Oliver Foote, Author at Oliver Foote

Can You Time The Market(s)?

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

This is an interesting question. In the current day as of November 2024 the Toronto Real Estate Market looks like it’s in of the best times to buy in decades. It’s been a buyers market for a few months and with rates coming down I don’t expect this to last much longer with signs pointing towards Spring 2025 being a sellers market again. But this begs the question, are you able to time the market? Many people say you shouldn’t bother trying, and honestly I mostly agree with that sentiment, especially with something like real estate that is an illiquid asset. If you plan a purchase or sale of real estate down to the day or week, your plan will likely fall apart pretty quickly. Real estate is unlike the stock market; where you can sell and find a buyer same day. You need to build in some timeline flexibility and think about an investment in real estate on the scale of decades and not just months or years.

However, even though we should be using long time horizons when thinking about any type of investing, is there a way to time the market? Now you know that since I’m writing a post about timing the market, my goal is likely to tell you that there is a way to do so. But that it’s not the only thing you should be considering when investing. Most people move and purchase new homes simply because their lives are changing in some significant way, maybe a child is on the way, a divorce is happening, aging (comes for everyone), or some other big shift has caused a homeowner to have to change their living situation. If this is you, and life is forcing you to make a change, there’s really not a lot to be gained from trying to time the market in search of a profit. But there is something to be lost with bad timing. I would suggest trying to time your move in such a way where you are buying and selling into similar market economics.

Essentially, try to time your move when things are relatively stable and there aren’t likely to be huge rate cuts or rate increases like we are seeing now. Many people sold in April 2020 after being laid off, simply to find that if they had decided to hold on just a few more months they may have been able to get much more money for their home. Of course sometimes a crisis is a crisis and there’s not much you can do. But selling during high volatility and then hoping to repurchase in a few months could lead to some nasty surprises. A real estate market can change very quickly. For example April 2020 was a buyers market and prices were plummeting while April 2021 was a sellers market and prices were going to the moon, just 1 year apart. People often forget that a house, while often their biggest asset, is also a place to live which can lead to different priorities than investors. The story if you’re a real estate investor can be quite different.

Investing in real estate for the purposes of turning a profit (as with any business venture) relies a bit more on timing than my discussion about a primary residence. For example, this past year was an absolute generational time to invest in real estate, so much inventory to choose from, many sellers willing to negotiate, if you throw in enough lowball offers some sellers were actually willing to bite, not a chance of doing that even a year ago. With rates coming down people will begin returning to the market relatively quickly, but there will still be a short period of time maybe a couple months with lots of supply available while people who have been waiting on the sidelines begin to realize that their buying power has improved significantly.

From a strategy point of view, I’ve been telling people to take open or variable rate mortgages for the past year or so because with inflation coming down steadily and the Bank of Canada making it clear that they will be cutting interest rates, taking a variable or open mortgage can allow an investor to get into a house, albeit maybe a bit heavy on the monthly payments when your first buy. But as rates come down you can lock in a much lower fixed rate, or even break your variable mortgage and pay the penalty when you think the time is right in order to get a significant discount on your monthly payment. It’s a bit of short-term pain that could pay off hugely.

I’m certain that there are investors out there who have been doing this exact strategy, and you’ll hear a lot about them in a year or two once they’ve locked in a lower rate and had their home equity increase like crazy with the return of the sellers market I’m expecting in 2025. This type of principle of buying when rates are high but anticipated to come down is not anything crazy fancy or sophisticated, you just need to have a plan of action, confidence that your projections will be correct (it helps if you read up on these things and know a bit about how markets and economies work) and have the means and people available to you in order to execute this kind of plan.

The layers of complication of real estate investing can go very deep and I’ve written some posts on the topic before, but I think that a lot of people overcomplicate things for themselves and get in their own way maybe due to uncertainty, or lack of education, or an information overload. Talk to investors, learn from them, and try doing it yourself. Learn, ask questions, do it yourself. Repeat. As with anything in life it is important to take calculated risks if you want to earn some kind of reward. If you think about it, spending 4 years (or more) of your life at a university is also a calculated risk, it costs lots of money and lots of time where you could have been working instead. But the thinking is that once you exit your university degree you will be more employable and be able to get a higher paying job than if you had the equivalent 4 year experience learning a trade or some other skill.

Real estate works the same way, the risk will likely have some kind of future pay off in 5+ years when you go to sell. Generally Canadian real estate purchased in good, growing areas has been worth the risk. In investing time is your best friend. The longer your time horizon, generally, the higher the likelihood that your investment will work out. Same goes for education, following the same example as before. In todays era everyone has a Bachelors Degree. So often you can’t do much with it and you’ll have to dedicate a further 2 years and more money in order to get your masters, at which point you may learn enough practical skills to be employable. Some people may even choose to do a PhD. So really the time commitment is quite a bit longer than it originally seemed, but the longer you commit to the concept of schooling, or holding your investment, the bigger the payoff tends to be. Real estate investing nowadays works in a similar way, the “arbitrage” opportunities of the market are much harder to find these days with the flow of information out there, and getting a positively cash flowing asset from the day you buy real estate just doesn’t happen anymore, so you have to build that into your plan and find a way to make the asset work for you. Not sure how I managed to draw a comparison between education and being a real estate investor, but I guess apples and oranges can in-fact be compared.

A general rule of thumb when you are buying an investment is buying with a 5+ year time horizon. If you’re buying something because you think that some event in the next week will make your penny stock take off and go to the moon, you’ve been sadly misled and will likely have to learn some lessons the hard way (like I did). Real estate works similarly; there have been times in the Toronto real estate market if you bought and then sold 2 or 3 years later you would have lost money. But if you take almost any 10-year time period in the history of the Toronto real estate market. Even if you bought at what was thought to be the absolute highest peak in history and you feel like an absolute idiot for doing so, 10 years later, without fail, you will have made a positive return on investment (the US stock market tells a similar story).

The elephant in the room is inflation, so even if you “made money” it’s possible that on inflation adjusted terms you still lost money, but even that scenario is EXTREMELY unlikely in a 10-year time horizon. BUY AND HOLD. The most important 3 words in investing. Do whatever you possibly can to avoid selling an asset that is expected to make you money. Especially if you’re trading it for something (like a car) that will cost you money. Obviously there are times where selling an investment is a good idea. Such as if you find another, better investing opportunity.

As mentioned a bit earlier, this post isn’t going to have any earth shattering, super secret, never heard before method of investing. This post is more about the philosophy that I believe in when it comes to investing. One of the most important principles that people often forget about when investing and budgeting is “pay yourself first”. The first line in your budget MUST be savings. If you are not saving a penny from your work, no matter how prestigious or not the work is, one day you’ll get old and maybe want to, at the very least, work a bit less. The only way that I’m aware of maintaining a lifestyle without working is by very diligently saving and investing, you must be selfish for the good of your future self. I am genuinely scared for people who spend everything they make, especially when it’s just “stuff”. Who cares about the car you drive, or what brands of clothes you wear. If you’re spending all your money to keep up an image you can’t afford, you may have slightly nicer things for a while, but you’ll end up in the same place as the next guy, broke.

I think sometimes my views on this savings thing are a bit extreme and there is something to an abundance mindset and viewing money as something fluid and obtainable. But there’s also truth to a dollar saved is a dollar earned and being prudent while you have the ability to work and save money, to ensure that saving is something you’re prioritizing, the time when you’ll probably be spending the most money is when you’re old, getting old is expensive. That being said, you don’t have to completely deprive yourself of fun and joy, just find ways to do it cheaply, honestly camping, hiking, and backpacking have been some of the best experiences of my life. This summer I finally took a bit of money and went on a vacation, which I’ll remember forever, it was absolutely incredible. But I still did it without breaking the bank. Hostels, discount airlines, grocery stores, no buying souvenirs that end up desolate in a box somewhere a year later. Took lots of pictures on the phone I already own (free!), went to free attractions, used and abused student discounts. You can have amazing experiences, without breaking the bank and still save aggressively. As another example, lets say you’re going out somewhere downtown, why not pick up some drinks from the liquor store beforehand, drink at home then go out so you don’t have to buy out the whole bar when you get there. Then wake up the next morning regretting your choices and come home with a $100 on top of it. Naturally, the best way to save money on alcohol is to not drink alcohol, but I’m not here to ruin your fun.

My last bit of investing advice is the classic, buy when other people are selling and sell when times are good, that is the wisdom of the markets. When times are good it’s easy to think they’ll last forever, if you plan to hold on for decades the best advice is to not touch your investments at all. If you are slightly more active and want to be smart about when to allocate funds it’s not a bad idea to increase cash (sell) as markets are going up so you can take advantage of those opportunities in a down market. Another method to have gain access to more opportunities is to simply keep your expenses very low, and find a way to make a (comparatively) high income so that you have good “cash flow”. I’m not a fan of ever selling investments, so if you’re able to keep buying in any market, you’ll generally be a net winner. However, as I’m learning, anything that results in a good income also comes with a lot of stress and hard work. Being successful is not easy, don’t let the internet and stories of people hitting it big make you think it’s easy. There’s always a component of luck, but there’s also a much bigger component of being opportunistic and taking full advantage of an opportunity when maybe an average person would let it slip. 95% execution 5% luck, getting that much luck is a great ratio. Anyway, that’s all I have time for this week hope you found this insight into how I think interesting or useful. As always thank you for reading and remember.

Keep Investing,

-Oliver

Newsletter #25: Real Estate Returns, Should You Time Markets?

This Weeks Blog Post:

Can You Time the Markets?:

Should you bother timing the market? The answer is: it depends.
My philosophy on saving money and investing and why you should always be saving.
Talk about market wisdom and how time is your best friend in investing.

Read the full article here: https://oliverfoote.ca/can-you-time-the-markets/

Real Estate Market Talk:

Greater Toronto Area home sales have picked-up this past October with a strong year-over year increase. There were 6,658 home sales through TRREB’s System in October 2024, up by 44.4% per cent compared to 4,611 sales reported in October 2023. The pace of which homes are selling also increased with inventory levels of available homes for sale of all types dropping to 3.5 months from just over 5. This is a significant drop as the market is now trending back towards a sellers market.

Even with the pace at which homes are selling, prices remained relatively flat, up only 1.1% compared to October of last year to $1,135,215 and up slightly compared to this past September. The numbers tell us that it appears more buyers have moved off the sidelines and back into the marketplace in October. The positive affordability brought about by lower borrowing costs and relatively flat home prices, prompted an improvement in market activity.

Chief Market Analyst for the Toronto Regional Real Estate Board, Jason Mercer, reported that market conditions did tighten in October but there is still a lot of inventory, over 24,400 of available homes of all types, and therefore providing choice for home buyers. This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed, selling price growth will accelerate, most likely as we move through the spring of 2025.

The condominium market also saw a rebound in October with sales up 33% across the GTA compared to October 2023. Prices, however, still softened slightly, down 2% respectively. With the completion of a large number of new construction units over the next couple of years, prices are expected to stay relatively flat for the time being.

Please never hesitate to reach out to me with any of your real estate related questions, I am here to help. Enjoy the fall season and I look forward to connecting with you soon.

Stock Market Performance as of Friday November 8, 2024:

S&P 500: 5,995.54 (+26.41% YTD)
NASDAQ: 19,286.78 (+30.62% YTD)
S&P/TSX Composite: 24,759.40 (+18.62% YTD)

Macroeconomics Statistics:

Canada’s CPI Inflation Sep 2024: 1.6% (0.4% Decrease from August 2024)
Current BoC Benchmark Interest Rate: 3.75% (0.5% Decrease on Oct 23, 2024)
Unemployment Rate August 2024: 6.6% (0.2% Increase from July 2024)

Greater Toronto Area (GTA) Real Estate Stats – October 2024:

YTD Average Selling Price: $1,121,871
YTD % Change in Average Selling Price: -1.0%
Y-o-Y (comparing Octobers) % Change in Average Selling Price: +1.1%

YTD Number of MLS Sales: 58,435
YTD % Change in MLS Sales: +0.1%
Number of MLS Sales in October: 6,658

Y-o-Y (comparing Octobers) % Change in MLS Sales: +44.4%
Number of Active Listings in October: 24,481
Y-o-Y (comparing Octobers) % Change in Active Listings: +25.3%

Inventory Available: 3.5 Months (Decrease from 5.0 Months in Sept 2024)

Hope you have an amazing week! Chat soon!

Keep Investing,
Oliver Foote

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Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Bank of Canada Moves 0.5%

Coming off the back of a Bank of Canada rate cut of 0.5% on Wednesday, October 23rd, 2024 there are still some questions in the air about if/how/when we will see this change start to impact fixed rate mortgages, housing market activity, employment rates, inflation etc. I also wanted to briefly mention an anecdote I heard from a friend of mine since we are nearing Halloween and I thought it was interesting, related to the economics of Halloween.

Inflation Down from August

As it stands right now, the 5 yr government bond which fixed rate mortgages are based on, has actually begun to tick up slowly in the past 2 weeks, but the longer term trajectory is declining overall. The Bank of Canada said in their last decision discussion that if the economy begins to evolve in the way they anticipate that more rate cuts are on the table. Inflation as of Sept 2024 was down to 1.6%, oil prices dropped quite a bit more than anticipated which is helping, housing has finally also started to subdue, I have noticed this myself, that prices for housing rentals and purchase are becoming more competitive and even post interest rate cuts the “crazy increase in activity” hasn’t happened.

Prime Time For Home Buyers and Investors

There are still a lot of good deals out there for the savvy investors and home buyers, condos are somewhat oversupplied in many markets and I truly think that now is a once in a long time type of purchasing opportunity (feel like I’ve been saying that for 2 years, but I think we’re approaching the tail end of good deals). There is a great opportunity right now to get into a property at a great price with lots of choice on the market and ride declining interest rates, lock in a fixed rate a year or two from now at something closer to 3-4%. Once companies begin hiring again the hiring freezes are over, economy starts moving again, I’m predicting a very different market 12-18 months from now once these rate cuts have worked their way through the economy.

Local Real Estate Strains and Successes

The Bank of Canada has also predicted in their October 2024 Monetary Policy Report that GDP will climb as we go into 2025 and 2026 as compared to 2024 (which was a tight year, if you tried to renew a mortgage at the start of this year you’ll have felt the strain). So if we’re factoring everything in, expanding economy, lower inflation, decreasing housing prices, decreasing interest rates, 5-7 months of supply in some (great) housing markets, I really think this is a case of buy when others are selling. However, housing tends to be a very regional thing, some areas in Toronto have actually just continued to go up, through all of this, it’s almost like it’s own little bubble where the economic strains didn’t happen (generally in the 1.75 million – 3 million range in particular pockets).

The Problem with Condos (Oversupply & Office)

Condos on the other hand are dime a dozen right now, so much available, great prices if you know where to look, and very few buyers. Now, why are there few buyers, well if you go back to my last post where I talked about the increasing vacancies in office real estate you’ll have noticed that downtowns are having a harder time than suburbs are right now with a majority of office employees working from home 2 or more days a week. There’s simply not as much need to live downtown anymore, so people have moved out to the suburbs where they can get something larger and only have to commute downtown once or twice a week, not a bad deal especially considering you can get a bit more space for the same price as a shoebox downtown. I believe that the general economic malaise, in addition to the shift in expectations for office workers has led to a twofold issue of extremely high office vacancies (20% in some downtown areas), which has led to this oversupply of condo inventory as well. If you look at all these factors of different types of housing supplies building up in different areas they are all somewhat related to a simple yet profound change in the way that our world works post-covid (in part).

Consumers Are in “Wait and See” Mode

Another thing noted in the Monetary Policy report is that consumer spending has continued to decline from the start of the year to Q2 (and likely into the end of the year). Things like cars, vacations, and interest rate sensitive goods are all seeing declines compared to last year. People are feeling the strain, so the interest rate cuts are quite welcome. On a personal note, I was searching for an apartment to rent recently as well as potentially purchasing a used car, and it seemed like every time I looked prices were continuing to decline, “if prices will keep dropping, why not wait until they bottom out.” I’m sure that’s what a lot of people who are looking at housing and cars and any other large purchases are thinking right now. There will have to come a point where interest rates on loans are appealing enough that people will want to purchase their car or home or whatever else, either that or prices are low enough to entice the same. But the issue with just waiting for prices to come down is that we need people to be spending money for our economies to not collapse, so holding rates too high for too long can lead to some negative consequences that most people would not be too happy about.

United States Riding the AI Wave

Strangely through all this downturn stuff, the US economy and stock market has just been doing just fine. The US has a lot of growth companies, and have been able to ride this new “hype wave” of AI which has just injected even more excitement and money into their veins, meanwhile a resource based economy like Canada is suffering because of reduced demand and reduced spending on things like oil and gas, while supply of oil and gas continuing to improve. As an aside, Canada continues to be a bit of a place that is tough on innovators, there are tons of regulations, which arguably is good, but too much can lead to a stifling of innovation. Highly regulated sectors tend to favour incumbents, again, not necessarily a bad thing, especially in some sectors where regulation is extremely important.

Canada’s Lacking Innovation Problem

I don’t know that innovation is quite in the blood of Canada in the same way that some parts of the US “move fast and break things.” On the other hand, if you look at a lot of these “fast movers”, we’re essentially returning to baseline with some modern upgrades where now instead of 20 cable channels we have 20 streaming companies, and instead of taxis we have Ubers which are just as expensive or more expensive in some cases. There’s a great video about how tech companies are becoming worse and worse and basically once they undercut and drive out all their competition they cease to be good deals and with the monopoly they now hold increase their prices and leave people without any other option but to pay for their services.

Tech Company Monopolies, Poor Regulation

It’s a bit more complicated than that, but in a nutshell, that is what has been the ultimate result whether it was the intention from the get go or not. From a business standpoint, it’s just good business to try and get hold of a monopoly or something close to it, patents were invented with that idea in mind. Allow innovators to profit off their creations. But just as I was complaining about too much regulation, there are some sectors that do not have enough regulation or are too highly influenced to properly regulate and encourage competition. There are simple reasons why we can’t have a purely capitalist economy, and why a purely state run economy runs into problems as well. As with anything, there needs to be a good middle ground, in some ways Canada does a better job of this than the US, but with respect to innovation, I think Canada needs to be more encouraging of this and work on keeping our best potential innovators in Canada instead of just hopping over to the US where the rules are a bit more favourable.

Economics of Halloween (God Bless the Dollar!)

To close off this discussion I wanted to divert a bit and talk about Halloween. It’s not the largest shopping holiday, but it is one that almighty capitalism has invented to collect our dollars. I was speaking with a friend recently and was informed of these seasonal Halloween shops and the micro economies that they work in. Some of these smaller stores will top $1,000,000 in revenue just on this one holiday, retail margins tend to be significantly smaller than something like software, but if you have a few stores opened, each doing $1,000,000 in revenue, you have quite a solid business on a few months worth of work each year. So I was curious, how much money does Halloween bring in each year? I only have the US numbers and they tend to spend a bit more than Canadians but it’s interesting nonetheless. In 2023, Americans spent $12.2 Billion on Halloween. Seems like a lot of money. To give a frame of reference Amazons 2 day “Prime Day” sale this year generated $14.2 Billion in revenue. So, while Halloween is quite popular among children and their parents. Amazon, in just 2 days, does more revenue. Other holidays spending for reference: Valentines Day $25.9 Billion, Black Friday online sales $70 Billion, Easter $22.4 Billion. Halloween at $12 Billion is a good attempt at a shopping holiday, but it doesn’t seem to have as much mass appeal as pretty much any other shopping holiday. Moral of the story, give Halloween a boost and buy some chocolates this year :P. Just thought this was kind of interesting. That’s all for my economic brain chaos, thanks for reading.

Keep Investing,

Oliver

Newsletter #24: Bank of Canada Rates and Economic Impacts. Slower Return to Housing Market

This Weeks Blog Post:

Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems:

Why does it seem like the US in invincible
Why tech companies get worse and worse every year, the undercut and monopolize strategy
Small tidbit on Halloween and shopping holiday economics

Read the full article here: https://oliverfoote.ca/canadas-economy-vs-the-us-innovators-technology-housing/

Market Talk:

This weeks market talk is sort of woven into the blog post. But effectively. yay! 50bps rate cut! Bank of Canada says more to come. Economy should improve in 2025-26. Housing still slow, especially condos. Amazing time to be a buyer. Probably won’t see this type of inventory again for 10+ years if rates continue coming down.

Event Update!

Thank you to those who have already indicated interest in my event (details below)!
If you would like to be a part of it you can respond to any of my emails until the event with: “sign me up!”
If you have done so already, expect to receive a Zoom link about 1 week prior to the event.

Topics:

Mortgage rule changes coming Dec 15, 2024,
how interest rates are affecting housing & the economy,
and more!

Details:

Date: Saturday Nov 16th, 2024 @ 10:00AM
Duration: 45 mins – 1 hr
Location: Zoom! (Webinar)
Special guest: Deren Hasip from Mortgage Scout

Hope to see you there!

Market Performance as of Friday October 25, 2024:

S&P 500: 5,808.12 (+22.46% YTD)
NASDAQ: 18,518.60 (+25.41% YTD)
S&P/TSX Composite: 24,463.67 (+17.21% YTD)

Canada CPI Inflation Sep 2024: 1.6% (0.4% Decrease from August 2024)
Current BoC Benchmark Interest Rate: 3.75% (0.5% Decrease on Oct 23, 2024) Unemployment Rate August 2024: 6.6% (0.2% Increase from July 2024)

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How Much is Office Real Estate Suffering?

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

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

Newsletter #23: Office Real Estate is Suffering. Residential is Due for a Jump

This Weeks Blog Post:

How Much is Office Real Estate Suffering?

This article is all about office, after some inspiration I decided to read some reports and the outlook at this moment in time is shall we say… Bleak.

Read the full article here: https://oliverfoote.ca/how-much-is-office-real-estate-suffering/

Market Talk:

Most of my market talk will be limited this week. But I have been noticing that there is tiny bit of a pickup happening in the market. With fixed mortgage rates coming down so much people are starting to realize this and homes are beginning to sell. It is gradual, but the past week or two has seen a couple more people at open houses, and a couple more people showing interest in homes.
I suspect the rental real estate market will stay somewhat muted since there is still a huge supply of condos in downtown Toronto and we are approaching that point where purchasing vs. Renting is starting to become quite close in price, within 300-400 dollars per month, and it’s usually right around this time that rental demand jumps, or prices jump, and I vote that prices will see a bit of a jump going into the end of this year and the start of next.
Additionally, we have two more rate announcements coming this year with it looking like there will be cuts at both. How much is TBD, but I’m hearing 50 and 25 bps. If that is the case I believe in the new year the real estate market will have a renewed energy and supply will start to become an issue again in short order. If you’re looking for a place, seriously, now is the time to buy. If you have the luxury to hold on, sell when the market pops. Obviously, every situation is different and you should consider and consult before deciding what your best approach is.

Market Performance as of Friday September 27, 2024:

S&P 500: 5,859.85 (+23.55% YTD)
NASDAQ: 18,502.69 (+25.31% YTD)
S&P/TSX Composite: 24,471.17 (+17.24% YTD)

Canada CPI Inflation Aug 2024: 2.0% (0.5% Decrease from July 2024)
Current BoC Benchmark Interest Rate: 4.25% (0.25% Decrease on Sept 4, 2024)
Unemployment Rate August 2024: 6.5% (0.1% Decrease from August 2024) (Everything is green! Improvements ahead!)

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