Experts share their analysis on the impact of work-from-home trend to pension funds
Commercial real estate continues to face challenges post-pandemic as more tenants look into vacating office properties or decreasing space, with work-from-home setup still trending steadily.
Jennifer Tozser, senior wealth advisor and portfolio manager at National Bank Financial Wealth Management’s Tozser Wealth Management, shared her insights on the issue with Globe Advisor. She finds this to be a potential concern for institutional investors who have their pension plans allocated to the commercial spaces, which was an attractive proposition in the past decade.
According to Jones Lang LaSalle IP Inc.’s Canada Real Estate Outlook report released in February, more downtown office properties have been vacated although mostly class B or lower-rated properties.
In general, five to 15 percent of total commercial real estate assets up to 20 percent are pension funds. Commercial real estate includes office space, retail, and industrial among others. According to Eckler consultant Lewis Gascoigne, the class A office space exhibited an impressive yield for most of the past 15 years in the low-interest environment, making it an attractive proposition.
The last 18 months have been a completely different environment from then. More tenants are vacating or reducing their office spaces, resulting in reduced rent income. Also, high interest rates have resulted in increased lending costs for real estate owners.
There are cases where real estate investments have been defaulted as a result of increasing vacancies, such as the investment fund for Brookfield Properties. “On the equity side, some are already bleeding red ink because of the vacancy issues, and walking away, giving their lenders the property,” said Arthur Salzer, chief investment officer at Northland Wealth Management.
On the positive side, commercial real estate remains to be an essential diversifier for investors, including pension plans. “Within the asset mix studies and liability work we do, we still believe real estate has an important role in asset mixes despite the current headwinds,” Gascoigne said. ““A lot of the managers we speak to expect [the] office [segment] will recover, but it could be two or three years before we see some normalcy.”
