Reimagining the foundations of real estate in a post-pandemic world
When the COVID-19 pandemic first hit, the impact on real estate was sudden and profound as health authorities around the world shut down entire cities to stop the spread of the coronavirus. With much of the world starting to reopen, we caught up with Brian Whibbs, IMCO’s Managing Director of Real Estate, to hear what investors can expect from this asset class as the pandemic recedes.
The last 18 months have certainly been a whirlwind for real estate. Let’s start with how the asset class performed throughout the worst of the pandemic.
What’s clear is that different types of real estate were affected differently, and the impact of COVID-19 wasn’t felt uniformly. The worst hit, unsurprisingly, were hotels and other real estate assets dependent on hospitality and tourism. The damage has been significant and people still haven’t returned, both in terms of investing and using these types of properties.
The retail sector was also hit badly. You saw shutdowns, re-openings, then shutdowns again, then re-opening with limited capacity, tenants going out of business, e-commerce taking off – it’s a lot to absorb for any retail property. It certainly looks like enclosed regional shopping centres won’t go back to what they were and will have to redefine themselves. Some shoppers and new tenants will come back as malls reopen, but it’s difficult to imagine a full return to pre-pandemic levels of activity. As a result, we’re working to reposition the retail assets in our portfolio.
What about office real estate? Office buildings also shut down throughout the pandemic, but it’s clear many employees want to come back to the office at least to some extent.
Office tenants largely continued to pay rent throughout the pandemic, so from an occupancy and cashflow perspective, the sector performed well. Values have held up as a result. The big unknown, is what the remote revolution means for the future of work, and whether it changes the need for office space.
We continue to believe that marquee properties in the world’s big financial centres – New York, London, Toronto, Paris and others – represent compelling value, but there’s no question there’s some uncertainty about where we go from here. These centres were all built around a foundation of public transit infrastructure and people being willing to commute into the core. Has that changed fundamentally? We think over the long term the answer is no, but in the near term, it’s more difficult to tell.
From an investment perspective, we see a lot of opportunity in office real estate. Our portfolio contains unique, marquee assets that might trade only once in their existence, like the TD Centre in downtown Toronto. We have a great pipeline that gives us access to these truly irreplaceable, trophy properties, in addition to compelling opportunities for future development.
There’s still a place for brick-and-mortar retail – but it’s clear at present that there’s too much of it.
What about residential and industrial properties? How have they held up?
Multi-residential assets performed very well, with higher prices and steady rents, and that looks like it will continue. We’ve been significant investors as a result, especially considering that just five years ago we had no exposure to multi-residential at all. This sector is also tied up with the future of work, just like office real estate, given how many people want to continue working from home even after the pandemic is over.
Industrial property has remained the “golden child” of real estate. Developers can’t build it fast or big enough, and that’s not showing any signs of slowing down. Warehouses are being built on spec and leased before they are even completed. Old product is also being regenerated, which helps supply, but I don’t believe it’s reached the point where it’s overbuilt just yet. We expect the pace of development and growth of the sector to continue to outperform going forward, especially as online shoppers now expect near-instant delivery, which means suppliers and brands must hold greater amounts of inventory on hand.
You mentioned shopping malls will have to reinvent themselves. How is that unfolding in practical terms?
Even before the pandemic, our view was that most shopping centres were typically overbuilt. A typical mall that’s a million square feet probably only needs to be 650,000 square feet today. That creates an opportunity to look at what else you can do with these massive spaces, and we are spending a lot of time with municipalities on this subject.
The Pickering Town Centre in Ontario is a great example of what’s possible. We worked with the city on a plan that would make better use of this shopping centre, while creating a new and vibrant downtown area for the city at the same time. We demolished the former anchor retail store, which will make room for a massive rental apartment and condominium development, and we’re working with the city to develop a city centre that will include a new library, a seniors/youth centre and a performing arts centre along with other amenities that will intertwine with the residential development. All of this is an exciting new way to look at this asset class and to surface opportunities to diversify away from purely retail use.