Author: Oliver Foote

How Much is Office Real Estate Suffering?

It’s Not Looking Good for Office:

Office real estate (even including the biggest and best downtown offices) are struggling. The market is continuing to get worse, with one of the longest downturns in the office real estate markets history. In your day-to-day life, the real estate of your place of work probably doesn’t cross your mind too frequently. But, this is quite an interesting discussion to have about the nature of work and how COIVD has changed the office market, likely forever, and if or when things might start to improve. After receiving some boots on the ground information relating to a prior post I wrote talking about commercial real estate I’ve come back to talk specifically about office spaces, since many people may either see an opportunity in office real estate, or something they would rather stay away from (I prefer the opportunity outlook). I am a tad bit optimistic on the long term outlook, but after digging into the numbers a bit more the present situation was somewhat of a shock to me.

Office Real Estate’s Prolonged Rise in Vacancy Rates:

Colliers Canada is a commercial real estate research firm and they publish office reports every quarter at their website. Looking at this report from Q2 2024, there is a chart on the bottom of the second page, that really shows the bleakness of the office real estate market (reproduced below):

Office vacancy, new supply, and net absorption. Greater Toronto Area 2020 – 2024. Colliers.

The point that most interested me was the vacancy rate. It has been climbing from a low of about 4% just as COVID hit, to just around an average of 13% today. There is another chart which shows areas in Toronto and around the GTA and it seems that suburban office spaces are faring just a little bit better than the downtown, and midtown regions. This is a 30 year high in office vacancy rates, and it’s happening across Canada and the US. Additionally, this is the most prolonged timeline of climbing vacancy numbers in office real estate. In the past office real estate was really a sound long-term investment as long as the location was solid, now there has been somewhat of a paradigm shift. In prior recessions the office market usually reached it’s peak vacancy rate about 2 years out then began to improve. This time, things are different.

Why Are Vacancies Getting Worse Four Years Out?

The natural question to ask about this chart is why do these numbers continue to climb? There could be many answers to that question, I’m going to hypothesize a few, but they all center around the changes that COVID injected into the world of work. At this point we all know the work from home story of the pandemic, and how even a few years after the outbreak, people are not back in the office full time, and it makes sense. Many people who were commuting downtown from a suburb 5 days a week benefited from the time and money savings that working from home provided. After having worked from home during the pandemic and being able to flex their schedule a little bit to deal with kids or a family obligation going back is a tough ask.

New Working Ways Are Here to Stay:

Getting people to go back to their old ways is just not going to happen, especially when they feel that there is a better way to work. Many people I’ve spoken to working for larger companies are downright refusing to come downtown more than 2 times a week. A dispute over 1 day in the office this way or that way isn’t worth firing someone over for a lot of companies, especially if the employee is in a good enough position to negotiate. This and similar trends leave the company with a vacant office more than half the time, so they begin to downsize, try to sublease or some other solution.

Downsizing or Rightsizing?

That vacancy chart is effectively showing the aftermath of companies slowly and continually downsizing their leases, or simply not renewing. The reason it was so slow and protracted is because commercial leases tend to be 5 or 10 year leases. As office leases were coming up for renewal during the pandemic, businesses would downsize the amount of office space they needed since half their workforce was working from home. Assuming an average of a 5 year lease timeline, this would suggest that vacancy will continue to get worse until around the 5 year mark as the demand stabilizes and companies understand how much space they want to lease for the new post-pandemic world of work.

What to Do With All This Space?

You may be wondering what is going to happen with all this vacant office space. Well it is possible that the market will recover as the overall job market and economy recovers (see rate cuts) and companies begin expanding once again, but there will still be a considerable amount of un-rented office spaces especially if the office spaces are not AAA downtown spaces. It’s likely that some landlords will have to sell their spaces. You might think that a natural adjustment for the market to make is to simply convert some of those office units into residential units. The problem is that even a simple conversion like this requires lots of time, red tape, money etc. The building code for residential units gets more strict every year (for safety and other reasons), or there may just be no way for a conversion to happen due to the location of walls or other hurdles.

Why Conversions May Not Be Possible:

Even if it can be done it can be prohibitively expensive for smaller landlords to justify the cost of conversion unless they are willing to wait for quite a while to see the return on their investment. Some conversion projects to condos have been a success, this is where your “loft” style residences come from. But if you’ve been following my posts recently, you’d know that new construction condominiums are also having their worst year in more than 2 decades, people simply cannot justify the cost of a new condo, especially when the market is being flooded with existing condo inventory and rates (up until very recently) are so high making everything more expensive.

Will Improving Macro Be Enough?

The options for landlord of office real estate right now are quite limited. If they consider a conversion to a more “retail” style change, they are also facing the problem of more people shopping online. Retail is taking it’s time coming back and while upscale malls are doing ok, many retail establishments are struggling more than they are improving. There is some good news however, it seems like times are changing in the overall macro environment. Jobs numbers came back with improvements in the latest Stats Canada jobs report, inflation seems to be under control, and the Bank of Canada is expected to cut rates a further 50 bps at their next announcement. Which would be a total drop in the benchmark lending rate of 1.25% just this year. These cuts should help get business up and running again and people spending money again since credit will get cheaper, loans, mortgages, and prices will (hopefully) stay somewhat under control.

Why Industrial Survived the Pandemic:

I think that office real estate vacancies will begin to improve sometime in the next year (or two), but it will be a slow and gradual process and there may be a new normal of somewhat higher vacancy rates. Industrial has managed to maintain their relatively low vacancy rates especially outside the city but as mentioned above, with online shopping and stores becoming more and more prominent, we’d expect industrial to have fared a bit better. A home office is much easier to build than a home warehouses or manufacturing facility. It’s also possible that in the long term the use of these buildings will have to be completely changed even if the process is a long and drawn out one.

Final Thoughts on Office:

I know that long and drawn out is never what you want to hear when the news is negative, but that seems to be the situation that office is in for the time being. Leaning back into my more optimistic side, I think that just maybe, people will be looking for types of spaces that aren’t your traditional office setup, but are a place that they can go to get an office like feel, but that is outside of their home. From personal experience I can find home to be a bit distracting trying to get any work done. But, I’m not sure how big of a market there is for this type of thing and it goes very much against the traditional commercial real estate business of renting out to one long term, stable tenant. Maybe the types of contracts will have to become more creative with potential tenants. I don’t have the answer to the problem with office real estate, but whatever it is will require a lot of creativity and will be faced with a lot of challenges and competition (supply). I don’t think it’s doomsday for office, but I think there’s a long road ahead. That’s all for now.

Keep Investing,

Oliver Foote

The Economics of Gaming

Startup Costs of Modern Gaming

Video games, what great fun. I’ve been noticing a lot more people getting into gaming who may not have ever played before, and or people are getting back into gaming for one reason or another. On my flight back home I downloaded an emulator in the airport on my phone and played some of my favourite childhood games. Then back in Canada, I found myself in a major big box store, so for the heck of it I went into their gaming section. It has been a while since I bought a new console. The last console gaming related activity I did comprised of modding a Nintendo Wii that I got second hand for $50. The sticker shock in the store was real. A new PlayStation 5 for $659 (+tax) is a nice chunk of change. Want a second controller with that. Try $95 (+tax). Want a new game that came out in the last 6 months, try another $80. Want to play online with your friends, try a $95/year subscription to access “PlayStation online”. So doing some quick math, just to get up and running is $930 (+tax). Over $1000 net. This is in Canadian Rupees by the way. Needless to say $1000 to get started with a modern gaming console is quite the steep price. Although, you could make the argument that it will last longer than a phone and those things cost more than $1000 often times. The point of this exercise is that if you’re not really a gamer day-to-day you likely won’t understand how this pricing makes sense. Let’s just say there is a LOT of money in gaming. So much in fact that it is larger than ALL of the global music, film, and TV markets combined… let that sink in. Now lets try to find out how that makes any sense.

Larger Than TV, Film, and Music… Combined

According to statista the revenue in 2022 from the global gaming market was 347 Billion USD. Sony, the creator of the PlayStation, has sold 36 million of their $500-600 consoles since release in 2020. Xbox has sold 22 million of their Series X/S consoles in a similar price range. Doing some more quick math, for Sony, that’s 18 Billion in revenue in around 2 years. We’ve all lost out minds recently that Taylor Swift is a Billionaire, and she’s top of the top in the music industry, so you know just 9x that in one year for Sony. Not to mention that the 9 Billion is a tiny portion of the overall market. So where is the rest of the money going? Well statista says that around 248 Billion of their 347 Billion is all mobile games, games on your smartphone. Which is kind of crazy to think about, but makes sense. Every single person has a smartphone. So naturally, some are going to play games, some will even pay money for those games or will buy in-game items. The barrier to entry is so much lower since everyone already has a phone, and the price can be more affordable since the size of the market is gigantic. One of the most successful recent games was Fortnite, it was free to download, available on almost all platforms, and they made an absolute killing off in-game purchases. Many games are completely free to play and make their millions just from running ads in between sessions. From the mobile side most people have heard of Candy Crush, and Angry Birds. They are both absolutely huge games, Candy Crush has made $20 Billion in lifetime revenue.

Apple and Google in Gaming

Something to point out here are the companies that truly benefit from the huge mobile gaming market (and arguably make it accessible). Apple with the App Store, and Google with the Play Store. Each respectively taking a 30% cut on any game purchases, in-game purchases, etc. Up until quite recently they have had a strangle hold on the App market for their devices. There have been some anti-trust cases coming up against them for monopolistic practices in recent times. Apple and Google have probably been some of the largest benefactors of the mobile gaming market, alongside the fact that their smartphones already tend to sell quite well. So if you hold any Apple or Google stock, you are already technically benefiting from quite a large segment of the gaming market (among other things). Without getting too much into the details of the lawsuits, a 30% commission on any sale when you can replicate code with the snap of a finger is not a very popular price, especially when you are forced to pay it no matter which platform your game is developed for. Hence the anti-trust lawsuits.

Microsoft and Nintendo’s Dominance

There are also some other major gaming companies. Microsoft, the creators of Microsoft Office and major investors in OpenAI. Own the Xbox and own Minecraft which is the most sold game of all time. They also recently purchased one of the largest publicly traded gaming studios Activision Blizzard who created the Call of Duty series which has been ultra-successful as well. Microsoft, also owns many other gaming franchises and studios which have done quite well. Then there is Nintendo, who recently have created the Nintendo Switch, which is one of the best selling consoles of all time, they also have many classic franchises that I grew up playing like Pokémon, Super Mario, and Legend of Zelda. Nintendo was actually one of the first companies to come out with a small handheld video game console and pioneered that market. Today we are seeing things like the Steam Deck from Valve which allows people to pay PC games on the go. These major studios control a large portion of the non-mobile market.

PC Gaming and Independent Developers

There is also the PC gaming app store Steam which like Google and Apple takes their 30% cut. They are the major gateway to PC games. On the PC there tends to be more room for indie game developers who work solo or with a small to medium sized teams because coding games for PC’s tends to be much more accessible than for consoles (startup costs for console development are in the tens of thousands of dollars). If these PC games become successful, sometimes they will be ported over to gaming consoles by request of the major console makers. The nice part about PC gaming and Mobile gaming from a development perspective is that you don’t have to be a billion dollar corporation to release your game. There have been some super successful games that started off small with one or two developers and have become smash hits, like being a professional musician that gets an early break with a popular song. Some examples that come to mind for me are Hollow Knight which is developed by a team of three, and Stardew Valley which is developed by one guy and has sold over 30 million copies. He’s probably one of the most individually successful game makers of all time. Like being a famous musician however, there are millions and millions of people trying to make their video game, and some become minor hits, but only a tiny few become ultra famous. You’re competing against the incumbents who have collective knowledge among their developers on the scale of millenniums of time spent building games. But hey, no harm in trying, always fun to start a new hobby, and with the sheer size and diversity of gamers (try 3 billion or so), you may find your market.

Watching People Play Games

Another gaming adjacent activity, is livestreaming and watching other people play video games, sometimes on a professional gaming team. If you’re like my parents, when they first saw me watching YouTube videos of other people playing video games, they thought it was weird. I sort of get it. But the best way that I’ve found to explain this phenomenon is like entertainment, or sports. You watch a good movie because the characters are funny, or charming. And you watch a professional gamer because you want to exclaim when they are doing something wrong that you’d never be able to replicate in a million years. Same story, different medium. YouTube itself made something like 30 billion dollars in advertising revenue in 2022, which it shares with the people who post videos on the platform. Many of whom are gaming content creators. There are layers and layers on gaming, and if you get involved enough the rabbit holes can go quite deep. But it has become such an all encompassing medium. You can play it directly on about 10 different platforms. You can develop your own games or work as a developer with a studio or you can watch other people pay for fun or professionally (e-sports).

Gaming Will Only Grow

Gaming is not going away, and the market size is projected to more than double by 2030. With a phone in everyone’s pocket and a computer in everyone’s house, there is always going to be space for a game or two… or three, who’s counting. With the layers of entertainment, modification, customization, development and more. There is space for every type of person within video games and something that will appeal to everyone’s tastes. Each successive generation becomes more and more interested in video games and this will naturally allow the market to continue to grow. It’s still somewhat hard to fathom that gaming is larger than all of TV, film, and music combined. But when you consider all that encompasses a “game”, it can be a very broad term. You never know where inspiration will strike, like this post. But if you get inspired to make a video game, you should go for it, it’s never a bad idea to participate in a growing market. I’m always interested in learning about different markets and gaming is one that you don’t frequently think of as being the behemoth that it is. Hopefully I was able to give a decent synopsis and education about why it is the way it is. As always thank you for reading and have a great day!

Keep Investing,

Oliver Foote

Why Exchange Rates Vary, Canada’s Weakening Dollar

Exchange Rates Introduction

Recently, I have had been lucky enough to go travelling through some countries in Europe and paying for things in a different currency gets one thinking about economics, naturally. To start of my discussion I’m going to mention my visit to Edinburgh because last time I was in the UK it was July of 2022 and I noticed that the exchange rate was significantly different than it is today in September 2024. Back in 2022 the exchange rate was about 1.5 CAD to 1 GBP. This time it was closer to 1.8 CAD to 1 GBP. Basically, it got more expensive for me, but if you think about this on a surface level, currency rates are somewhat of a silly thing. I haven’t changed much, the amount of money that I make hasn’t changed much. On an individual level it’s kind of weird that at different points in time if you want to go and travel, the value of the money you make in your home country can decide the types of things that you can do and how expensive your vacation will be. With so many countries accepting your credit card it makes exchange rates feel even more fake. For example, I was in Denmark and I didn’t see a single Danish Kroner. I couldn’t tell you what that currency looks like, it didn’t even occur to me to exchange money before I went over there because everyone accepts cards. When money is digital it’s somewhat funny to me that there’s different “currencies” at all, it’s just numbers on a screen.

Why Currencies Strengthen or Weaken

Getting past the fact that digital payments are a somewhat funny concept, let’s talk about how the strength of your currency is determined. The different currencies and exchange rates are mostly based on your home countries economy. But this encompasses many things. Employment rates, inflation, Gross National Product, health of trading partners, imports/exports, government policies, etc. All currencies are technically free markets, this means that the market for your countries currency could hypothetically react to a bad piece of news and the currency could temporarily strengthen or weaken, sometimes significantly, on a single news story. Often, there is also a comparison going on, generally the benchmark is the United States, the European Union and various other large economies which are the benchmarks for healthy economies which other currencies are compared against. You may notice in your home country that there is inflation or it’s harder to find a job for a large part of the population, or foreign governments are not buying your governments bonds because the interest rate they are paying is lower than a competitors government. There are a lot of economic dynamics that can determine the value of your currency compared to the currency of another country.

Example of Bad News Affecting Exchange Rates

Let’s take the time that I went to the UK in 2022, arguably, it was a great time to travel to the UK because around that time the country was having governmental problems and their prime minister at the time was ousted, then an interim prime minister was given power, proceeded to break everything by implementing policies everyone agreed were horrible, then was ousted in a matter or weeks or months, all I remember was that a piece of lettuce lasted longer than the PM. These terrible policy decisions led to a loss of confidence in the UK, not quite as crazy as Brexit was, but this period of instability meant that the British Pound took a nice little fall, it was temporary, but the recovery wasn’t immediate. At that time buying British pounds from a foreign exchange perspective would have been a great time to do so since the country itself is largely stable, but this was just a temporary moment of instability. Now, one could argue, that we are getting closer to what the historical exchange rate was. I remember prior to Brexit the British pound was closer to 2.1 CAD to 1 GBP. There’s no saying if it will ever return to that value since Brexit is quite a permanent decision. But we can look towards other interesting economic indicators to get an idea of what exchange rates might look like in the future.

Canada’s Dollar Will Weaken in 2025

For Canada, unfortunately, the Canadian dollar is anticipated to weaken a little bit more in the coming year 2025, which means travel will become more expensive, and arguably makes now a good time to buy foreign currencies such as the USD or the GBP. So why is the Canadian dollar predicted to be weaker? There are a few reasons. Canada is beginning to see quite a jump up in the unemployment rate, people are continuing to lose jobs and new jobs are hard to find. Fewer jobs means fewer people spending money, less demand for goods, less goods produced, this slowing becomes a cycle and our economy “slows”. Since employees are basically business investment, and business investment leads to production or exports/imports. If there is less business investment, and fewer people working, it generally follows that the GDP or GNP of Canada will decline. Another reason this is problematic for Canada is because in the US the GDP has actually been climbing and they are our largest trading partner, so by comparison, we are doing worse, and our currency suffers. Additionally, Canada still has a largely resource based economy, with the largest one being Oil, and Oil prices have not been as strong in recent months, you may see this as a good thing since it’s cheaper to buy gas at home, but it does cause our currency to suffer somewhat. All of these problems, and inflation finally coming down led to the Bank of Canada to cut interest rates in an attempt to stimulate the economy.

Interest Rates, Bonds, and Currencies

Canada was notably the first G10 nation to cut rates. The country has now cut rates three times with another rate cut anticipated before the end of the year. Cutting interest rates means it should in theory be easier for businesses to get loans and invest back into producing goods and get consumers spending again since their loans will also be cheaper, this may also increase housing activity in Canada, which is also a huge part of the economy. But in the interim, our currency will likely suffer while we try to increase output because fewer people will want to purchase Canadian government bonds since the Fed in the United States has yet to cut their rates, making their bonds a more attractive place for people to leave their money. When the government sells bonds, it takes money out of circulation, meaning there are fewer dollars, which means less inflation, less inflation usually leads to a stronger currency. We did somewhat benefit from this since our inflation wasn’t as high as the United States during covid so we had a stronger currency for a while, but the US continues to surprise with their economic output, the machine continues to operate well, while Canada’s is suffering a bit at least from an economics point of view.

Conclusion

In conclusion, Canadians can expect travel to become a bit more expensive over the coming year or two, with the future TBD. I think we need to be pushing to improve investment in technology companies, so much of the world relies on tech and our only claim to fame is Shopify. Economics are a complex problem, and tech won’t solve all of our issues, but we do need to find a way to benefit from the knowledge that we have in the country, because we also suffer from a pretty significant brain drain, the best and highest paying jobs are in the US for our smartest students, so most of them will naturally decide to go there. The US is a great country if you have lots of money and good benefits, and if something goes wrong while they are there, they can always come back, it’s sort of a win-lose for Canadians and Canada. The best way for a Canadian to start a tech company is to move to California, at least last time I checked, so that needs some fixing. This will be a bit of a shorter post because I’m technically on vacation. Currently, I’m sitting outside a coffee shop called Przystanek Kawa in the wonderful Dutch inspired old town square of Gdańsk, Poland (bit of a mouthful, but the city is beautiful), and I’m going to get back to being a tourist and enjoy the sights. I’ll be in Warsaw tomorrow, then it’s off to Lauterbrunnen before returning home (sadly). I will say this solo travel thing does sort of get old quickly (this is only day 2 of 7 days solo) especially when you’re in a place where you aren’t speaking your first language, you can only see so many museums, castles, and church’s before it all starts to feel the same, and hostels have their own quirks and problems, definitely have some stories for another time about rough roommates. Anyway, it’s easy to complain, but I’m extremely happy and lucky that I can do this kind of travel even if it’s not high class luxury travel, I’m quite enjoying the experience and continue to love each new city I go to. That’s all for now, see you in Canada!