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  • Andrew Cigna

Office REIT Price Targets Lowered: Is the Broader CRE Sector the Key to Unlocking New Opportunities

A top Canadian investment bank has downgraded the price target for several Canadian REITs and casts doubt on the long-term profitability and viability of traditional office real estate.

The report from CIBC World Markets noted that market volatility can influence the real estate industry, and the current conditions may deteriorate to the point of questioning office real estate's viability. However, the bank acknowledges that such a view is nuanced, with the investment bank also foreseeing a complex future for real estate investment trusts.

The CIBC report downgraded price targets for Allied Properties, Dream Office, Slate Office, and True North Commercial - citing the working from home trend as the most significant disruptor in the market, with hybrid working solutions likely to outlast the pandemic.

At the same time, some banks have been criticized by landlord CEO's for not bringing employees back to the office. But, Dave McKay, CEO of Canada's largest bank, Royal Bank of Canada, has stated that the pace of the return to the office is hurting productivity in the country and, as such, has committed to bringing employees back three to four days a week.

Despite the many uncertainties that surround the office market, there seems to be a consensus that office space will be required beyond the pandemic’s end. How much of it is needed and how workers will interact with it remains uncertain. Dean Wilkinson, real estate analyst with CIBC World Markets, recognized that conditions are evolving and the market is in flux. Whether traditional office space's viability will continue to diminish with future hybrid office solutions remains to be seen.

Are Headlines Overhyping REITs' Weakness? American Investment Bank Sees a Compelling Opportunity

As headlines continue to sound alarm bells about headwinds facing commercial real estate, is there another side to the story? Recent reports offer differing views on the state of Real Estate Investment Trusts (REITs) and their potential for investors.

S&P Global Ratings predicts that the technology sector slowdown will dampen demand for office space, leading office assets to underperform relative to other property types. According to this view, the office REIT sector is likely to experience limited growth in net operating income in 2023, given slow leasing activity and landlords' limited pricing power.

However, Raymond James, the Florida-based investment bank that tracks American and Canadian REITs, has a different take on market conditions. In a recent report titled "Fake News: Is Commercial Real Estate the Next Shoe to Drop? Disconnect Springs Compelling Opportunity for REITs," eight analysts at Raymond James posit that negative headlines about commercial real estate often focus on office headwinds, which make up only about 15% of the 20-trillion-dollar commercial real estate market and less than 4% of REIT market cap.

The Raymond James report identifies several factors that make the current REIT market an attractive investment opportunity. The authors note that REIT balance sheets are in strong shape, overall interest rate and refinancing risk is low, development pipelines are below pre-global financial crisis levels, liquidity profiles are strong, and REITs continue to have access to capital. Additionally, Ray James analysts believe opportunities for REIT consolidation are likely to emerge.

In Canada, there are similar concerns that the office market may be underperforming. According to CIBC World Markets' Jason Wilkinson, office REITs have yet to recover from the global financial crisis, trailing behind the overall recovery of publicly traded REITs. Canadian office vacancy rates reportedly hit a record high of 17.7%, according to real estate brokerage CBRE.

Which view of the market is more accurate? Ultimately, both S&P Global Ratings and Ray James point to specific trends and factors that affect the performance of REITs and commercial real estate properties. Investors should be aware of these risks and opportunities and make informed decisions based on factors that are meaningful to their investment needs. It is crucial to work with a professional advisor who can provide sound guidance in navigating the complexities of the real estate market.

In conclusion, while headlines may seem bleak for REITs, it is important to understand the nuances of the sector and the diverse factors that may affect its performance. It is the job of investors to distinguish the factors that underpin these trends and determine the best approach to capitalizing on this information. As always, investors should consider their own risk tolerance, investment goals, and principles when assessing their investment alternatives.

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