By Ray Punn, Vice President, Skyline Wealth Management
Introduction
As we steer our way through 2023, the narrative of the Canadian real estate sector is one of both challenges and opportunities. Faced with more stringent financing conditions, an anticipated economic slowdown, and a hike in office vacancies, the real estate sector appears poised for an uncertain year.
Nevertheless, while short-term obstacles loom, the long-term prospects of Canadian real estate investing seem decidedly brighter. Public and Private investors continue to express interest in real estate. The greater certainty for interest rates, with another recent raise to 5%, is projected to recalibrate pricing expectations throughout 2023. This anticipated stabilization could help commercial real estate investment soar to an all-time high of $59.3 billion this year, underpinned by robust merger and acquisition activities.
Furthermore, residential real estate, particularly in urban areas, is seeing an uptick in demand as employees aim to minimize commute times. This trend complements the increasing demand for multi-family rental real estate, driven by high immigration targets. In 2022, Canada’s overall rental vacancy rate hit a 20-year low of 2%, and is expected to decline further in 2023.
With $58.5 billion invested in commercial real estate in 2022, almost matching the record volume set in 2021, it is clear that the sector, while undergoing adjustments, holds significant promise. Despite being dubbed “the correction year” by industry insiders, optimism permeates the air. As the market adapts to these shifts, the narrative of the Canadian real estate landscape is gradually evolving from a tale of challenge to one of opportunity and growth.
The Current Landscape of Retail Assets in Canada
Canada’s retail asset landscape dynamics have undergone a seismic shift, primarily driven by the shift from traditional retail stores due to the rapid rise of e-commerce and changing work environments.
E-commerce has grown to such an extent that it is reshaping the structure of retail assets, pushing landlords to reconsider the utilization of their spaces. The digital marketplace has fostered new consumer habits and expectations, posing challenges for traditional retailers who fail to adapt. However, despite these challenges, there are opportunities for asset transformation and adaptation within the ever-evolving retail environment.
The shift toward remote work in the corporate world has significantly reshaped the office market in Canada. In the, the national vacancy rate peaked at 17.7%, a historical high, with major cities like Toronto, Vancouver, Ottawa, and Montreal recording unprecedented downtown office vacancies. However, in this changing landscape, secondary cities have displayed resilience, with decreasing overall office vacancies. This shift has not only led to a surge in sublet opportunities, offering greater tenant flexibility, but has also redirected construction efforts toward suburban areas. These changes underscore an industry evolution toward a blend of physical and remote workspaces, emphasizing the importance of high-quality, amenity-rich office assets.
Despite the challenges, the adaptation and resilience within the Canadian retail asset landscape underscore the potential for strategic repositioning and diversification, setting the stage for the industry’s next evolution.
The Silver Lining: Strategic Repositioning and Asset Diversity
Amid the changing dynamics of Canada’s real estate industry, there is a potent opportunity for strategic asset repositioning to fit investor behaviour. In doing so, real estate stakeholders can better accommodate evolving market trends, bolster asset performance, and maintain resilience amid uncertainty.
Notably, the retail asset class offers a rich field for strategic repositioning. While the rise of e-commerce has challenged traditional retail models, its impact is not ubiquitous. Essential goods providers, grocery and pharmacy outlets, have demonstrated resilience in an increasingly digital landscape. Leading Canadian grocery chain Sobeys has seen a decline in e-commerce sales post-pandemic, indicating a resurgence of in-store shopping. In short, Canadians value the in-person shopping experience when it comes to getting groceries and running errands post-pandemic. Thus, the strategic transformation of retail spaces might consider optimizing for a blend of digital and physical shopping experiences, focusing on these resilient sectors. This proactive approach not only refreshes underutilized spaces but also elevates their relevance and value in a diverse retail ecosystem.
Amid these shifts, the importance of asset diversity is paramount. Holding a variety of assets allows investors to mitigate risks linked to economic cycles, industry shifts, and changing consumer behaviors. Furthermore, diversified portfolios can potentially provide more consistent income streams, as downturns in one asset class can be balanced out by the performance of others.
Whether residential properties are evolving to meet new housing demands or retail spaces are undergoing a strategic transformation, each asset class offers unique prospects. Real estate investors who diversify their portfolios are strategically positioning themselves to navigate market uncertainties and seize growth opportunities brought about by these trends.
Strategic asset repositioning and portfolio diversity are not just survival strategies. They offer substantial opportunities for investors to stay ahead in the dynamic Canadian real estate landscape. These approaches facilitate agility, adaptability, and success amid ongoing industry changes.
A Different Narrative: The Skyline Story
A major player in the Canadian real estate industry is Skyline Group of Companies. Despite the broader industry challenges, Skyline has crafted a compelling narrative by leveraging its geographically diverse portfolio and focusing on key areas of growth and resilience within the sector.
A noteworthy testament to Skyline’s success is Skyline Apartment REIT, Canada’s 5th largest landlord in multi-residential units. The portfolio comprises a mix of established multi-residential properties and new developments across dozens of communities nationwide. This investment product showcases a unique strategy of targeting Canada’s secondary and tertiary markets, where rental housing demand is strong, yet competition is relatively lower. This approach has allowed Skyline Apartment REIT to attain an impressive occupancy rate of approximately 96% across its portfolio, representing a strong testament to the sound property acquisition and management strategy.
A pivotal factor underpinning Skyline Apartment REIT’s success is its commitment to delivering safe, clean, and affordable housing with exceptional service. Unsurprisingly, the REIT has delivered robust annualized returns over the past years, boasting 14.51% since inception in June 2005.
Further testament to Skyline’s strategic acumen is the performance of Skyline Retail REIT, which showcases an impressive occupancy rate of approximately 97%. This REIT focuses on retail properties anchored by “everyday essential” services such as grocery stores and pharmacies. In a time when many traditional retail assets face headwinds, Skyline Retail REIT’s emphasis on essential goods and services has proven to be a key differentiating factor in its historically stable performance.
This strategy has maintained high occupancy rates and rent collection which has fostered resilience amid the e-commerce boom, pandemic, and changing consumer behaviours. Indeed, this strategic positioning and intelligent selection of tenants have allowed Skyline Retail REIT to deliver substantial returns, with an annualized return of 12.72% since its inception in October 2013.
Skyline’s success story underscores the power of strategic asset selection, diversity, and adaptability in the current real estate landscape. It serves as a prime example of how innovative thinking and prudent strategy can craft a different narrative, turning challenges into opportunities within the dynamic Canadian real estate sector.
In the face of a challenging landscape, the Canadian real estate industry has proven its resilience and dynamism. While the sector grapples with an upswing in e-commerce and a rise in remote work, leading to heightened vacancies and widespread negative press, these disruptions are only one facet of a much more intricate narrative.
The industry is undergoing a profound transformation, driven by the strategic repositioning of assets and a push towards diversified asset classes. As highlighted in the case of Skyline, innovative thinking and adept strategy can pivot these challenges into promising opportunities. By capitalizing on the strengths of diverse geographic portfolios and targeting growth sectors, Skyline has demonstrated the potential for robust performance in both the multi-residential and retail real estate sectors.
Looking ahead, the Canadian real estate industry stands on the cusp of a promising future. Industry players can navigate these turbulent waters by embracing change, leveraging strategic opportunities, and committing to asset diversification. Despite the challenges, there are silver linings. These suggest not an industry in decline but rather an industry evolving and adapting to meet the demands of a new era.