As vaccination efforts continue around the world, more people are starting to head back to the office and to the shops again. So, is commercial real estate primed for a strong comeback? Kim Parlee speaks with Colin Lynch, Head of Global Real Estate Investments at TD Asset Management.
Originally aired November 16, 2021
Colin, it's always great to have you with us. Let's just start with, are people heading back into the office? Are you seeing a change in vacancy rates?
- Well, thanks, Kim, and good to be here. Short answer is yes, though at varying speeds. So let's start in Canada. Physical occupancy of the office is still pretty low between 10% to 20% in most markets. But in the USA, we're beginning to see physical occupancy increase, around 25% in New York City, close to about 45% in Dallas. In Europe, physical occupancy in some places is approaching 60%. That would be the case in London. And we're hearing in Australia that folks are gearing up to go back to the office very much coincident with accelerating vaccination rates.
- I know you've got a chart that-- I actually got a few charts here that I want to bring up. And this first one, I think, shows the supply-demand situation for office space in Canada. Can you just tell us what we're looking at here and why you think it's material?
- Yeah, sure. So these blue lines are absorption. That's a mark of how much space is being occupied. So when it's above zero, that means that tenants are occupying office space. And when it's below zero, it means tenants are given back office space. The orange lines are supply, i.e. how much new office is being constructed. And that gray line is vacancy.
And so if we look in the middle of the chart, we see the pandemic, and we see these blue lines, these negative blue lines, growing and growing and growing. But what we're beginning to see, especially over the last four quarters, is that those negative blue lines are shrinking. And so tenants are giving back less and less space, and you can see the trend line. And so we're approaching a spot where we might see tenants begin occupying more space in the office. And so we think that from the perspective of being through the worst of the impacts on office caused by the pandemic, we're probably through the worst of it.
- And then this chart is interesting as well, Colin, bring this one. You're showing about the average square foot of residence in various countries, and I was thinking, why are you bringing this talk about commercial real estate. And then I saw the tiny space that somebody is living and maybe working in Hong Kong, and that explains why they want to get back to the office. But tell me what we're seeing here.
- Yeah, that's right. Conversation about working in the office, working from home, really depends on the physical characteristics of the homes in which people live in. And throughout much of Asia, the spaces that people live in are relatively small. And so we showed Hong Kong here, beneath 200 square feet on average. Japan, we see near 400 square feet. But if you look in Tokyo, that's closer to 250 to 300 square feet.
So why is this relevant? Well, it's really hard to have a home office in a space that's only 200 to 300 square feet. And so we've seen throughout the pandemic in Asia, whether it's in Tokyo or in Hong Kong, we've seen folks going into the office, physical occupancy as being around 50% to 60%.
- What about malls? Are people starting to get back into the malls? I mean, people have gotten pretty conditioned to shopping online.
- Yeah, we certainly have. The short answer is we're beginning to see people return to the malls, especially the highest quality malls. Some of this is motivated by consumer confidence levels. Some of this is motivated by just being able to get out and about again. In those malls that are destination shopping centers-- so you might have a movie theater, you might have a number of different retail formats-- we're seeing that volumes are beginning to recover. Haven't recovered fully. But what has recovered fully in some instances are sales.
And so what does that mean? Folks are going into the malls more purposefully. They're shopping more and spending more on each trip. And when we have bag counters, they're actually counting the bags, we're seeing more bags per shopper in a number of these malls. So we're seeing a financially confident consumer spending more on each trip.
- Well, I guess on that financial confidence piece, let's bring up this next one. And this, I think, is showing a consumer sentiment. And if your shopping bag analogy is the one we're looking at, sentiment is back up.
- Yeah, that's right. And we're seeing the results of that through folks going to the mall in multiple countries around the world. And we're seeing the sentiment reflected in the mall, but we're also seeing it as well in industrial. And so folks are not only going to the malls, but they're also shopping online at a number of these e-retailers as well.
- So industrial, I know, obviously, did well through online. You mentioned that it's been doing well. What about multi-unit residential? I mean, is the power of rent back? Is there the ability to raise prices?
- Short answer there is yes as well. So rents are coming back. In 2020, we saw a lot of conversation about people moving out of cities, out of urban cores. When we look at the data, yes, we saw some people move from San Francisco to Austin. But we saw a lot of people move within the same metro area. In April, we had announcements about vaccinations, many corporates announced the return to work.
Yes, there's been delays for sure, but what happened is folks began moving back to some of these cities. And so when you look at rental growth, especially in the USA, dramatic acceleration. Or in many places, above pre-COVID rents today. And we continue to see that grow.
- That's the States. What are you seeing in Canadian cities?
- Yeah, well, we're seeing two things. We're beginning to see that rebound in rents as well, in Canada and Toronto and Vancouver, Montreal. We also have another dynamic which is significantly rising house prices. And that's being spurred by low interest rates and rising building costs. And so many prospective homeowners are being priced out of the market. And so they're turning to apartments as more affordable options. So we're seeing rental growth beginning to really pick up, and we think that will continue over time.
- I want to go back if I could. I jumped a bit over the industrial sector. I mean, that was one-- obviously we've been conditioned to shop online, industrial warehouses, those types of things, where you think of these big Amazon warehouses-- did really well. But is that going to come down a bit now? Has that cycle peaked in your opinion?
- Well, yeah, so we're certainly at lower levels today in terms of e-commerce spending than we were in the first quarter of this year. But we are still materially higher than we were in 2019. We think that over time, e-commerce spending will continue to tick up. And this has motivated a tremendous amount of demand for industrial space around the world. Every market, whether Toronto, Montreal, Sydney, Melbourne, is seeing unprecedented demand. Many are seeing record-low vacancies.
And that is resulting in rents that are rising every quarter in many industrial markets around the world. It's been a remarkable turnaround for a space in real estate that was very much out of favor 10 years ago. So a lot of demand for sure. We are lower than we were at the beginning of the year, but long-term outlook still says we will continue to see e-commerce grow.
- Colin, we're going to have to leave it there, but it is great to have you with us, as always, Thank you so much.
- Great to be here.