As the economy continues to face major technological disruption, investors will face an increasingly competitive environment to find the best real estate opportunities, a panel of experts suggested at an event in Toronto on Thursday.
“Every time you hear the word challenge, you should hear opportunity,” said Tim Bellman, head of global research on Invesco Ltd.’s real estate team during the firm’s annual global real estate forum at the National Club in Toronto.
The situation has broadly improved for mid-size and smaller pension funds eager to get into the real estate game, as they can now gain relatively easy access through funds that simply didn’t exist 10 years ago, said Robert Cultraro, chief investment and pension officer at Hydro One Inc. and another panellist at the event.
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However, the panellists all agreed that Canada simply doesn’t boast enough core-level real estate opportunities to go around. As such, in an environment where the search for new opportunities is competitive and often forces institutional investors to look to foreign markets, Bellman discussed several technology disruptors that could drastically affect the quality of real estate investments.
The proliferation of e-commerce could have significant ramifications for the real estate sector worldwide, he said. With the advent of online shopping, the demand for certain types of space is increasing while the market for others is decreasing. Certain retail scenarios, such as experiential spaces, flagship stores and prime malls that are known to be the best in a given urban centre, will continue to do well, added Bellman. And grocery-anchored shopping centres have the potential to go either way, he noted, while most other common retail spaces will face significant headwinds in the future.
On the logistics side, autonomous vehicles could present a shift for real estate, he said. Without the human element, delivery trucks could travel much longer distances, bringing disruption to the supply chain. As well, driverless cars have the potential to lower the need for parking lots, which could prove an untapped source for real estate, especially in urban areas. On the other hand, increased commutes for workers could have ramifications for residential real estate, said Bellman.
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As well, with concerns about further job automation on the horizon, the demand for certain workspaces could see a shift, he said. Office space in technology-focused locations could see a boom, but overall demand for office space could decline as more automation could mean less need for back-office positions.
And a final possibility is rental income from building roofs for offices as drones become more popular, said Bellman. If there are more of these objects buzzing around in the sky, there will be a greater need for infrastructure for their use, he added.
“Certain sectors are clear winners and certain sectors are clear losers, and then there are those that could go either way. The clear winners are logistics, both major regional logistics facilities and last-mile logistics facilities, and the burgeoning demand for both,” said Bellman.
“I think office is a clear loser, going forward, with technologies and disruption coming to service jobs, etc. It’s not completely a loser. I think city-centre locations will continue to do well, but back-office functions, secondary locations, [it’s] very hard to see rental growth in those areas,” he added.
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The key issue here is that “most global real estate portfolios are overweight offices and underweight logistics. This is a huge change that we all need to be thinking about making,” said Bellman.
However, Catherine Ann Marshall, an investment consultant at RealAlts, warned others on the panel about jumping on a technology trend too quickly. “In the early 2000s, the sexy investment was a fund that was investing in what were called, at that time, data hotels. And people thought, ‘Oh, server farms, data hotels, we’d love to be in it. Let’s invest.’ Well, we had a recession in the U.S. in 2001 and there was a pop in the dot-com exuberance and those very narrowly defined funds, they got creamed.”
Marshall cautioned against viewing investment opportunities in simple terms of good and bad. A safer area, she suggested, would be where a technology job boom is taking place. For example, investors could achieve exposure to it by purchasing high-end real estate in what Marshall described as trendy “millennial dent” locations that are popular with younger workers.
“Until it’s clearer how some of these extremely rapid changes are going to happen, I think it’s very well-advised to generally go for locations that give you exposure to those high-tech industries but without making very explicit, very narrow bets on a particular change,” she said.
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