Andrew: Real estate really fits a broad portfolio from an asset-allocation perspective because you have equity-like returns, bond-like volatility, and during different market periods, that can help be a ballast to performance during tough economic periods, but it can also create opportunity for performance enhancement in other parts of the cycle.
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Ingrid: Hello, everyone, and Happy New Year. My name is Ingrid Macintosh, and I am so excited to welcome Andrew Croll, managing director and head of global real estate here at TD Asset Management on TDAM Talks today.
Today, we are going to be exploring why this might just be the perfect time to be considering real-estate investing as part of your investment strategy. We're going to talk about the market environment, the long-term potential of real estate, and how this approach can add stability, growth, and resilience to your portfolios.
We're going to end the podcast, as always, with a lightning round that's going to touch on the what we invest in and how. I'm not going to hold that one back a little bit for now, though, because I really do want to get Andrew's unrehearsed reaction. So Andrew, welcome to the podcast.
Andrew : Thank you, Ingrid. Long-time listener, first-time speaker. It's a pleasure to be here.
Ingrid : Yeah, you're in the hot seat for today. This is the first time you've been on the show. Maybe we'll start-- just because our listeners don't know you, let's tell them a little bit about yourself, how you came to TDAM, and what your day looks like.
Andrew : I joined TD Asset Management back in 2013, been working with the real-estate team that entire time, although I've worn a number of different hats over the years. More recently, a few years ago, I joined the alternative-investments committee, which oversees all of the activity for our real-estate infrastructure and commercial-mortgage businesses, and at the start of the year, took over as head of the real-estate business.
In terms of my day-to-day real estate-- one of the things that I love about real estate is the physical nature of the asset class. It is something that you can very much touch and feel, and with that comes a lot of travel. I spent a lot of the year traveling around the country and, frankly, around the globe, meeting with some of our partners and touring assets in the portfolio.
It is a very people-intensive business, so meeting with property managers, asset managers, leasing agents, brokers, and our clients. And I spent a lot of time doing that throughout the year.
Ingrid : I want to take a look at real estate. And for our listeners, first, talk briefly about why real estate, generally, in portfolios. TD Asset Management has been in the real estate-investing business for 35-years-plus now. And then specifically, I really want to start talking about why real estate in 2025, but maybe more broadly, why real estate in our portfolios.
Andrew : I think if you look at real estate and really think about it as a service provider to the local economy in which the asset resides, it's really about providing space, whether that's office, retail, industrial, or residential space for economic activity and demographic activity to occur.
And so real estate responds to GDP. It responds to consumer spending. It responds to population growth. And in that way, some of the returns of real estate are similar to that of equity investments, that growth component. But real estate also is about the underlying cash flows and the leases that occur at the individual building level.
And typically, those leases are contractual. They're long term in nature. They have inflationary protections. And so in a way, you have very similar characteristics as a bond investment. And so real estate really fits a broad portfolio from an asset-allocation perspective because you have equity-like returns, bond-like volatility, and during different market periods, that can help be a ballast to performance during tough economic periods, but it can also create opportunity for performance enhancement in other parts of the cycle.
Ingrid : Which is really why pension funds have really favored real estate for such a long time. It really does perform the way they need it to. And more recently, we've seen firms like TD Asset Management being able to incorporate real-estate investing for retail investors in their managed solutions.
How does real estate do in 2024? Because I think that's going to help set us up for the conversation about what we're seeing this year in 2025.
Andrew : Yeah, I would look at 2024 as a period of adjustment for real estate. Obviously, coming out of the pandemic and then the heightened inflationary environment over the last several years, we saw a tremendous run-up in interest rates. And real estate has been adjusting to that higher interest-rate environment. And some of that adjustment occurred through 2024.
So we actually saw capital values decline in 2024. But that was offset by relatively robust income growth. And so I would characterize the performance of real estate in 2024 as flat-ish. If you compare that to stocks, obviously, the S&P 500 is up tremendously throughout the year. And so in this environment, real estate has held its value but certainly not outperformed the rally that we've seen on the equity side of things.
One thing, I think, if you look at and go back a couple of years and you go back to 2022 when stocks were selling off and bonds were selling off at the same time, real estate and other real assets that have those long-term cash flows, like infrastructure, performed quite well into that high single-digit, low double-digit type of performance where stocks and bonds were more neutral to negative in that environment.
And so real estate isn't going to outperform in every cycle. But in an environment where your stocks are up 20-plus percent, you don't need real estate to carry that weight, but it really provides the downside protection in different market cycles like it did in 2022.
Ingrid : Yeah, I think we always think about investors' portfolios over the long term. So this has that calming effect in the overall portfolio and the diversifying effect in the portfolio.
When we think about real-estate investing-- and we'll go a little bit deeper in a moment in terms of what we truly mean the different types of real-estate investing-- they're not accessible to just anybody. A retail investor can't often just access the types of investments. What's unique about the way TD Asset Management looks at real estate? Can you talk about the TDAM process?
Andrew : We've been managing real estate for over 35 years. And we take a very broad-based approach to the diversification that we look to achieve. Real estate is a less-liquid asset class, and so it is harder to rebalance positions relative to stocks and bonds. And so it's really important that, when we're investing in real estate, we take a long-term perspective.
We try and size the positions in the portfolio in a way that there is no shock to the performance of the overall portfolio based on one individual property. Related to that is the fact that the portfolio is broad enough that the first dollar that is invested is diversified across over 250 individual properties across different property types and across different risk strategies, core value add, and opportunistic investments in real estate.
Ingrid : Can you talk about your three Ts? I often hear you talk about the three-T approach. And what are you really looking for?
Andrew : The three-T approach is really referencing our valuation approach and the idea that we take a approach that is transparent, it's trusted, and true. And really, we were pioneers in the Canadian real-estate market in evolving the best practices of our valuation approach where we, a number of years ago, moved to quarterly external valuations by third-party accredited appraisers in Canada.
And we think that, because we are an open-ended strategy, we're investing for the long term, it's very important that the valuations are transparent and that clients have trust in those valuations. And so the independence of that process is critical. Obviously, we've been going through a period over the last several years of that price adjustment in real estate.
And as we've gone through that, we've had, every quarter, every single one of our assets appraised by external valuers. We've also rotated our appraisers, which we do every three years, which ensures that you have different sets of eyes on the valuations. And that gives us a lot of confidence that we're providing the best available information from a valuation standpoint across the entire portfolio at any given point in the year.
Ingrid : That's great to hear because I think sometimes the opacity of non-public investments holds investors back a little bit. So knowing that there's a rigor, that there's an independence, and that there's a very high bar for that is incredibly important.
So you started to touch a little bit on the diversification piece. Can we go a little bit deeper on that? Tell me a little bit more about having access to what you refer to as strategic real-estate investments across Canada.
Andrew : When we look at the performance of real estate over time, right now we're in a period where office investment is somewhat out of favor. There's less capital interested in investing in office today, certainly, than it was five-plus years ago. But what's interesting is that we see cycles of real-estate performance over time.
It's not that long ago that industrial assets were out of favor, that super regional shopping centers, enclosed retail was out of favor. And so these cycles occur throughout real estate. And it's our conviction that having exposure to breadth of the four major property types-- office, retail, industrial, and multi-unit residential-- is critical to that success.
I did want to highlight that multi-unit residential would be another key differentiator of our approach to real estate. Again, we're very early in investing in multi-unit residential as part of our portfolio. We made our first investments back in 2007, 2008. And we built up a portfolio of purpose-built apartment rentals that makes up over a third of the real-estate portfolio today.
And why that's interesting is that, one, most other peers, including large pension funds, are relatively underweight multi-unit residential compared to more commercial property types, but two, how this property type performs during different market cycles.
And so where office is more correlated to jobs and economic growth, multi-unit residential is more correlated with population growth and demographics. And that is less correlated with economic activity and the broader stock market. It's more predictable, although we have seen the Canadian government reduce immigration targets over the next couple of years.
But our view is that long term, that population growth, which has been positive-- and we expect long term to continue to be positive-- will create a demand for multi-unit residential. And then at the same time, there's a significant lack of supply of purpose-built apartment rentals. And in fact--
Ingrid : Plus my children are trying to find them.
Andrew : It's a real challenge. And I think that affordability issue that we have in Canada, it's not going away anytime soon. But as an investor in real estate and having exposure to the rental market provides diversity in a portfolio that otherwise would just have office, retail, and industrial assets.
Ingrid : I think it's a really important point that you're making, as well. When we all personally think about real estate, I think a little bit more like a stock. We think about buying an asset and the asset goes up. That's our experience with real estate.
But really, when you look at it from a portfolio perspective, the different types of real-estate investments have different return components, be it the appreciation of the underlying asset and/or the cash flow that comes with the revenue associated with that, so a whole bunch of different variables in that.
At the outset, you talked about loving the work because the assets are tangible. I could talk to somebody about a stock, but if I talk to somebody about a building or something-- can we go a little bit deeper? I'm going to ask you to maybe give examples for our listeners and make it real about some of the things that we have in our real-estate portfolios. And I'm going to take you through the four categories that you talked about. So why don't we start off with office and what's happening in the office space.
Andrew : Yeah. I think in office, there is a flight to quality. So tenants are demanding the best space.
Ingrid : If you're going to make me come back to work, I want it to be extraordinary.
Andrew : Exactly. And that's transit link, its location. You can see that in the occupancy rates of office building. AAA office has a much higher occupancy rate than A and class B. I think one of the things that we're watching closely in office is on the capital-expenditure side of things.
There is-- not just because of tenants but also regulatory factors, as well, that requires investment in the sustainability of our buildings, and that requires capital, significant capital in some cases. And there is going to be a situation of have and have nots in the office space. And so when we're budgeting for our real-estate investments in the office, it's important to be thinking about that.
Work from home is not settled. In Canada and in the US, we're still evolving from a work-from-home perspective. There still is demand for office space. If you have employees in three days a week, you need the same amount of office space as if you have employees in five days a week.
There's no new supply in office that is being started right now. And so it's a 3-, 4-, or 5-year time frame to get new supply online. And so while there are some completions and there are certain pockets of the market that have challenges from a leasing standpoint, there is still long-term demand for office space in key markets and locations.
Ingrid : And that still ties back to demographics, as well. Let's pivot and talk about industrial. Can you give us some examples of investments in industrial and what those investments look like?
Andrew : Yeah. So in industrial, this has really been the darling property type over the last number of years. Coming out of and during COVID, everyone was ordering their groceries online and other things as they were abandoning their brick-and-mortar retail-shopping experience. And that created a boom in demand for logistics and e-commerce use of industrial space. And that created a tremendous amount of rental-rate growth in industrial.
In some markets, we saw 40%, 50% year-over-year growth in rents. And so where we are today, rents have already peaked. They've actually come off their peak levels. And a little bit of that steam is coming out of the Industrial market.
Ingrid : So because more supply is coming on, like people are building new centers? Or--
Andrew : It's both supply and also tenant demand. You're not seeing as much leasing demand right now as you were back a few years ago for logistics space. And so while occupancy levels are relatively strong across most markets, the demand for logistics is easier to come in and take new space is much more limited.
And so in the short term, it's a little bit of a reset we're seeing in the industrial space. Long term, we do believe that industrial and the demand for e-commerce is a trend that will continue to make it an attractive place to invest.
Ingrid : And you're seeing that across North America and globally?
Andrew : We're seeing that across North America and globally. And so we're, right now, more of a risk-off approach in terms of-- I mentioned that we invest opportunistically, as well as in core assets. So on the opportunistic side of things, we have built industrial facilities over the last several years.
Right now, it's sort of a risk-off approach where we're not looking to develop new industrial unless a tenant with a really good credit quality comes in and wants to pre-lease that development and de-risk from that standpoint. And we're seeing that in other markets around the world, as well.
Ingrid : But what about the retail sector? Is retail dead or is retail alive?
Andrew : Yeah, it's funny. Retail has gone through a few boom and busts over the last number of years. Obviously, during COVID, there was a mandate in some provinces to close retail facilities. And this had a major impact on closed shopping centers.
What we've seen is a significant resurgence of retail post-pandemic, where sales numbers, foot traffic in centers is at or above where we were on a pre-pandemic level. And so what we are seeing in retail is a bit of a survival of the fittest, where better retail centers are demanding leasing opportunities, especially from international tenants.
And I think unlike in the US, Canada has a lot less retail per capita. And we haven't seen a lot of new development of retail in the last 10, 20 years. And so we do think that retail has been performing quite well over the last two years.
And then I think the second component of retail, which is important, is on the essential retail side of things, so grocery stores, home-improvement stores. Essential retail has performed really well over the last number of years and is in high demand.
In addition to that, the enclosed shopping centers that have large parking lots and land that are well located with transit , links, there are future redevelopment opportunities with those parcels of land alongside the retail investment over time as well.
Ingrid : Can you share for our listeners some examples of properties that they might be familiar with? I think about some of the places I go and, to your point, the crowded parking lots. But for our listeners, making it real, I think is really powerful.
Andrew : Yeah. On the retail side of things, we have Bramalea City Center in Brampton. We have CF Fairview Mall, which is just north of the city. We have a number of retail, basically, the whole block on the North side of Bloor Street from Bay and Bloor to Yonge and Bloor, the so-called Mink Mile.
And then in Vancouver, the city of Lougheed, it's a retail center, but there's a lot of residential development around King George Station. There's an office building and some residential, but there's a whole bunch of retail surrounding the transit station area. That's in the portfolio, as well.
Ingrid : That's such a great example of the diversification within the retail part of the diversified types of real-estate state portfolio that really are hitting every part of the demographic spectrum. Last but not least, multi-unit residential, what can you tell me about that?
Andrew : Yeah. So I've spoken a bit about multi-unit residential already. I think the key here is that the affordability challenge is not going away. There are rent controls in most markets. And so what that does when you have high periods of market rent growth is that in buildings that have rent control, you see lower turnover ratios. So the turnover of some of our portfolios of multi-unit residential is close to that 10% range where it would be normally in the 30% range.
And so it takes longer to access that income growth, but it's still there. It's embedded. If you're a long-term investor, you have access to that growth over time, and that will drive consistency of that cash flow and income growth and create stable income streams. And as I mentioned, the population and demographic component helps diversify that property type away from the other three.
Ingrid : And where would some of the flagship properties that we own in that part of the portfolio be? Would they be in major urban centers? Or--
Andrew : Yeah, major urban centers. We have a number of assets in Toronto, but we also have investments in markets that have large universities, like in Hamilton, Kitchener, Waterloo, London, et cetera. We have-- again, trying to provide that geographic diversification, we've got two development of new apartment buildings, one in the Broadway corridor in Vancouver and one in Halifax. And so across the country, we've got interesting multi-unit residential projects. Some of them are stabilized and cash flowing, and some of them are under construction and future cash-flow producers for the portfolio.
Ingrid : A couple more paths I want to take you down. First, I just want to talk about relative positioning in the portfolio. We've talked about office, industrial, retail, and multi-unit residential. Relative to other real estate-investing firms, how might we be positioned in terms of our overweight or underweight within those categories?
Andrew : Yeah, I think on the office side of things, we would be similar weight to our peers. We would be-- well, if you include the pension plans in that, we would be relatively underweight office. On the retail side of things, we'd be underweight relative to our peers and the pension market. We would be underweight on the industrial side of things, as well, and then significantly overweight on the multi-unit residential side.
Ingrid : We just got those. And talk a little bit, as I said at the outset, about that strategic access or that privileged access to deals. Like, when you're outcompeting for deals, do we have an advantage, or what is it about the team at TDAM?
Andrew : Yeah. I think I mentioned this is a people business as much as a physical business. And we have, over the 35-plus years of managing real estate, established long-standing relationships. These are property managers. They're asset managers, developers as well as brokers, and other participants in the market.
And we have the flexible structure to be able to work with these different groups in different ways. We have a model that is one in which we can pick the best property manager for the best market, for the best property type. You can imagine that managing an apartment building is very different than managing an office building in two different cities across Canada, and so being able to have that expertise and focus and working with different relationships.
So it is hard to quantify. But one of the ways that we do quantify that benefit is about 80% of all of our transactions, our acquisitions that we've ever done, certainly over the last 20 years, have been off-market transactions. So we're working with our relationships to source investment opportunities.
We typically don't like to do a fully brokered process where we're bidding against other groups that are competing for the same asset because it increases the price. And so we can leverage those relationships. But I think the second part of it is also just the benefit of having such a well-established portfolio.
We have so many organic investments within the 250 assets themselves. It creates future opportunities, whether it's development or redevelopment strategies to deploy capital in a very efficient and accretive way. And so we're very fortunate to have the portfolio that we do that allows for that embedded opportunity. And then the relationship capital that we've developed over the last 35 years allows us to execute new opportunities in the market.
Ingrid : And as we're sitting here at the beginning of 2025, what has you most excited about real estate for the year ahead? And I know it's a long-term investment, but at the outset, we did talk a little bit about why this feels like a really interesting inflection point.
Andrew : It's very difficult to time any market. If you could perfectly time--
Ingrid : We wouldn't be sitting here.
Andrew : --time the stock market or the real estate cycle, we might not be sitting here. But there is only a handful of times over the last 30 years where we've seen negative performance in real estate in terms of the capital values. And obviously, we spoke about why that is-- the pandemic, and interest rate, and inflationary environment that we've been through.
But as we look forward to 2025, we're excited because a lot of the pain of that interest-rate adjustment, we think, has been priced into the market. And it's not to say that we're all the way at the bottom, but you can't time the bottom. And we're closer to the bottom than we are to the top right now.
And as we look at even just the portfolio that we have, we have, over the next three years, a tremendous amount of income growth that we have visibility on somewhere in the neighborhood of 8% annualized income growth in the portfolio. And so income yields are much higher than they were three years ago. Income growth is well above where inflation is.
Ingrid : You're paid to wait, and you have an outlook.
Andrew : And so we don't think that trying to time the cap rate or the valuation cycle and the interest-rate cycle is necessarily the way to go. But when you look on a forward-looking basis, income yields and your income growth are going to drive the majority of returns. And we think that 2025 is a bit of a sweet spot in terms of where we are in the cycle.
And we think there's a tremendous opportunity, in particular, when you compare that to the fact that stocks have had just an unbelievable rally this year. And if you're thinking about it from an asset-allocation standpoint and where your risk is, we think there's a lot more upside potential than downside risk in real estate coming into 2025, and we're excited about that.
Ingrid : Well, Dave Sykes and I just recently recorded our year-ahead broadcast. And we always said it's not "or." It's "and" when it comes to alternatives and, specifically, real estate. This has been a fantastic discussion. Andrew, thank you so much for coming on the podcast this first time. I'm sure we'll have you back as the year plays out.
Andrew : It's great. Thank you so much, Ingrid.
Ingrid : For our listeners, a Happy New Year. We're off to a great start. You could always listen to us on TDAM Talks on your favorite streaming service, or follow us at tdassetmanagement.com. Thanks, Helen. Have a great day.
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