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’re talking about real estate in the new interest-rate environment with Steve Marino, executive vice president with GWL Realty Advisors. We talked about valuations, and the outlook for residential and industrial real estate. And we started by asking about the evolving office sector.
Steve Marino (SM): The Canadian office market is continuing to cope with the threat of structural changes in the demand for office space. Interestingly, the Canadian market 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. Beyond this, 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. I would say recent return-to-office mandates, though — across financial services, consulting organizations and government tenancies in particular — should help prove to be constructive. The flight to quality is intensifying as tenants prioritize well-located, high-quality and well-amenitized buildings. Tenants are using the office 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 both occupancy and rent, while their counterparts are realizing elevated vacancy and softening rents. So, there are certainly going to be winners and losers, as I might describe it. Buildings that are better positioned to take advantage and really leverage their amenities and succeed, and others that will require capital to be repositioned and, in some cases, repurposed.
Residential real estate
SM: The essential nature of housing and its chronic undersupply in Canada have combined to create very strong market fundamentals. Robust immigration targets and the fact that the majority of new Canadians move to large urban centres upon arrival in Canada, position multi-residential as one of our highest-conviction investment strategies, and a foundational element of our portfolio construction, positioned to deliver strong growing income returns with a potential for capital appreciation across economic cycles.
The state of the industrial real estate sector
SM: The Canadian industrial market continues to exhibit very strong fundamentals with a national vacancy rate below 2%. The sector is witnessing slowing rental-rate growth. 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. This is an asset class that continues to have very favourable market fundamentals, and certainly an asset class that we think is quite significant moving forward, in terms of our rotation of capital.
Timely valuations
There’s been a lot of conversation and headlines around valuation that are getting a lot of attention. Valuations are critical. They are the basis by which investors invest into, divest out of, and ultimately assess the ongoing performance of their investments. I would highlight three key elements that I think are critical for best-in-class valuation practices. Firstly, at a minimum, quarterly property valuations. These are dynamic market conditions, and it’s critical to ensure your values are current. Second, 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. I think collectively those three practices are quite critical to ensuring a robust and timely valuation process.
And, finally, what’s the key take away on real estate investing in a high-interest rate environment?
SM: I constantly counsel investors to think about the long-term investment strategies and objectives of adding real estate to your portfolio, and really focusing on high-conviction strategies and activities that can realize meaningful cash-flow growth. And, thereafter, making sure that capital is aligned accordingly in your portfolio. We believe a disciplined portfolio investment strategy with active management and risk-mitigation practices are critical to a framework that allows the fund to successfully invest through cycles. Timing the market is difficult to do. And I think that’s one of the great virtues of this asset class. Predictability of income, the strong inverse correlation to other asset classes, and ultimately the limited volatility, those features allow investors to remain invested over the course of multiple periods, and, again, participate in compounding through the course of multi-year investments.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Steve Marino of GWL Realty Advisors. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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