To Our Investors and Partners,
As Crown releases our first quarter results, we reflect on the challenges and opportunities facing our industry and look ahead to refine our strategies for 2023. A number of macroeconomic variables have reduced investor appetite towards the office sector. This sentiment is reflected in the trading prices of Canadian REITs which are trading at approximately a 20% discount to analyst consensus NAV. This discount is even more pronounced (40%) in the case of pure play office REITs.
This past quarter, along with regional bank turmoil reminiscent of the GFC, are headlines of large and prominent U.S office owners handing back keys to their lenders. While the Canadian banking landscape is markedly different than that in the U.S, such headlines contribute to the long list of headwinds facing the Canadian office real estate sector — rising interest rates, inflationary construction costs, and hybrid work, to name a few. While public markets have arguably over-corrected, private real estate faces a test of resilience. For several years now, the commercial real estate market has benefited from tailwinds, experiencing growth in both rents and capital values. As this is no longer the world in which we live, Crown’s ability to reposition assets and grow income through active asset management is ever more relevant.
More than ever, classification systems developed decades ago are not sufficiently nuanced for today’s needs — consequently the statistics that are often disseminated in the media are equally oversimplified. Turning to the actual experience within Crown’s portfolio, this past quarter has seen positive leasing absorption, primarily driven by our suburban portfolio, where tour activity remains markedly higher relative to our downtown assets. We attribute this activity to Crown’s diverse tenant base, spanning across industries such as logistics, construction, engineering, education, healthcare and professional services. The average tenant size is less than 10,000 square feet and workplace decisions for this group are more fluid that would be the case with large downtown corporate/bank occupiers. Crown’s continued focus on the ESG/wellbeing credentials of buildings, the quality of amenities, upgrading shared areas and creating move-in-ready suites have allowed us to showcase our assets as “best-in-class” within their respective sub-markets.
It is further worth noting that in the current market differentiated product means buildings that are not stranded and have a clear pathway to decarbonization. Crown has continued to build its Sustainability team and further develop decarbonization pathways for our assets. Crown also marked the one-year anniversary of our partnership with the City of Toronto through our participation in the Green Will Initiative (GWI). As part of the GWI, Crown is aligning over 4 million square feet of office properties (our entire Toronto portfolio) on a pathway towards Net Zero.
We continue to remain confident that these uncertain times will yield high quality value-add opportunities and we will continue to evolve our own strategies so that we can meet the expectations of our investors.