Right from the very beginning, the coronavirus pandemic has taken Canadian real estate investors on a wild ride.

After the freefalling panic of March 2020, the sector settled into a relatively comfortable rhythm and undulated through several waves of the virus, saving one of its steeper peaks and troughs for the tail end of 2021.

No sooner had the industry celebrated a record-setting third quarter of 2021 — CBRE Group Inc. reported $15.8 billion in total investment volume across Canada, the second consecutive quarter in which the previous high-water mark was passed — than the world was introduced to the Omicron variant, wiping out any hopes for a largescale return to office in the near future.

Read: How will coronavirus affect real estate investing long term?

Tom Keenleyside, associate director of investments at Western University, is certainly ready to get off the pandemic rollercoaster, but that doesn’t mean he’s turning his back on commercial real estate. In fact, the university’s $1.9-billion pension plan is in the process of doubling its allocation to real estate, from its current five per cent level to 10 per cent.

“Ideally, you’d like to have coronavirus behind you before you start investing, but it takes time to deploy funding. The timing is difficult. We’ve held back on jumping in, but we’re now back in the search. Overall, it’s a great asset class.”

Optimism ahead

Western University isn’t the only institutional investor pushing on in the sector, according to Kevin Meikle, the vice-chairman of investment sales for Cushman & Wakefield’s Canadian operations.

“In the long term, real estate continues to be viewed positively across the board. Allocations aren’t deceasing; to the contrary, major institutions are looking to increase them. It has performed well historically, with only minor blips during the pandemic.”

Real estate by the numbers

1.2M sq. ft. — The amount of office and flagship retail space at the Phoenix Palladium in Mumbai, India that’s being jointly developed by the CPPIB following its $231-million investment

$95M — The value of the CPPIB’s commitment to the 13-storey One Centenary Way in Birmingham,U.K., scheduled for completion in early 2023

$15.8BN — Canada’s all-time record for commercial real estate investment volume in a single quarter, set in Q3 of 2021 on the back of 2,400 transactions, according to CBRE

15.8% — Canada’s overall office vacancy rate in Q4 of 2021, according to CBRE

Eric Plesman, the Healthcare of Ontario Pension Plan’s head of global real estate, says he has every reason for optimism in the year ahead, given the favourable economic background. “There’s a fair amount of private capital that’s sitting on the sidelines still looking to be invested in real estate. And unless the central banks move quicker than everyone expects, I think it’s still going be a supportive interest rate environment for real estate owners.”

Read: Coronavirus pummels certain real estate assets, bolsters others: report

In addition, the inflation concerns plaguing consumers and governments globally could actually fuel interest in commercial real estate, since the asset class has long been viewed as an effective hedge against rising prices over the longer term.

Plesman credits the strong performance of the HOOPP’s real estate division in part to its fairly large exposure to industrial and multi-family residential property. Both sub-sectors are widely seen as big winners in the pandemic era after a series of lockdowns fuelled an online shopping boom that’s yet to subside, while the overheated residential housing market keeps younger Canadians in the rental market for longer with home ownership increasingly out of reach.

More than one basket

At the other end of the scale, the growth of e-commerce has dealt a serious blow to physical retail, with enclosed malls and shopping centres particularly hard hit.

However, Richard Dansereau, head of global real estate at Fiera Real Estate, says there may be opportunities for investors as the sector bottoms out. “The knee-jerk reaction is to put all retail into one basket, but I don’t think it’s a fair assessment, because not all types have suffered as badly as others.”

Investors that find themselves priced out of industrial assets such as warehouses and distribution centres — where demand vastly exceeds supply — could find more value in convenience and strip malls tarnished by association with less vibrant retail assets, he adds. “Strip malls are here to stay and I think they will start trading. They have weathered the pandemic storm because they provided a vital service to the community and they continue to do so.”

Read: 2021 IIC coverage: Are pension plan sponsors rethinking real estate investments in work-from-home era?

Meanwhile, mixed messages abound in the commercial real estate sector most affected by Canadians’ changing workplace habits: office. According to Statistics Canada, more than four million Canadians were still working from home at the start of 2022 — accounting for almost a quarter of the total labour force — although that figure is down from an early pandemic peak of more than 40 per cent.

In the fourth quarter of 2021, CBRE reported a nationwide vacancy rate of 15.8 per cent, hitting heights not seen since the mid-1990s. Still, the downtowns of Ottawa, Toronto and Vancouver bucked the trend with single-digit vacancy rates that ranked them as the three tightest markets in all of North America.

Overall, Plesman describes the office sector’s prospects as cloudy. “In the back half of last year, the office side certainly began to improve and we saw a pickup in leasing. Until we get some clarity on that, it’s going to continue to put some doubts over the asset class.”

Looking abroad

As major Canadian pension funds continue to boost their allocation to commercial real estate, they’re increasingly looking beyond their own borders for investment opportunities.

At the end of 2021, the HOOPP’s non-Canadian properties accounted for more than 40% of its total portfolio, up from around 30% in 2019. The pension fund’s Eric Plesman expects the trend to continue as he develops a strategy for growth in Asia to complement the HOOPP’s existing U.S. and European holdings.

“It’s not because we’ve sold down Canada. It’s because the fund has continued to grow and we get a greater allocation. Canada is a fantastic place to invest — and we invest here — but I’d say it’s not as deep a market as some of the other markets that we are in, just as a function of size.”

International joint ventures are attractive for institutional investors seeking to take a more active approach to their portfolio and generate enhanced yields by developing their own buildings, according to Cushman & Wakefield’s Kevin Meikle. That’s particularly true for investors operating in popular real estate sectors where demand has driven prices to unattractively high levels at home. “Because they’re doing it themselves, they can also develop a product that is more specifically geared to what users are looking for.”

The CPPIB recently announced partnerships with local firms to build office-led mixed-use developments, committing $231 million for a complex in Mumbai, India and $95 million for a 13-storey building in Birmingham, U.K.

Geographical diversification will be important as countries adapt to a post-pandemic world, says the CPPIB’s Peter Ballon. “The impact varies city by city. We continue to be active and we see some good office opportunities in a number of markets.”

If anything, the emergence of Omicron in late 2021 muddied the waters further by forcing employers to postpone their plans for returning to the office. But Meikle predicts the new variant will be seen as more of a blip in the pandemic-era evolution of the office. While the first shutdown in March 2020 opened the eyes of both employers and employees to the viability of working from home, the intervening period has done nothing to challenge the office’s enduring value as a forum for creating culture and driving innovation, he says. “People will always want places to gather where they can feel like part of an organization.”

Read: 57% of Canadian employers planning return to office by early 2022: survey

Peter Ballon, the Canada Pension Plan Investment Board’s global head of real estate, is also convinced of the office’s long-term resilience, even if the workplaces that staff end up returning to bear little resemblance to the ones they left when the pandemic first took hold. “For investors like us, the question is which office, because I don’t think all office is impacted the same. We’re focused on investing in the ones that will continue to thrive in a post-COVID world.”

Office footprints

The best bets are higher quality buildings that assist tenants seeking to accommodate employee preferences for hybrid workplace options, says Plesman.

“We’ve been looking for the kind of office that employees are going to want to come back to, whether it’s the amenities that they offer, the newer age buildings that have light depth and flexible floorplates for people to design out what the workplace will look like or where the building itself is located.”

That could spell trouble for holders of B and C class office assets, according to Richard Chilcott, a principal at Avison Young (Canada) Inc.’s capital markets group. “You need great space to attract tenants. If you’ve got a cube farm that was last refurbished in 2005, it’s not going to get leased. The saving grace for the market is that there’s an awful lot of secondary capital looking to take on those older assets and refurbish them.”

Sheila Botting, head of the real estate firm’s professional services division for the Americas, says it’s easy to forget that many of the trends currently dominating the office sector were set in motion pre-pandemic.

Read: Real estate investments balloon as future of retail, office sectors remain up in the air

Many large organizations, including banks, government bodies and other employers, accelerated existing plans to shrink their office footprint following optimization studies, she says. “The flip side of that is we’re watching tech companies and others gobble up space in the market. So we’re seeing a huge transition in terms of the occupiers in the market, but there’s still a demand for downtown.”

Key takeaways

• Institutional investors aren’t pulling back on commercial real estate, despite continued uncertainty around the Omicron variant and the length of the pandemic.

• Opportunities could open up in the depressed retail sector as competition drives up prices for prized industrial assets.

• The flight to quality that began in the office sector pre-pandemic has intensified as tenants and investors seek workspaces that match up to workers’ higher expectations.

Whatever the future may hold, Chilcott likes to put it all in perspective by reminding himself of the industry’s prevailing emotions in the fearful early days of March 2020. “Right now in Canada, real estate has got tremendous vitality. There’s enormous change going on and we’re lucky enough to have the capital, brains and wherewithal to do this, which makes it a really exciting time to be involved in the industry.

“You would never have expected that just two years ago, when we were all sitting at home wondering what was going to happen.”

Michael McKiernan is a freelance writer.