Toronto Real Estate Forum: The Ying and the Yang?

By Robin White (Toronto)

The 25th Toronto Real Estate Forum wrapped up earlier this month, and a soldout audience was treated to a potpourri of executives from major real estate companies, banks and pension funds; developers, economists and politicians opining on a variety of topics relating to the real estate business.

Having attended all 25 Forums, as well as many of the Property Forums that preceded the Real Estate Forum, I always found that I came away with a consensus on the state of the real estate markets, and where the business was headed.  

This time, it felt different. There were many contradictory opinions; here are just a few:

·         Interest rates were going up; interest rates were going to stay lower for longer.

·         Bond yields were heading up leading to higher financing costs; therefore, higher cap rates and, thus, lower prices. The recent rise in bond yields is short term, and they will revert to their previous levels or drop even lower, thereby reducing financing costs and, consequently, cap rates.

·         There will be an ongoing trend towards urban development as millennials seek opportunities to live and work in the urban core; the suburbs will experience a rebirth as millennials seek more attractively priced homes in which to raise a family.

·         The effects of the Trump presidency and Brexit will have a major impact on the future of the U.S. and European economies; the powerful secular forces that are present around the world will transcend any of the impact of Trump or Brexit.

·         Canada is in a wonderful place right now. We are seen as a good place to invest, because of our stable and transparent government and economy; Canada is irrelevant in the global scheme of things.

·         All levels of government have massive levels of debt to contend with, and are still running deficits; we have never amassed such a high level of cash looking for a home.

·         In the next 10 to 20 years, technology could affect up to 70% to 80% of the existing workforce; unemployment levels in the U.S. are at a low point.

My father used to say if you are not confused, it is because you have not been paying attention.  There is no question that anyone who was paying attention at the forum must have been somewhat confused.

So what are we to make of it all?

In my career, I have been through four recessions. Some have been more severe than others. Looking back at all of them, there were telltale signs in advance of the recession that should have been harbingers of things to come. These signs included companies overleveraging, undisciplined financing, speculative development, undercapitalized developers, junk bond activities, commercial mortgage- backed securities and so on.

There will be another recession. That is a fact. The questions are: When? And what can we do to prepare?

Coming away from this year's forum, although there were many conflicting views expressed, it is difficult to pinpoint any particular reason why we will see a recession in the near term. I am in the camp of interest rates being lower, at least for the next few years. There may be some short-term corrections, as we saw with the recent rise in bond yields, but I do not see any major forces likely to increase long-term interest rates – a situation that is good for our business.

Possibly, the biggest takeaway for me was the air of positivity that existed throughout the conference. Despite the confusing signals expressed in the breakout sessions, my many conversations with attendees at the coffee breaks, the cocktail parties and the dinners were all extremely positive and uplifting. 

And, perhaps, this is the most important takeaway of the 25th Real Estate Forum. When the attendees are positive and the mood is uplifting, they generally spell a positive outlook moving forward.

So let's make a toast to that, and may I wish everyone the best for a very happy and prosperous New Year.

(Robin White is Chair of Avison Young’s capital markets group and a founding Principal of the firm. He is also a Company Board Member and sits on the firm’s Executive Committee. During his career, which began in 1977, he has co-ordinated the sale of more than $5 billion worth of commercial real estate and completed several significant lease transactions, including several high-profile office buildings and industrial properties.) 

Outlook for 2017: It’s the seventh inning, but how long is this ballgame?

by Mark E. Rose (Toronto)

Take me out to the ball game!

It is only fitting that, in a year full of upsets, the Chicago Cubs celebrated their first World Series win in 108 years. The nine innings of American baseball have become a metaphor for the global real estate market cycle, but given the many variables of the current climate, just like the World Series finale, this cycle may be going into overtime.

Redux, or changes ahead?

The commercial real estate industry will end 2016 as it began – with low interest rates, low cap rates and moderate GDP growth in most nations. But it does not feel like the same environment heading into 2017. Rising protectionism and political unrest have introduced a healthy dose of fear and skepticism as to where we are in the current market cycle and what comes next. Despite job growth, improving market fundamentals and superior yields to alternative investments, commercial real estate owners, occupiers and investors disagree about how long this cycle could – and should – continue.

Pundits have taken both sides of the interest rate debate – from low rates indefinitely to a gradual return to historical levels (normalization). Meanwhile, virtually all developed countries piled on additional debt, ensuring that no government would lead the charge to raise rates. Economists disagree about how best to proceed, but a majority of business executives understand that we need to normalize rates one day – and sooner rather than later. It is hard to conceive a climate with less consensus.

Buyers and sellers used Brexit and the U.S. presidential election to pause and gather data points. Decision-making might have slowed in 2016 but, as we discovered while compiling the Avison Young 2017 North America, U.K. and Germany Commercial Real Estate Forecast (due out January 12, 2017), the appetite for investment in real estate continues unabated. The overarching themes of global financial growth from a depressed base and global population topping 10 billion in the next few decades provide strong support for everything related to real estate. Technology is a game-changer, potentially impacting what, where and how properties get used and constructed. If history is a guide, technology – like immigration – has redistributive impacts but can create meaningful positive economic growth for decades to come. 

We will start off from a similar place in 2017. Prices are at historic highs, liquidity is available, but natural tensions are rising. Decision-making has slowed and fear of this cycle coming to a close is stressing financial models and generating negativity. New York-based retail and housing are examples of city-specific product types that are going through a correction, but retail and housing in general are alive and well. Investor Sam (Grave Dancer) Zell is calling a top again, but the timing of such predictions remains to be seen. It is likely that markets that enjoyed disproportionate gains earlier in the cycle are taking a pause as investors look more broadly for opportunities. In a classic cycle, what we would expect next is a wave of consolidation that pushes prices even higher prior to a broad-based market reset.

The case for extra innings

Let’s pivot back to the baseball analogy. The widely held opinion is that real estate is in the seventh inning. At Avison Young, we disagree. We see something very different. We might be in the seventh or eighth inning from a pricing perspective, but given the market forces and attributes that currently exist, we could be in the seventh inning of a very long extra-innings game for our industry. Real estate is a legitimate investment alternative and is currently producing higher current yields than stocks and bonds. In fairness, interest rates are providing support, if not stimulating over-performance, due to the capital intensity of property investments. As long as rates hover near zero in most advanced industrialized countries, real estate will remain a preferred option for pension funds and other global investors. 

Geopolitical events, such as Brexit, are mainly playing out in the currency markets with the British pound and the euro taking significant hits against the U.S. dollar. Energy and commodity volatility are also repricing countries like Canada, whose currency lost ground against the U.S. dollar. But in each case, the change in currency has made these countries more competitive for exports and, effectively, put hard assets “on sale” to investors flush with cash and benefiting from a stronger currency. The U.K., Germany and Western Europe, Canada and Mexico boast some of the largest GDP markets in the world and global trade has not seized up – nor will it. The U.S. and Canada, in particular, are blessed with resources, technology hubs and growing workforces. As a result of these factors, along with safe-haven status and low interest rates, North America has been the preferred destination for global capital, and will continue to be in 2017.

Additionally, investors in this region are beginning to harvest gains, creating a “wall of capital” to take advantage of any dislocations in the marketplace. This wall is one of the reasons we are predicting that North American global investors will have the U.K. and, specifically, London in their sights in 2017. We believe that well-timed portfolio acquisitions could produce significant returns.

To get the full story on Avison Young’s outlook for 2017, including forecasts for the office, retail, industrial and investment markets throughout North America, the U.K. and Germany, watch for our 2017 Forecast Report on January 12, 2017. To ensure that you receive a copy, please contact the Research Manager at your local Avison Young office or sign up here: http://www.avisonyoung.com/research/subscribe-research-reports.

On behalf of the board of directors, Principals and the entire Avison Young family, we wish you the happiest, healthiest and most prosperous 2017!