Current issues in residential and commercial real estate

Sébastien: Hello everyone and welcome to the “In Your Interest” podcast. My name is Sébastien Mc Mahon and today I'm joined by my colleague Claude Sirois, Managing Director, Real Assets and Private Equity at iA Financial Group. Hello, Claude!

Claude: Hello, Séb, how are you?

Sébastien: I'm good. How about you?

Claude: Tip top.

Sébastien: So, we had you, I think it was in year one of the podcast, and we were supposed to do a 10-minute episode. We had such a long conversation that we did two episodes of like 15 minutes each, and it was very well received. So, we thought, well, it's time to revisit the topic of the real estate market. You know, office spaces, commercial spaces, condos and see where we're at now. Because two years ago, we were kind of coming out of COVID, there were still some uncertainties. But now, you know, the trends may be more mature. That's the plan today. So, is that a good plan?

Claude: It is a good plan.

Sébastien: All right. Good. So, you told us how COVID had affected the real estate market in 2022 and 2023. What's changed since then?

Claude: Hey, you know what? I remember the good old days pre-COVID there. It was a lot of fun.

Sébastien: Yeah.

Claude: Mind you, it's still a lot of fun today. There's no boring moments in real estate. And real estate remains a topic and a headline for multiple reasons. Obviously, we all know that our habits have changed dramatically through COVID: consumption, how we socialize, how we work, how we get to work.

Sébastien: How we commute.

Claude: How we commute. Evidently, COVID has brought lots of changes in all the asset classes related to real estate on multiple fronts, whether it’s offices or shopping centres, residential, industrial.

You know, the fact that logistically, goods had to be... the whole logistics chain disruption that happened through COVID there. The demand for industrial space just skyrocketed.

So, yes, a lot has happened since the last time we spoke. And new trends have also popped up. So, it's very interesting.

Sébastien: And population growth was historically strong in the last two years. And also labour scarcity in the construction sector now is such a limiting factor for, you know, residential, office, commercial. Data centres now, also. There's a new demand there. And everyone's thinking: “well, AI is going to be the new economic revolution.” Well, we need to build this stuff. We need to build the data centres.

Claude: Absolutely. I mean, as it relates to data centres, you know, you bring up that category. Just think about a Google search, okay, a ChatGPT search generates and requires ten times more energy than a Google search. Okay? So, the collateral effect of this is the demand for data centres, for servers, from hyperscalers across all the markets in the world have just skyrocketed. And as a company, we are obviously monitoring this and we have invested into some data centre operators in the US and in Europe. And it's a fascinating new asset class that, you know, a few years ago was there as an alternative real estate asset class, but now has become the new darling for real estate. And I mean, there's construction everywhere. You have Microsoft who's bought a nuclear plant next to a future data centre that they're going to build because they require lots of energy.

Sébastien: Yeah.

Claude: So, it's a fascinating, fascinating new asset class that is popping up of, you know, the new environment that we're in.

Sébastien: Yeah. Some of the few resources that we have in Canada: we have cold, so that's good for data centres. We have electricity. But again, we need to build the capacity and again, we need construction workers there as well. So, you know, the funnel effect is fully there. And, you know, a data centre needs as much energy as a small neighbourhood.

Claude: So, we did a co-invest data centre platform in the US. And they're building a data centre that will require 420MW. Okay? That's enough for the city of Sherbrooke.

Sébastien: Yeah.

Claude: To support and generate the energy required for the data centre, it's the city of Sherbrooke.

Sébastien: Yeah.

Claude: So, I think, I mean, it's fascinating.

Sébastien: Yeah. And that has an impact on, you know, we're always looking at the scarcity of housing. So, the condo market, maybe you can start there. How has it evolved over the last few years?

Claude: So, the condo market has suffered dramatically in the last few years across the country. The condo developers who were at the top of their game pre-COVID bought land, secured sites. Obviously, the sales have slowed down. The financing costs have increased, the construction costs have increased and demand has slowed to a point where it's crickets.

Downtown Montreal, Q3 2024, there were 13 condos sold. So, when you look back pre-COVID, that was what was being sold every day.

Sébastien: Yeah.

Claude: So, it's tough. It's challenging. It's going to take years before it comes back. And in the meantime, it's not generating units in a market that is just dying. Dying to get to have more offers, to increase the offering in terms of dwellings and housing units for the population.

Sébastien: And one conclusion that everyone was running into in like 2021 and 2022 is that: “well, we can just convert office space to condos and residential and off we go.” But is that really the case?

Claude: I'd love to own a Ferrari and measure 6’6”, but it's not going to happen.

Sébastien: Yeah.

Claude: So converting office space into residential units is a nice concept, but it's very challenging because, you know, you're in a world of compromise all the time. You're compromising on the experience, the amenities you may offer, on the design, on the layout, on the distance between the door and the windows because of the floor plates that were not designed originally for residential units. I mean, there are a few examples in Montreal and elsewhere in the country. It's all fine, right? But in five years, ten years from now, will these units age properly over time? It's a tough project to convert.

Sébastien: And the return to office or RTO? Are people back in the office?

Claude: There are measures being done on a monthly basis, specifically for Toronto, but I can’t obviously speak for elsewhere in the country. So, the peak days are at about 76-79% of 2019.

Sébastien: Okay.

Claude: Okay? The average:  62%, 63%, 65% depending. And the slow days are 35%-39%. You can guess what those days are.

Sébastien: Yeah. Of course.

Claude: So, probably a bit lower in Montreal, I would say about the same in Vancouver. There is obviously, and it's in the newspapers every day, a lot of articles on, you know, companies that are inviting their employees to go back to the office five days a week. Recent examples of, you know, JP Morgan, Amazon, etc.

The interesting thing about… let's take Amazon as an example. Amazon have sent a nice email to their employees saying: “you're back to the office five days a week”, but they had to pull back and invited them to go just three days a week. Because in 40 Amazon offices in the U.S., there's no space to welcome the employees five days a week.

Sébastien: Yeah.

Claude:  So, they're trying to fix that at the same time. So, it's an interesting environment for offices. And obviously the whole dynamic around COVID has been obviously very painful for the office category. Generally speaking, the vacancy rates are still high, but it's going to come back. It's going to take some time but it's going to come back.

Sébastien: Okay. Maybe now quickly to wrap up the shopping centres. I remember when we did the previous episodes that what surprised me the most was you said that shopping centres were back. You know, people were back at it and I was thinking, you know, well everyone is shopping online now, but they were back. How about now? 2025?

Claude: So, the mall operators for the dominant schemes in Canada, all the operational metrics are back to 2019. Whether it’s footfall, sales, the occupancy level, etc. Is it more challenging? Yeah. But you know what? People want to get out and socialize and experience. Touch and feel, and go back into a physical space. And the irony of the whole Canada Post strike in the fall was that it brought people back into shopping centres.

Sébastien: Yeah.

Claude: Because “I'm not going to wait for my package because it's not going to be delivered.” So, it brought more people in the shopping centres than before. So, great opportunity for the retailers to elevate their experience with our consumers. And all of them have adapted to the new environment. So yeah, it's thriving. It's thriving here, and it's thriving in the U.S. too.

Sébastien: Good. Thank you. I mean, we could do this all day, Claude. You know, I always love the conversations with you.

Claude: I’ll have to charge you, though.

Sébastien: [Laughs]

Claude: I'm kidding.

Sébastien: I would pay for that!

Claude: [Laughs]

Sébastien: So, thanks again. It's always a pleasure to have you.

Claude: Same here.

Sébastien: And thanks to all of our listeners. We'll see you again next week with a new episode of the “In Your Interest” podcast.

Ashleay (pre-recorded voice): Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms. Visit the economic news page on ia.ca or follow us on social media.