New global realities mean new strategies for real estate investing

Supply chain issues, growing e-commerce and a global pandemic are among the factors that have altered real estate dynamics in North America, says Steven Marino, executive vice-president, portfolio management at GWL Realty Advisors.

Where office and retail were once the dominant real estate sectors, he said multi-family assets, industrial properties and land now command the lion’s share of investor attention.

“Those three asset classes have really stepped into the void that’s been created by a shortage of office investments,” he said. “And thankfully the positive fundamentals that support those asset classes have really helped to give investors a lot of confidence moving forward.”

Speaking on the Soundbites podcast, Marino said 2021 saw a wave of new capital looking for exposure to alternative investment asset classes, which includes real estate.

“That certainly created substantive tailwinds, in terms of the scale of capital that has moved into real estate,” he said.

Industrial property has benefited from a trend of re-shoring manufacturing and distribution, as companies learned to place higher priority on having goods near at hand. As a consequence, the industrial sector has become the hottest real estate asset class.

“We’ve seen 20% to 30% annual increases in rents over the last two years,” Marino pointed out. “Vacancy rates in Toronto, Montreal and Vancouver all hover just at around 1% or less. Those are record vacancy levels, and that’s translating into record pricing power for landlords.”

As for land itself, he acknowledges that has become one of the greatest challenges for growing municipalities.

“We’re seeing municipalities across the country really having to revisit their city-planning timelines to understand how much land they want to make available to help supply the growth that is being demanded by a large logistics organization,” he said.

Meanwhile, the retail and office sectors continue to evolve as consumers demand greater convenience and new use-cases.

“Enclosed retail centres continue to see challenges,” Marino said. “We’re seeing the ‘de-malling’ and in some cases redevelopment of retail centres really to help to drive more foot traffic into those centres.”

Some developers are experimenting with mixed-use formats, adding multi-family densities into and near retail facilities.

“You’re seeing current projects like Sherway [Gardens in Toronto] or Yorkdale [Mall in Toronto] having substantial density being added to the immediate proximity of those footprints, just to really take advantage of the strong attributes of those locations,” he said.

The strategy, which often carries a big price tag, is a deliberate attempt to create experiential opportunities that attract consumers.

“It’s a defensive move but I think on some levels it’s an offensive move as well,” he said.

As for offices, Marino believes a radical transformation will play out over time.

“It’ll be really dependent on the quality of the office assets we’re talking about and the nature of the tenants’ business and their function. Certainly, the best-in-class assets are continuing to do well,” he said. “Weaker assets are suffering, and landlords are having to reinvest capital into their assets to improve their positioning and to augment their offering.”

As always, he believes location plays a huge role in the success of any real estate venture — particularly when it ensures access to a wide range of amenities. In Toronto, for example, young professionals still want to live and work in the city, and a stable labour pool is made possible by transportation hubs that improve accessibility and convenience.

“If you’re an employer of choice who wants to be able to access those labour pools and create dynamic work environments for your staff, you really need to lean into where those amenities and where those life experiences are for your employees,” he said. “You have to be part of the fabric of local communities.”

Even suburbia can replicate the urban experience by creating central business districts with a variety of services that are accessible by a range of transportation types. Mississauga, Ont. has created a vibrant urban core near its city hall, just as the city of Vaughan — the fastest-growing municipality in Canada between 1996 and 2006 — is trying to do at Highway 7 and Jane.

“Those cores are likely to be far more successful or resilient than the standalone suburban building that really doesn’t have the same amenities set to offer to its tenants,” he said.

Marino described monetary policy as the single biggest risk to the real estate market.

“When I think about the economy, I think about the risk potentially associated with effectively managing any monetary policy changes and certainly that’s a conversation of the day, just given the prospects of potential rate risers in the course of 2022,” he said. “So, we’re looking forward to an orderly and measured approach to managing those interest rate raises and making sure that the economy can manage that.”

Ultimately, he believes the nature of real estate and its return profile contribute to its widespread popularity as a key component of a multi-asset class portfolio, helping to generate and preserve wealth for investors.

“When I couple that with the value that’s determined by key locations, adaptability and resilience, it really provides great value to its stakeholders.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.