Significant headwinds in the commercial real estate sector have impacted the number of transactions seen in 2023, leading institutional investors to pursue diversification at home and abroad.
The totals for acquisition dispositions of office assets in 2023 were “extremely low” compared to the previous year, says Lewis Gascoigne, an investment consulting principal at Eckler Ltd., noting there are still many questions surrounding the health of the asset category, particularly amid ongoing debate about the popularity of the hybrid workplace and whether it will become the new normal. “I don’t think anyone really knows that sort of final destination just yet.”
Last month, the Canada Pension Plan Investment Board and Oxford Properties Group Inc., the real estate arm of the Ontario Municipal Employees’ Retirement System, sold two office buildings located in the Vancouver downtown core for roughly $300 million. Adam Jacobs, head of research at Colliers International Group Inc., is just one of many stakeholders wondering whether this move signals that even the large institutional real estate asset owners in Canada are opting to sell some of these assets, rather than continuing to take a “wait and see” approach. “It’s fair to say their investment approach has changed a bit over the last five years.”
The net proceeds from these sales are being transferred to, among other areas, alternative real estate assets like apartment development, laboratory spaces or data centres, he adds. While real estate opportunities continue to play a key role in any institutional investors’ portfolio, investors are being more careful when looking for new deployments particularly in commercial assets. But Jacobs says investors aren’t leaving office assets entirely behind. Rather, they’re increasing focus on diversifying their real estate portfolios through global expansion and introducing a new mix of assets.
“It’s not like a wholesale walking away from office, it’s just sort of balancing the books a little bit, [they are saying] ‘we can’t just have more . . . office in our portfolio, . . . we want to diversify.”
After conducting a review of sales data, Jacobs found investors have been selling a variety of office assets, including some across international markets, such as Germany or the Netherlands. “They used to just completely dominate our market now, [but] there’s a lot more of their money flowing to Germany, Denmark, the U.S., Singapore and Australia.”
Stakeholders are also now considering the possibility of repurposing their office assets to other investment categories, such as multi-family residential assets, says Gascoigne. Indeed, emerging segments of the real estate landscape, including industrial and multi-family residences, are catching the eye of investment organizations. A recent report from Avison Young found 47 per cent of investment sales in the fourth quarter of 2023 were for industrial properties.
According to Colliers’ most recent study of office real estate in Canada, the national office vacancy is expected to reach a peak of 15 per cent by the end of the second quarter in 2025. After this point, the researchers expect to see some signs of recovery.