Investing in Commercial Real Estate

More and more Canadian investors are looking towards real estate investments for safety and yield. Below are five different property types available for investors, each with their own benefits and values.

Industrial Real Estate

Industrial real estate covers a wide variety of property uses. In Canada, it is probably most notable in its use by energy and oil companies. This can make it extremely valuable in times when oil prices are high and related companies often secure real estate for their needs years in advance to lock in low costs when property prices are attractive. There are other uses in this category to such as government property, distribution centers and warehouses and manufacturing plants.

Office Buildings

Recent surveys and data show that office buildings have remained one of the most popular types of real estate investment with global investors. Large investment funds and institutional investors flock to these types of investments, often due to its income capacity and the fact that office buildings generally occupy prime central locations. While the relocation of corporate headquarters is often a major indicator regarding the performance of other types of real estate, as jobs and incoming workers lift the local economy, it is also wise for Canadian property investors to keep an eye on remote working trends and its impact on the future demand for office space.

Multifamily Apartment Buildings

Multifamily rental apartments offer Canadian property investors an easy to understand step up from residential single family homes. Experienced and sophisticated real estate investors often prefer multifamily to single family due to lower costs per door, easier management and higher ROI on value add improvements. Canadian investors typically choose multifamily for passive income generation and wealth preservation.

Retail Properties

Canada’s retail property performance is among the best. Choices for investing range from stand-alone single tenant stores to local shopping plazas to super-sized, internationally respected shopping malls. Retail stands out for income investors and those seeking passive wealth buildings.

Raw Land

Raw land can run from small buildable lots in existing residential communities to large plots that could house farms, factories or malls. While land doesn’t generally provide the income and yield that the above commercial properties do, it does offer low maintenance and low holding costs.

Summary

Selecting the best commercial property type to invest in really comes down to watching real estate cycles and selecting the right types based on personal goals, while evaluating the individual merits of each property. Dependent upon your goals, your financial needs can be met with a variety of different property types.

2015 Canadian Mortgage Trends

The recent 2015 Bank of Canada rate cut stole headlines and was expected to fuel a new low interest rate as banks and mortgage lenders vied to make more home loans. However, as we approach March, a new trend appears to be emerging – which can take things in the opposite direction.

Bloomberg News recently picked up on Canadian mortgage insurers and lenders pulling back and making new plans in some pockets of the market. Entities including Home Capital Group and Gentworth MI Canada are reportedly preparing to defend against more defaults and losses on loans, as well as tightening underwriting criteria as they fear the fallout of low oil prices.

Between investors withdrawing capital and cash flow interruption, many are expecting high capital rates to fall out of the oil industry as well. These entities want to protect themselves from further losses – possibly making it harder to borrow for regular home buyers and homeowners in regards of qualifying for mortgages and their borrow amount.

Together, current trends can make residential condos and single family homes, as well as industrial property slightly less attractive to investors in the short term. Expect more activity in commercial property sectors such as multifamily and retail, as Canadian investors seek more safety, growth and yield.

Industrial developments like Edmonton airport’s new distribution center may offer exceptions to this, but those that have stalled on buying homes could add to the pool of renters nationwide; increasing performance for apartment building owners.

Domestic and global capital will likely seek out other commercial property investments. Retail in particular may provide some shelter to investors looking for properties that can better ride out any potential dip and bounce back easily when things pick up.

Investment Lessons

Legendary investor Warren Buffet made big waves with Canadian and energy sector investments over the past few years. However, financial reporting from his flagship firm Berkshire Hathaway shows the ‘Sage of Omaha’ dumped its entire Exxon Mobil investing (around $3.7 billion) in the beginning of 2015.

According to coverage by The Globe and Mail, this was Buffett’s single biggest bet since IBM five years ago. This dramatic portfolio shift is probably in part due to crumbling oil prices, but also potentially a side effect of his frustration over the Keystone XL pipeline which he said was a “good idea”.

How to Invest Like Warren

Everyone wants to know how to invest like Warren Buffett. Most do it too late. So while the news is fresh, how can more Canadian investors emulate Buffett’s latest bold investment moves and enjoy more Warren style rewards?

The big question is where the legend is investing now.

According to financial filings by Berkshire Hathaway, some of the most notable moves and holdings over the last year have been in services that support retailers like Wal-Mart – which we know has become a major player in Canada. Retail property investments are definitely complimented by current trends picked up by the Toronto Star in February 2015.

A declining Canadian dollar, new stores with better deals and the prioritization of experience and saving hassle has kept more Canadian consumers shopping at home. That bodes extremely well for retail real estate investors and the performance boost applies equally to smaller local plazas as major outlets.

However, more than anything else Buffett and Berkshire Hathaway’s real estate investments continue to stand out as the ones to watch. Buffett continues to be bullish on real estate which he still names as his best investments. His forays into this arena are widely diversified from personal residences to farms to commercial retail property and mortgage debt, as well as real estate sales.

Investing 2015 - What to Look For

While some have forecasted a bland year for real estate in 2015, others are anticipating an exciting one. With global capital flows, cross-border investing, low interest rates and millennials fueling a buying boom, Canada continues to stand out as a great global destination for commercial real estate investing. However, there is still plenty of uncertainty over which cities will post the best gains. With the information we currently have, these are aspects investors should look for this year.

Professional Management

If there is one factor that Canadian investors can’t afford to prioritize in 2015, it is securing professional property management. The potential of an investment is only unlocked by great management. Seek out a veteran team with a proven track record.

Leverage

This year will be the year to take advantage of strong leverage. Partnerships with other accredited investors can be a very smart move this year and will allow Canadians to expand their portfolios safely. Low interest rates can’t be ignored and ought to be capitalized upon as well. Combining both of these forms of leverage could prove to be extremely powerful and can afford investors a great opportunity to scale during this optimal time.

Property Types

While most expect oil prices to return to normal before long, industrial properties will probably be less attractive than other commercial real estate sectors in 2015, until confidence returns. Office may remain strong and is normally a favorite with foreign commercial property investors. Multifamily and retail are likely to remain among the most trendy and desirable property types in the short and mid-term.

Diversification

Until real clarity comes to the market and the media realizes that constant scaremongering filler content is bad for their organizations too (even if it bumps up short term ratings), the best strategies still rely on diversification. The more diversified investors are in geographic location, property type, number of and type of tenants, the better their overall performance should be.

Income

Like Warren Buffett, investing for income and cash flow appears to be the favourite strategy and priority for 2015. Prioritize income and cash flow, desire value, prefer tax liability reducing structures, and price fluctuations won’t be a factor that should make investors nervous, or self-sabotage with rash moves.

Commercial Real Estate Investments in 2015

Analysts and data suggests 2015 will continue to see international capital flows and commercial real estate investments, growing and building upon the last two years. So how much capital is flowing? Where is it going and where are the opportunities for individual Canadian investors?

Factors Driving Global Real Estate Investment in 2015:

• Geopolitical unrest
• Failure of BRIC nations to offer safe and appealing CRE opportunities
• Entry of major sovereign wealth funds
• Need of pension funds and HNW individuals to make new investments
• Flight capital to safety and security
• Low interest rates
• Need to minimize tax liability

Where the Capital is Coming From

According to Real Capital Analytics, as of November 2014:

• Inter-regional investment in the Americas had reached $17.4 billion
• Domestic investment in the Americas had topped $338 billion
• Asia Pacific had invested $17.4 billion in the Americas
• The EMEA had similarly invested 8.1% of capital ($17.4B) in the Americas

Where the Capital is Going

According to Preqin data and a CCIM Institute report in January 2015, there is an additional $220 billion in capital waiting on the sidelines, which is poised to be deployed into real estate investments. This is up almost 20 percent from Dec. 2013, which saw almost $700 billion in global commercial real estate transactions (a seven year high).

Oxford Economics forecasts suggest strong investment in North America and specifically retail establishments, which is based on fundamentals and growing global affluence. The CCIM Institute points to an ongoing slowdown in China dragging down Asia Pacific demand, while tight monetary policy in the UK has slowed growth and turned off investors.

Office, multifamily and retail has been and is expected to continue to be the top choices of global investors. Industrial real estate in North America is currently suffering from significant uncertainty due to low oil prices.

Compressed cap rates and peak asset prices in gateway cities are likely to push more foreign investors to destinations that offer cheap leverage and strong secondary cities, which provide more value and a better security cushion for wealth preservation.

For the Individual Canadian Investor

What does it all mean for individual Canadian investors? Individual investors ought to continue to find select opportunities in smaller deals and will benefit from partnerships and low Canadian interest rates. Yield and cash flow will continue to be more important and prioritized over pricing fluctuations and expectations of cashing out in the short term.

Lesson on Crowdfunding

Fueled by technology and lots of media hype, crowdfunding became very popular a few years ago. It seems to have performed well for socially minded campaigns and funding new tech gadgets. As the technology behind crowdfunding platforms has grown, at least a dozen services have popped up providing easy plug and play options for launching new crowdfunding portals. Those interested in real estate have seized on this to throw up a variety of real estate crowdfunding websites vying for dollars over the internet.

However, a recent pitch by a new real estate crowdfunding startup on the reality TV show Shark Tank saw the concept taking a beating from some of the world’s most respected and wealthy venture capitalists, savvy investors and real estate and technology experts. In fact, they not only refused to fund the project, but literally laughed the founder off screen.

So what’s not to like about crowdfunding?

The first and most notable issue which was repeated by the entire panel was that it lacked the credibility and trust that investors really need. The panel including Barbara Corcoran, Daymond John and Mark Cuban highlighted how individuals, including themselves look for and need to invest with other reputable individuals that have a proven track record.

The second criticism was that these systems were really designed to take advantage of elders and non-accredited investors, by marketers that were unproven in their ability to deliver results. In other words; under experienced developers and managers backed by less experienced investors putting their only meager savings into the pot was seen as a poor recipe.

So what do these sophisticated investors like investing in and how?

The ‘sharks’ and other legendary investors have proven time and again that in addition to technology they have done very well investing in real estate, and have retained and grow their wealth by pooling money and diversifying.

To emulate their success, and successful investments individual accredited investors will seek out real estate opportunities and diversify into multiple income producing properties. However, they will do it through smaller and tighter partnerships with other accredited and qualified investors, in projects organized and managed by those with proven track records of success.

Canadian Fundamentals Keep the Country's Property Market Growing

Low interest rates aside, Canada has many underestimated fundamentals working in favor of its property markets, which will help fuel the Canadian property market and real estate investment portfolios through 2015.

While some have proclaimed the Canadian property market has been growing too fast and imply it relies on oil prices too much, the statistics and fundamentals indicate otherwise. The latest data and headlines shows from Edmonton to Toronto, the Canadian property market continues to move ahead with confidence in 2015.

Data from the Canadian Real Estate Association (CREA) shows that property prices have actually been growing at a steady and sustainable rate, even as investors continue to net globe topping yields on income producing investments. According to CREA, national home prices only nudged up 3.8 per cent between Dec. 2013 and Dec. 2014.

There is far more to the Canadian economy than oil prices. While the focus recently has been on the luxury, urban core real estate in parts of Canada, 90 per cent of the nation does have affordable real estate. This is creating a new foundation of strength, while allowing for more growth.

Strategies for Investing

Oil prices continue to decline, and despite rumors of the Keystone XL pipeline making progress, the US reports it already has record oil reserves. Most analysts expect oil prices to bounce back by the end of 2015, but in the meantime many investors are searching for the strategic moves to preserve wealth and keep yields high.

1. Accelerate Property Acquisitions Ahead of the Surge

Data shows a significant surge in individuals searching to buy Canadian property at the beginning of 2015. This is no doubt in part thanks to the interest rate cut, but also due to oil prices and the continued excitement and confidence in Canadian property markets. Until oil rebounds and proves reliable, interest rates are raised substantially, there is no reason for this activity to wane. This suggests at least several quarters of strong buying activity.

2. Go Retail

Both low interest rates and low oil prices benefit the retail sector. Transportation and store inventory tends to become less expensive, all while reducing the cost of capital.

For retailers, it’s a win-win situation on both sides, with lower operating costs and increase in sales.

3. Diversify

Canada continues to boast one of the soundest and best performing real estate investment markets. For Canadian income investors, this might be the best time to scale with inexpensive leverage and diversify across a broader section of the nation’s property markets. Invest in traditional urban strongholds, in rapidly growing trendy cities and branch out into new secondary and tertiary markets. Invest in multifamily, retail and mixed-use.