What the sale of two Vancouver office towers means for commercial real estate

This deal, Reading explained drives home the gap between class A buildings in prime locations, and the class B and C buildings in secondary locations that lack the income generation to attract buyers. While we’ve just seen two major pensions shed a pair of class A buildings, Reading notes that the income generation from this kind of building should continue to make them attractive to pension funds and institutional investors. CPPIB and OMERS got some freedom and capital from the deal, but those properties are not necessarily the kind that we’ll see pension funds offloading en masse. Rather they may hold more properties like this on their books to retain that stability of income.

Office real estate is most risky in the class B and C buildings found in suburbs and secondary cities. The dynamics introduced by the pandemic, hybrid work and high vacancies, are still playing out here. Reading does expect those buildings to recover somewhat as the economy eventually transitions into recovery mode, driving up office demand. He also expects some of that excess office supply to come off the market as buildings are repurposed into residential, industrial, or retail applications. He notes that a few buildings in both Calgary and Ottawa have sold to private capital at rock-bottom prices, with the expectation that they’ll be repurposed.

While office real estate continues to transition out of crisis mode, Reading sees some of these properties beginning to fit into an outlook driven by industrial and multi-family residential real estate. This so-called ‘beds and sheds’ approach has been historically strong, both through previous downturns and in the wake of the pandemic. He also notes that there has been some steady uptick in retail real estate. The recovery of retail from the pandemic has been faster than office, and last year we saw two significant deals on class A retail properties that could point to a more attractive outlook. Namely, the sale of a 49 per cent interest in Vaughan Mills by Ivanhoé Cambridge to LaSalle Investment Management and the recent sale of Pickering Town Centre which is currently slated for redevelopment, with the addition of condo towers to the retail complex. Those deals also drive home the value still found at the top-end of commercial real estate subsectors. It’s those top-quality assets that Reading believes pension funds should and will focus on. Smaller scale asset managers, however, may find more opportunities in hard-hit segments of the real estate market if they can tolerate some short-term risk.

“There’s an opportunity to pick up smaller scale assets that fit the old real estate adage ‘location, location, location,’” Reading says. “There could be smaller scale assets that are well located that could do with a bit of a cleanup and more active leasing. There are properties that could be repositioned, adding residential to properties with some existing holding income for example. There’s definitely risk there, but it could kick up your return if you’re willing to take on that risk. It may not be something that you can turn around in six months, but the right properties in the right locations can be quite lucrative.”