while their counterparts are realizing elevated vacancy and softening rents,” he said.

Residential real estate

Conditions are more favourable in the residential housing sector, particularly multi-family residences where there is growing demand and a chronic undersupply. Marino said robust immigration targets and the fact that the majority of new Canadians settle in large urban centres is creating upward pressure on rental rates.

“We believe it is positioned to deliver strong, growing income returns with potential for capital appreciation across economic cycles,” he said.

He also likes residential real estate as a hedge against inflation because of its short-term leases and ability to participate in rental-rate growth across expansionary cycles.

“That shorter lease duration allows rents to be reset to market, and really provides strong organic cash-flow growth,” he said. “Ultimately, the ability to grow rent really does help to preserve buying power.”

Industrial real estate

Another good inflation hedge, he said, is the booming industrial sector, where short turn-around times — typically 12 to 18 months — allow investors to more closely follow demand trends.

He said the Canadian industrial market continues to exhibit strong fundamentals, with a national vacancy rate below 2%.

“The sector is witnessing slowing rental-rate growth,” he said. “That’s not to say rental rates are declining. Rather, they are simply unable to sustain the torrid 20% to 30% annual rental-rate growth they were able to realize over the last couple of years.”

Marino said there’s “a bit of a pause” in rent hikes as participants assess the economic backdrop and central bank actions.

Timely valuations

Marino said media reports about real estate valuations have received a lot of attention in the investment community. The wide dispersion of results among valuation indices suggests not everyone is using the same yardstick.

“Some of those indices have identified that dispersion as being irregular in the historical context of their benchmarking activities,” he said. “I think it’s a testament to the fact that there are some groups that are being more current on values and others that may not be quite as current.”

Real estate markets remain largely liquid, he said, underscoring the importance of valuations so investors know when to get in and out of a property.

“Firstly, at a minimum, I would suggest quarterly property valuations. These are dynamic market conditions, and it’s critical to ensure your values are current,” he said. “Secondly, I would stress the need for the inclusion of externally prepared valuations to ensure there is an independent lens on those values. And finally, robust valuation benchmarking across industry peers to ensure transparency and relative context both for managers and investors alike.”

Marino said he encourages real estate investors to focus on meaningful cash-flow growth and making sure their capital is aligned accordingly.

“I can’t help but reflect on the recent regional banking crisis as a reminder of the challenges of mismatching your assets and liability strategies,” he said. “In my estimation, real estate is no different.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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