As Crown releases our second quarter results, Ontario has entered Step Three of its “Roadmap to Reopen.” With the easing of pandemic-related restrictions and expanded access to indoor settings, businesses are refining their plans to call employees back to their offices. Most firms are signalling a hybrid or flexible approach going forward, with the majority of staff returning this fall and we are seeing glimpses into the alternative strategies being pursued by banks, tech companies and larger institutions as they publicize their plans. Going forward, a central office location will always be considered crucial to a firm’s brand, talent retention and business. Ultimately, the extent of remote versus on-site work will vary by industry, function, and location.
Investment activity has continued to be inconsistent across asset classes, with Industrial and Multifamily sectors seeing the most cap rate compression and attracting the widest range of buyers.
This quarter, office investment volume was at its highest level since the pandemic began but still below prior years. Crown’s experience has been that the buyer pool for stabilized office assets has been deeper than that for value-add offerings. This bodes well for Crown’s funds as we continue to dispose of stabilized assets and pursue value-add acquisition opportunities.
Crown continues to track leasing tours as they are an important leading indicator of the health of the leasing market and, ultimately a predictor of transactions. This quarter, the portfolio has seen the highest level of touring since the start of the pandemic. Year to date, renewal leasing volume is in line with Crown’s 2021 budgeting for our Fund Portfolio.
As organizations implement varying degrees of a return to the office this fall, we are now seeing reports of companies that were once looking to shed space shift directions. Tech companies have continued to grow and favour Canadian cities, especially Toronto (#4) and Ottawa (#10) where occupancy costs and access to talent are favorable (refer to CBRE’s 2021 Scoring Tech Talent Report). These cities remain top destinations for tech companies and despite the pandemic-induced economic slowdown and increased vacancy by North American standards, our core Canadian markets continue to perform extremely well.
With the return to the office discussion in the rear-view mirror, investors are now focused on the risk of inflation, a result of recent, unprecedented fiscal stimulus. This concern may be a great boon to the real estate industry, as investors who previously had little exposure to real assets may now consider such an allocation as an effective inflation hedge. With new signs of a strong recovery, including the Bank of Canada’s prediction of a nearly 7% global growth rate, there is also the opportunity for meaningful income growth in real assets. The Bank of Canada is likely to wait for the U.S. Federal Reserve to be the first central bank to hike interest rates before it follows suit and given the current environment, the Fed may do so sooner than expected. The Bank continues to signal its expectations of such a shift in H2, 2022. This type of proactive communication should help avoid interest rate surprises and provide the balance the economy will likely need.
As a professional office operator, Crown continues to serve the needs of our tenants as they return to the office, while trying to maximize the value of our assets. We are especially excited about new opportunities in our space.