Jeff Tripp, Head of Alternative Investments at TD Asset Management, joins Kim Parlee to discuss how commercial real estate is withstanding the Omicron variant impact and why it may be a good hedge against inflation.
Jeff, it's great to have you with us. Thanks so much for making the time. How has the Omicron variant impacted the recovery in commercial real estate?
- Hi, Kim. I think we would define it as relatively modest impacts. And it varies by region and property type. So if you look at most impacted businesses and by property type, you've got small businesses, restaurants, hospitality would be amongst the most affected. And then regionally, or by jurisdiction, by country there's a huge variation.
Parts of the US have largely returned, whereas cities like Toronto and Canada have remained quite locked down and restricted. I think, generally speaking, real estate markets can see through the latest disruption towards a more sustained recovery.
- And we all certainly feel for those of us who are in Toronto, being locked down for an extended period of time. You've got a really interesting chart here I know that you brought. I want to take a look at it. It shows that, despite the lockdowns, the rent collection has actually remained fairly solid. Take me through what we're looking at here.
- Yeah, so this chart shows of percent of contractual rent by property type that's actually been received during the pandemic. So you start at Q2 2020 on the left and you move through to Q3 2021. The top three lines that you see are residential, industrial, and office. And I think what that really pronounces is the stability of those property types.
And you've got contractual income and contractual cash flows by way of leases that provide that stability. And I think that's one of the things that real estate can bring to a diversified portfolio is that stability of income. The one that you see that's starting a little lower and then trending up as you move left to right is retail.
And for obvious reasons, we all experienced it as we reflect back-- the lockdown in retail. So we did see more stress in rent payment. But I think what you see as you move to the right is that recovery where you're back up to similar levels of rent payment that you see with the other property types.
So to us, that speaks to the need for diversification in a real estate portfolio. And it speaks to the importance of contractual income streams like long-term leases.
- It really does. And I'm curious, that, I guess, is a historic look or at least a backward looking look at what has been happening with rents. When you look forward and you think about what the drivers are going to be for the sectors in longer term-- and I guess we'll look at commercial again with retail, office, industrial, you talk about multi-unit residential-- what do you see? What's going to be driving things?
- Well, as a general theme, ESG factors are critically important. So that's something that you need to acknowledge, needs to be integrated in investment processes. I think as we think about all of these property types, we're thinking about ESG and sustainability.
From a pure property type perspective, online shopping and e-commerce fulfillment will continue to drive industrial demand around the world. We've seen the pandemic accelerate some of those trends in Canada. So our positioning is well-weighted to industrial as well as a development pipeline that allows us to build some of that product and hold it long-term.
As you said, Kim, apartments have been resilient. We really do expect that to continue. If we think about Canada as immigration returns, foreign students start returning to university, that'll provide a tailwind to residential. And affordable housing is a major issue-- an important social issue.
So we think about that in our apartment investing activities. Retail continues to evolve-- well-located shopping centers, on transit, in dense areas will outperform, in our view, long-term. The ability to intensify those sites, add other types of uses like residential, education, medical, provides the investor with some tailwinds and some enhanced performance opportunities, but we think is also great for the communities.
- Let me ask you about inflation. That's one thing, of course, that's been spooking the public markets quite a bit as people get concerned about rate increases. And I know that real assets can help, I think, work as a hedge for investors in the right way. And you've got a chart here to take a look at that. How should people think about inflation and real assets?
- Yeah. Real assets really can provide a partial inflation hedge. And again, from a diversification perspective in a portfolio speaks to the value of adding real assets. This chart shows time periods through recent history along the x-axis and then the correlation of different property types with CPI during those periods. And infrastructure and real estate are shown to have very positive correlation with inflation, while the results are somewhat more varied when you look at equities and bonds.
So some of the reasons that we see that with real assets are those contractual income streams that we talked about. Another would be in real estate, variable expenses, operating expenses like utilities, are often paid by the tenant. So that provides a more stable income stream to the investor.
- Great conversation, Jeff. We're out of time. I'm going to have you back to talk about infrastructure-- you mentioned it. But all the more reason to get you back. Jeff Tripp, thanks so much for joining us.
- Thanks, Kim.