The commercial real estate sector was unexpectedly thrust into the spotlight in 2023, with many wondering if the lingering effects of the pandemic and soaring interest rates would expose it as a weak spot in the financial system. For Brian Rosen, chief executive of Colliers Canada, weathering economic uncertainty and changing market trends is par for the course at a real estate and investment company with a 125-year legacy. Rosen spoke to the Financial Post’s Shantaé Campbell about the challenges of 2023, how a recession could bring workers back to the office in 2024 and the secrets of Colliers’ longevity. This interview has been edited and condensed for space and clarity.
Financial Post: Commercial real estate made a lot of headlines in 2023, sometimes for the wrong reasons. What surprised you most during the past year and why?
Brian Rosen: I wouldn’t say that I was surprised about what happened in 2023. We were faced with a rapid increase in interest rates, which raised the level of uncertainty in the market in terms of valuations and in terms of finding the price equilibrium where vendors and buyers need to meet. That’s not really surprising because it was a natural outflow of the rapid increase in rates, which was a logical outcome of inflation. It’s disappointing that the market hasn’t been as strong as it was in prior years, but I wouldn’t say it was terribly surprising.
It’s also not surprising that in the office sector, owners and tenants and occupiers don’t have a clear sense of what their space needs are and therefore what the value of an office is yet. If I had to point to one thing that somewhat surprised me, it’s maybe just how dramatic the difference in points of view can be in that sector. Right now, people can think that something hasn’t changed in value or that it’s worth nothing. The office market was always going to be something of a complexity coming out of COVID, but the points of view have been pretty divergent.
FP: What was the biggest trend that emerged in 2023 that you think will have staying power?
BR: Hybrid working is here to stay. Now, hybrid working, just to make sure it’s clear, doesn’t mean remote working. Hybrid working existed before COVID, but based on multiple different research sources, we are now at around 70 to 75 per cent of the 2019 level of daily occupancy, depending on what city you’re in Canada. And that is still a bell-curve shape, with higher occupancy during the middle of the week and much lower on Mondays and Fridays. So that trend is definitely going to have staying power. I do think occupancy will increase over time. I do think immigration into Canada and the return to GDP growth are creating more jobs, with more people and greater usage of office space. So I think the long-term trend for offices is still positive, but hybrid work and the impact it’s having on office utilization will also continue to be a factor.
FP: How do you see the market evolving in 2024, in light of challenges posed by construction costs, elevated interest rates and market volatility?
BR: I think we will have a slower start to the year from an overall transaction standpoint. Construction costs have definitely started to flatten and certain commodity costs and those of the trades have come down. But there is still a stickiness to a lot of those costs. Interest rates have flattened and, more recently, the U.S. Federal Reserve has indicated cuts are coming. There are a lot of predictions on cuts ahead for Canadian interest rates as well. Overall, though, that will take time to flow through the system. And once we start seeing that happen, once we see some debt maturities coming through next year at higher interest rates than where they started in 2020 and 2019, that’s going to create some action in the market. There may be distress in the market, but this will take some time to work its way through. So we do expect a pickup in activity in the second half of the year, for sure.
FP: How is Colliers navigating those challenges?
BR: One of the things that Colliers has focused on for a number of years is diversifying our business. Whether that’s globally by moving into spaces like engineering and investment management, or within our business in Canada over multiple decades, broadening our exposure into recurring business lines like property management or project management, in addition to growing our transactional businesses, like capital markets, brokerage and leasing. Having a mix of different businesses has helped us weather some of the transactional declines in 2023. And we’ve always felt that during times of challenge, clients turn to experts — we feel like we’ve strengthened our ability to provide expert advice for our clients and built up our capabilities so that when the market comes back in a stronger way next year, we are confident we’re going to get more than our fair share of the growth that’s out there. And we’ve done that through making changes and investments in our business, even during a down year.
FP: Has the return to the office stalled? How do you see the balance between office and work from home playing out, and what does it mean for the office sector?
BR: I wouldn’t say stalled. I would say that we’ve had some research to show us that it is increasing. We are hitting more of a stasis in terms of the number of days in the office per week. In terms of people coming in three to three-and-a-half days a week is sort of the target area for a lot of companies. But what we’re unsure about in 2024 is how will a changing economy, a recession potentially, impact the employee–employer relationship? In the last couple of years, the employee has had much more power and historically has been able to dictate by the virtue of the labour market being so tight that if an employer said come back to the office, an employee could easily say no. Will that change in 2024 if a recession comes in? It’s unclear. If it does change, that could encourage more people to go back into the office. As we’ve seen through our research, managers want people back in the office more than the staff want to be in the office. So there is a little bit of a split right now in sentiment and we’re unsure whether that’s going to change in 2024 based on the job market changes.
FP: How has investor sentiment in the commercial real estate sector evolved, and what advice would you give to potential investors considering the market?
BR: Over the last year and a half, it’s really been cautious. New investors have been cautious to deploy any capital because values have been unclear. Existing investors have been focusing on their existing projects. So, the focus has really been on taking care of them because if you don’t know the value of something, it’s hard to lend against that and it’s hard to invest against it. So, where the sentiment is right now is I think people are encouraged by some of the announcements by the central banks about interest rates. I think there will be reinvestment again next year. Don’t know exactly when but definitely more toward the middle of the second half of the year. And for new investors, there may be some wonderful opportunities. There definitely could be some distress, which is not wonderful for the company going through it, but for a buyer, it’s an opportunity to help restructure a capital stack and find some good assets that wouldn’t normally be available. Price points may come more into focus versus where they were at the height of the market when interest rates were lower. The cap rates may also be more affordable. So, there definitely could be some investment options in the future and a lot of companies make strong gains coming out of tough times.
FP: If you had to bet on one subsector of commercial real estate for 2024, what would it be?
BR: The two that have continued to be strong and shows no sign of subsiding are industrial and multi-family. The macro factors just continue to support those industries in the multi-family sector. We have a shortage of housing in Canada and we have an ongoing immigration target that’s high. Combine those together and that is a huge incentive to build more developments as well as to sustain appropriate levels of pricing and rent. The challenge is it’s very expensive to build and make the economic return worthwhile. So, that is creating a little bit of a gap.
For industrial, there’s a limited amount of supply. Vacancy is still around one to one-and-a-half per cent in our major markets, even with a potential slowdown in leasing from a recession. So even if vacancy increases by a couple points, it’s still going to be a very healthy rate of two, three or four per cent. That’s still a very healthy market. Office could be a home run for someone if you get the right asset, but more risk to it.
FP: What will commercial real estate insiders be talking about at the end of 2024?
BR: Interest rates are going to dominate again. I think the big one is going to be how much they go down and where did cap rates end up? A more minor topic will be privatization and consolidation in the industry. Some public REITs will go private, but we will also see some private developers or private owners get taken over.
FP: Colliers International is celebrating its 125th anniversary. What is the secret to longevity in commercial real estate?
BR: There are a couple of things. One is being nimble and another thing we pride ourselves on is our enterprising culture. That has been a part of our DNA since the outset, and it is something that is part of our Canadian business. It really stems from our global leadership with Jay Hennick as our international CEO, a noted entrepreneur and a fan of low bureaucracy. The ability to have a culture like that allows you to adapt to different market conditions over time. We’re not stuck in our ways. We’re not slow moving, we’re fast, we can adjust. The last several decades, we’ve really focused on diversifying our business so that we maintain a strong transactional business, but also have the benefit of other income streams — so that when the market goes up, we succeed but when the market goes down, we have a great baseline. I think that focus on long-term success, combined with the ability to pivot quickly with an enterprising culture, has led to continued success over time. We’ve seen pandemics, multiple world wars, depressions, recessions — we’ve seen it all.
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FP: What is your vision for Colliers Canada? What do you plan to focus on in 2024?
BR: My vision is to continue to push that forward. We like to say from strength to strength, but there’s just a lot more in our business that we still have to expand into. Some of those nascent business lines that we are investing in now, we see a huge opportunity to expand. Simple example is our project management business, which has been the market leader for years, and then in the last several years has continued to grow into new adjacencies. So, we look at all of our businesses and say how can we maintain our No. 1 position and expand into new adjacencies? That is my vision —— to maintain our DNA, maintain our culture, maintain our enterprising spirit and continue to grow upon that baseline by expanding into new adjacencies.
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