Assessing the Risks and Opportunities That Lie Ahead for Global Real Estate

At a general session titled “A Conversation with Industry Leaders on Global Real Estate Markets” at the 2023 ULI Spring Meeting in Toronto, moderator Peter Ballon, global head of real estate for the CPP Investment Board in Toronto, summed up the turbulence of the current real estate environment this way: “We have a situation of persistent inflation, rising interest rates, rising cap rates, bank failures, and a recession that’s perhaps looming. Other than that, it’s a perfect environment to be investing in real estate.”

Negative Short-Term Outlook for U.S.

Global gateway cities in the United States are still struggling from the fallout of the pandemic and the rise of remote work, said the panelists, who said they do not expect recovery to come anytime soon.

“You don’t want to count these cities out—particularly places like New York and San Francisco,” said Dennis Lopez, chief executive officer of QuadReal Property Group in Vancouver. “They’re great cities, but in jurisdictions with higher taxes, the departure of people to places with lower taxes has had huge impacts.”

Everything depends on the sector, however. “Obviously, office will take longer to recover than logistics,” Lopez said. “We’re trying to go beyond just thinking about cities and instead consider micro-locations. Data analytics allows you to go through vast amounts of data and pick out spots that might be a great investment, whether it’s in a moderate-growth or high-growth city.”

Brighter Outlook for Europe

Europe, however, is not experiencing a shift away from gateway cities, said Lars Huber, chief executive officer of the European region for Hines Europe in London. “Quite the contrary,” he said. “A broad range of cities are attractive beyond just Paris and London, like Copenhagen and Amsterdam, which have transformed over the last 10 years. That’s where people still want to live. That’s where they want to work. That’s where talent can be found, and educational offerings. I think European cities in particular have done more to make inner cities attractive over the last decade than their stateside counterparts.”

Europe and Asia are ahead of the United States in terms of incorporating environmental, social, and governance (ESG) factors into real estate, said Nathalie Palladitcheff, president and chief executive officer of Ivanhoé Cambridge in Montreal. The risks of not investing in energy efficiency go beyond facing higher utility costs, she said.

“I’m afraid that the wakeup call is going to be very brutal in the United States when we’re going to realize that so much of our office stock is obsolete,” she said. “Europe started earlier, and they’re going to have less work to do to catch up. They have dramatically improved the quality of the buildings, which is not the case in the United States.”

Amy Price, president of BentallGreenOak in San Francisco, said she sees the trend toward decarbonization as an opportunity for the United States. “Right now, we’re being forced to think about it because regulation is coming,” Price said. “But for investors, owners, city planners, the opportunity is to take a step back and ask, why does this really matter?”

Both tenants and global investors care much more about ESG than they used to, she pointed out. “So the opportunity is to engage your tenants, figure out what they want, and also partner with your capital providers to figure out what’s important to them. That’s where you create value—through liquidity and revenues, not just by focusing on meeting regulations.”

Partnering to Produce More Housing

Housing affordability continues to be a challenge across the globe, the panelists said. Gary Berman, president and chief executive officer of Tricon Residential in Toronto, cited two pathways to making housing more affordable—public/private partnerships and development of single-family rental housing.

An example of the former is Tricon’s Canary Landing in Toronto. “This is a public/private partnership with a 99-year ground lease from the province of Ontario,” Berman said. “The financing comes from the Canada Mortgage and Housing Corporation, and Toronto cut red tape and gave us a break on development charges. Because of that, we’re building about 2,500 units, and a third of them are affordable. We certainly can do it all over the United States, if governments can partner and provide land on a ground-lease basis and provide subsidized financing.”

Berman also noted the importance of investing in the single-family rental market. “Single-family rental allows you to close the wealth gap,” he said. “If you’re living in a multifamily complex in, say, the U.S. Sunbelt and you don’t have the $20[,000] or $40,000 to buy a home in a neighborhood with a better school district, single-family rental allows you to do that. You don’t need the downpayment. Now you’re in a better school district, which allows better outcomes for your family and their families.”