Jon Love, founder and executive chair of KingSett Capital, is known for speaking his mind on issues ranging from public policy to taxes to fueling innovation.
With decades of experience investing in commercial real estate and leading companies, he brings a unique perspective to today’s market. Overall, Love is confident in the future of Canada and Canadian real estate.
Green Street News sat down with Love to get his views on where valuations are headed, where opportunities can be found and where the office sector is headed.
With interest rates finally starting to come down, how is your view of the Canadian real estate landscape changing? Have valuations finally hit bottom?
Moderating interest rates are clearly a tailwind for real estate. One must remember why interest rates are falling, which is that the economy is slowing generally, so it’s a balance of lower interest rates versus a slowing economy. And we’ll see how that plays out. Business confidence has been at a bit of a low ebb that has been growing over time.
“Business confidence has been at a bit of a low ebb that has been growing over time”
At the end of every long-tenured federal government, there is an appetite for change. There has been disappointment that this government doesn’t really have a prosperity agenda with regards to innovation, growth [or] jobs, so clearly we need to see change either of their strategy or of government to get us back, to focus on how to build a pie, not just how to share it.
Once national governments pivot to more of a focus on the economy and prosperity, unlocking job creation and opportunities, you’ll see a significant change in business confidence, which will filter its way through the entire commercial real estate chain.
Do you expect KingSett to be a net buyer or net seller this year and in 2025?
We are always active on both sides of the market because we have different funds with different strategies. Generally, we are fairly even on both sides of the slate. It reflects our strategy more than a view on the economy.
I tend to be, net, more on the positive side because I think Canada has so many constructive things going, while there are a number of things holding back our potential. I am optimistic that, in time, some of those barriers will be put aside and we will see the economy grow on a per capita basis again.
Correct me if I’m wrong, but I think part of your personal strategy when it comes to barriers is that you view them as challenges that you are willing to face head on?
That would be right. I think some of the big issues are that Canada cannot have a prosperity agenda without a forward-looking resource strategy. And I use the word resources broadly, which is all the way from hydro to solar to renewables to minerals to commodities, farm, oil and gas, energy, etc.
And today, we have a basket of regulations that say all of those things are bad. That has to change.
Which sector presents the most attractive buying opportunities at this time?
You know, in every geography and in every asset class there are always great buying opportunities. It all depends on your skill set. We find opportunities all the time across the country in different asset classes.
“In every geography and in every asset class there are always great buying opportunities”
If someone is asking for my advice, I’d say stay in your lane. Work a little harder, and you’ll always find some things that present opportunities to you.
The office sector has taken some serious lumps over the past few years amid the work-from-home trend. Where do you see it going from here?
The office story is quite a nuanced story, so I think it needs to be unpacked on a few levels. First, return to work: Our return to office is the greatest where employers are the most competitive because they need their people back. They need that product of enhanced office engagement which delivers greater productivity and innovation. You’ll find that in the most competitive sectors and the least competitive sectors such as government because governments have no competitors.
Employers that are doing this well are not doing mandates. Rather, they are explaining to their people why it is important for them to come to the office. It is super difficult to train, to encourage and to spread culture [via] Zoom calls or Teams calls, so having people together is the best way to invest in their future, and investing in their future is the best way to build a business.
“My view on office is that you will see a slow migration back to more days in the office”
Many employers are trying to get their employees in all together on the same days, which means that most employers need the same amount of space. In the GTA, for example, demand shrunk by about 4m sq ft, but it’s grown in the triple-A space by 6m sq ft, so there is a bigger impact on single-A space. Triple-A space in downtown Toronto is 6% vacant, which is double the vacancy rate [prior to Covid].
My view on office is that you will see a slow migration back to more days in the office as over time, people will understand that if they are going to be in an office job, they need to be in the office to get the learning, the training, understand company culture and have better advancement opportunities
You’ve been critical of some of the moves by the government that you see as impeding, progress. Where would you most like to see public policy focus in the next few years? What are the crucial points?
There are three areas that policy must address. First is that Canada has a potential to be an energy superpower, and to do that, we need to break down the barriers that stop large projects from moving forward. whether they’re hydro, hydrogen or LNG. My ambition would be to have Canada become a much greater energy powerhouse.
“My ambition would be to have Canada become a much greater energy powerhouse”
Second is to address the innovation economy. First, we tend to tax innovation more than others, which is difficult, but we also put limitations on innovation in the regulatory environment and there is a whole raft of things that need to be done there.
Third is an existential crisis: housing. Housing can’t be fixed by sending money to the problem. Housing needs to be fixed by removing the barriers that have limited supply. Our housing crisis is all a product of poor public policy decisions at all three levels of government.
The good news is that because it is poor public policy decisions that got us here, better public policy decisions can help us get out of here. We need more supply at all edges of the spectrum, not just one kind of supply, and there is more-than sufficient capital. Money is not what is needed. What is needed is to reduce the tax burden and the regulatory burdens.
If you build an apartment building in Toronto, 30% of the cost of the building is taxes. We could charge 30% less rent with tax breaks. Governments typically tax things that they don’t want. In Canada, that is gasoline, liquor, cigarettes and … apartment buildings.
“Governments typically tax things that they don’t want. In Canada, that is gasoline, liquor, cigarettes and … apartment buildings”
On regulations, we’ve got all of these codes that prohibit any mass solution to any issue. We can have no innovation because we have no scale. We have the inverse scale as the regulatory environment for just getting a permit is exhausting.
KingSett is building an affordable housing project that is geothermal. Now, I might have thought that having a zero-carbon affordable housing project would be welcome, but the fact is that it took us five years to get a permit [in Toronto]. We are under construction now, but it takes us three-and-a-half years to build it, and the system is so difficult to work through.
Looking back at the various cycles you’ve experienced in your career, what stands out as different today?
This is a relatively benign cycle. There are two kinds of recessions in real estate: operating and capital. An operating recession is when there’s more space than tenants. If you go back to the early nineties, we had lots of vacancy, and the tenants we had in place, many of them couldn’t pay their rent.
Today, buildings are relatively full, and tenants are paying rent. On the operating side, it’s fine.
On the capital side, however, the Covid stimulus that ratcheted up interest rates had quite a cost shock to the real estate industry. Cost of funds went from you’re borrowing money at 2.5% or 3% and suddenly it’s up to 6% to 7%. That rippled through and had an impact on the cost of mortgages and the availability of mortgages.
The good news is that the capital recession is the easiest one to fix. We will see over the next period as interest rates moderate and as business confidence builds, the markets will stabilize and resume again. I am hopeful for 2025.
The interest rate decline depends on the pace of elections. Both in the U.S. and Canada, it would be nice to get the noise of these political elections behind us whatever it means to pass the hurdle of uncertainty. I am not picking sides in either election, rather it is about getting that uncertainty behind us and getting back to business.
What excites you most about the year ahead?
Canada’s got such unbelievable untapped potential. I am optimistic that it will evolve at political and societal levels. The focus has to be on how we can unleash some of this potential and make Canada a stronger country, and I think that is a pretty exciting opportunity.
We need to lean more into focus around things that people really care about, which is prosperity in the broadest sense.
