CPPIB: What’s behind the sale?

CPPIB has stakes in office, retail, residential and industrial properties all over the world. The eyebrow-raising $1 fire sale is one of CPPIB’s four CRE sales in recent months. It sold its 45% stake in California’s Santa Monica Business Park for USD$38 million, 75% less than it paid in 2018. The pension fund also sold 21% of its 45% stake in South Korea’s Kendall Square Development Venture and expects to walk away with USD$245 million.

Together with co-owner Oxford Properties Group — the real estate arm of the Ontario Municipal Employees Retirement System pension fund — CPPIB sold two downtown Vancouver office towers (401 West Georgia St. and 402 Dunsmuir St.) for CDN$300 million. In 2012, CPPIB paid CDN$115 million for a 50% stake in 800 Burrard and the West Georgia Street tower, while 402 Dunsmuir, which houses Amazon, opened in 2020 as an expansion to the West Georgia property.

On Boston Properties’ Q4 2023 earnings call it said the “selling partner” (which it left unnamed) had spent USD$71 million on redeveloping the building. Selling to Boston Properties released CPPIB from spending another USD$46 million on the project.

Risks for Canada Pension Plan is unlikely to go away

Lisa Shalett is the chief investment officer, wealth management at Morgan Stanley. In a 2023 analysis, she wrote that CRE-related risks are unlikely to go away any time soon.

“The sector is now facing a huge ‘refinancing wall,’” she wrote. “More than half of the $2.9 trillion in commercial mortgages will be up for refinancing in the next couple of years. Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages.”

Morgan Stanley analysts forecast that commercial property prices could drop by up to 40% — rivaling the decline during the 2008 financial crisis.

According to Moody’s Analytics, in Q4 2023 the national office vacancy rate in the U.S. rose to 19.6%, shattering the previous record of 19.3%. Canada’s downtown office vacancy rate hit a record high of 19.4% in the same period. CRE investors worldwide are no doubt keeping a close eye on these figures as they consider what to do next.

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What does this mean for Canada Pension Plan (CPP) members?

For many Canadians CPP is a major part of their retirement income. In 2021, approximately 6.2 million Canadians received CPP payments each month.

CPPIB’s decision to sell its ownership in the four properties likely means short-term losses for the pension fund. However, doing so opens up opportunities for it to invest elsewhere and potentially recoup those losses. In 2022, for example, CPPIB expanded its venture with a Toronto-based residential real estate company and also invested in clean energy and an enterprise cloud software platform.

What does this mean for the commercial real estate industry?

Investment management experts at Morningstar said a commercial real estate market crash is one of eight market risks for investors in 2024, largely due to COVID’s impact on working in-office.

CRE markets worldwide experienced a dramatic decrease in investment in 2023: a 55% drop year-over-year in Central Europe and 52% in the U.S. (the largest decrease since 2012). According to CBRE’s 2024 real estate market outlook for Canada, the country fared better but still had a 15% year-over-year decrease in investment. In the same report, the CBRE said overall global CRE investment activity dropped by 47% in 2023.

Global real estate services firm JLL says leases on one-third of U.S. office space will expire by 2026. This could put even more pressure on CRE if enough companies choose not to renew those leases.

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How could this impact commercial real estate investors?

Troubling market indicators could make current or potential investors extra cautious and keep them from entering the CRE market, make them hold off on further investments, or — similar to CPPIB — see them withdraw in part or in full from CRE property investments. An influx of CRE investors trying to unload their properties could lead to prices dropping further and make it tougher for them to sell.

Fewer investors could also make it harder for CRE businesses to raise money for new developments or to acquire more properties.

Hold, buy or sell? Tips for commercial real estate investors

Commercial real estate investors all have different circumstances, risk tolerance and short- and long-term goals. These differences play a role in deciding what’s best for all CRE businesses, as well as investors in the commercial real estate space.

Here are four things to keep in mind as you plot your next moves.

Consider your investment goals

Before making a decision, you will want to think about your investing goals and have a frank discussion with investing partners or your financial advisor. For do-it-yourself investors, it may be good idea to consider tax-loss harvesting — a process of capturing investment losses that can help offset capital gains earned from other investments.

More: Find the right tax software to help you find tax deductions

Investors will also want to consider how to best capitalize on the apparent movement of capital from institutional investors, such as Canada's pension fund, away from commercial real estate holdings. Some investors may consider this an opportunity — the proverbial fire sale on office and retail space. Others may opt to short current holdings — essentially, doubling-down on the potential for CRE to experience further capital flight in 2024. Regardless of the investment strategy used, investors should prepare for potentially volatile activity in the North American commercial real estate market.

One good way to prepare is to make sure you have the right investment brokerage. For active traders, consider a discount brokerage with robust research tools and — if you're a new client — a generous welcome offer. A few good options include:

  • CIBC Investor's Edge: Get 100 free trades and up to $4,500 in cash back when you open an account
  • Questrade: Get a $50 trade commission rebate when you open and fund a new account
  • Wealthsimple: Get $25 when you open and add $150 to a new account + get commission-free trades and up to $150 back in transfer fees when you transfer $5,000 or more to your Wealthsimple account
  • Qtrade: Get $50 for each new account opened and funded at Qtrade

Review your investment risk tolerance

If making money is your top priority — and you see potential in commercial real estate making a rebound — it could be worth holding onto (or investing in) commercial real estate properties. To find the best options, consider CRE stocks with a portfolio of stable, long-term tenants that are turning a profit for current investors. Another good option is to invest using a low-cost fund, such as a real estate investment trust (REIT) or an exchange-traded fund (ETF). Learn more about REITs and how to use them in your investment portfolio.

More: Find the right online brokerage to buy and sell CRE shares

Do your research

This is key to get a thorough understanding of your target commercial property market — things such as vacancy rates, current economic conditions and long-term economic forecasts.

A good place to start are business reports from local news agencies, along with reports released by independent investment analysis firms, such as Morningstar. Another option is to review documents and analysis published by banks and brokerage firms. Many investors can search by asset class or specific holding to find news and reports.

To get started, you can open a discount brokerage and a practice account. This gives you an opportunity to discover how the brokerage account works and gives you access to research and insight.

More: Open a discount brokerage account

Talk to experts

Consulting with a financial advisor will get you guidance personalized to your particular situation and goals. Talking to a commercial real estate agent specializing in your market of choice can give insight into market conditions and potential opportunities.

Bottom line

The CRE market has always had its ups and downs, but it has generally proven resilient and able to bounce back from periods of recession and other challenges. Whether you choose to invest in CRE for the first time, keep your investments in the industry or explore other investment options, think carefully before making any big moves and be sure you are 100% comfortable with whatever decision you make.

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About the Author

Laura Stricker

Laura Stricker

Author

Laura Stricker is an award-winning journalist and communications professional. She is a graduate of the Toronto Metropolitan University (formerly Ryerson) journalism program.

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