Tag: investing

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

“Do What You Love” is Backwards: Stay Focused, Learn to Fail

The Modern Challenge of Finding a Career:

Many young people, myself included, have a hard time trying to figure out what to do with their lives. I’m usually a proponent of try as much as you can until you find something that sticks, but this is much harder to execute in reality than it may initially seem. Changing from thing to thing to thing can be exhausting in the same way that just sticking with the first thing you find and end up hating going into work every day is exhausting. So what is the answer? If doing something you hate is exhausting, and trying to find something you love is exhausting, what are you supposed to do? That’s the topic I’m going to try and tackle today. Not necessarily an easy topic to discuss, but I think I have some insights that may be somewhat helpful to the directionless or those who want to change direction.

Why “Do What You Love” Sucks:

I’m first going to start with the common wisdom of “do what you love.” I’ve been hearing this for quite some time, and after trying to do just that, I actually think this statement is backwards and that “do what you love” is not great advice. Why? Well if you’ve ever tried to make a living off a hobby that you enjoy doing in the few spare hours off work, you’ll quickly learn that making money, and doing something for fun, for most of us, are two different worlds. When you try to make money off something you are doing for fun, it can often cease to be fun, and I think this is especially true for creative endeavours. If you are a painter, or you make trinkets or cookies in your free time, and you try to mass produce paintings and trinkets, you’ll soon find yourself burnt out from needing to paint every second of the day in order to keep up with the demand for your art (best case scenario). If you aren’t accustomed to the pace of painting all day long, and you don’t have a way of continuing to make it interesting for yourself, you may find yourself no longer interested in that thing. There are those few people in the world who make a living off their music, or their art, or some other creative endeavour, but there are thousands and thousands more who are “starving artists.” So unless you have an unrivaled thirst to out practice and outwork basically every single competitor, or some unrivaled business acumen, you might want to continue doing that thing as a hobby.

Why You Shouldn’t Start a Business Based on “Do What You Love”:

I spoke in my pervious article (Employed Vs. Self-Employed Work) about what people overlook when they are starting a business, and I discuss the huge challenges with being self-employed. If you do choose to “do what you love” as your own business, you need systems in place, you’ll spend a lot more time just managing the business than you want, and you’ll have to become a jack of many trades rather than being able to focus on your craft. This can be managed and software nowadays is a godsend, but I still caution people who want to leave stable work for effectively contract jobs because you really are going to be working 24/7 rather than just 9-5. I see these advertisements for Realtor school quite often on my Google ads (presumably because I spend a lot of my time looking at houses and economic data), and I always laugh at their tagline “escape your 9-5, take control of your own schedule”. Which loosely translates to, “you’ll now be working 9-9 most days, oh also doing open houses on weekends, and if you’re doing this business right, you’ll likely be fielding calls or making calls most hours of the day. You’ll have to try and find new business every day and you’ll spend the majority of your time just looking for clients rather than working for them.” If you want something to be completely engaged in, then by all means, do the self-employed game, maybe you’ll love it, but if you want balance in your life, maybe don’t. You can create some amount of balance once you’ve established yourself, have a client base, and know how to delegate, but at the start you will be working your butt off to make ends meet with lackluster results unless you’re truly exceptional. Usually it takes people 5-10 years before they can slow down a bit and take back some control of their schedule, and some people never manage to. So, don’t say I didn’t warn you.

How Building Your Skills Leads to Love:

Now, I’m going to somewhat contradict the above paragraph. Because I’m going to talk about the right way to “do what you love”. Since I mentioned this phrase is backwards you’re probably wondering what I think is the right phrase. I think it’s something along the lines of “work hard, learn a skillset, do disciplined practice, become an expert, and finally, love the result.” It’s so much easier to love something you’re good at, that you’ve practiced at, and that you want to keep pushing the boundaries in. This perspective is not new to me, but it has been reinforced by a few books I’ve been reading recently the first is The Algebra of Wealth by Scott Galloway, which I think is a great introductory finance book and money book in general. The second is Grit by Angela Duckworth (a bit late to the party I know). I think that both of these books overarching ideas when it comes to a career is focusing on becoming good at the thing you are doing, and reframing “failure” as something that helps you get better and better.

It’s Supposed to Be Hard:

Often when you are learning something new, it’s going to be hard, it’s going to suck, and you’re going to want to quit. In Grit Duckworth interviews many Olympic swimmers and one of them says (I’m paraphrasing), “honestly, going to practice is hard, and I frequently don’t want to go, and I often find myself thinking about quitting.” She then goes on to say that a top performer attitude is doing the hard thing anyway. They are focused on the top level goal of getting to the Olympics and winning medals. They have a compass that guides all of their lower level motives. She stresses the importance of finding your one overarching life compass that doesn’t change. When it comes to putting in the hard work that is hard to do every day, she stresses the importance of routine. It’s much easier to do the hard thing if you have a routine and do it at the same time every day, so you don’t have to “re-convince” yourself to do the hard thing. Just showing up is half the battle. Lastly, the importance of long term commitment. The good old 10,000 hours (or 10 years) of practice to become an expert is something that can be hard to remember when you’re in the trenches doing the hard work, but nothing replaces disciplined practice. Probably the most important trait or feeling you need to have towards the work you are trying to do is the desire to be constantly getting better. If you have no drive or “grit” to improve on the last thing you did then you’ll quickly lose the motivation you need to keep moving. This is where other people are extremely helpful and getting quick feedback on what you’ve done is extremely important too. You should have a coach or mentor figure who can help you set goals for disciplined practice, and then can give you feedback on what you’ve done so you can improve quicker. You should also spend some time reflecting on your practice and resting, don’t overdo it every single day. Even Olympic athletes have a daily training limit. If you do all these things, and are focused on challenging yourself, building a skillset though putting in multiple repetitions, getting feedback, and have an compass guiding your lower level goals. Then you are on the path eventually loving what you do.

Finding Your “Life Compass”:

Many people after reading this might say, “that’s great Oliver, but I don’t have a compass, and quite frankly I still have no clue what I want to do.” There are a few things you can do to try and some questions you can ask yourself to try and find your compass. Think back to what you enjoyed in high school, as this often tends to be the start of what people’s “career discovery” phase. Think about things that you are generally good at, ask friends and family if you can’t think of anything. If you are still having trouble this is where the exploring phase can work well. But you have to spend time actually trying things, not just reading about them. It can take a while before you develop a true interest in something so don’t give up on something after 1 day of it being challenging or not working out the way you thought. The most important thing, and this is advice I often struggle to follow myself, is to put yourself out there. If you don’t have your compass, you need to be spending time to find the compass. If you have the compass, you need to be spending time to build good habits and a system that will help you “train” in order to become a “professional” at your chosen career path. All of this is hard, all of this will be a huge exercise in failure. But if you work through the challenges, learn from your failures, and defeat the fear of failure (you don’t know till you try) you’ll make great progress towards you overarching goal.

Reframing Failure: Failing is Awesome!

As a side tip from another book, try to reframe failure as being “awesome”, like “hell yeah, that was hard as hell, I just fell flat on my face, I’m ready to get out there and do it again!”. I think the advice of finding what you love as a function of practice, training, and hard work, rather than simply a function of “do what you love” or “do what you’re interested in” is much sounder advice. In simple terms I think people should “do what they are good at, and practice to become an expert.” This advice builds resiliency in children, teaches them to have grit, and to not be afraid of failure (weird how that happens as you get older). I completely understand why many student nowadays are having a hard time unfreezing themselves from paralysis by analysis. They’ve learned to avoid failure at all costs, and especially with the internet and everyone’s lives being online, it can be extremely damaging and unforgiving to fail in public. If you fail a course at school, or do poorly on one test, your chances of not getting into the best university could be lost, so the pressure is high, and the consequences of failure are high as well. Which is the exact opposite approach we should be teaching. It’s good to experiment, it’s good to try new things, it’s good to iterate, and importantly one of the best ways to avoid a future failure when you need to perform, is by failing so many times in private that it’s unreasonable you’ll be unsuccessful (i.e. doing lots of math problems, or making hundreds of cold calls, or lots of songs, or lots of paintings). Fail so much, and become so good, learn from your mistakes, that when you do put your practice to work, even a bad day will still be a good result. We need to be providing more and more opportunities for students to fail in private, and more importantly emphasizing that practice is important in every aspect of life; a career is no exception. I even believe that failing in public can be a great lesson, but I think too much negative feedback when someone is just starting out can be destructive to the motivation to do that thing in the long run, and it can be hard to come back from too much hate about the path you want to pursue. So in the beginning maybe some sheltering from failure is justified. But over time, once they’ve built the failure muscle, and understand that failure is awesome, and decide to just give things a go and focus on constant improvement, the negative feedback becomes easier to deal with as competence grows, and funnily enough, the failures might decrease, at which point I encourage constantly pushing the needle to get better and better. I strongly believe that if we were pushing this kind of advice, rather than “do what you love”, people would be loving what they do a whole lot more, and the generation of directionless young people would have a much easier time finding their direction.

Thanks for reading, I hope that you found this article helpful or interesting. Feel free to email me, I’m always interested in hearing what other people think about these articles. As always,

Keep practicing,

Oliver Foote

Is Now a Bad Time to Enter The Workforce?

Statistics Canada Thinks It Is

I have been hearing from many people recently that they are having a hard time finding work. This is not just anecdotal, Stats Canada came out with their most recent labour force survey and the unemployment rate is sitting at 6.4% as of June 2024 and has increased 1.3% in total since April 2023 which was a recent low (low = good). Among these groups, returning students (those who are going back to school in the fall) are at their lowest June employment numbers since June 1998. You may be saying not a big deal, students still have time to figure things out. While this is true, they are also the future of the labour market, and one of the most common ways for students to find their full time employment is through their summer internships or other jobs. If there are fewer students interning and less work for students overall I think this is a concerning development.

I think this lower student employment rate, and the overall high unemployment rate are leading indicators that we are heading for stagnation or even some form of a quiet depression. After having conversations with people from many different industries and hearing by word of mouth from friends of friends, a lot of companies are holding off on hiring right now, because there may be some level of uncertainty about whether their clients will continue to be in business in the coming year or two. This is leading to hesitation across the board regarding hiring people, and especially for new grads. This is making it even more challenging since companies that are shrinking their workforce or looking to hire would rather hire one senior person who can do the work of two people rather than hiring two junior people who need training.

Signs of a Drawn Out Downturn?

Of the types of economic downturns, in this case specifically a job market downturn. It is almost better to have a COVID-like situation where people get hit very hard but can bounce back relatively quickly. A long, slow, protracted downturn, meanwhile, may be felt by fewer people as a whole, but for those who do feel it they will not get a lot of relief in the coming years. It has become apparent that although the Bank of Canada has cut rates, the effect of the rate cuts will be fairly muted, as borrowing power only improves marginally for those looking to take out loans such as a mortgage and businesses are still hesitant to borrow money in order to invest. Because leverage is expensive as a whole right now, we will likely see less economic growth. In order for a business to get a good return on their investment they will need a rather high ROI to justify their cost of borrowing and justify a higher risk investment when a relatively risk free investment is still hovering around 3-4%. With inflation coming down below the risk free rate, there is almost no reason for businesses or investors to look towards higher risk investments which means that less money overall will circulate through the economy.

Canada is also in a special situation because we are always welcoming new highly skilled workers into the country, this could be a good thing for businesses because if there is more demand for their jobs they can theoretically pay a lower rate and get the same output. From the workers side this puts them in an unfortunate situation, they will have to find a way to stand out from the crowd or accept a much lower wage at a time when the cost of living is not improving much.

Real Estate Indicators of Slowing Growth

From the real estate side we are seeing some relief in the rental market, as a recent rentals.ca report showed the year over year rental prices in June 2024 were similar or lower in some of the larger metro areas compared to this time last year. We can also look to the resale market and the pile of inventory that is building up, especially in some segments such as condos. This has yet to manifest in much lower prices, but there are some individual great deals for those who are looking.  The market is a whole isn’t seeing much price pressure likely due to the fact that owners are finding a way to hold on until they get the price they are looking for and aren’t in a rush to sell. The number of truly “distressed” sales has only increased marginally anecdotally speaking and banks have been instructed to help those who are in distressed situations to manage their real estate. We likely won’t see a significant decline in prices in the coming years, but prices may slide slowly downward until borrowing becomes a bit more affordable.

I do foresee a time in the next 3-5 years as things improve with respect to borrowing costs that prices will jump up due to the lack of new construction sales. New condo projects have been taking longer to sell and fewer people have been purchasing them. This also corroborates my previous point about lower investment as we’ve reached a point in Toronto where about 50% of condos are owned by investors which means that they are soon to be the majority of the potential buyers, if not already are, and if investors are not investing their money, condos are not going to be built. If condos are not built, there will be less housing while more people continue to come to the Toronto area which simply supply and demand says higher prices.

Potential Improvements in Student Economics

Another interesting development has been the cap on student visas. On balance I view this as a positive development as I believe the intention of capping them was to prevent predatory “career” schools from taking advantage of students and not providing them a proper education. I quite frankly see nothing wrong with this, although it may inconvenience people who were all but too happy to take advantage of these students whether for cheap labour or for absurdly high tuition fees. The only potential downside to this is that some reputable institutions may lose some of the funding they were anticipating from international students and have to make cuts. But again, I see nothing wrong with a little competition, and competition breeds innovation, so maybe in the end this will turn out to be a positive development across the board. I also see positives when looking at student adjacent market such as the student rental market around campuses.

They will likely become somewhat less competitive with this change. I recall from my time at university that it was truly a crapshoot trying to find a half decent student house. The number of questionable landlords who didn’t take care of their properties was high, the inability of students to clean up after themselves was bad, the SERIOUS lack of supply was horrendous. Overall, there were frequently poor outcomes and often just plain unsafe living conditions. So some relief in that regard is well overdue in those markets. Although, I’m not certain that this will affect the larger universities who may not be as highly affected by the student visa quota. Interestingly, Graduate level visas have not been affected at all which is in line with the concept that Canada is interested in highly skilled workers. (although arguably our problem is with trades workers not highly skilled workers).

Signals from The United States

Interestingly though, if you look to our friends in the south (the US) their stock markets are continuing to do well, which is arguably signaling that things are improving over there and there is confidence that they will continue to improve. The US employment rate is still hovering around an all time high (a positive development) and since they have a more diverse economy they are more resilient overall. You can’t predict the market, but generally when I look at my portfolio and get very happy that is usually a sign that it’s time to sell some of it and cut down on the risk. However, I’m more of a buy and hold type of investor rather than a time the market investor, so I’ll probably just ride whatever wave comes and try to build up some cash in order to purchase any opportunities that may come along in the next little while.

It will be interesting to see how all of these different aspects of the economy develop in the next couple of years, I will be following them closely and doing my best to keep you up to date on them. Hopefully you found this discussion interesting. Feel free to let me know your thoughts any time, I’m always interested to talk economics.  

Keep investing,

Oliver

Sources:

Stats Canada Labour Force Survey June 2024: Click Here

Student Visa Cap News: Click Here

My last post: https://oliverfoote.ca/dont-invest-in-stocks-or-real-estate/