In our previous issue, I began my column by saying that by the time you read this the coin toss of the U.S. election will have been decided. For this issue, I have a similar opening: by the time you read this, we’ll know if the Mayans were right.
Of course I say this mostly in jest, since the idea that the end of the Mayan calendar heralds the end of the world has fairly conclusively been debunked. Heck, even the U.S. government had to release an official statement, saying "Many of these rumors involve the Mayan calendar ending in 2012 (it won’t), a comet causing catastrophic effects (definitely not), a hidden planet sneaking up and colliding with us (no and no)… The world will not end on Dec. 21, 2012, or any day in 2012." But nevertheless, there hangs in the air if not an apocalyptic zeitgeist, then at least a nebulous feeling of anxiety. It’s prevalent in popular culture, but it also seems to have percolated into real estate.
The low-level anxiety in Canadian real estate is certainly not connected to the Mayan calendar gossip, but in my mind its two things professionals should be a little more clear headed about: statistics and sentiment indexes. And let me cut straight to the point: do not be afraid of statistics, or sentiment indexes. The first lack context, the second are more a response to external conditions.
As Mark Twain once famously said, “Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.” With statistics, we have to be very wary of information malnutrition. George Carras, president of RealNet Canada Inc. (itself a real estate information company), put it very well during his presentation at the Emerging Trends in Real Estate event sponsored by ULI/PwC’s when he said “Today we live in an era where it’s real easy to get a lot of cheap, quick facts. It is analogous to someone consuming a junk food diet and paradoxically thinking they are healthy because they are full, only to get sick days later due to a lack of nutrients.” Carras wisely advises to be critical of the statistics utilized by the popular media, and to always put statistics in perspective. “Newspaper headlines have reported that year-to-date high rise sales are down by 30 per cent, however last year was a record year, and 2012 has actually seen the third best year for high-rise sales on record,” he stated. This message was echoed by John O’Bryan, vice-chairman of CBRE, earlier during the event as he described a “fear versus fact” mentality in 2013 and the potential damaging implications of lowered consumer confidence on not only the condominium market, but also the commercial markets.
This low confidence relates to my concern over sentiment indexes. For example, the Canadian Real Estate Sentiment Survey for Q3, produced by the Real Property Association of Canada (REALpac) and FPL Advisory Group, saw the index drop to its lowest level since 2009, saying “Canada's commercial real estate leaders express caution and less optimism today than a year ago in regard to the broader Canadian economy and the prospects for sustained real growth.” The survey went on to note that “sentiment stemming from an unstable international economy has Canadian senior executives taking cautious approaches and wondering if Canada will be next to face financial consequences.”
What we need to focus on is notwithstanding the possibility of an even bumpier global economy ahead amidst continuing sovereign debt struggles in Europe and the U.S. fiscal cliff, the Canadian real estate economy is the place to be. Driven by influences that have been well-established in the current real estate cycle, stable fundamentals (low vacancy rates, constrained supply of investment product, cheap debt), disciplined lending practices, and strong immigration and thus employment to Canada’s major cities are pillars to rally around. As O’Bryan pointed out, this environment has fuelled the “best first half in terms of investment volume on record with $14.3 billion of commercial transactions,” and buoyed by ideal REIT buying conditions such as “little risk in cash flows, open capital and debt markets, and a steady supply of sellers looking to rebalance their portfolio or repatriate their money into foreign markets.” With all these positive indicators, it comes as no surprise that 2012 is on pace to be the second best year ever on record. I echo O’ Bryan’s droll assessment: “[Even] if the iceberg rolls over I would still want to be here.”