COVID-19 has led to the acceleration of trends but how do investors approach a space that has seen mixed results during the pandemic?
Real estate has been one of the more interesting asset classes during the pandemic. On the one hand, markets such as the GTA and Vancouver have seen residential demand go through the roof, while other areas of the country have dried up. Office spaces that were vibrant, are now quiet and are posing question about the future of tenancy. Meanwhile, areas of the industrial space are booming thanks to the demand for e-commerce, distribution and data centres. Yet while those demands are up, publicly traded REITs are down, making it more difficult for advisors looking to gain exposure to the space.
“We are very strong believes in diversification for portfolios, real estate is similar to other assets where you take different angles to achieve diversification. That tends to be geography, property type and risk strategy,” says Colin Lynch, head of global real estate investments at TD Asset Management. “You can’t predict the nature a shock, but you can construct a portfolio that has the adequate balance, exposure and risk parameters to ensure it performs well in great and tough economic times.”
While some are quick to point fingers at specific sectors underperforming, Lynch says he looks more within the sectors themselves. One area, retail for example, has had positive stories with essential services like groceries and pharmaceutical. Whereas shopping malls were hit hard during the shutdown and could see changes in consumer behavior. “Early indications have been that foot traffic isn’t back to normal levels. People are being more purposeful entering malls, going to a particular store, making a purchase and departing.”
Office space is another area Lynch says has been hit hard and will have question marks going forward. He notes that not all areas of the world experienced the same level of shutdown as Canada, so some areas still have high occupancy rates. He does believe many will return to offices once the pandemic is over, he also says occupiers will re-assess their needs. “The office space dynamic remains a question mark and is a shorter-term risk. I would say office rents, broadly, remain paid, so the question will be the renewal dynamic.”
When it comes to industrial, Lynch says that the pandemic has accelerated the trend for warehouses, distribution and data centres and investor interest has grown. He is watching what role e-commerce will have when things get back to normal and says there could potentially be a scaling back, or not. Still, when it comes to industrial, with the space as big as it is, he says that it is important for investors to know their asset’s role in the space.
Finally, an area Lynch remains high on is multi-family residential. “We think multi-family residential plays a strong role in portfolios because occupancy tends to be very high and multi- family is connected to population growth drivers. In many parts of the world, there has been a shortage of housing and multi-family plays an integral role in the solution. Overall, what drives multi-family is population growth and once we are through the pandemic every expectation is the population growth will be robust again. We anticipate there will be significant demand for housing and multi-family residential will play a big role to satisfy that demand.”