Strong market fundamentals will drive Canadian commercial real estate investment to record levels in 2020, with the industrial sector being the “rock star,” says the vice-chairman of CBRE Canada.
In an interview with RENX, Paul Morassutti said 2020 could be an unprecedented year. He forecasts a volume of $50 billion in CRE investment, as Canada has become a top destination for domestic and global capital.
“We’ve been positive for a number of years now. So this is really a continuation of that,” he said. “When we look at 2019 overall investment activity, we did not have a record year, but I would argue that it’s only because the first quarter was so weak.
“The end of 2018 and early 2019, there were a lot of global economic jitters, interest rates and bond yields were plummeting.
“We were close to seeing an inversion of the yield curve and because of all of that, around Christmas of last year, everyone and their brother was predicting there was going to be an imminent recession. And as a result of that sentiment, capital in Canada just kind of hit the pause button.
“They moved to the sidelines to see how everything was going to play out and clearly those concerns of an imminent recession dissipated fairly quickly. We now have lower interest rates in place and for the rest of the three quarters, activity was incredibly strong.”
“Do not focus on the cyclical”
Morassutti said the investment market has good momentum behind it and despite all the media noise about geopolitical uncertainty and volatility, the underlying fundamentals remain compelling.
He said the market sectors which are performing most strongly today – multifamily, industrial and office – are well positioned to ride out any turbulence.
In addition, Morassutti said “nobody’s very good at predicting when the next recession’s going to be anyway.” For this reason, he suggests stretching out your investment horizon and not worrying as much about the economic cycle.
“If you set that aside, the longer-term structural supporting fundamentals of the Canadian real estate industry are just incredibly strong,” he observed. “And, I think the consensus of foreign capital is, when you look around at alternative markets in today’s world, where can you find the long-term safety, stability, growth prospects of Canada?
“Our message has been do not focus on the cyclical. Focus on the secular, or the long term, and we think the long-term prospects for the Canadian real estate industry remain very, very bright.”
CBRE’s Canada Market Outlook 2020
In its Canada Market Outlook 2020 report, CBRE is forecasting investment volume in Canada to jump to $50.4 billion in 2020, up from $45.1 billion in 2019. In 2018, it was $49.3 billion. In some of the key sectors:
* The industrial sector is forecast to rise from $10.1 billion in 2019 to $11.1 billion in 2020;
* The multifamily sector is expected to increase to $11.9 billion from 9.9 billion;
* Retail will jump to $8.3 billion from $6.4 billion;
* ICI Land is forecast to increase to $7.6 billion from $6.5 billion;
* The hotel sector will grow from $945 million in 2019 to $1 billion this year;
* Office is the only sector forecast to decline from $11.3 billion last year to $10.4 billion.
Morassutti said the shift to e-commerce in retail has been a great tailwind to the industrial sector, with rents and values going through the roof.
“But, when you look under the hood a little more carefully, you begin to understand why all of that is rational. If you’re a logistics company today and you’re building out your supply chain, or if you’re a retailer and you’re building your supply chain, the most critical factor that has come up over the last few years has been speed of shipping,” he said.
Changing consumer expectations
“Five years ago, if somebody ordered something online they would expect to get it in two or three days. Today they expect to get it the same day or within 24 hours.
“As a result, the requirement to get that product into consumers’ hands that quickly means that you need more facilities, you need bigger facilities, you need facilities with higher clear height, better internal systems so that you can use every cubic inch of that building as efficiently as possible.
“And in a world that same-day delivery is now key, for a large logistics company if you can save just one per cent in transportation and labour costs, that translates into about 15 per cent of additional rent that you technically can afford to pay.”
“The reality is, for these companies, transportation and labour costs (are) about 70 per cent of the equation. Real estate is about five.”
He said the ongoing ecommerce penetration and the increasing desire for same-day or next-day delivery has transformed the entire supply chain in Canada. That will continue.
Office, multifamily and industrial
On the office side, in certain parts of the country there is a huge demand from the technology sector. The multi-family sector is being positively affected by the lack of housing ownership affordability. With house prices so high, more Canadians are becoming renters and immigration is helping that market.
“Industrial has become the new rock star,” said Morassutti. “Multifamily is pretty close to it. They’re both performing extremely well ,but so is the office market especially if you have assets in Vancouver or Toronto, Montreal, Ottawa.
“Calgary would be the one outlier in that regard where they continue to have a hard time in the office sector. But. virtually every other part of Canada is doing well.
“If you’re fortunate enough to be in Vancouver or Toronto where the vacancy rates are somewhere around two per cent – they’re the lowest in North America – you just had huge, huge rental increases over the last couple of years.”
Coronavirus the wild card
Morassutti said the impact of a worsening situation with the coronavirus is the $64-million question. However, he said it’s simply too early to call.
Will it be contained in the next few months or will it turn into a global pandemic? Will this be the catalyst that changes market psychology?
If so, Morassutti said there would be significant ramifications to the global economy. However, it is a wild card right now and too early to say how it’s going to play out.
In addition, Teck Resources’ recent decision to drop its application for a $20.6 billion oil sands project in Alberta is “devastating” to investor confidence, and compounds other bad news from the sector.
“Then you’ve got the whole climate change issue where globally pension funds, sovereign wealth funds, and private investors are divesting themselves of high carbon companies,” Morassutti added.
“Capital investment in the oil patch has tumbled in the last five years and now you’ve got more companies saying we’re not going to finance any high-carbon companies. That is becoming the norm and the implications for Alberta in that regard are negative.
“But, I also think that Alberta has a true opportunity to pivot, to diversify, to go deeper into clean tech and clean energy production.
“We also have concerns that the way that market has historically operated, which is it sort of lived and died on the back of the price of oil, is simply not going to be the way it can continue going in the future.”