If executives arrived at Tuesday’s RealCapital conference in Toronto with concerns about a downturn, CBRE’s Paul Morassutti likely put a bit more spring into their steps.
His annual state-of-the-economy presentation focused on Canada’s booming tech sector, and how innovation could be an economic — and commercial real estate — saviour when recession arrives.
“Some say a recession is looming, sounds ominous,” he said during a keynote address. “This morning, we’re going to explain why there may be less to fear in the Canadian commercial real estate market than many would have you believe. We will also discuss why we believe Canada’s most valuable resource has nothing to do with energy, minerals or anything else that comes from the ground.
“In real estate, identifying areas of growth is fundamental. Increasingly, the areas of growth in Canada are all about technology and our growing knowledge economy. Technology is the catalyst, change agent and king-maker and its impact is rippling through every sector of our market.”
Canada well-positioned if recession hits
Morassutti, CBRE’s vice-chairman of valuation and advisory services, said the rising interest rate environment, combined with historically high global debt, will undoubtedly lead to a reckoning. However, he said economies positioned to benefit from new technologies and lifestyle trends should weather the worst of whatever storms are coming.
He noted the innovation sector extends well beyond what many people think of as traditional “technology” into virtually every aspect of Canadians’ lives.
“Tech has become so ubiquitous across Canadian industries the true impact the tech sector has on Canada’s economy has been understated. CBRE research estimates that for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms.
“Loblaws for example, a grocer, employs almost a thousand people in its AI digital division.
“When you look at it this way, Canada’s tech sector is exceptionally diverse and has a multiplying effect on the economy. But even more important is the rate of growth. Over the past 10 years, tech has grown at more than 2.5 times the pace of the energy sector and three times the overall economy.”
Support for innovation from both the private sector and governments has made Canada a true leader in technology and innovation — and that is driving many of the commercial real estate trends today across the country. He pointed out Canada was the first country to create a national artificial intelligence strategy, and the creation of incubators such as MARS district in Toronto opened the door for innovators to become established and grow.
Toronto a “global tech powerhouse”
“In 2017, Toronto produced more tech jobs than San Fran, Seattle and Washington, D.C. combined,” he said. “Toronto has emerged as the undisputed tech capital of Canada and is a global tech powerhouse and it is no coincidence that our downtown office vacancy rate now sits at a 26-year low.
“In Ottawa, tech companies are now the biggest (private sector) tenants, second only to the federal government, occupying more space than the accounting and legal sectors combined.”
Toronto’s office development pipeline of 10 million square feet under construction is 58 per cent pre-leased. Twenty per cent of that is tech sector space, despite the sector historically accounting for only four per cent of total occupancy. Microsoft is moving into the downtown core, taking a landmark 132,000-square-foot lease at the new CIBC Square.
“Tech companies anchoring new buildings is something we have virtually never seen before,” he said.
That expansion is occurring across the GTA and surrounding areas.
“Waterloo region and Toronto form the second-largest tech cluster in North America. This corridor, dubbed Silicon Valley North, encompasses 15,000 tech companies, 200,000 tech workers, and over 5,0o0 tech startups and 16 universities and colleges and is a testament to our tech strength.”
Vancouver and Montreal have also taken great strides, and other Canadian cities have been creating niches for themselves.
He said the good news doesn’t stop there. Canadian immigration policies are welcoming thousands of international students into our universities and colleges, and highly skilled workers into the labour force.
“Capital follows talent, and capital-backed talent produces innovation that will define the future,” he said.
Industrial sector also benefits
Tech is also having a major impact in another outperforming sector of CRE, the industrial market. The impact of e-commerce is driving demand for logistics, and pushing rents higher.
“It is not a stretch to say that we have never seen a better market than the 2018 industrial market. The lowest availability we have ever tracked. Rising rents. In some market, rising dramatically,” Morassutti said.
And while markets like Toronto, Vancouver, Montreal and even Calgary get much of the attention, this trend isn’t focused in a few large centres.
“Demand has outstripped supply for the last 10 years and the new supply pipeline is still low relative to fundamentals.
“Once again, technology is the driver here. The ongoing shift to e-commence remains the primary tailwind. Here in Toronto it represents roughly 85 per cent of all occupier demand and there is more of it to come.”
But, what happens if, or when, the economy begins to slow down?
“All of that sounds great but it raises an obvious question: If tech is having an outsized impact on our market, how durable is that demand? And what happens when we hit a slowdown?”
Apple investors lost $70 billion in value in one day recently, tech stocks have fallen from historic highs, privacy concerns abound and increasing government regulation is in the offing in many sectors.
“Are we in a tech bubble?”
Morassutti also raised the spectre of declining venture capital for startups and rapidly expanding firms.
“Are we in a tech bubble?” He asked, proceeding then to address the possible fallout.
Morassutti said we live in a very different world from two decades ago when the first dot-com crash caused severe economic upheaval. He agreed there will be a “scaling back” of demand, but he does not see the same kind of traumatic impact.
“Fears of a dot-com-style crash appear to be unfounded. First of all, the extremes are not the same. The last dot-com crash was based mainly on hot air and hype.
“As (futurist) David Houle says, tech continues to push into new areas of our lives at a rate that most of us just can’t fathom.
“We can debate current-day tech valuations, even with the decline it may still be overvalued. But when you consider where tech is going; cyber security, health care, fintech, clean energy, proptech, it becomes clear that if anything they are just getting started and the ecosystems around them are not going anywhere.
“Despite softening economic conditions fundamentals at the property level remain incredibly strong. Technological change, and tech business growth and tech talent are the dominant factors driving demand.”
Canada can’t become “complacent”
In keeping with his upbeat presentation, Morassutti said there are many reasons to take heart.
“Real estate is cyclical, always has been and that hasn’t changed,” he said. “We should be aware of those cyclical factors just as we should be aware that our fundamentals as we enter this slowdown are, on average, as good as they have ever been. That is cyclical as well.”
But Canada’s diverse population, safe banking structure, high standing in international “freedom” rankings, and world-leading tech sectors are all huge positives.
“The biggest challenge we have is that this is a race with no end, and there is no room for complacency because we are competing with everyone,” he said.
“Rather than obsess over when the next downturn will hit, I take comfort in knowing the Canadian market is well positioned not only to weather it, but to continue to flourish.”
— With files from Ann White