Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s Soundbites, we speak with Steve Marino, executive vice president of portfolio management with GWL Realty Advisors. We spoke about what segments of the industry are hot, how real estate acts as a hedge against inflation, and the way property use is changing.

But we started by asking about the current state of Canadian commercial real estate.

Steve Marino (SM): With the broader economic recovery that occurred in the equity markets in 2021, there has been an increasing wave of capital looking to get exposure to alternative investment asset classes and certainly real estate would be one of the primary groups within the alternatives bucket. So, I think that certainly created substantive tail winds in terms of the scale of capital that has moved into real estate. And kind of interesting, while we’ve historically seen a proliferation of transactions occurring in the office and retail sectors, in 2021 we’ve seen a bit of a pause in those two asset classes and, more so, the scale of new capital has really been focused on industrial assets, multi-family assets, and land in particular. And so those three asset classes have really helped to give investors a lot of confidence moving forward. Industrial real estate is certainly the hottest asset class. We’ve seen 20 to 30% annual increases in rents over the last two years. And that’s really driven by substantive growth in the demand for logistics space to really help fulfill the needs of the growing e-commerce business. And then the other trend is we’re seeing a continued desire to onshore or reshore key elements of supply chain management to have greater inventory locally that they can access in a pinch. And all of that demand has really created a shortage of supply. On the other side of the ledger, I think there are still some questions as it relates to the retail sector. You’re seeing, in some cases, people building mixed-use formats with multi-family densities including in those centres, just to really take advantage of the strong locational attributes. And the one other asset class I should just touch on is office. Assets that are best in class and provide those amenities and can ultimately create value for tenants I think will continue to be hotly sought after.

Significant risks on the real estate horizon.

SM: I think the single biggest risk to our industry is always the health of the overall economy. Ultimately, real estate houses the economy and so I think about the risk associated with effectively managing any monetary policy changes and certainly that’s a conversation of the day. I think the other risk is just the broader risk related to greenhouse gas emissions, you know there’s a responsibility for managers to be part of the solution. And I think managers that are able to distinguish themselves are going to be rewarded for their successes in that regard.

Hedging against inflation

SM: Historically the answer as to real estate’s success as a hedge against inflation has really been a product of the ability of real estate to participate in that rising-rate environment and translate rising rates into increases in rental rates. The industrial market’s had great success in terms of translating some of that inflationary pressure into rents. And I think the other asset classes that has done a strong job is the multi-family asset class where we’ve seen substantive rent increases being realized. And one of the key components is exposure to shorter lease durations. If a lease profile is shorter in nature, you’re able to reset rent to market. In instances where your leases have longer duration, you’re somewhat unable to participate in those rising rental dynamics and so you’re somewhat less hedged relative to inflation. If I take that thesis and kind of apply it to the tangents, I would say student housing would be a natural extension of multi-family and similarly self-storage would be a natural extension of small-bay industrial where there is greater lease turnover and so certainly landlords are able to participate in some of that rental upside in a fairly meaningful way.

And finally, what’s the bottom line on commercial real estate investing in Canada?

SM: I think real estate’s character and return profile contribute to its widespread investments as a key component of a multi-asset class portfolio, helping to generate and preserve wealth for investors. When I couple that with the value that’s determined by key locations, adaptability, and resilience, it really provides great value to its stakeholders.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Steve Marino of GWL Realty Advisors.

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