What Makes More Money Multifamily Or Retail Rents

Allied Properties REIT president and CEO Michael Emory. (Courtesy Allied)

When 4 panelists met to lay out their prospects for the iv major commercial real manor asset classes during a recent RealCapital virtual panel in Toronto, trends had been pretty clearly established in three of the sectors.

Industrial and multiresidential were (and are) performing well. Certain segments of retail continue to generate strong returns, while others are struggling. Nevertheless, while at that place's a consensus amongst many office owners and occupiers that near employees volition render post-pandemic, there's still some uncertainty near the home and part mix in one case the pandemic ends.

"The sectors are always evolving and total render operation varies," said moderator Peter Senst, CBRE'due south president of Canadian capital markets, in his introduction. "Every sector has its own bicycle. It'south therefore critical for leaders of real estate companies to brand strategic decisions knowing that the future of dissimilar nugget classes may, and likely will, change their momentum."

That set the table for the four highly respected senior executives, including Allied Properties REIT (AP-UN-T) president and chief executive officer Michael Emory, who tackled the office sector.

Allied and the function sector

Allied is focused on providing distinctive urban workspaces to knowledge-based companies in major Canadian cities. Despite the pandemic, Emory said 2020 was an encouraging year.

"We had virtually no tenant failures in the office component of our tenant base of operations. Our same-asset NOI (net operating income) sustained itself relative to 2019, which we were very pleased about given the amount of rent nosotros abated under the CECRA (Canada Emergency Commercial Hire Assistance) program.

"Nosotros did 258 charter transactions in 2020, which is a staggering number; 103 of those lease transactions represented deals with tenants that are new to our portfolio across the country."

Allied had a 17.3 per cent average cyberspace rent increase for renewals across its portfolio over 2020. Emory attributed that to the strengths of its three largest markets: Toronto, Montreal and Vancouver.

While there'due south been a lot of talk almost how working from dwelling house will impact the market, Emory said most all of Allied's office users intend to return their unabridged workforces to the office after the pandemic is over.

They've experienced corporate cultural disintegration and declines in appointment and productivity as people accept connected to work from home.

Emory said knowledge-based organizations' top priorities aren't costs and cost-containment, just alluring and retaining top employees.

Allied is very urban-focused and Emory doesn't believe companies will make any major migration to the suburbs for office infinite. While he said the suburbs remain viable, he thinks the pre-COVID-xix tendency of increasing urban intensification volition continue.

"Centuries of man history is not going to reverse itself because of a transitory pandemic," said Emory. "It just isn't."

While trading in part buildings substantially stopped when pandemic shutdowns kicked in final spring, it restarted late last year largely where it left off in Feb 2020.

"We don't expect to have any distress opportunities in 2021," said Emory. "We will pay top dollar for whatever becomes available to the states that fits squarely within our investment and operating focus in 2021.

"And if we don't, someone else will. There's a tremendous amount of coin looking for a home. A lot of it is very long-term investment capital. I expect it to be expensive and I expect trading to be considerably more active for high-quality urban function space in Canada in 2021 than it was in 2020."

Industrial

Summit Industrial Income REIT (SMU-United nations-T) owns and manages an eighteen-million-square-pes portfolio of light industrial backdrop in Ontario, Quebec and Alberta. CEO Paul Dykeman said fundamentals for the class were the strongest ever in February 2020 and the year ended in a similar position.

More than 90 per cent of Summit's portfolio remained open through the pandemic, though some small-bay tenants were impacted and utilized the CECRA plan and rent deferrals. Occupancy remained between 98 and 99 per cent throughout 2020.

Summit increased rents by more than xx per cent on expiring leases and closer to 30 per cent in the Greater Toronto Area. Some increases approached fifty per cent, according to Dykeman.

"Past August, we shifted into offensive mode and went into the capital markets a couple of times and the debt markets a couple of times and ramped up our acquisition program," said Dykeman.

Interest in industrial has grown substantially in the past few years; it'south seen as a stable and condom income-producing investment vehicle with increasing growth upside. Dykeman said Height is only ownership industrial properties in the Toronto and Montreal areas considering it forecasts connected growth and need in those markets.

Dykeman said industrial land is trading at up to $3.5 million per acre, which would push rents per square foot up to $13 to $15, while in-place rents are around $6.50.

With a express supply of quality industrial space to learn at below replacement cost, Meridian is condign more active in development. Dykeman said the downside is industrial properties now accept longer to build and the cost will approach $300 per square foot. Information technology was around $175 just a few years agone.

Amazon'south aggressive Canadian expansion is dragging the industrial market along and pushing rents up, only it'south not alone. Other e-commerce players are also driving demand and Dykeman said more attention is being placed on the onshoring of additional inventory after product shortages and international shipping delays caused problems in the early days of the pandemic.

Multiresidential

BentallGreenOak is a global real manor investment management adviser and service provider with $66 billion of assets under direction. Toronto-headquartered Sun Life Financial Inc. caused a bulk pale in BentallGreenOak in July 2019.

Managing manager of portfolio management Christina Iacoucci said BentallGreenOak's multiresidential portfolio has held up very well through COVID-19 headwinds, including higher unemployment, lower immigration and reduced post-secondary pupil populations. All of these factors have combined to increase vacancies in the rental market place.

Sun Life's portfolio has been repositioned over the by 4 years to focus on the intensification of urban cores. Iacoucci said that has paid off fifty-fifty though the pandemic prompted some younger families to move out of the core due to affordability and to take advantage of low involvement rates and more space.

BentallGreenOak is edifice purpose-built rentals in Hamilton, which Iacoucci said has created an affordable alive, work and play environment that'due south attracting immature people.

"Downtown markets take been hit harder than the suburban markets due to an influx of new purpose-built rental supply that has come on stream, also as the increased shadow rental supply that we're seeing from short-term rentals and condos," said Iacoucci.

Iacoucci expects a significant post-pandemic snapback in urban and suburban apartment demand as market and economic fundamentals are still strong.

"There's still going to be a wide range of investors looking to add multifamily to their portfolios," she said. "Despite the greater amount of new purpose-built rental that has come on to the market place and volition continue to come on to the market, the need will still outweigh supply."

Multiresidential yields can take advantage of depression-interest Canada Mortgage and Housing Corporation financing for leveraged investments, Iacoucci added.

Retail

Jonathan Gitlin is president and COO of RioCan REIT. (Courtesy RioCan)

RioCan REIT (REI-United nations-T) owns, manages and develops retail-focused and increasingly mixed-use properties in loftier-density transit-oriented areas. Its portfolio was comprised of 223 properties, with RioCan's interest accounting for 38.3 1000000 square feet of leasable infinite, as of Dec. 31.

Part of RioCan's diversification strategy is due to the challenges facing the retail sector. However, president and primary operating officer Jonathan Gitlin said: "Our biggest challenge is bridging that broad gap between perception and reality."

While 2020 showed weak spots in bricks and mortar, Gitlin said physical retail outlets nonetheless have a disquisitional function in providing goods to consumers. Necessity-based retail has performed well through the pandemic and Gitlin expects shoppers will want to return to experiential retail stores one time the majority of Canadians are vaccinated.

There's been some weakness in urban storefront locations, simply Gitlin believes there will be a resurgence and major Canadian markets will once once again thrive.

RioCan has benefited from stronger suburban markets, all the same, where its retail locations have done well and Gitlin said tenants are happy to renew. The trust has sold all 506 units of a retail/condominium mixed-use development it'southward building in the Greater Toronto Area city of Oshawa.

Gitlin said 2020 was quiet for retail transactions due to uncertainty about underwriting, which left many potential investors uncomfortable. He believes grocery-anchored shopping centres are resilient and condom and a good investment opportunity for a diversity of unlike investors.

The lending community is still willing to lend money on the backs of well-located retail backdrop, according to Gitlin. He believes the Canadian investment market, specially for grocery-anchored and necessity-based retail, will ramp upwards.

Enclosed malls are difficult to underwrite and predict and are experiencing more strain. While retail power centres have an enhanced perception of risk, Gitlin thinks they'll also be recognized as rubber places to invest.

Gitlin said there are still solid fundamentals in place for practiced retail property operators and managers in practiced locations with value-oriented tenants. The sector as well offers another benefit.

"These are typically very conveniently located parcels of land that have cracking income streams on them. But there's a lot of flexibility in what you tin can do with those parcels of land."

There are opportunities to buy retail in public markets at deeply discounted values and Gitlin expects that discount to net asset value will narrow.

Source: https://renx.ca/realcapital-panelists-break-down-four-asset-classes/

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