Panelists discussing real estate investing in uncertain economic times at the RealCapital Conference in Toronto, from left: William Secnik of Fiera Real Estate Investments; Jaime McKenna of Fengate Asset Management; Randy Hoffman of Oxford Properties Group; Ugo Bizzarri of Timbercreek; and moderator Peter Senst of CBRE. (Steve McLean RENX)

Real estate continues to create value with less volatility than the stock and bond markets, and Canada’s relative stability should keep the money coming.

That was the general consensus of participants during a panel discussing investment in uncertain economic times at the Feb. 25 RealCapital conference at the Metro Toronto Convention Centre.

CBRE president of Canadian capital markets Peter Senst, the panel moderator, said Canada experienced record trading volumes from 2016 through 2018, but 2019 got off to a very slow start before ending with a very strong Q4.

“There’s record liquidity,” he said.

Senst noted Canadian banks were among the notable buyers in 2019, something new for the sector, and industry giant Blackstone is now looking at every major deal in Canada.

While pension funds are increasing their capital allocations to real estate, they were also among the biggest sellers in 2019 as they looked outside of Canada for higher yields.

More capital chasing fewer deals

“There’s a bit more depth in the market, with more capital chasing fewer deals,” said Fiera Real Estate Investments Limited senior vice-president of investments William Secnik.

He’s the fund manager for Fiera’s Core Real Estate Fund, which held more than 100 assets valued at more than $2.8 billion at the end of 2019.

Secnik saw more Canadian development in 2019 because it’s become harder to find existing properties for sale. In terms of foreign investment, more investment funds are flowing out of Canada than are coming into the country.

Of the money that does come in, Secnik said China represented 70 per cent of foreign investment in Canadian real estate three years ago. Now the United States accounts for 70 per cent.

“We’re starting to see a significant diversion of capital into areas like Ottawa, Halifax and Montreal as Toronto and Vancouver become more expensive,” said Jaime McKenna, managing director and group head for real estate for Fengate Asset Management, which has more than 75 active real estate projects representing about $5 billion in gross completed project value.

“The alternative space within real estate is really getting a lot of airspace,” with co-living, seniors housing, cold-storage and data centres gaining more prominence, she added.

Fengate has raised two development funds in the past four years focused on residential rental and condominium properties. McKenna sees no slowing on the residential rental side.

McKenna noted office space under construction in Toronto is already 75 per cent pre-leased, and she believes Montreal and Ottawa are under-supplied with office space.

Oxford still believes in retail

Oxford Properties Group is the real estate investment arm of OMERS, one of Canada’s largest pension plans. It owns and manages more than 50 million square feet of real estate in Canada and also has portfolios in the U.S. and Europe.

Oxford head of investments Randy Hoffman thinks the logistics sector still has a lot of runway, with near-zero vacancy rates in Toronto and Vancouver and substantial industrial rent increases, due to the strengthening e-commerce sector.

Oxford has spent millions of dollars master-planning and improving its shopping centres in recent years to increase density and foot traffic.

“The best malls will continue to get better over time,” said Hoffman, but that takes “reinvestment and reimagining the offering.”

As an example, he noted Toronto’s Yorkdale Shopping Centre had sales of $1,300 per square foot five years ago, and last year that figure was up to $1,960 as a result of this strategy.

Oxford is investing in food, beverage and entertainment options, which Hoffman said now represent nine per cent of retail gross leasable area at its malls.

It wants to get that figure up to 20 per cent. Hoffman said the ratio is upwards of 40 per cent in some strong-performing retail assets in China and United Arab Emirates.

Hoffman said it may also be nearing the right time to enter, or re-enter, the Calgary office market.

“We needed some time for the institutions to be able to mark their books to reality, and reality hopefully means putting greed aside. The big ask spread that was there for so long hopefully is coming into a realm where professionals can make deals happen.”

Multifamily remains Timbercreek’s strength

Timbercreek chief investment officer and global head of direct and debt investments Ugo Bizzarri is responsible for acquiring and financing more than $7 billion worth of multifamily residential properties.

“Demand in multifamily is enormous and we don’t have enough supply, and that will continue to go for the next five to 10 years,” he said.

Bizzarri sees plenty of multifamily rent growth in Toronto, Vancouver and Montreal, but less in Edmonton, Calgary, Winnipeg and Saskatchewan.

He believes there’s room for more growth and said multifamily rents in the Australian cities of Sydney and Melbourne are 40 to 50 per cent higher than Vancouver and Toronto, despite similar economies and immigration patterns.

While Bizzarri believes all asset classes are late in the cycle, he said it makes economic sense to build multifamily. Timbercreek is now also building office space for the first time in Toronto.

Bizzarri said Timbercreek is “trying to figure out how to create our own growth in a low-growth environment” and is looking at retail properties where it can create value through multifamily or mixed-use development.

Interest in suburban office space

Fengate has a large suburban office portfolio west of Toronto and McKenna said interest in space there, and further west in Burlington and Cambridge, is “substantial.”

She said there’s similar interest outside of Montreal.

“Any highway-oriented suburban office” space is attracting attention because companies and their employees can’t afford to be downtown, said McKenna.

This has led Fengate to look for opportunities to buy land for future residential development in such suburban areas. Secnik said Fiera bought suburban office space last year for similar affordability reasons.

While cost escalations are a challenge, McKenna said Fengate remains bullish on developing in Canada’s six largest cities and is focusing on joint ventures with “city-building opportunities” with large mixed-use properties.

Fengate is also involved with repositioning B-class malls where it believes there are value-add opportunities.

Secnik said industrial rents are now often close to retail rents and underperforming retail power centres could be converted or intensified to increase their worth.

Bizzarri predicted “capital inflows in real estate in Canada in 2020 will probably double and you’ll see a lot more mergers and acquisitions.”

Pension funds vs. private capital

Hoffman said there are clear differences between pension funds and private capital, especially relating to investment timeframes, but he’s seen the lines blur in the past few years.

Oxford has been involved in seven GTA industrial transactions with an average value of less than $20 million in the last year-and-a-half. Historically, it’s been looking for deals of at least $50 million, or $100 million-plus.

“What we’re trying to do is complement the portfolio,” said Hoffman. “While we can still go elephant hunting at the same time, we want to be able to find the right infill opportunities.”

Bizzarri observed larger pension fund-related companies such as Oxford and Cadillac Fairview are more active than smaller pension funds, which he believes are still more passive with their capital.

“Private equity does more deals with smaller ticket prices and is willing to roll up a portfolio of 10 deals of $20 million versus one large deal worth $100 million or $200 million,” said Bizzarri, noting the key factor for Timbercreek’s investment strategy is being in cities with liquidity.

“It’s not that private equity doesn’t do big deals. Blackstone is private equity and does massive deals.”