Is an office 'bloodbath' on the way?

Some of Canada’s office building areas will soon undergo a “bloodbath”, the head of a leading global institutional investor predicts – one that will only be made worse by the credit crunch mid-sized banks currently face in the US.

The prediction came from the chief executive officer of the Caisse de dépôt et placement du Québec (CDPQ), Charles Emond, who was an investment banker for the Bank of Nova Scotia before his appointment to the investment group in 2020.

Emond was responsible for turning the Quebec fund’s crumbling real estate portfolio into one of its largest and strongest investments over the course of 200 transactions and three years, BNN Bloomberg reported. Retail space and office properties – previously two of the portfolio’s weakest links – now constitute almost a third of investments, while logistics properties grew by 20% to roughly a quarter of the portfolio over the same period.

Now Emond predicts a time of reckoning is on the horizon for the country’s lower-quality buildings.

“There’s going to be a bloodbath in some areas, for sure,” he said in an interview with Bloomberg News. Regional banks and other, smaller lenders tended to undervalue the market when it came to commercial real estate loans, he explained. The recent collapse of these lenders – such as Silicon Valley Bank and Signature Bank – spelled the inevitable arrival of a credit crisis.

“It’s going to be weak banks lending to weak buildings,” Emond said.

CDPQ, which Emond said owned higher-end office properties, would be spared for the most part, but would still have to contend with a shrinking demand for space.

CDPQ is the country’s second-largest public pension manager after the Canada Pension Plan Investment Board. It had $402 billion in assets, BNN Bloomberg reported, more than 10% of which is real estate. Its US office portfolio comprised around $5 billion across 15 office properties, Emond said.

“We have a different solution for each of the 15 properties,” he said. “In some cases, we’ll sell, and there’s a pool of buyers that will convert it. But conversion is not that easy either.”

Earlier this year, for example, the Quebec fund’s Ivanhoe Cambridge property at the 1211 Avenue of the Americas building announced that Fox Corporation and News Corp. had extended their headquarter leases there until 2042.

“You’ve got long-term lease, a good tenant, and no refinancing issue in the short term,” said Emond of the Ivanhoe Cambridge property. “So we have no plan on divesting it.”

But Emond said that, for the most part, CDPQ now preferred “other markets” to New York, Chicago, and San Francisco, which he predicted would be some of the hardest-hit by the credit crunch. Denver, Dallas, Atlanta, and Austin – states recording solid population growth – were the fund’s current bets.

CDPQ was also looking to invest in more residential properties and student housing, he told BNN Bloomberg. “The price point, the affordability, the clients – this is all stuff that is actually quite defensive,” Emond told the news hub.

Last year, CDPQ committed US$685 million to an Australian venture owning the country’s largest portfolio of student housing.

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