The commercial property puzzle: Investors refuse to write down assets despite public market pain

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The valuation gap is growing and trillions of dollars are on the line, but it’s hard to know who’s right

to the Spanish billionaire behind the Zara fashion retail chain. Its sellers were OMERS’ real estate arm, Oxford Properties, and its co-investor, the Canada Pension Plan Investment Board.

to smooth out market volatility, but they can’t ignore public investors forever. Many institutional shareholders doing the public-market selling are just as large, smart and sophisticated. Now that the pandemic is no longer a global emergency and benchmark interest rates have jumped at least four percentage points in both Canada and the U.S., investors are taking stock of all that has transpired. As the dust settles, with Canadian and U.S. central banks suggesting they are hitting pause, it is clear there are stark differences between the different asset classes of commercial real estate.

The office sector, though, is very clearly hurting, as are retail properties, albeit to a lesser extent. Office towers were among the hottest commercial real estate to own heading into the pandemic, with a vacancy rate of just 1.2 per cent in downtown Toronto, but white-collar workers have embraced hybrid work accommodations and the national occupancy for office buildings in Canada hit an all-time high of 17.7 per cent in the first quarter, according to CBRE.

 

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