For several years conversation in the commercial real estate industry has centered on the unusually long length of the current expansion cycle and how we must be in its late stages. But more than 10 years in, while growth in many fundamentals has slowed, the cycle marches on. That’s led some experts to ask whether we’ve entered a new kind of cycle marked by prolonged periods of low growth, low inflation and low interest rates. Such an environment would prove favorable for continued stability in the commercial real estate sector for the foreseeable future.
As one industry insider put it, real estate experts are prone to using baseball as an analogy and talking about what inning the industry is in to reflect its place in the cycle. But that analogy is no longer working with this cycle stretching deep into extra innings. “I’m wondering if we’re in a new cycle, bumping along bottom with low interest rates, low inflationary rate,” said Dean Connor, president and CEO, Sun Life Financial. “We can just bump along the bottom for a long time. … We’re not sanguine about this…. But I am saying baseball analogy doesn’t work for us anymore.”
That was one argument laid out in panel discussions this week at the annual Toronto Real Estate Forum. More than 2,600 commercial real estate pros gathered at the Metro Toronto Convention Centre for the annual forum for sessions and networking centered on Canada’s largest market. The two-day forum was preceded by a smaller one-day event, Global Property Market, which covered key trends shaping commercial real estate investment and lending activity in Asia, Europe and North America. (Both events are organized by Real Estate Forums, which, like NREI, is a division of Informa.)
Here are some other key takeaways from the two events.
- Throughout the panels a recurring theme was the overall geopolitical and macroeconomic uncertainty hanging over all investors in 2020. The combined factors of the trade war between the U.S. and China and its knock-on effects on other trade relationships; the uncertainty surrounding Brexit; the 2020 U.S. presidential election; on-and-off protests in Hong Kong and the overall expectation of slower GDP growth make for a tough climate in which investment decisions will have to be made.
- A panel of heavy hitters discussed the outlook on European real estate. It was moderated by Lonneke Löwik, CEO, INREV, and featured Tony Brown, global head of real estate, M&G Real Estate; Justin Curlow, global head of research & strategy, real assets, AXA IM – Real Assets; Karim Habra, head of Europe & Asia-Pacific, Ivanhoé Cambridge; Richard Jackson, co-founder & managing director, Apache Capital Partners; Matthew Richards, CEO, capital markets, EMEA, JLL and Rebekah Tobias, head of business development, MARCOL. Total returns have been falling in Europe across all property sectors. This has stemmed in part from heavy interest from investors globally in the region. Many overseas investors still see Europe as a safe haven overall and are willing to accept the lower returns for the stability.
- Europe is in a period of low growth, but panelist agreed there is still some room left in the cycle. There has been so little development in the past decade in general that in some markets there is strong rental growth. In some cases, it’s been fueled by supply being taken off the market and converted to other uses, pushing vacancy rates down even further.
- Historically Germany has been a main focus for international investors in Europe, but recently France and the Nordic region have been “real darlings.” Those parts of Europe have drawn myriad investor classes in recent years.
- Emerging alternative real estate classes in Europe include health care/aged care; hotel and leisure, and student housing. With student housing in particular, there are an estimated 19 million students throughout Europe, with only 10 percent having formal accommodations. There’s also been a rise in English-taught classes throughout the region, leading to more American students attending universities in Europe. All this is creating a big potential market for development of student housing.
- A session on emerging and development markets was moderated by Peter Cuthbert, president, head of global real estate, Fiera Real Estate Investments Ltd. It featured Christine Filgiano, executive vice president, portfolio construction & risk management, Ivanhoé Cambridge; Frank Cohen, senior managing director, global head of core+ real estate, Blackstone; and Dietrich Heidtmann, managing director, head of international capital markets, GTIS Partners. “Owning retail in Brazil is like owning retail in the 1950s in North America,” Filgiano said. “The malls are packed. You’re going back in time and doing real estate the old-fashioned way.” She added that there remains tremendous growth potential because of a lack of product. So, there’s an opportunity to build and manage new properties.
- “Different markets grow at different speeds,” Cohen said. “But as global investors we find that what happens in one part of world, eventually happens in another part of the world. We bought industrial in the U.S. in 2010 as e-commerce was getting a bigger and bigger share. In Canada e-commerce was a smaller share … but global investment themes tend to move.… If you see something in one part of the world and it’s not in another part yet, you may have an investment bet.”
- A panel on global debt and equity trends was moderated by David Hutchings, international partner, head of investment strategy, EMEA capital markets, Cushman & Wakefield. It featured Michael Kavanau, lead director - EMEA, debt & equity advisory, JLL; Shawn Lese, managing director, head of Americas product & solutions, Nuveen Real Estate; Lee Millstein, president, Cerberus Global Investments & global head of real estate, Cerberus; Tom Shapiro, president & founder, GTIS Partners; and Allison Wolfe, CFO & global head of portfolio management, Oxford Properties. “We’ve been surprised by the strength of the U.K. market,” Wolfe said. “The lender appetite for quality assets has been much stronger than expected.”
- Other panelists added that with interest rates falling again, debt is getting cheaper. That’s driving returns and has given cap rates some room to compress, while still maintaining a healthy spread relative to bond returns. “In the short term, it’s been positive,” Milstein said. “But in the long term it could be a concern” and lead to a debt-fueled asset price bubble.
- “There’s a search for yield globally going on. With 25 percent of sovereign bonds trading at negative yields, real estate is a great place to put capital as an alternative,” Milstein said.
- “I’d much rather be a borrower than a lender in the U.S.,” Shapiro said. “It’s a very tough market. There are a lot of debt funds and a lot of liquidity for banks and life insurance companies.”
- A session discussing trends in capital flows was moderated by Jon Love, CEO, KingSett Capital, and Jennifer McClelland, vice president and senior portfolio manager, Canadian equities, RBC Asset Management. Speakers included Dean Connor, president and CEO, Sun Life Financial; Darryl White, CEO, BMO Financial Group; and Mark Wiseman, global head of active equities and chairman, BlackRock Alternative Investors. The exploding use of artificial intelligence (AI) was a big topic the panel tackled. “AI will not change everything in the short term, but it will change everything in five to 10 years,” White said. “I don’t think anyone can sit on the sidelines and expect to catch up in five years… In the bank I work for, it’s profoundly important—for risk management, for transaction monitoring, for prevention of money laundering. And it will automate tasks that are pattern-based. The robots we have are in the hundreds now…. It will change just about every job under our collective watch. The doesn’t mean it replace every job. But it will change every job.”
- Connor pointed to predictive modeling as another technology trend in the finance world. For banks “trust used to be, ‘If I give you my money, will you give it back?’ The way we expressed trust was building these beautiful buildings with granite and marble to convey, ‘We will be here in 100 years.’ Now trust is about data. ‘Are you using it for me or against me?’ I think this is going to be the defining issue of the next decade.”
- The panel also tackled the question of why historically low unemployment rates in the U.S. and Canada have not led to much wage growth. White pointed to technology and immigration as two factors suppressing wage inflation. “When you look at that immigration taking jobs available and keeping wages where they are it should be stable for a little while.” Connor added that in the U.S., rising health care costs being paid by employers have taken the place of wage gains. “Wages aren’t growing as fast because this other compensation is going up fast instead.”
- Another panel took on the question of tech transformation directly, especially with the recent surge in capital investment in proptech companies. Robert Courteau, CEO, Altus Group, moderated a panel that included Ajay Agrawal, founder, Creative Destruction Lab; Michael Turner, president, Oxford Properties Group and Jim Young, co-founder & CEO, Realcomm. “Every technology is simply lowering the cost of something,” Agrawal said. “Thinking you have to keep up with how technologies work can be daunting and can be a trap. When you boil it down to, ‘What is it lowering the cost of?’ you can go back to your business.”
- Young, meanwhile, outlined his view of the industry now being in phase 5.0 of a more than 40-year process of technology adoption and evolution. The fifth phase includes AI, autonomous vehicles, blockchain, augmented reality, robotics and drones. And part of the task for the industry is to weave these new pieces into the technological base that’s been built over the past four decades.