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Canada’s 2020 CRE returns worst since 1993: MSCI/REALPAC

Last year’s Canadian commercial real estate return was the worst since the recession of 1993, acc...

IMAGE: Peter Cuthbert, Fiera Real Estate president and head of global real estate. (Courtesy Fiera)

Peter Cuthbert, Fiera Real Estate president and head of global real estate. (Courtesy Fiera)

Last year’s Canadian commercial real estate return was the worst since the recession of 1993, according to the 2020 MSCI/REALPAC Canada Property Index.

The total return plummeted from 6.68 per cent in 2019 to negative 4.12 per cent in 2020. Data has been collected since 1985, and the total average return since then has been 8.5 per cent, to put the numbers in perspective.

“Real estate suffered a down year,” MSCI executive director Simon Fairchild said during the virtual MSCI/REALPAC Canada Real Estate Investment Forum sponsored by Avison Young on Feb. 2.

“We’ve not been able to say that many years, certainly recently, but we recorded a 7.8 per cent fall in values for the year on a stabilized basis and an income return that’s less than four per cent.”

What the MSCI/REALPAC property index measures

The index measures unlevered total returns of directly held property investments. Its goal is to enhance transparency, enable comparisons of real estate relative to other asset classes and facilitate comparisons of Canadian real estate performance to other private real estate markets globally.

The index includes buying, selling, development and redevelopment activity data provided by major pension funds, insurance companies and large real estate owners in Canada.

It encompasses 44 portfolios with 2,356 assets totalling 505.8 million square feet and a gross capital value of $158.1 billion.

Of the four countries which have released 2020 figures, Canada’s performance is the weakest. The United States’ total return was 1.8 per cent, the United Kingdom’s was negative 0.8 per cent and Ireland’s was negative 0.9 per cent.

While Canada’s rate of return deteriorated by 10.8 points, the downturn was four per cent in the U.S.

REALPAC chief executive officer Michael Brooks hosted the forum.

Fiera Real Estate president and head of global real estate Peter Cuthbert, TD Asset Management head of global real estate investments Colin Lynch and Ontario Teachers’ Pension Plan head of responsible investing and director of total fund management Deborah Ng provided commentary.

Lynch was surprised by how much better the U.S. performed than Canada. He said some of it was likely related to how different governments have handled the COVID-19 crisis; there were more government-imposed lockdowns in Canada, which meant fewer buildings and businesses were open.

“Hopefully this is the extent of the downside and we get some recovery coming soon,” said Cuthbert.

Returns by asset class and market

At the extreme ends of the spectrum, industrial properties had a 12.7 per cent return and retail had a negative 15.1 per cent return.

“That spread between best and worst is twice as big as it was last year, and last year was the highest that we’d seen,” said Fairchild.

The residential return was 5.7 per cent and the office return was negative 1.5 per cent.

Eight major cities were included in the index, and the top performer was Ottawa with a 0.1 per cent return. All of the rest were in negative territory: Toronto at -0.8 per cent; Vancouver at -2.3 per cent; Montreal at -3.9 per cent; Halifax at -8.5 per cent; Edmonton at -8.6 per cent; Winnipeg at -9.5 per cent; and Calgary at -12.7 per cent.

Capital growth by asset class and market

Capital growth for all properties was negative 7.8 per cent and the overall income return was 3.9 per cent.

Industrial had 7.8 per cent capital growth and a 4.5 per cent income return. The respective numbers were 2.2 and 3.5 per cent for residential, negative 5.9 and 4.7 per cent for office, and negative 17.8 and 3.2 per cent for retail.

IMAGE: MSCI executive director Simon Fairchild. (Steve McLean RENX)

MSCI executive director Simon Fairchild. (Steve McLean RENX)

Fairchild said retail valuations were hit particularly hard in Q4 2020, as the asset class had experienced only a four per cent drop in valuation through September.

Capital growth was negative in all eight cities: -4 per cent in Ottawa; -4.2 per cent in Toronto; -5.9 per cent in Vancouver; -7.2 per cent in Montreal; -12.7 per cent in Halifax; -12.9 per cent in Edmonton; -13.1 per cent in Winnipeg; and -17.2 per cent in Calgary.

Income returns and losses

The income returns were 4.3 per cent in Ottawa, 3.6 per cent in Toronto, 3.8 per cent in Vancouver, 3.5 per cent in Montreal, 4.8 per cent in Halifax and Edmonton, 4.2 per cent in Winnipeg, and 5.4 per cent in Calgary.

Every city experienced negative net income growth, with Vancouver at -7.6 per cent; Ottawa at -10 per cent; Calgary at -11.4 per cent; Toronto at -11.7 per cent; Edmonton at -14.5 per cent; Montreal at -14.8 per cent; Halifax at -16.1 per cent; and Winnipeg at -23.6 per cent.

Net income growth was negative 13.1 per cent for all properties. It was 1.2 per cent for industrial, negative two per cent for office, negative 2.7 per cent for residential and negative 30.2 per cent for retail.

Retail and office performance

“Retail has been under pressure for a number of years since the peak back in 2013 and we’ve seen a gradual decline since then,” said Fairchild. “But it turned into a sharp decline in 2020 and it’s the largest malls that are being hit the hardest.”

Regional shopping centres had a negative 18.3 per cent total return, while larger super-regional malls were close behind at negative 16.5 per cent. Local neighbourhood retail fared better with a negative 2.9 per cent return.

Large new office buildings in prime downtown areas have been the focus of investors for several years, as they’ve outperformed suburban office properties. That wasn’t the case in 2020, however, as downtown major metro properties had a total return of negative 1.7 per cent and suburban major metro properties had a total return of negative 0.9 per cent.

“One quarter doesn’t make a trend, but it’s interesting to note that we’ve seen the downtown markets fall more sharply through the last part of this year,” said Fairchild. “Returns of eight to 10 per cent are down to negative two, where things in the suburbs have moderated from plus-four to minus-one.”

Annual net investment

Net investment was $1.29 billion in industrial, $1.01 billion in office, $660.3 million in residential, $202.4 million in retail and $694.9 million in other property types.

“Investors still have an appetite for real estate and the amount of money going into these portfolios has actually gone up from about $3.7 billion to $3.9 billion,” said Fairchild. “Half of the net new money is in development.”

Toronto led all markets with $2.72 billion in net investment, followed by: Vancouver with $520.5 million; Ottawa with $246.1 million; Montreal with $146 million; Calgary with $92.7 million; Edmonton with $75.7 million; Winnipeg with $73.6 million; and Halifax with $6 million.

COVID-19 disruptions

MSCI executive director of real estate solutions research Bryan Reid said some COVID-19-related disruptions were accelerations of trends in play before the pandemic hit.

“The pandemic has put a rocket behind some of the things that were already evident in these sector profiles,” said Reid. “The COVID crisis has impacted some of these retail assets a lot more heavily than other property types.”

REALPAC COVID-19 surveys of rent delinquencies showed they were highest in retail, particularly in enclosed malls during Q2 and Q3.

Capital growth outlook for 2021

All of the panelists predicted commercial real estate capital growth of between zero and five per cent in Canada this year.

“The dynamic of low interest rates and monetary fiscal policy will provide a little bit of a floor relative to other periods of distress,” said Lynch. “However, I can’t see a dramatic positive overall return for real estate in Canada.”

Cuthbert believes the industrial sector could cool off a bit since “pricing has gone through the roof” and rents are now similar to those at open-air big box retail centres.

He thinks well-located retail properties could recover because they’re well-suited to handle last-mile logistics through deliveries and product returns.

“Who’s to say that your 15,000-square-foot box can’t have 10,000 square feet of warehouse and 5,000 square feet of single SKU retail in the front?” asked Cuthbert.

Many major shopping centres also act as community hubs where people spend time together, a trend that could be accentuated after COVID-19 lockdowns are lifted, Cuthbert added.

“I’m not as bullish on retail, just thinking of the number of bankruptcies that we’ve had,” said Ng.


MSCI’s research-based indexes and analytics have helped investors build and manage portfolios for more than 40 years.

Its products and services include indexes, analytical models, data, real estate benchmarks and environmental, social and corporate governance research.

MSCI serves 97 of the 100 largest money managers, according to the most recent Pensions & Investments ranking.

REALPAC, founded in 1970, is the national industry association dedicated to advancing the long-term vitality of Canada’s real property sector.

Its more than 120 members include publicly traded real estate companies, real estate investment trusts, private companies, pension funds, banks and life insurance companies with investment real estate in all asset classes.

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