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Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.
Welcome to Altus insights podcast series with Ray and Marlon hosted by me Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada. Hello and welcome to another Altus Insights Podcast. It's Friday night, and Marketing decided we're not productive enough. So here comes the very enthusiastic review of the market and construction cost escalation in 2023. Thankfully, despite it being midnight up here in the Great White north, we have Ray back on the team. Now that the golf courses, courses are closed up here and we're frozen and the Floridians have had enough of him he is back to his actual day job, which is being tortured by marketing folks. So, the debate has come up a few times this year on the cost side, and Mr Positive says construction cost increases are likely to temper versus the rampant increases over yonder and Ray has become all depressing. Mr Doom and Gloom in general, misery, end of the world and the free market mode, i.e. like a NIMBY that just found out was and as a right development. There's been proposals for an hour's drive away from the house and they're going to round up the troops to fight it. How dare someone cast a shadow on a heritage dead squirrel? Today we're going to meander aimlessly through the subject of the Ontario market and escalation as we winged it due to the unjust treatment that befell us this late morning from unnamed peeps in the great state of Texas. So we'll start off, right? Why so glum, chum? Throw out some words of wisdom on the end of 2022 and then we'll have a chat about 2023. Well, Yeah. Especially with the beginning of this year as a carryover of what we experience and 2022, based on past recession fears, how high will interest rates rise and as well as what with the Office market with the return to the office. Whether or not we're going to see sort of a continued increase in office vacancy rates and will people return back to the office? Yeah, it's the investment side that we're not overly concerned, only because the demand for investment property is still strong. But at what price? Right and the challenges we're dealing with right now is that there's still demand, but there are sort of price discovery points that are still being argued to vendors and and buyers of what is the appropriate price based on the interest rate, based on a slowing marketplace. And as well as the less bidders on the market. So we've seen sort of a drastic drop of investment activity in the first half of the year compared to the second half of the year. And the so far, the January, February numbers are dismal. And it's not just Ontario, but across Canada, as investors are trying to figure out what or what their portfolio strategy should be, and as well as the challenge with trying to find financing for some of the projects that they're looking to acquire. So far from that perspective, there's sort of like a continuation from fourth quarter line in the first quarter with the amount of activity. And as well as to some extent the uncertainty going forward for the first half of the year. Yes I mean, that's where you come in, all the doom and gloom if you've got to flip it around. So I agree. Last year started really kind of terrible, but we finished kind of terrible. Condo sales ground to a halt. So we were slightly less been the average over the last 10 years. This year is probably going to be terrible. Rent on the project can still make no sense because they're getting hammered by municipal fees. Office isn't going to get built because no one's actually in an office anymore. We're all locked at home. So realistically, if you look at that side of things, it's going to grind to a halt. It depends which side of the market you look at. And you guys did the survey where 72% of people are going to put projects on hold. Well, that means one third of the people are actively out there looking for opportunities. And now is the time when opportunities exist. So realistically, I think if you're in the market, you're not well-heeled, you're not well capitalized. There's major risk for you right now. And you could get into trouble. The guy easily got the cash. This could be the opportunity is the way I've been sort of saying is I see 2023 is the handover year. So kind of like we've had a great run from my 2017 or earlier. Now we're in the hangover here. You know, a few people drank too much, probably got themselves in a little bit too much trouble. Now, the people who are a bit more sensible, they're looking around and going, oh, I can pick up a deal, I can get some land here, I can get a project is in trouble. I can pile it up a little bit because we know it's coming back next year to house 24/7. I'm calling the hair of the dog, basically. Grab yourself a scotch. Hang on. It's still going to be interesting, but we'll see the first signs of life. And then by 2025, the whole market comes up. So I think it's how you look at short term. I agree. It's kind of doom gloom realm is burning for the mid-term and long term. For Canada and Ontario. They look kind of positive if you put a reverse spin on it. Now, that's the way I do my market presentations. Unfortunately, at the end of it, most people, I'm not quite sure if that's positive or negative or what the hell you just said, but. We've taken a different view and how you see the market is going to play out. And if we look at it like that and you took away all of the negative noise right now, all of that turbulence in the market, surely Ontario is pretty rosy if you look at the immigration stuff, if you start thinking midterm, what does this look like in 2025, 2036 or even fast forward to 2030, isn't this just two years of pain and suffering because interest rates. A to a certain extent and I totally agree with 2526 is that it has to be better than what we're seeing right now. But it is immigration. That's the thing that's saving us now, Ontario. But if you look at the provincial migration that if it wasn't for immigration, Ontario will actually be losing people and you know, is partly based on the affordability and the price wise. So housing prices have dropped over the past nine months. And to your point, with new home sales, that basically there's only been maybe a few products cancelled, but there's definitely been a delay in launches or a scaled back version of them. And now we're starting to see perhaps a couple of other approaches. And it's all based on the interest rates are on. Yes, it's high right now. And typically the announcement today of 150,000 jobs, trade is supposed to be good news. But again. Well, what would that do to the Bank of Canada with will we see increase interest rates? And from that perspective, those people that are hanging on and the good thing is that you have full employment so that people can cover their mortgages, but how long can they keep hanging on before they run into some financial distress? And the same thing with on the commercial side, you have a number of owners that are lovers and they have to renegotiate. And depending on how long this interest rate hike, high 12 will remain. And as well as especially with the number of alone that have number of investors are asking, well, maybe now's the time to bail and maybe we'll take their money and take their profit. So there's that pressure as well from sort of outside influences that are impacting some of the pricing points that there are some vendors that have to take pricing as supply. So to your point, quite point optimist optimism. I got that right. If you have their own, if yourself, cap wise, you're in really good position in the massive market that you can pick and choose. And as well as negotiate having with some of the product in the market. Yeah the way I'm looking at is right, interest rates are terrible. Probably going to go up a little bit. And we do know the central banks of the US and Canada, their prime objective is to make as many people unemployed as humanly possible and hopefully cause a recession because they do actually care because they get paid. Even if there is a recession and there isn't a recession, realistically, success isn't measured to them what they do. It's measured by this obsession with a 2% inflation rate. But again, the way I'm starting to look is if things come down and you see those pressures, but if you're well capitalized, there is no pressure, why sell at the bottom? The only people are probably going to get pressure. The people are maybe overextended themselves and isn't necessarily a bad thing. If people started de-leveraging themselves a little bit, became a little more sensible and realize that what we've seen for the last five years isn't the norm, it's the anomaly. I mean, I was at a presentation the other day and the economist was present in saying interest rates are never probably going below 3% ever again or in the near future. Therefore, get used to it. We're waiting for it to come down. It's going to trickle down. Everybody knows the Bank of Canada is not going to reduce any rates whatsoever till 2024, no matter what happens to the economy, because they only care about one thing 2% inflation. They don't care what the impact is to the economy. They have no interest in it. But it's the interest rates that no way. I know for how long we've been in this low interest rate. And if you look at the activity in the base, America, especially in 2021 and the first quarter of 2022, people can make certain bets because the interest rates that are OK. Right you can still make a bad bet with other people's money or low financing. You can still do. OK right. But the challenge we're running into, if you look at the industrial sector. Right it's that is it's the most sought after investment asset. E-commerce is booming and supply can't keep up with demand in the marketplace. And they've seen rents increase by about 20% or 30% But over the last few years, well, it comes to a point whereby how high can run scale? And we'll see. Well, one the positive that is that now you see a lot more industrial development go into southwestern Ontario, all going to Hamilton. But how hard can it go before you can that there's going to be pushback and as well as on their terms, if you're buying something at negative leverage at 3 and half, 4%, and expect the runs to pull you out by going 20 or 30%, and that's two or three years. Yeah, something has come in because it might not happen. And to justify that price for that asset, I think people are definitely people that are providing financing are scrutinizing the numbers and the yields and the growth more. But I think that's another cause of a slowdown in investment activities, especially for the first half of this year. I just figured that's why they like using the phrase first year discounted cash flow. Now they don't have to worry about what happens to the offer. I mean, it's not the new way to make stuff look like it works. I don't get positive cash flow or even break even till the year 12. But by year three, look at the money I make in. That's a 19 joke that we've heard. You've probably heard as well, a lot of people trying to make stuff work by looking out for years. Well, I know. And discussion about the yields and the whole thing is some of these discussions are also coming up in the office right now from the office. You ready? It is interesting with the DTA that for the first time in a while, not our office investment transaction was actually in number three behind industrial and behind land. And part of the boom in investment today is based on companies re strategizing and and especially institutional players divesting themselves of office. And the biggest transaction that we saw last year was in January with the sale of the World Bank Plaza for over $1.16 billion. Right and then it's part of strategizing. But if you look at where apartment came in for investor activity and again, they're the most sought after product and along the same lines are industrial. I came in tied with retail. Right and it's not because the lack of demand, but the lack of product and as well as the price expectation from the vendors that are looking at pricing. So the good thing is that to some extent, investors are a little bit more careful and they're scrutinizing the assets more and they're not as quick as to throw money out, especially with this whole target now put forward net net 0 for carbon and commercial properties. It's going to cost a lot more in the way of capital investment and expenditures to get these buildings at a certain level going forward. So it's going to be some big costs coming down the road for commercial real estate. No, the federal government keeps saying, don't worry about going carbon zero. It's not going to impact. They're going to find everybody new jobs. We don't need to worry about it. We don't need the oil and gas sector. Everything will just take care of itself. They keep telling us that we need to trust. And these guys are fiscal geniuses. Yeah OK. But the thing is, with the net zero thing is not just doing something positive the marketplace, but I think it also will have a positive impact on returns and values of some of these assets. Yeah, I've heard places like New York are actually going to start penalizing you if you can't bring your building up to that level. So it's not going to take long before someone notices that goes. That's a great idea. A new revenue stream. Let's start finding people. Yeah I think again, the way I look at it is I still think it's short term, especially in Ontario, particularly because we've got a provincial government that to a degree has hung its entire high on building more homes. We know that the federal government hung its heart on immigration. I mean, McKinsey did an in-depth study and figured out that if the federal government spends like a drunken sailor, the only way to deal with it is increase population as much as humanly possible. So you can actually pay for said drunken sailor actions. So you combine those two together and we have to build a lot more homes. We have to have a lot more immigration. Well, if population growth is going to accelerate, like wasn't it one of the highest years since Confederacy in terms of immigration last year? That's going to continue. The backlog of millions is we keep getting our friends to the South of us, busting a bunch of new friends up to the border as well. So like, everybody's coming from everywhere. So if you look in that respect, if all of a sudden the Conservative government in the province does not want to have their next election slogan as we build way less. They actually want a positive theme. They're going to have to start pushing that. So they're going to have to accept immigration. Find a way to deal with the feds. Build a lot more housing. And as we build more housing, that means we need more employment. Which land eventually sort out the office sector will need more industrial, will need more retail, and shouldn't the whole thing turn into a cyclical thing where it all kind of May help itself out if you start fast forwarding over the next 10 years in different points as the population grows massively. We were in with a decline yesterday and they're asking so what is that indicator? What type of change are you looking in the vacancy rates or the rental rates for the market the term. Right and our whole thing was we thought we knew we were more comfortable making that bad comment say two or three years ago when things behaved normal. Right so and things today are not behaving normally where the interest rates are. We're at almost full employment despite high inflation. So people are still spending. And granted, all the savings have been diminish and the lines of credit, I think are still increasing. And depending on how long the interest rates are at this level. And whether or not this office employment continues to increase, because I guess the only sector that we're hearing about mostly is the tech sector sort of scaling back. But again, is also important to note that they're scaling back, but they're also at higher employment, especially with pre-pandemic. So yes, they're decreasing employment, but they're still at a certain level that was pre-pandemic. So you have seen that growth or maybe overzealous growth over the last little while. So even somewhat negative news is on the positive side, but it's too soon. And we've been saying this for a while now, but we're still waiting for a couple of other indicators to show a true trend on return to the office, because the stats now are we're at 30 perhaps I've heard 50% of people back into office downtown. I kind of laugh at that 50% because I still don't think is that high. But I do see increased people on public transit and on the go trade. People are slowly engage and companies are finally realizing what they have to do to bring people in. But it's got to be a tough slog to bring people back in. And people just don't want to do that three hour commute anymore. Right and especially on a promise of a hybrid, but not definitely not every day. So it's still the trend is going in the right direction, perhaps, maybe too slow. But we're still waiting for the outcome in those areas or what companies are going to do with their space. You know, it's interesting, we're having this discussion in a presentation we did earlier on this week, and someone said to me, why don't you go back to the office full time? And I actually said, it's not just the commute. The problem is, is downtown Toronto is an utter mess. They're digging it up everywhere. You can't get anywhere. The city isn't taking care of business anymore. The place is messy. It's dirty. So I think part of the problem we have actually isn't necessarily also just attracting people downtown. I think the municipalities have let us slip over the last two years, and I think it was a great example of a city that's just fallen from being, I think, really gray into somewhat of looking in a decline. I mean, this doesn't create a nice atmosphere like I was downtown this week, two or three days, I think it was great. Went out for dinner, left the restaurant a nice Instagram. Fortunately, you didn't have to walk to your next place, you know, climbing all the traffic cones, trying to get run over by construction vehicles and then realizing that the same street 16 times in the last five years. But that aside, there's got to be a positive in this. And I look at this in relative. So you've said the doom and gloom stuff like that. But the way I kind of look at the markets, it's all like these interconnected bubbles. No matter how you look at the market, they're in a. Next bubbles and the all time so developers got bubbles at project properties they are not taking to the next. Can each one act differently in those influences? So it is just a matter of time, isn't it, before the market? And that's what I meant by just sales down that I think, you know, you start to see this work from home, the hybrids settle down. We know our office ourselves. We have shrunk the amount of office space we've done. We've gone from wall 3 floors while bits of three floors back to just one fourth floor. We've renovated you go in some days and the place is pretty full. Like I was in on one steam first year this week it was pretty full. I was filling up again, seeing some positive signs. Will it go back to before? No, but I don't think people should be thinking it's going back to before. I know it's time to start looking forward. And I think the population grow if we have no choice to do it, otherwise the country's dead in the water. So we have no choice to have made a huge mistake in the amount of money to spend over the last eight years and they have no choice. So that has good situations, bad situations. They're not going to let us use the oil and gas sector to get of trouble, which would probably do it like that because obviously that looks bad on TV, so we got to slug it out instead. So as we slug it out, I still think commercial real estate is likely in the mid and long term. It's going to be the place to be. And I get you what you're saying. We don't know when that midterm is going to hit. And that's the question is how long is short in this terms where things come positive? Like like I said in the outset, construction costs are going to level off the next two years as opportunities. So it's positive is positive because there's a negative. And there's a couple of negatives and two negatives always make a positive, and all of those negatives just happened to come together and create a positive. And that's kind of the way I'm looking at the mark is, yeah, it's a bunch of negatives. How do we find the positives in the market? But I agree with you on our timing, but it's going to take a little while to sort out on the commercial side with what the interest rates and and, you know, companies are still repositioning their assets. And again there's demands for investors of expectations are growth. And I think the commercial market will right itself about six months or a 12 months ago. The overall investment demand is there, but at what price? What are the growth assumptions and what are the expenses that are occurring? So but going forward, I think every deal is going to be scrutinized a lot more compared to 18 months ago. You mean it's actually going to be scrutinized? And I think that's part of the challenge. Right, because I think there are certain people in place right now that have never been through a slowdown or a high interest rate environment. And there's their one getting educated, and two, trying to figure out what it means for the assets going forward. So I think I totally agree. I think that's going to be eventually sorted out. And the same thing on the construction side, I see the street on Wellington has been sort of in front of our building has been under construction, it seems like, for the last 10 years, but now you have open lines and start to get positive. So actually I actually see a positive in the downtown with some of the projects actually finishing up. And compared to when we're in the pandemic, I think construction activity, we're starting to see perhaps a light at the end of the tunnel. So I'm feeling a little bit more positive about that. But the downtown compared to a few months ago. Now and that's where I look at, you know, it's going to get bumpy a little bit. But, you know, bumpy, bumpy might not be a bad thing. I think it shakes everyone up and gets rid of some of the complacency that I think is starting to really badly sneak into the business. And whether that's good or bad or whether or not it's just been such a good run, I found generally people were always like, I'll work itself out. I think now people are kind of going, well, maybe it will work itself out. I should look at this twice, think about it before I jump in with both feet. And I don't think that's necessarily a bad place to go because I genuinely think this is going to go absolutely crazy in the midterm as the number of people flood into the country, but we have no choice but to address it. And that's the thing that I think we're already at that point before we started with the higher levels of immigration. And now we've paid so much money to a consultant from the US to tell us that bringing more people is the solution to everything. I mean, what could possibly go wrong? Yeah, the thing is, I think you are a little bit too focused on Toronto, like it's Toronto. The challenge is sometimes a three hour commute. And going forward, based on more people work at home, if you had the same people, you know, it's not the same impact on the office front. But when you look at Ottawa, you have your 20 half an hour commute. I think you're going to see a quicker stability. You're not seeing a lot of new supply. So you look at the office vacancy rate is actually flat compared to Toronto, actually going up about 200 basis points from quarter to quarter. Right and southwestern Ontario, same thing with housing affordability and the universities there. I think there's employment and, you know, research and definitely tech development and same thing with Hamilton and St Catherine's. I still think there's further growth in the number of people that have relocated their whole last five years or have started their own companies and create employment in that area. So I think the benefit to this is that we're going to see the outlying areas roll up perhaps a little bit quicker than the Toronto market going forward. Yeah, we actually had a joke on Wednesday with the gentleman you have on the panel today and he was like, what's the solution to the housing problem? And I said, look, tongue in cheek, build a new city, completely new city with none of the counselors allowed in until we finished it. And that would be the solution. Get as many people as possible out of the city of Toronto and this God complex exist in Toronto. It's the greatest place on the planet Earth and no one can do anything long. And it is a great city. I'm not saying that, but Holy smokes, they just don't like change. This is what the problem is. There needs to be a systemic change to get housing and they don't want it. So I think that tongue in cheek, I'm like, let's just go build a new said 5 million people. Let's stop now. Let's just stop building. I guarantee you we finished a hell of a lot quicker than our. The economics would be a bit more complicated, but the Saudi Arabians just went, let's build a big C. So why can't Canadians do it too? Because we have regulations. Yeah, we seem to get rid of those. That's why you build a new city this unregulated, and then you hand it over afterwards. And then the bureaucrats can go in and wreck the place. So we ended on a positive note. I mean, I thought you were very positive at the end of last. So I think the conclusion from both of us is going to be bumpy in the short term. We don't know how long talk short term is, but we think in 2020, 2026, then midterm is likely to look positive. But right now it's hard to see 100% what that looks like long term in my story. So if that's the conclusion I'm taking from this, the conclusion I've got is the market is generally soulless. Individuals and makers work at this time of night and do these podcasts and then before the podcast tell is the Best Podcast we have are the ones where me and you are actually on it, which really inspired us to greatness today. And we are talking about some funny podcast coming up. We actually have a list about 20 subjects, but one of the ones we're coming on today was having the US have a discussion with chat live on what we think the market's going to do, what happens with construction costs and seen how close they're going to be to all those predictions. So we may have a little bit of fun with that one in the future. This to change stuff a little bit. That was yohannes, this idea, the guy that torches us right now. So it sounds like it could be fun. Everyone seems to be playing with a line and posting it, so why don't we see what happens when we stick for all those people versus an eye in a room? Let's see what why I use the term real intelligence verses artificial intelligence looks like, but we'll see how that goes. So Thanks very much, ray. It's nice to see you back again. We haven't been on in a while and look forward to the next podcast just by.