Low interest rates tempting for investors in commercial real estate

How the future of commercial real estate in Canada and internationally will develop is still open to much speculation, but there is a lot of optimism.

Nathan Denette / The Canadian Press

Investing in commercial real estate right now can seem unusually difficult with extremely low interest rates, ever-soaring prices, and a pandemic that has turned the way we work and shop on its head.

But it can also offer unusually good opportunities for those finding their way in a low interest rate environment and an uncertain economy, say people in the industry.

Fundamentals in the commercial market stay the same even during these unusual times, says Jay Jiang, chief financial officer at Dream Office, a Toronto-based real estate investment trust (REIT) with holdings across Canada, the United States and Europe.

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“We stayed on the sidelines during the first part of the COVID pandemic. But in the low interest rate environment, we were more active in acquisitions. We believe that the value of great office buildings in the best locations in the country will be forever, ”he says.

It is true that work patterns are changing and many people who have worked at home during the pandemic are unsure when and how often they will use the office. “But we believe the office will remain an important part of the way companies work – a place to attract, retain and work with people,” said Mr. Jiang.

In its most recent statement, released on Sept. 8, the Bank of Canada said it is keeping rates low and that this will not change anytime soon. The bank left its overnight loan base rate at its lowest level of 0.25 percent as it worries about a shaky economic recovery that resulted in Canada’s gross domestic product actually shrinking about 1 percent in the second quarter and inflation above 3 percent lay.

The bank is also continuing its quantitative easing program, adding about $ 2 billion a week to the money supply.

This makes money available and cheap for commercial investors, on the other hand, nobody knows exactly how much and how strong the economy will recover from the pandemic.

“It’s an interesting time because we have some real investment risks in the industry due to the pandemic. At the same time, governments and the bank are trying to mitigate the risk, ”says Justin Forgione, trading broker at Rexton Commercial Realty Advisors Inc. in Toronto.

With low interest rates and a bank-backed pillow, commercial property investors can be tempted to go shopping, but they should still be careful, says Mr. Jiang.

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“In general, buying good assets is a good idea, but you need to manage your risk and not have too much debt.”

– Jay Jiang, Chief Financial Officer at Dream Office

“In general, buying good assets is a good idea, but you need to manage your risk and not have too much debt. Interest rates may be low now, but it’s hard to speculate where they will eventually go. If you keep your debt low and have plenty of liquidity, you can refinance if something changes. “

How the future of commercial real estate in Canada and internationally will develop is still open to much speculation, but there is a lot of optimism.

At the end of February, the CBRE Real Estate Market Outlook 2021 predicted that “office and retail markets, which carried most of the pandemic, will gain a foothold, while industrial and multi-family houses” [residential properties such as apartment buildings] clearly benefit from the reallocation of capital into defensive, stable sectors. “

Investments in industrial properties such as factories, warehouses and logistics warehouses have been particularly strong and active, said CBRE.

In a statement accompanying the publication of the report, CBRE Chairman Paul Morassutti said that “industrial” [transactions] exceeded everything in 2020, ”and CBRE expects investors to raise or invest in an additional 40 million square feet of office space by the end of this year.

The risk for commercial real estate investors is lower in tier 1 markets like the Greater Toronto Area and Vancouver, Forgione says.

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“When rates rise, the correction in these large markets will not be as severe as in secondary or third-tier markets,” he says.

Some types of commercial assets have become more attractive than others during the pandemic, Mr Forgione added.

“Switching to work from home and not shopping in malls while on lockdown has penalized some of those assets,” he says. On the other hand, in addition to the appreciation of logistics and industrial space that the CBRE describes, commercial real estate outside of factory outlets is doing well, he says.

As long as interest rates remain low, investors should expect general high demand for commercial real estate, which will drive prices higher, Forgione says. Even vacant industrial areas are now relatively expensive, rising building wages and material costs as well as general inflation keep sales values ​​high.

Mr. Jiang agrees. “Every month it looks like there’s a high water brand on prices, and then there’s a new one. Your land and building material costs are also all more expensive, ”he says.

When rates eventually rise, smaller investors could be harder hit than bigger ones, says Benjamin Shinewald, president and CEO of BOMA Canada, the umbrella organization for building operators and managers.

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Large institutional investors can protect themselves by holding large cash reserves even when buying real estate, he says.

“The good news about our industry is that it is very well capitalized and has an extremely long-term perspective. That is why institutions such as insurance companies and pension funds invest in us, ”says Shinewald.

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