Panelists at the MSCI/REALPAC Canada Annual Property Index event in Toronto, from left: moderator Michael Brooks of REALPAC, managing director and portfolio manager Christine Iacoucci of BentallGreenOak, CFO Teresa Neto of Granite REIT, and CBRE executive vice-president and managing director Jon Ramscar. (Steve McLean RENX)
The industrial real estate sector’s 2019 rate of total return far outpaced any other on the MSCI/REALPAC Canada Annual Property Index, and it’s looking good in 2020 – largely due to the continuing impact of e-commerce.
Teresa Neto, chief financial officer for Toronto-headquartered Granite REIT (GRT-UN-T), was part of a recent wide-ranging panel discussion at the Toronto Region Board of Trade after the index results were released.
She said online sales accounted for just 4.4 per cent of total Canadian retail sales in November of 2019. That compares to 11.2 per cent in the United States in Q3 2019 and 15 to 20 per cent of retail sales in some European and Asian countries.
“We still have a tremendous amount of runway in Canada on e-commerce.
“That’s going to continue to drive logistics, e-commerce and warehousing, not to mention the population growth we’re experiencing in our major cities in Canada. We’re bringing in 320,000 to 340,000 immigrants every year.”
Industrial rents exploded in 2019
Christina Iacoucci, managing director and portfolio manager for BentallGreenOak, said industrial rents “just exploded” in 2019.
For example, Neto said Toronto experienced 20 per cent growth in industrial rents. That helped widen the total return spread between industrial and residential, the second-best performing sector on the index.
“On the residential side, rents have grown as well, but there’s going to be a cap on what people can pay for rent versus home ownership,” said Iacoucci. “The other thing that’s slowing down on the residential side is that there’s a lot of demand, pressure and movement on new build.
“Construction costs have gone through the roof and really slowed down the development of new purpose-built rentals.”
Neto pointed out rent represents just five per cent of costs for logistics companies, while transportation accounts for 30 to 40 per cent.
By reducing transportation costs two per cent, she said tenants can accommodate large rent increases without suffering too much.
Industrial development is a challenge
While there’s plenty of desire for more industrial development, and Neto said e-commerce is driving 30 to 40 per cent of it, it’s a challenge in Vancouver and Toronto due to a lack of available land. Rents also have to be in the $10- to $12-per-square-foot range to get a five per cent return in those cities, she added.
This has led to companies seeking infill properties to redevelop into modern industrial assets. Scarce land availability has also led Granite to do most of its recent development in the U.S. and Germany.
Neto believes cold storage for groceries and pharmaceutical products will be the next wave of e-commerce and warehousing growth.
She said food delivery leaders in the Netherlands and Germany are starting to do interesting things with artificial intelligence and she believes that will move into Canada as well.
Repositioning underperforming retail sites
Iacoucci said some underperforming retail sites could be converted to last-mile delivery light industrial properties, and they might even be able to get higher rents.
“I don’t think every site is right for residential, but there is a huge demand for last-mile delivery. It’s difficult to find sites large enough to have these distribution centres.”
CBRE executive vice-president and managing director Jon Ramscar acknowledged the repositioning of retail sites with mixed-use redevelopment in major markets.
However, he said such moves have less potential in secondary and tertiary markets, where retail is often performing worse.
The retail sector is pulling back because a lot of money previously invested there is now going to industrial, Ramscar added.
Co-working is here to stay
On the office front, Ramscar said co-working spaces are here to stay.
While WeWork was burning through cash at an unsustainable rate before a restructuring which began late last year, Ramscar said there are other companies operating in the space and CBRE is working with many them due to the demand.
Ramscar said downtown Toronto has the lowest office vacancy rate in North America and new construction is 80 per cent pre-leased. Since there aren’t a lot of available office space options, co-working sites can fill gaps and provide a valuable service.
Large fund managers are going global
Panel moderator and REALPAC chief executive officer Michael Brooks asked about the recent trend of large fund managers going global and diversifying.
Toronto-based Sun Life Financial Inc. (SLF-T) merged Bentall Kennedy, the North American real estate and property management firm it acquired in 2015, with global real estate investment firm GreenOak Real Estate last year to create BentallGreenOak.
The company now manages about $63 billion in office, industrial, retail and multiresidential assets for about 750 institutional clients.
Iacoucci said these moves were made by Sun Life in response to the desires of institutional investors.
They’re becoming more interested in real estate because it provides better returns than bonds, equities and debt, and they’re looking for further portfolio diversification.
“If you look within Canada, there are only so many locations and asset types that you want to invest in,” said Iacoucci. “We needed to have a much larger reach for our clients.
“I think a lot of companies like ourselves are seeing this as a competitive advantage to be able to deliver these global diversification plays.”
Foreign investment in Canada
Brooks said five of the top 10 biggest global real estate investors are Canadian. He asked about foreign real estate investment coming into Canada.
Ramscar said 70 per cent of the foreign investment in Canadian real estate in 2016 was Chinese and last year 70 per cent of it was German.
He noted Canada remains a safe haven for investment and is becoming a larger tech player, so the foreign appetite for Canadian real estate remains strong in Toronto and Vancouver and is growing in Montreal.
Environmental, social and governance
While pension funds and major institutional investors have been dealing with environmental, social and governance (ESG) concerns and reporting for years, public companies are now making it a bigger priority.
“In the last 12 months I’ve seen a massive shift, where our investors are demanding more and more information on ESG,” Neto said of Granite REIT, which has a $3.9-billion market cap and $4.5 billion of assets under management in North America and seven European countries.
“It’s challenging as an industrial REIT because most of our leases are very much triple-net and tenants manage most of their energy use.”
Neto said global automobile parts supply company Magna International, which is Granite’s largest tenant and represents 40 per cent of its revenue, won’t share information. However, it does produce its own ESG report.
Granite is asking tenants for ESG information, gathering as much as possible, and will report on what it has while also committing capital to its own ESG programs.
“When pension funds started reporting ESG, the industrial portfolios were left out,” said Neto.
“If we’re not ready to communicate to our investors about ESG, it’s going to be a problem for us and we’re going to limit our access to capital. That’s a bad thing for our returns.”
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
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.
