Publicly traded office real estate trusts have seen their values drop precipitously in recent months as a combination of high interest rates and rising vacancies in the wake of the pandemic have sent tremors through the sector. Now Carl Gomez is waiting for the other shoe to drop.
Real eState
‘50% correction’: Why Canada’s office real estate sector is heading for a reckoning
“The total return on (office) REITs has seen almost a 50 per cent correction,” he said, referring to the combination of unit price declines and cuts to distributions.
“I think there’s a disconnect … between what’s happening in the private market and what’s happening in the public market, which is already sensing that these changes (in valuation) need to occur.”
Cash flows at risk
Gomez said public investors seem to be acknowledging that changes to capital market conditions as well as “structural changes related to the nature of how we work — including hybrid and work-from-home” mean that valuations must adjust.
Among the publicly traded real estate investment trusts operating in the space that have already been punished is Slate Office REIT, which reduced its monthly distribution to one cent from 3.3 cents in April. True North Commercial REIT, which owns properties in British Columbia, Alberta, Ontario and the Atlantic provinces, announced a 50 per cent reduction to its monthly distributions in March to shore up cash to improve the trust’s capital profile. The unit prices of both REITs plummeted and are still off by more than 40 per cent.
The question of whether privately held assets will meet the same fate has been swirling ever since commercial real estate was thrust into the spotlight by market watchers who see it as one of the most vulnerable sectors to current interest rate and inflation trends, as well as credit tightening in the wake of a pair of bank failures in the United States.
“The sector is facing considerable headwinds including high vacancy rates,” she said, as large numbers of workers continue to work in part from home. At the same time, rising interest rates are putting pressure on landlords, particularly when renewing loans or refinancing properties.
“High debt costs are eating up a much higher portion of rents from a shrinking tenant base,” said Girardo, adding that refinancing and renewal problems are further complicated by declining property values.
High-profile defaults
Toronto-based investment giant Brookfield Asset Management spooked some market watchers by defaulting on US$750 million in loans tied to two Los Angeles office towers in February and, later, a further $161 million on a portfolio of office buildings largely located around Washington, D.C. Girardo also cited PIMCO-owned Columbia Property Trust’s default on US$1.7 billion in notes secured by seven buildings in some of the largest U.S. cities, one of the largest office defaults since the start of the COVID-19 pandemic in 2020.
While Gomez said those defaults may have been affected by additional stresses in the United States, such as tighter borrowing conditions, and can be handled by large players such as Brookfield and PIMCO, the Canadian sector is not immune to the factors driving such decisions.
At the time, the four Canadian Office REITs the CIBC analysts covered were trading at an average 41 per cent discount to net asset value, suggesting investors were already somewhat soured on the office sector.
While the analysts, led by Dean Wilkinson, emphasized that their outlook covered only the next 12 months and was “not an overtly negative perspective on the long-term prospects for office properties per se,” others aren’t so sure.
“I think in the short-run, investors are well capitalized. However, we will see impacts in the long run,” said Erkan Yonder, associate professor of real estate at Concordia University’s John Molson School of Business.
Like Gomez, he sees trends including continuing vacancies alongside an uptick in subleasing as an indication tough times lay ahead, with newer buildings in good locations having the best shot at withstanding them.
But what Gomez sees as an inevitable adjustment or “revaluation” in privately held office real estate — unless trends in interest rates and hybrid work suddenly reverse — could be slowed by a concentration of office real estate ownership in Canada.
“A good chunk of office buildings, particularly in the downtown office buildings, are in the hands of well-capitalized investors like pension funds,” Gomez said. “They’re resisting taking write-downs right away (because) they’re not feeling distressed like some of the REITs, which are a little bit more leveraged and need access to capital to keep them going.”
Two of Canada’s largest commercial real estate investment and development companies — Cadillac Fairview, with $40-billion in assets largely concentrated in office and retail properties, and Oxford Properties, which has an office portfolio of more than 23-million-square-feet in Canada, the U.S., the United Kingdom and Europe — are owned by the Ontario Teachers Pension Plan and the Ontario Municipal Employees Retirement System (OMERS), respectively.
Jo Taylor, chief executive of the Ontario Teachers Pension Plan, said in an April 5 interview that office occupancy was holding up relatively well in Teachers’ portfolio through Cadillac Fairview, particularly in desirable “class A” buildings in major cities, adding that Cadillac’s investment model is not predicated on external financing.
In the April interview, Taylor acknowledged that there had been no recent “marquee disposals” in commercial office real estate that would establish “comparables” for future asset sales based on current conditions.
In the meantime, capitalization or cap rates — a key measure of a building’s value based on the income it generates from rent, taking into account the costs associated with the building — are being scrutinized by market watchers as they assess the situation and risks.
“If net operating income goes down, your cap rate should go up, but what we’re seeing is that they haven’t adjusted by as much, if (at all),” he said.
“Those cap rates are, for the most part, staying sticky, mainly because of the appraisal lag.”
‘Significant’ writedowns coming
In late March, Jim Keohane, a director at Alberta Investment Management Corp. (AIMCo) who spent eight years at the helm of the Healthcare of Ontario Pension Plan (HOOPP), predicted “significant” write-downs were coming on office and commercial real estate as owners and lenders digested the effect of rising rates and lingering vacancies and their impact on traditional metrics including cap rates. The higher financing costs combined with lower rents would have a steeper impact on valuations than rising rates alone, he said.
The spread is a proxy for the level of risk taken on by investing in real estate instead of bonds, he said, and it would be expected to stay the same or even widen with new perceived risks — such as vacancy rates in some markets rising above 10 per cent, double what they were before the pandemic. Instead, the typical 400-basis-point spread has shrunk to around 200 basis points as interest rates have risen, he said.
Rising subleases
Rising subleases are also among the signs he sees of a reckoning on the horizon. These suggest that while landlords are still getting their full rents, companies are reassessing and reducing their space needs, and aren’t likely to occupy as much on lease renewal. Toronto showed the biggest absolute increase in sublets by square footage in the first quarter of 2023 from the previous year, according to an online presentation Gomez made April 19, while Vancouver’s increase was highest in percentage terms, at 55 per cent.
Other worrying trends such as shorter leases at renewal are starting to take hold, he said, suggesting these sector pressures show no signs of easing any time soon. And there are some that aren’t even on the radar yet.
“We’re starting to see an increase in the amount of incentives … so there’s a lot of discounts, free months’ rent,” Gomez said. “So the net effective rent that the landlord is getting is much lower than the base (rent) value … and that doesn’t necessarily get captured in the data.”
Calgary, hit hard by the last energy downturn, is offering grants to convert vacant office space into housing and has approved at least 10 projects under consideration as part of a downtown incentive program, said Girardo, the Canadian Western Bank executive.
Those projects face challenges including floor sizes and mechanical systems that are not conducive to residential units, and difficulty estimating renovation costs.
“Grants help remove some barriers but not all,” Girardo said.
Unlike the 2008 financial crisis, when the lending taps were turned off and building owners went into immediate distress, he expects this market drama to play out over a longer period of time.
“Office valuations simply haven’t adjusted (this time) … even though market expectations of all the cyclical and secular trends have,” he said.
• Email: bshecter@postmedia.com | Twitter:
Real eState
Two Quebec real estate brokers suspended for using fake bids to drive up prices
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
The Canadian Press. All rights reserved.
Real eState
Montreal home sales, prices rise in August: real estate board
MONTREAL – The Quebec Professional Association of Real Estate Brokers says Montreal-area home sales rose 9.3 per cent in August compared with the same month last year, with levels slightly higher than the historical average for this time of year.
The association says home sales in the region totalled 2,991 for the month, up from 2,737 in August 2023.
The median price for all housing types was up year-over-year, led by a six per cent increase for the price of a plex at $763,000 last month.
The median price for a single-family home rose 5.2 per cent to $590,000 and the median price for a condominium rose 4.4 per cent to $407,100.
QPAREB market analysis director Charles Brant says the strength of the Montreal resale market contrasts with declines in many other Canadian cities struggling with higher levels of household debt, lower savings and diminishing purchasing power.
Active listings for August jumped 18 per cent compared with a year earlier to 17,200, while new listings rose 1.7 per cent to 4,840.
This report by The Canadian Press was first published Sept. 6, 2024.
The Canadian Press. All rights reserved.
Real eState
Canada’s Best Cities for Renters in 2024: A Comprehensive Analysis
In the quest to find cities where renters can enjoy the best of all worlds, a recent study analyzed 24 metrics across three key categories—Housing & Economy, Quality of Life, and Community. The study ranked the 100 largest cities in Canada to determine which ones offer the most to their renters.
Here are the top 10 cities that emerged as the best for renters in 2024:
St. John’s, NL
St. John’s, Newfoundland and Labrador, stand out as the top city for renters in Canada for 2024. Known for its vibrant cultural scene, stunning natural beauty, and welcoming community, St. John’s offers an exceptional quality of life. The city boasts affordable housing, a robust economy, and low unemployment rates, making it an attractive option for those seeking a balanced and enriching living experience. Its rich history, picturesque harbour, and dynamic arts scene further enhance its appeal, ensuring that renters can enjoy both comfort and excitement in this charming coastal city.
Sherbrooke, QC
Sherbrooke, Quebec, emerges as a leading city for renters in Canada for 2024, offering a blend of affordability and quality of life. Nestled in the heart of the Eastern Townships, Sherbrooke is known for its picturesque landscapes, vibrant cultural scene, and strong community spirit. The city provides affordable rental options, low living costs, and a thriving local economy, making it an ideal destination for those seeking both comfort and economic stability. With its rich history, numerous parks, and dynamic arts and education sectors, Sherbrooke presents an inviting environment for renters looking for a well-rounded lifestyle.
Québec City, QC
Québec City, the capital of Quebec, stands out as a premier destination for renters in Canada for 2024. Known for its rich history, stunning architecture, and vibrant cultural heritage, this city offers an exceptional quality of life. Renters benefit from affordable housing, excellent public services, and a robust economy. The city’s charming streets, historic sites, and diverse culinary scene provide a unique living experience. With top-notch education institutions, numerous parks, and a strong sense of community, Québec City is an ideal choice for those seeking a dynamic and fulfilling lifestyle.
Trois-Rivières, QC
Trois-Rivières, nestled between Montreal and Quebec City, emerges as a top choice for renters in Canada. This historic city, known for its picturesque riverside views and rich cultural scene, offers an appealing blend of affordability and quality of life. Renters in Trois-Rivières enjoy reasonable housing costs, a low unemployment rate, and a vibrant community atmosphere. The city’s well-preserved historic sites, bustling arts community, and excellent educational institutions make it an attractive destination for those seeking a balanced and enriching lifestyle.
Saguenay, QC
Saguenay, located in the stunning Saguenay–Lac-Saint-Jean region of Quebec, is a prime destination for renters seeking affordable living amidst breathtaking natural beauty. Known for its picturesque fjords and vibrant cultural scene, Saguenay offers residents a high quality of life with lower housing costs compared to major urban centers. The city boasts a strong sense of community, excellent recreational opportunities, and a growing economy. For those looking to combine affordability with a rich cultural and natural environment, Saguenay stands out as an ideal choice.
Granby, QC
Fredericton, NB
Saint John, NB
Saint John, New Brunswick’s largest city, is a coastal gem known for its stunning waterfront and rich heritage. Nestled on the Bay of Fundy, it offers renters an affordable cost of living with a unique blend of historic architecture and modern conveniences. The city’s vibrant uptown area is bustling with shops, restaurants, and cultural attractions, while its scenic parks and outdoor spaces provide ample opportunities for recreation. Saint John’s strong sense of community and economic growth make it an inviting place for those looking to enjoy both urban and natural beauty.
Saint-Hyacinthe, QC
Saint-Hyacinthe, located in the Montérégie region of Quebec, is a vibrant city known for its strong agricultural roots and innovative spirit. Often referred to as the “Agricultural Technopolis,” it is home to numerous research centers and educational institutions. Renters in Saint-Hyacinthe benefit from a high quality of life with access to excellent local amenities, including parks, cultural events, and a thriving local food scene. The city’s affordable housing and close-knit community atmosphere make it an attractive option for those seeking a balanced and enriching lifestyle.
Lévis, QC
Lévis, located on the southern shore of the St. Lawrence River across from Quebec City, offers a unique blend of historical charm and modern conveniences. Known for its picturesque views and well-preserved heritage sites, Lévis is a city where history meets contemporary living. Residents enjoy a high quality of life with excellent public services, green spaces, and cultural activities. The city’s affordable housing options and strong sense of community make it a desirable place for renters looking for both tranquility and easy access to urban amenities.
This category looked at factors such as average rent, housing costs, rental availability, and unemployment rates. Québec stood out with 10 cities ranking at the top, demonstrating strong economic stability and affordable housing options, which are critical for renters looking for cost-effective living conditions.
Québec again led the pack in this category, with five cities in the top 10. Ontario followed closely with three cities. British Columbia excelled in walkability, with four cities achieving the highest walk scores, while Caledon topped the list for its extensive green spaces. These factors contribute significantly to the overall quality of life, making these cities attractive for renters.
Victoria, BC, emerged as the leader in this category due to its rich array of restaurants, museums, and educational institutions, offering a vibrant community life. St. John’s, NL, and Vancouver, BC, also ranked highly. Québec City, QC, and Lévis, QC, scored the highest in life satisfaction, reflecting a strong sense of community and well-being. Additionally, Saskatoon, SK, and Oshawa, ON, were noted for having residents with lower stress levels.
For a comprehensive view of the rankings and detailed interactive visuals, you can visit the full study by Point2Homes.
While no city can provide a perfect living experience for every renter, the cities highlighted in this study come remarkably close by excelling in key areas such as housing affordability, quality of life, and community engagement. These findings offer valuable insights for renters seeking the best places to live in Canada in 2024.
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