Jim Bogusz is an experienced real estate professional having spent three decades working in the industry. He’s the former Chief Operating Officer of Beedie – the largest private industrial land owner, developer and property manager in Metro Vancouver – and current Board Chair of the Independent Contractors and Businesses Association. So when he said he’d love to chat with us about the current economic situation and its impact on real estate – we couldn’t wait to pick his brain.
“We’ve seen crises before and in my career I’ve seen the 2008 Financial Crisis, 9-11, the dot-com bubble and the stock market crash of 1987, to name a few. It seems we get a shock of some sort every 10 years or so but this is different. This isn’t just a financial crisis, this is a health crisis, and while we can take lessons from the past we are largely in uncharted territory. For example I’ve never seen the economy slammed shut in a matter of days. Without a doubt our framework for making real estate decisions needs to be looked at differently.” says Jim. “How this recovery looks and how we come out the other side will be different. Policy decisions made today will impact us for many years.”
So what do you mean by “It Depends”?
“In the big picture Canada is seen as a safe harbour for capital. We have a strong banking system, proven and stable politics (like it or not), a decent education system, a decent healthcare system, and our country is relatively safe and clean,” says Jim. “This all provides a really great backstop for us. On the other side, I think that immigration will continue. I believe it has to. It’s a simple fact that we need more people to grow our economy and that will continue to put upward pressure on real estate. I firmly believe, in markets like Vancouver and Toronto, real estate will always be in high demand.”
“So in the long term I’m still bullish on real estate but in the near term I’m adjusting my thinking, and a lot has to do with trying to forecast where buyer/renter demand is heading,” Jim says.” “It’s never a bad time to buy “best properties” but in the short term I’m looking at that definition of “best property”, and how to value it.”
Interestingly, the way this pandemic is raising awareness around public safety may eventually drive behavioural changes that could carry forward for a while and impact what defines “the best properties” in real estate. A few thoughts:
- Technology works so people can work from anywhere. This is really the first time where we’ve been able to distribute our workforce back to the home. Naturally, there is still much to work out and as business evolves to resolve the productivity kinks we may see more promotion of this. That will certainly create demand for more bandwidth into our homes but also reconsideration of how space is utilized. Moreover we may eventually see more people fleeing to secondary markets like Kelowna or Victoria to take advantage of more space and lower-priced real estate in order to avoid large city crowds and achieve their lifestyle balance.
- On the commercial side, Jim is looking at a couple of things: (i) what this would do to future office space demand and leasing and (ii) will consumers return to the malls and regional shopping centres as before. Imagine for a minute where we’d be today if we hadn’t made the progress in e-commerce and logistics we had? That’s not going away. Businesses may not return to their large lease footprints in core business centers and small businesses may not recover at all leaving landlord’s financially stressed and pondering what the highest and best use of a property really is. On the plus side, industrial real estate, i.e. warehousing, light manufacturing and logistics space has proven itself to be invaluable during these times and I doubt that sentiment will ever change now. Vancouver especially is short of industrial space and he sees demand, and pricing, continuing to go up.
- What home buyers or renters are looking for may change. For example, we may see more consumer attention paid to indoor air quality. Buildings that have more open windows, owners that perform regular testing, monitoring, inspection and are proactive about air quality management will likely be preferred by buyers/lessees and asked about a lot more. Along with more bandwidth to the front door, how spaces are laid out, especially if we are expected to live, work and raise a family in them will suddenly become more important.
- Another interesting point to consider is the notion of transit centric developments. With everything going on, public transit ridership may take a long time to recover. If so, what we’re likely to see is a continuation of the trend towards mixed-use developments. The mayor of Paris called it the “15-minute city” where all of a resident’s needs – work, shopping, health, or culture – are within 15 minutes of their own doorstep. We see elements of it here already but it may certainly evolve much more deliberately and influence future developments.
Leading Indicators For Real Estate Opportunities
It’s hard to predict what will happen with real estate but there are a few leading indicators for investment opportunities that he’s looking at:
- Commercial valuations. The value of a commercial property depends on its potential income and its cap rate. The cap rate is defined as a property’s net annual rental income divided by the current value of the property. If tenants are defaulting on rental payments and/or properties are left vacant, commercial valuations may decline opening up potential opportunities for buyers.
- Development completions. “In 2008/2009, there were a number of towers completed but people simply didn’t show up on the closing day. They gave up their deposits and walked away.” Jim caveats that this might not happen to this same extent this time as there is more protection in the market but that there still may be pockets of opportunities for buyers in the condo market.
- Mortgage deferrals. Mortgages can currently be deferred for up to six months so until that point comes, we will not know the extent of distressed assets hitting the market. Many investors are rethinking equity positions and reconsidering the relative safety of real estate. “Keep an eye out and hold on to cash so that you can take advantage of potential opportunities that come up.”
So, Jim, are you buyer?
Short answer: “yes.” But I’ll qualify it by considering the above. As a buyer I’d go hard on due diligence, not only just building conditions but also doing a very deep dive on the tenant, and their financial strength, and even looking beyond that into the rental market or neighbourhood in general. If you are buying I’d recommend buying what you know, stay in your lane and don’t hesitate to pay for advice if necessary, or partner with someone with the knowledge and expertise in that particular segment of the market. Coveted properties don’t always come available so when they do you’ll want to have a game plan.”