Real Insights feature curated content from industry leaders during the program formation of the Real Estate Forums and Conferences. Each report features on the Top 10 Real Insights focused on major trends. For more details on the performance of RealREIT, click the following Insights.
Despite global economic instability and three interest rate hikes, Canadian REITs delivered positive returns.
Canadian REITs delivered positive returns in 2018 despite escalating trade wars, Brexit, rate hikes, slowing economic growth in China and political instability, which were all drags on the market.
The S&P/TSX Capped REIT Index has returned 5.6% last year, while the total return of the broader S&P/TSX Composite Index was down approximately 10% over the same period. REITs also delivered the second-best return of any TSX subsector, surpassed only by technology stocks.
REITs managed to outperform the capital markets despite the BoC hiking rates three times in 2018.
“We believe that economic growth and supply-demand levels are
more important drivers of REIT performance than interest-rate
changes, so long as the interest-rate changes are gradual and not
unexpected,” wrote RBC Capital Markets analyst Michael Smith.
Even so, rates are unlikely to increase in 2019. According to a poll
of nearly 40 economists in early July, the BoC will hold interest
rates at 1.75% through to the end of next year.
“For the Bank of Canada, there is no rush to cut interest rates.
At the same time, with the Feds moving relatively aggressively to
cut interest rates, the BoC by next year will have to cut at least
once in order to prevent the Canadian dollar from appreciating too
strongly,” said Benjamin Tal, Deputy Chief Economist at CIBC.
“So, the question is, how long can you divorce yourself from the
Feds if you are the BoC, and I say not for too long,” Tal continued.
Canadian REIT activism has been on the rise in recent years,
according to figures from Activist Insight, even as activism in the
broader Canadian market has dropped after peaking in 2015.
REIT activists’ demands reflect the wider trend of institutional
investors reshaping the corporate governance landscape and
challenging how boards think about fundamental issues, such
as strategy, risk, capital allocation and board composition. REITs
are responding to investor demands by engaging more often and
directly with shareholders in an effort to improve transparency and
accountability, EY reports.
“Canada is the most shareholder activist-friendly jurisdiction in
the Western world,” said Walied Soliman, Chair of law firm Norton
Rose Fulbright Canada.
Canadian law allows shareholders with a 5% stake in a company
to call for a special meeting, compared with 10% in the United
States, giving activists the ability to launch campaigns without
locking in too much capital.
REIT M&A deals in 2018 collectively hit their highest monetary
mark since 2007. One dozen transactions were either completed or
announced last year. The value of these deals was approximately
US $76.3 B, NAREIT calculated.
M&A observers believe the volume in 2019 will match or even
exceed last year’s figure.
“While 2018 volume was significant due to many REITs being
traded at a significant discount to their net asset value, we
anticipate 2019 being similar. There are many investors and a
great deal of capital waiting for the right time with values, cap rates
and so forth,” says Greg Ross, National Managing Partner of the
Construction, Real estate, Hospitality and Restaurant Practice
at accounting and consulting firm Grant Thornton LLP. “The real
estate fundamentals are very strong, with low unemployment, low
interest rates and high consumer confidence.”
The mature nature of this real estate cycle means investors continue to display a degree of caution – EY
With late cycle uncertainty emerging as the market slows,
institutional investors are allocating more capital to REITs than
private equity funds, as REITs have historically outperformed broad
equities in late-cycle periods.
For example, California State Teachers’ Retirement System
recently announced a US $100 M commitment to REITs, its firstever entry into the sector.
While institutional investors tend to favour private equity funds
when the market is expanding, he says that REITs outperform
them by 2.5 to 3.0% over the long term, reports John Worth, EVP,
Research and Investor Outreach with NAREIT.
“…Global REITs, as an asset class, are set up well to outperform
most other sectors in 2019 and deliver an attractive 9% to 10%
total return balanced between yield and growth, not just growth,”
said Samuel Sahn, Timbercreek’s Portfolio Management &
Research Executive Director.
While REITs are where smart money goes to hedge any volatility
that may come with a maturing real estate cycle, investment
criteria differ from one shop to another. Emerging trends that are
starting to shape the industry become a harbinger of the direction
of capital flows.
Small Cap vs Large Cap
A good portion of small-cap REITs are newcomers that have
significant growth potential, even though they are generally
regarded as more volatile and riskier in the short term than largecap investments.
Small-cap dividend yields are typically larger than the major
players, which is likely due to capital being driven into large funds
that are pushing down yields. Large-cap REITs generally offer
greater access to capital and liquidity for investors than many
small caps do, however, as they often pay out in dividends or other
methods that aren’t available for immediate liquidation.
A look at the current FFO ratios for large and small-cap REITs
shows that small caps are trading at a substantial discount to large
caps: 12.6x compared to 17.3x as of March 31, 2019. The last time
the ratio was lower was in March of 2016.
Sector Based
The industrial sector continues to grow, driven by the rise
of e-commerce. National vacancy is at its lowest levels and
development is not keeping up with demand. Timbercreek, in their
2019 Global Real Estate Securities Market Outlook reports that
“favourable demand and supply dynamics will be supportive of
rental and capital value growth in 2019, positively influencing the
share prices of industrial REITs.”
The convergence of real estate and technology will create a strong
growth for data centers, representing one of the best investment
opportunities in 2019.
The imminent rollout of the 5G mobile communications network
and the significant increase in data that will need to be processed,
stored and distributed is likely to have a significant impact on the
data centre sector.
With the onset of 5G, a massive boom in edge computing is
expected to take place, transforming the way enterprises manage
their networks. According to experts, the edge data center market
is expected to exceed US $16 B by 2024, growing at a compound
annual growth rate of more than 20% in the next five years.
Demographics
According to Environics Analytics, millennial households account
for 19% of all households, approximately half the number of
households headed by baby boomers. However, over the next 10
years, as mortality shrinks the baby boom generation, the number
of households headed by millennials will start to exceed those
headed by baby boomers.
These two divergent generations are primary drivers of demand
in the apartment market. Millennials preferring the flexibility that
renting affords while boomers are downsizing and are choosing the
convenience of maintenance-free living.
An important factor in driving demand for facilities that cater to
seniors’ needs is the growth in the population aged 85 and older.
Canadians in this age group also show a strong tendency toward
collective dwellings, with 31% living in this type of housing in 2017,
according to the PwC Emerging Trends report.
Technology
Technology is accelerating the pace of change and contributing to
a more dynamic and fast-moving real estate market.
For those unable to keep pace, the risk of asset obsolescence
is very real, with negative implications for portfolio value and the
business generally. The accelerated pace of change seen in our
markets makes obsolescence more relevant than ever before.
Investors, lenders and rating agencies are considering these
factors as part of their process in determining how to underwrite
companies and their real estate assets, according to EY.
REITs have become some of the most active and innovative
developers across Canada.
JVs are increasingly being used by REITs, particularly for mixeduse developments to help mitigate risk.
Allied has partnered with Perimeter Development Corp. to build a
300,000 sq. ft. mid-rise office building that will make up Phase III of
The Breithaupt Block in Kitchener’s Innovation District. Allied has
announced that it has signed a tenant to the space for a 15-year
lease.
In addition to the office project, Allied and Perimeter have acquired
two nearby parcels of land totalling 94,090 sq. ft. They plan to
construct an ancillary five-storey parking structure on the site,
with approximately 700 parking spaces, for use by tenants of The
Breithaupt Block.
Allied has partnered with Westbank on a number of projects,
including KING Toronto, a mixed-use development on King Street
just west of Spadina, and has partnered with RioCan REIT on The
Well project on Front.
RioCan REIT is leveraging transit-oriented retail assets it
owns in Calgary and Toronto into mixed-use projects with a
substantial mix of residential. In Calgary, RioCan has joined with
residential developers in a $70 M mixed-use retail and residential
redevelopment at its Brentwood Village Shopping Centre, which is
served by Calgary’s light-rail transit.
Artis remains active in new construction with about $202 M
invested in projects under development. That includes a mixed-use
tower in Winnipeg and new industrial spaces in Houston, Phoenix
and Denver. The REIT also has several planning projects not yet
at the construction stage. “These projects are progressing well
through the development stages,” said Jim Green, the REIT’s
CFO.
Crombie has a pipeline of two dozen sites for either development
or redevelopment, Executive Vice President and COO Glenn
Hynes told RENX in a recent interview. It is currently spending over
$500 M on redevelopments at five existing properties in Oakville,
Montreal, Vancouver, St. John’s and Langford, BC.
The projects comprise about 1.4 M sq. ft. of new leasable space;
452,000 sq. ft. of commercial area and 976,000 sq. ft. of residential
rental space. The largest project is 520,000 sq. ft. at Oakville’s
Bronte Village Mall where Crombie has partnered 50-50 with
Montreal’s PrinceDev on a $275 M addition of two rental apartment
towers of 10 and 14 storeys, respectively.
Crombie also recently acquired a $32.4 M, 20.25-acre industrial
site in Pointe-Claire, Quebec. The REIT will develop and own
a 285,000 sq. ft. customer fulfillment centre at the property for
Empire Company Ltd.’s online grocery home delivery service.
Empire is the parent company of Sobey’s, which maintains an
ownership stake in the REIT.
Acquisitions and merger activity have surged as REITs seek to
expand.
With a wide belief in the market that the current real estate cycle is
in its late stages, interest rates and cap rates are creeping up, and
debt is readily available. There’s also a large disconnect between
private and public real estate values, several analysts note. “The
backdrop is certainly conducive to M&A,” says Haendel St. Juste,
REIT Analyst at Mizuho Securities USA.
Since 2011, REITs have made gross acquisitions of over US $540
B; REITs also sold some $250 B of properties over this period,
resulting in net acquisitions of nearly $300 B according to NAREIT.
REIT M&A deals in 2018 collectively hit their highest monetary
mark since 2007. One dozen transactions were either completed or
announced last year. The value of these deals was approximately
US $76.3 B, NAREIT calculated. Included in this list of mergers
was:
The merger of CREIT and Choice Properties last year created
Canada’s biggest real estate investment trust: 751 properties for a
total of 66.8 M sq. ft. of retail, industrial and office space.
At the time of the merger, Canadian REIT had plans to add 2.4
M sq. ft. of space through 15 projects that are currently under
development.
Nexus REIT was created through the combining of Nobel REIT
and Edgefront REIT in April 2017. Nexus REIT has a portfolio of
70 industrial, office and retail properties in Canada comprising
approximately 3.8 M sq. ft. of rentable area and valued at more
than $500 M.
Nexus completed a $3 M deal on April 2 to acquire four industrial
properties in Fort St. John, B.C., Estevan, Sask. and Blackfalds
and Medicine Hat in Alberta. The buildings are all occupied by
construction firm MasTec Canada and have leases ranging from
four to seven years.
Artis has a portfolio worth about $5.36 B with office, retail and
industrial properties in five Canadian provinces and six US states.
They are currently selling 27 properties over the next two to three
years and expects to sell more than $600 M in properties by the
end of 2019. Jim Green, the REIT’s CFO, said the divestment is
part of a strategy to increase both cash flow and to shore up share
prices. The REIT plans to increase its US presence and decrease
the number of office assets they own.
KingSett will acquire Dream Industrial REIT’s eastern Canadian
Properties for $271 M. The portfolio contains 38 assets and 2.8 M
sq. ft. of GLA. Brian Pauls, CEO of Dream Industrial REIT says,
“We plan to utilize the net proceeds from the sale to increase
scale in our target markets as we continue to transform, as well
as enhance the overall quality and performance of the Dream
Industrial portfolio.”
Dream Industrial also announced the purchase of two other
properties, one in Oakville, the other in Ottawa, for about $40 M.
“We remain focused on driving solid organic growth and improving
the quality of our portfolio,” said Lenis Quan, Dream’s CFO, in the
release.
US-based American Landmark/Electra America (ALEA) is in talks
to acquire Pure Multi-Family REIT. Pure Multi owns 22 properties
containing more than 7,000 residential units. The properties are
located in five general geographic areas, Dallas-Fort Worth,
Houston, Austin and San Antonio in Texas, and in Phoenix.
ALEA currently owns and manages approximately 28,000 units
valued at over US$4 B. The US firm has been extremely active in
mergers and acquisitions having completed, among others, the
acquisition of Apartment Trust of America, a US apartment REIT,
and the sale of approximately US $2 billion of apartment assets
to Starwood Capital Group and Milestone Apartments Real Estate
Investment Trust.
Crombie REIT announced in Q2 that it has entered into a second
agreement of purchase and sale to sell an 89% non-managing
interest in a 15-property portfolio for an aggregate purchase price
of approximately $193.3 M to an affiliate of private equity firm
Oak Street Real Estate Capital, LLC. Crombie will retain an 11%
ownership interest and will continue to manage and operate the
properties. The Transaction is scheduled to close in the fall of
2019. The first transaction Crombie did with Oak Street involved a
majority non-managing share of 26 properties for $161 M.
Minto Apartment REIT is breaking into the Montreal market and
increasing its Toronto portfolio with the purchase of 50% interests
in two multi-residential rental properties for $209 M. The REIT is
partnering with IG Investment Management to take a 50% stake in
Montreal’s Rockhill Property. Valued at $134 M, the deal will mark
Minto REIT’s first foray in the Montreal real estate market, bringing
a six-building, 1,004-suite property into its portfolio. In Toronto,
Minto REIT will also take a 50% stake in the 409-suite Leslie/York
Mills apartment complex partnering with existing owner HOOPP.
For both acquisitions, Minto REIT will act as the asset and property
manager, earning fees for those services.
“These acquisitions increase our suite count by 31%, while also
advancing our growth and geographic expansion strategies,” said
Michael Waters, the CEO of Minto Apartment REIT, in the release.
Melcor REIT announced this Spring that it had acquired a retail
property with warehouse space in Calgary, Alberta for $12.45 M.
Andrew Melton, President and CEO of Melcor REIT said, “this
acquisition fits well with our strategy to grow in markets we know
well and represents the continued redeployment of capital from our
asset recycling program. Being funded by the REIT’s line of credit,
this acquisition will be immediately accretive to AFFO.”
WPT Industrial REIT acquired 13 industrial properties in the US
for US $226 M this Spring. In addition to the 13 buildings which
total 2.2 M sq. ft. of leasable space, the portfolio includes three
parcels of land and is located in multiple American markets. The
acquisition adds properties to WPT’s current holdings in Chicago,
Milwaukee and Minneapolis and launches three new markets for
the REIT, including Los Angeles and Miami.
Supply is not keeping up with demand for rental apartments,
despite a significant increase in construction.
In 2018, growth in demand for purpose-built rental apartment units
outpaced the increase in supply across the country, causing the
vacancy rate to drop to 2.4%.
Matt Danison, CEO of Rentals.ca, said the new mortgage stress
test, higher interest rates and home prices have dramatically
increased the number of people looking for rental accommodation
this year.
“With near record-high immigration in Canada and record-low
unemployment, demand for housing is high, but flat or declining
resale house prices due to current and expected future credit
tightening has deterred many would-be first-time buyers from
entering the ownership market. That demand overflow is being
felt in the rental market, where very few Canadian markets are
offsetting demand with new rental supply,” added Danison.
Bob Dhillon, CEO of Mainstreet Equity, adds that rising interest
rates and the new federal mortgage stress test have made it more
difficult for prospective buyers to purchase homes, pushing them
into the rental market instead.
In 2018, average rents grew by 3.4% in Canada— higher than
the rate of inflation— to an average of $987, CMHC reported.
However, the average property on Rentals.ca was offered for rent
at $1,917 per month in May, an increase of 4% month-over-month.
The creation of affordable housing is a top priority across all levels
of government. As part of the National Housing Strategy (NHS),
the Rental Construction Financing Initiative provides low-cost loans
to encourage the construction of rental housing which is affordable
to middle-class Canadians across the country. The initiative has a
total of $3.75 B in loans available to encourage the construction of
more than 14,000 new rental housing units.
Details of Ontario’s new Housing Supply Action Plan were
announced in May and proposed to put in place the following key
measures:
GTA rental completions have reached a 25 year high according
to a report from Urbanation. A total of 42,841 purpose-built rental
apartments were proposed for development but had not yet started
construction as of Q1 2019, and the number of purpose-built
rentals under construction was 10,694.
Solid employment growth, high costs of homeownership and a
preference to rent amongst millennials are underpinning strong
demand for apartments, while record immigration levels are
expected to drive demand even higher.
These factors, together with insufficient and constrained rental
supply, are expected to only intensify housing challenges,
especially in Canada’s gateway markets.
Due to the growing imbalance between housing demand and
supply, the multi-family sector is expected to continue to see
steadily increasing rents along with low vacancy rates for the
foreseeable future.
“When you look at the underlying fundamentals in Ontario, there
is, what we believe, a shortage of affordable housing options in
the province, and given that, we continue to see strong leasing
demand in the Ontario apartment sector that benefits from a lack
of affordable options plus population growth within the province,
particularly in the GTA,” Brad Sturges, the Real Estate and REITs
Analyst from Industrial Alliance Securities, told the Globe & Mail.
“We think there is still an imbalance between demand and supply
in the province, which should continue to be positive for market
rental rate growth.”
RioCan plans to borrow about $200 M of CMHC-backed financing
for their 36-story rental tower at Yonge and Eglinton called “
eCentral”.
“The cheapest debt in town is CMHC-guaranteed debt, which you
can put on rental residential buildings, so we’re quite hopeful that
our first CMHC transaction will take place before the end of the
summer,” Ed Sonshine said in an interview with BNN Bloomberg.
In the past 18 months, RioCan has been pivoting towards
apartment rentals. Its new strategy is retail and condo/apartment,
focused in Canada’s 6 major markets. It is well into its process of
selling off close to a hundred of its retail properties in secondary
and tertiary markets and switching its focus towards building new
apartment rentals.
RioCan in March 2018 also launched its residential brand: RioCan
Living. Through the brand it now has 8 projects in development
that will amount to 2,100 units, 13 additional projects are in early
planning stages, with a remaining 25.1 M sq. ft. of development
opportunity.
Diversification enables REITs to gain exposure to key markets and
dilute their exposure to sectors experiencing headwinds.
With its acquisition of CREIT, Choice Properties diversified away
from grocery-anchored retail and into office and residential
properties.
“I would say (the acquisitions) are quite strategic and one of the
important aspects of this transaction for Choice properties is the
increased diversification,” said Galen Weston.
He pointed to the industrial sector as an example. “Choice already
owns a number of industrial-type units, but they are Loblawoccupied. So now we are increasing our exposure to industrial,
which is something we were very anxious to do,” Weston said.
The acquisition gave Choice a portfolio comprised of 78% retail
(based on NOI), 14% industrial and 8% office. It had 9% industrial
and 2% office.
WPT’s purchase of 13 industrial buildings enabled them to
diversify into major US markets.
RioCan is in the middle of a transformation that will see the
company diversify its portfolio by adding a host of residential/retail
mixed-use properties, the first several of which are currently under
construction and set to open later this year.
RioCan is offloading non-core assets, raising approximately $2 B
towards the venture.
By shifting towards residential properties, RioCan is both offsetting
any potential slowdown in the retail sector while concurrently
offering what will be thousands of residential units in the major
metro areas across the country.
Boardwalk REIT has partnered with Redwood Properties in a JV to
build two residential towers totaling 365 rental units in downtown
Brampton, across the street from the GO Station.
Boardwalk CEO Sam Kolias said the addition of newly constructed
rental communities in a new target market is consistent with the
REIT’s long-term strategy of diversifying its portfolio. Kolias added
in an interview with RENX, that this new development provides “a
measured, high-quality entry” into the GTA.
While some REITs diversify by acquiring properties in sectors or
markets in which they are underexposed, others are focusing on fringe real estate asset classes.
NAREIT tracks 11 REITs in its “specialty” sub-sector. However,
research firm Green Street takes a broader view and it counts
more than 40 non-traditional REITs that also includes operators of
data centers, manufactured homes and self-storage among other
sub-sectors. Combined, those non-traditional REITs represent 37%
of the equity REIT market cap.
Easterly Government Properties is a US REIT that focuses on
investing in US government-leased buildings. The US government
is the largest employer in the world and the largest office tenant
in the US. The portfolio is 100% leased and has a weighted
average age of 11.5 years. Most of its buildings are office buildings
(67%) and the rest are either courthouse/office (6%), lab (9%),
VA Outpatient (11%) or others (7%). One of the REIT’s recent
acquisitions was an FBI facility in Salt Lake City.
Innovative Industrial Properties was founded in San Diego in 2016
to capitalize on the growing medical marijuana market in the US.
It has become the landlord to some of the country’s biggest pot
farmers. Typically, the company buys a property that a grower has
already established and then leases it back to the grower.
Americold Realty Trust is one of the newest additions to the
market. The company, which is one of the largest REIT focused
on the ownership, operation and development of temperaturecontrolled warehouses, went public in January 2018 and had a
market cap in excess of US $6.6 B.
Based in San Francisco, Digital Realty Trust is a data center REIT
with over 170 properties in 11 cities on four continents.
Founded in 1902 and headquartered in Baton Rouge, Louisiana,
the Lamar Advertising Company is a REIT that sells advertising
space on billboards, buses, shelters, benches and logo plates.
With more than 330,000 displays, it is one of the largest outdoor
advertising companies in the world.
ESG Initiatives grow across the capital markets as financial
viability is measured.
Responsible investing is widely understood as the integration
of environmental, social and governance (ESG) factors into
investment processes and decision-making. ESG factors cover a
wide spectrum of issues that traditionally are not part of financial
analysis, yet may have financial relevance.
The term was introduced in 2005 in a study written by Ivo Knoepfel
entitled “Who Cares Wins.” ESG investing is now estimated at
over US $20 T in AUM or around a quarter of all professionally
managed assets around the world, according to Forbes.
ESG breaks down into three components.
Environmental refers to an organization’s processes, policies,
practices, and impact related to the natural environment.
NAREIT reports that 79% of REITs owned green buildings in 2018
which were certified by at least one of the following bodies: LEED,
Energy Star, BREEAM, CASBEE, BOMA or HQE23.
The majority of REITs have reduced their energy consumption
every year for the past three years, which is reflected in a 2%
reduction in absolute energy consumption amongst REITs in the
past year, or the equivalent of energy usage from 31,223 homes,
according to the 2018 GRESB Portfolio Analysis Report.
Social refers to an organization’s processes, policies, practices,
and impact with regard to the people – both internal and external –
with whom it interacts.
Prologis launched its Community Workforce Initiative in 2019.
The program collaborates with local workforce development
organizations, nonprofits and schools to offer individuals interested
in careers in logistics, distribution and transportation the following
opportunities:
The company is also launching the Prologis Trade and Logistics
Lab in Miami, where more than 300 high school students will be
offered experiential learning opportunities and internships.
Governance refers to an organization’s processes, policies,
practices, and impact with regard to its organizational design,
transparency measures, policies, protocols and procedures, and
formalized governing bodies, roles and responsibilities.
Acquired by Brookfield Properties in December 2018, Forest City
Realty Trust set supplier diversity and hiring goals that adhered to
or surpass local requirements. For projects on existing properties,
it required at least one diverse vendor to be included in the bidding
process.
To evaluate and select locally based suppliers, Forest City utilized
a supplier-locator database tool that allowed it to sort diverse
suppliers by regions. The company also set internal goals to
support the growth and success of minority and women-owned
businesses.
In March 2019, Bentall Kennedy and REALPAC in conjunction
with the United Nations Environment Programme Finance Initiative
published the Global ESG Real Estate Investment Survey Results.
Respondents of the survey, which was conducted between
September 2018 and February 2019, collectively represent over
US $1 trillion of assets under management.
The survey found that 93% of respondents include ESG criteria
in investment decisions. Survey results indicated that 68% of
respondents have a real estate investment strategy in place that
considers GHG emissions of potential acquisitions – 100% of
respondents from the Asia-Pacific region, 72% from Europe and
47% from North America.
Across all regions, 95% stated that they contribute to or support
sustainability benchmarking at the portfolio and operational levels
and assess performance results.
The majority of respondents are highly motivated to use ESG
criteria in investments because of:
“Every owner and investor should have an ESG strategy. There
are four reasons. First, the business case is incontrovertible.
Second, the expectations from stakeholders, including investors
and tenants, will only increase. Third, the pressure from regulators
and government will continue to rise. Lastly, it’s the right thing
for all corporations to do for their brand, their communities, and
their continuing social license,” said Michael Brooks, the CEO of
REALPAC.
More money is chasing real estate today than any other time
in history.
This has been an unprecedented period of fundraising that has
pushed dry powder to a new high of US $1.54 T as of the end
of June 2019, meaning that many investors have significant
commitments yet to be deployed, Prequin reports in their Private
Equity and Venture Capital Quarterly report.
Meyers Research Managing Director, Steve LaTerra, has seen
money targeting real estate more than double since 2012. The
amount of dry powder has been steadily increasing since 2014.
More money is chasing real estate opportunities today than at any
time in history.
REIT balance sheets are now so strong, according to NAREIT, that
in 2018, despite two corrections, REITs managed to raise equity
capital 110 times totalling US $41.84 B. All this capital was raised
during a year where there was a trade war escalation, four US rate
hikes and growing recession fears.
In NREI’s fourth annual research survey exploring the state of
publicly-traded REITs, respondents continue to have a stable
assessment of capital markets for REITs. Roughly two-fifths of
respondents said the availability of both equity (39%) and debt
(40%) is unchanged from a year ago. But three in 10 respondents
said equity (30%) and debt (31%) are more widely available. Those
figures rose about 10 percentage points from how respondents
answered in 2018. Only about one in 10 respondents (13% for
equity, 12% for debt) said capital was less available than a year ago.
Blackstone Group is tripling its fundraising goal for the real estate
investment trust it started last year.
The company said in its initial filing with the US SEC that it planned
to raise US $5 B for Blackstone Real Estate Income Trust but now
says it will raise an additional $10 B on top of this, according to the
Wall Street Journal.
Brookfield Asset Management closed one of its latest global private
real estate fund, Brookfield Strategic Real Estate Partners III
(BSREP III). With total equity commitments of US $15 B, BSREP
III is Brookfield’s largest private fund to date and will focus on
acquiring high-quality real estate assets on a value basis.
BSREP III significantly exceeded its original fundraising target of
$10 B, reflecting strong investor demand.
As part of Deloitte’s 2019 Commercial Real Estate Outlook, 500
global investors were surveyed, 97% of survey respondents
planned to increase their capital commitment to CRE over the next
18 months. Respondents from the United States plan to increase
their capital commitments by 13% in this time frame, while those in
Germany (13%) and Canada (12%) show similar levels of interest.
Figuring out how to deploy capital will be a major theme in 2019.
Several capital market experts said they expect the volume of capital
placements to be about the same as 2018 although there may be
changes in how or where funds are deployed, such as a move away
from big cities on the coasts and into secondary markets.
While some investors are exploring secondary markets in search
of yield, others remain in the major markets where there is more
stability and demographics work in their favour.
As commercial real estate values reach all-time highs in the
nation’s top-tier cities and cap rates get squeezed, secondary
markets with strong economic fundamentals are attracting investor
interest.
“Yield is king and yield is now being found in less-usual suspects,”
Spencer Levy, Americas Head of Research at CBRE, told the
Financial Post. “Some of the usual suspect central business district
markets are later in the cycle, and so some of the capital is now
flowing to other smaller markets to get this yield.”
The yield on assets in secondary markets can be anywhere from
75 basis points to as much as 100 basis points wider, depending
on the market and the product type, according to Chris Ludeman,
Global President of Capital Markets at CBRE. Good property
fundamentals, strong economies and smaller equity requirements
allow investors a broader field of play, Ludeman says.
In Canada, there has been a recent exit out of secondary markets
with RioCan divesting out of secondary markets with plans to sell
100 of its properties. Allied REIT also exited out of the Victoria,
Winnipeg & Quebec City markets to focus their operations in
Canada’s largest cities.
In Q1, BTB REIT acquired two office buildings in Laval, Quebec
for $25.3 M. The REIT is exiting secondary markets in order
to concentrate on the Greater Montreal, Quebec City and
Ottawa areas. BTB recently sold properties in Sherbrooke and
Drummondville, Quebec and it is planning to sell four more
properties in smaller markets.
However, Northview Apartment REIT has opted to expand into
secondary markets, such as in the north and Atlantic regions
of the country.
The secondary markets that Northview targets have significantly
lower upfront prices, particularly when compared to the current
rates on offer in the larger metro areas across the country. Lower
competition in those secondary markets translates into higher
occupancy rates for the company. Northview owns over 27,000
units that are scattered across eight provinces and two territories.
According to CBRE’s 2019 Investor Sentiments Survey,
investor’s appetite for ‘good secondary market’ showed
an increase to 33% from 28% the year before. The share of
sovereign wealth funds, insurance companies and pension funds
that now want to invest in secondary markets has risen from 25%
to 52%.
Colliers International noted in its 2018 property outlook that sales
and leasing volumes have been shifting (and will continue to
shift) to secondary locations due to decreasing availability and
progressively pricier rents in the primary markets.
Another reason for the increased interest in secondary markets is
the cost of housing in primary markets. According to PwC’s 2018
Emerging Trends report, there is pressure for tenants to hire talent
in a tight labour market. Millennials make up one-third of this talent
and are starting to settle down and start families. The proximity
to affordable housing is becoming more important and is in short
supply in the primary markets.
JLL’s Lauro Ferroni, Director of Research reported that there was
an increase of investment activity back into primary markets in
2018 following three consecutive years of decline.
Investors, he says, are looking for the security of an income
stream coupled with high-quality assets that will be best-positioned
to go through different economic cycles. The performance of the
commercial real estate sector over the next several quarters will
dictate whether this will turn into a trend, he notes.
New trends, new brands, the expansion of established brands
and untapped development potential all providing opportunities for
REITs.
Major Canadian retail REITs will be increasingly focusing on
redevelopment activities to maintain growth in the future, according
to research by Ryerson University’s Dr. Maurice Yeates and Dr.
Tony Hernandez.
The same applies to the US. For several high-productivity retail
REITs, particularly Simon, Regency and Taubman, redevelopment
remains a substantial source of untapped long-term value. Toptier retail assets are ideal for the “live-work-play” mixed-use
residential expansion, and there are a handful of highly successful
redevelopments from these three higher-productivity REITs.
High-productivity mall REITs continue to find accretive yields in
redeveloping vacated department store space into higher-value
mixed uses, including multifamily and experience-based retailers.
In Canada, while e-commerce is certainly impacting the retail
sector, its negative ramifications are less pronounced than in the
US.
The 2019 Summer Shopping Habits Survey and 2019 Summer
Dining Habits Survey, developed by Lightspeed, found that
physical retail is still the most prevalent form of shopping for
Canadians at 47% and Americans at 36%.
There are a number of retailers expanding into the Canadian
market: UK brand Cath Kidston, Korean beauty brand Innisfree,
Dutch discounter Hema and France’s ba&sh. As well, there are
Canadian brands that are expanding: Bad Boy, Giant Tiger and
SPINCO.
Digitally native brands are making their mark on the brick-andmortar landscape. Collectively they are set to open 850 stores in
the next five years, according to an Online Retailers Report by JLL.
Research firm Coresight projects up to 12,000 closings by yearend, primarily concentrated in the mall segment.
As of June, US retailers have announced 6,986 store closures and
2,985 store openings. This compares to 5,864 closures and 3,251
openings for the full year 2018.
The bifurcation between top-tier and lower-tier retail REITs
continues to widen as retailers focus investments into the highest
productivity locations. Downsizing retailers have focused their
investment into higher-performing stores and have continued
to close weaker-performing stores in lower-tier malls and retail
centers. 2017 saw an unusual surge in the rate of store closings,
but total closings dropped 20% in 2018 before reaccelerating yet
again in the early part of 2019. Lower-productivity mall REITs are
in a continual fight for survival and funding concerns are expected
to be lingering issues for the foreseeable future, Daily Forex Times
reports.
Retail keeps evolving despite these headwinds.
In keeping with the Space-as-a-Service trend, PropTech
startups Fourpost and BrandBox are transforming the traditional
retail model by adapting the SPaaS model to retail through
“brandboxing.”
Brandboxing is a full-service approach that enables smaller online
brands to open and operate stores in malls. Prefabricated spaces
available for shorter lease terms and lower rents make it easier
for online merchants to scale and test the success of the brick and
mortar stores without having to obtain a permanent location.
Fourpost has already launched studio shops in the Mall of America
and West Edmonton Mall. Macerich announced the launch of
Brandbox in Tysons Corner Center in Virginia this last November.
To start, Tysons Corner housed six brands with space ranges
from 550 to 2,500 sq. ft. at the property with six to 12-month lease
agreements.
Real Insights is powered by Altus Group’s Investment Transactions research. For more information, please visit altusgroup.com.