Real estate finds itself buffeted by a number of challenging macroeconomic trends, from slowing economic growth to the disruption of the retail industry and housing affordability concerns – and now, the coronavirus pandemic. We spoke with Brian Whibbs, IMCO’s Managing Director of Real Estate, to get his insights about how investors are approaching this asset class.
Let’s start at a high level – what are some of the driving forces in real estate today?
Real estate is the oldest class in the world. At its core, it’s quite simple: it’s land, and what you do with it. What drives it all is demographics – where and how people want to live and work. Today, that means global urbanization. That has created enormous support and growth for markets like New York, Vancouver, London and other global urban centres. The living and working preferences of Millennials and Gen X are setting the tone, with industrial and retail following along wherever the people go.
What happens to the appeal of real estate in a highly volatile environment like the one created by COVID-19?
I think real estate becomes more appealing in this sort of market. It’s a hard asset backed typically by long-term contracts, so I’d say it will be the least affected for the longest period of time. Everything gets affected eventually, especially if the economy is under exceptional strain and in uncharted territory. As governments order the closure of most businesses, we are seeing many of our retail tenants struggling to pay rent and asking for deferrals or abatements.
The retail industry has undergone a dramatic disruption in recent years. What is your view on what that means for real estate in this sector over the long term?
E-commerce, driven by shifting customer expectations and the desire to satisfy shopping needs immediately, has upended the status quo. There’s still a place for brick-and-mortar retail – but it’s clear at present that there’s too much of it. The nice thing about big regional shopping centres is that they’re in excellent locations. We think that at first, those locations will be intensified with residential development, and over time the market will dictate what else goes there. The underlying land is excellent, so it’s a shift in use more than anything else.
How does industrial real estate fit into the retail shift?
There is a big demand for industrial right now – warehouses, specifically – which is obviously being driven by e-commerce and its distribution needs. It’s quite interesting because while it’s typically not enjoyed top-of-mind attention from investors, many are rushing to it now. It’s very quick and inexpensive to build and in some ways it’s actually replacing retail.
What about the office real estate market? How sensitive is it to factors energy prices or crisis like this year’s COVID-19 pandemic?
Office real estate is sensitive to short-term shocks and longer-term structural issues as well, but impact varies from market to market. So, for example, in New York or Toronto, you have high barriers to entry where it’s relatively difficult to build new product, job growth has been strong and rents have trended upward. That’s a stark contrast to markets like Calgary, where the energy crisis has led to a dramatic oversupply.
It’s too early to tell how the pandemic will affect the office environment. We’ll likely see more social distancing and working from home, but whether this leads to tenants taking less space overall is unknown.
How are you thinking about residential real estate and housing demand when considering investing in this asset class?
There are compelling opportunities in residential, perhaps more so than even five years ago. People have become more accepting of renting for life or living in a multifamily residential building like a condo. We’re evolving away from the desire of having a single-family home, so I think you’ll continue to see more multifamily residential development globally.
How do you see the real estate asset class evolving over the coming decade? What considerations are you factoring into your long-term investing strategy?
I think the trends we’re seeing today will continue, and that we will see more urbanization. People want to live in the city; that’s where the growth is. People are seeking cosmopolitan convenience and the ability to satisfy their work- and personal-life needs without having to commute.
I also think the retail transformation is far from over. Ultimately, there will be a balance between e-commerce and physical retail, but I think unfortunately we’re still a number of years from away from finding that balance.