The worst of the commercial real estate downturn appears to be over and, while there are still challenges ahead in the Canadian market, a sense of optimism continues to emerge.

That was the impression from senior real estate executives who offered perspectives on fundamentals, trends and strategies during the closing roundtable at the recent RealCapital conference at the Metro Toronto Convention Centre.

Resiliency and finding opportunities within the various markets have been the keys for many of these company leaders.

“Credit has been the shining star for us in the last year-and-a-half,” said Randy Hoffman, Oxford Properties' executive vice-president of North America investments.

He highlighted Oxford’s investment in a variety of debt positions — including first mortgages and mezzanine investments across markets and sectors — which has been a growing part of the business since it was launched almost 15 years ago.

“It's been generating some great returns for us.”

Oxford Properties Group is owned by OMERS, a defined benefit pension plan with $128.6 billion in net assets across a global portfolio of public market, infrastructure, private equity, venture capital and real estate investments.

Hoffman said his company’s parent expects its portfolio to generate high single-digit returns.

Ontario Teachers’ Pension Plan’s new operating model

Ontario Teachers’ Pension Plan (OTPP) owns Cadillac Fairview and announced last June an evolution of its operating model. OTPP has established an in-house real estate group that includes Cadillac Fairview’s global team of 37 investment professionals.

OTPP is focusing on global real estate investing and portfolio management. Cadillac Fairview manages the growth, diversification and densification of its Canadian portfolio and provides real estate services to OTPP.

OTPP’s real estate portfolio, including Cadillac Fairview assets, was valued at $29.3 billion as of June 30, 2023.

Pierre Cherki became OTPP’s executive managing director of real estate in January after spending most of his career at DWS Group, a German alternative investments manager with a global real estate portfolio. He has also been a member of Cadillac Fairview’s board of directors since 2022.

“We need diversification and therefore we will continue to invest in non-Canadian markets,” Cherki explained, noting an emphasis on industrial, multifamily and data centre properties, as well as alternative asset classes, in Canada and in other parts of the world. 

“But there is no doubt in my mind that Canada will continue to be by far the largest part of our investment portfolio.”

Canada is an attractive place to invest

Nearly $17 billion of Blackstone’s nearly $600 billion global real estate portfolio is invested in Canada, and the Canadian business is growing.

Blackstone managing director and head of Canada real estate Janice Lin said the country is an attractive place to invest due to its growing population, a well-educated and high-quality workforce, stable financial and government systems, and supply challenges in most real estate asset classes.

Hazelview Investments chief executive officer Ugo Bizzarri said his company raises “a fair bit of capital” from foreign investors for many of the same reasons Lin had outlined.

Lin said asset classes such as data centres and student housing are “very nascent relative to many other places in the world, especially the U.S., which is a really interesting proposition.” She’s trying to figure out how to incorporate those assets at scale into Blackstone’s Canadian portfolio.

“I think what takes Canada from good to great is more foreign capital investing in our market,” Hoffman said. “Taking this from a market where a $500-million transaction is large and shallowly bid versus New York and London, where it is average and deeply bid, will take this market from good to great.” 

Housing shortage will remain a problem

RioCan REIT chief operating officer John Ballantyne, who moderated the discussion with RBC Capital Markets Real Estate Group managing director Nurit Altman, noted there are shortages of both housing and retail in Canada.

The Canada Mortgage and Housing Corporation has said 3.5 million new homes must be built by 2030 to restore affordability and CIBC World Markets deputy chief economist Benjamin Tal had said earlier in the day that number is actually much higher.

While Hazelview launched six multifamily projects last year and plans to launch six more this year, Bizzarri said even that lower 3.5-million-home goal won’t be reached. He believes housing affordability will remain a major issue and the situation could worsen. 

Bizzarri thinks all levels of government should work together to try to solve the problem and emphasized that more tradespeople are needed among immigrants.

“Unfortunately, there's no cure,” Bizzarri said. “It's going to take 10 years of being very aggressive on the supply side to fix the affordability issue that we're seeing in Toronto.”

Cherki and Lin emphasized this problem isn’t unique to Canada and is ongoing in cities around the world.

Office to multifamily conversions

Hoffman reiterated a well-known industry fact: a wide-scale solution won’t be found in converting office buildings to multifamily uses, because such conversions are difficult and expensive. 

Altman pointed out that, despite slumping office building prices in Toronto, Vancouver and Montreal, they’re still too valuable to convert.

Hazelview has done three conversions and Bizzarri said he doesn’t want to do three more. In most cases he believes it would likely be a better option to tear down an existing office building and replace it with a purpose-built multifamily building.

Looking backwards and forwards

Although some major deals were transacted last year, Altman said volume was down about 30 per cent across Canada. She asked the panellists about the challenges and opportunities they faced last year and their outlook moving forward.

Lin believes the inflation of recent years is largely behind us, which should create stability, and she’s optimistic about the opportunities that will present themselves to Blackstone this year.

“We will just continue to lean into the sectors we like the most because we're investors throughout cycles and we’re investors with a longer-term view,” Lin said. “We look at where supply and demand are today, as well as over two, three, five and 10 years into the future.” 

San Francisco-based global alternative asset management firm TPG acquired a 75 per cent stake in Oxford’s Brampton Business Park and Vaughan Industrial Park, which combine to encompass about 5.1 million square feet, in a December transaction that valued the fully leased portfolio at $1.3 billion.

Hoffman said Oxford didn’t set out to sell the portfolio but received interest from TPG. Oxford wanted to keep a piece of the action and TPG realized the value of retaining the company’s platform and people involved, so a deal that pleased both sides was struck.

“The thing that I found to be the most difficult component of the transaction was trying to procure financing,” Hoffman said.

Alternative asset classes including data centres, self-storage and student housing may provide opportunities for Oxford this year, Hoffman noted.

“Real estate fundamentals in Canada are very, very strong in multifamily, industrial, retail and even some office,” said Bizzarri.