Continue to be a market leader.
That’s the objective for David Tweedie and David Holden as the recently appointed co-heads of RBC Capital Markets’ Canadian real estate investment banking group.
Tweedie and Holden’s team comprises 35 market pros in three offices across the country. The business has three pillars — traditional corporate finance, property brokerage and mortgage brokerage — which they said work in tandem to deliver value for clients.
The co-heads spoke to Green Street News about the current state and future direction of Canada’s commercial real estate sector.
Can you talk about your team and what your near-term objectives are?
David Holden: We’ve been a market leader historically, whether it’s in real estate brokerage or in the public market space, including real estate IPOs and real estate M&A. Our objective is to continue to lead, and thankfully, we do continue to be our clients’ first call when it comes to assessing opportunities.
As the negative tone and sentiment dissipate from our market, and confidence returns, we’re optimistic transaction activity will continue to accelerate.
What commercial real estate sectors are you active in? Any notable deals?
David Tweedie: Given our national presence, we touch all asset classes and have been active in all of them. There are some sectors that are more challenging than others, like office, which has seen a lot less trading given the sector disruption post-pandemic. Other sectors have seen robust activity, particularly industrial and multi-residential given the strong fundamentals in those sectors.
“Retail is also showing a lot of signs of life in terms of increased trade activity, with significant capital seeking more exposure to the sector”
David tweedie
Retail is also showing a lot of signs of life in terms of increased trade activity, with significant capital seeking more exposure to the sector.
We have been fortunate in that, during what has been a quieter period in the public markets, our property brokerage and mortgage brokerage teams have been very active, which illustrates the strength of our platform. In what has been a more challenging time for some borrowers, our clients have come to greatly value the expertise that our mortgage brokerage team brings to the table.
Holden: Our team executes deals of all sizes. We’ll do regular mortgage brokerage deals with a direct lender, and we’ll move into the bond market as things get larger and more complicated. Perhaps the most notable deal of last year was the $1.2bn mortgage bond for West Edmonton Mall.
Do you have a working theory on how the current business cycle is going to play out?
Tweedie: The macroeconomic outlook for Canadian real estate and general economic and population growth is quite positive. Canada continues to elevate its position for global capital. And as evidenced last year, of the 10 largest transactions completed in Canada, eight … had a foreign capital element.
The Canadian commercial real estate sector is very stable on a relative return basis. We have a lot of pension fund and institutional ownership across most asset classes. It is a much more conservative capital structure environment, which leads to lower volatility, which attracts capital — particularly in times of volatility.
Like any country that had inflationary pressures, we’re still working through the impact of higher interest rates and the friction that it has created within the overall investment markets. That said, we now see a clear and defined path to rates coming down.
“We now see a clear and defined path to rates coming down”
david Tweedie
As it relates to real estate cycles, all the elements are there for Canada to emerge from what has been a more difficult time and be on a path to a more balanced market. We certainly can’t predict the future, but we think the elements are there for quite an interesting run again in commercial real estate.
Holden: From the public markets’ perspective, the Canadian REIT sector has grown massively over the past 20 years, and REITs have become major players. However, REITs have largely been on the sidelines for the past couple of years, ever since interest rates moved aggressively higher through 2022 and 2023.
It is important to remember that while REITs are real estate companies, they’re also public stocks and susceptible to public equity fund flows moving out of real estate to chase returns in other sectors. Unfortunately, that is what has happened over the past few years.
The public market support for REITs will come back. We’ve started to see it in a few names, notably Boardwalk REIT, who did an equity deal late last year, and more recently, Chartwell Retirement Residences and Sienna Senior Living coming back to the equity market with very successful offerings.
We’ve continued to be committed to the space, and like everybody else we’re impatient for things to get better. Overnight interest rates have already been cut 75 bps since June, and are forecast to continue to come down, which we expect will bring support back into the REIT market.
How far in the rate cut cycle do we need to get before we’ll have a clearer picture?
Holden: That’s the magic question. Tone has already been improving, as we’ve had three 25 bps rate cuts in Canada, with more forecasted to come. Additionally, with the U.S. expected to cut rates later this month, that too will likely further bolster our sector.
Tweedie: I also think if you’re looking at the private market, longer-term financing is quite constructive for transactions, and Canadian real estate lender balance sheets remain strong with capital to deploy. I think the frictional point is the shorter-term rates, and that affects developments and transitional financing.
As overnight rates continue to become more accommodating, we expect it to bring balance back into the market with a wider array of transactions getting done.
Are there opportunities in distressed assets?
Holden: When you look at what’s happened in Canadian real estate over the past couple of years, we have clients who are very well capitalized that have been saying, where are the opportunities? Where’s the distress? Where’s the property that someone needs to sell? And it hasn’t really happened.
“We haven’t had a lot of distress, and businesses have generally operated quite well”
david holden
The Canadian lending environment is more conservative than in the U.S. At times that can be a challenge, but it helped protect some borrowers avoid getting into trouble. As a result, we haven’t had a lot of distress, and businesses have generally operated quite well.
What is your outlook for the rest of the year?
Holden: Hopeful. We spend a lot of time in the real estate public markets, which have suffered through a bit of a negative sentiment lately, and we need some good news to come our way. The operating fundamentals are robust. We’ve had a couple equity deals get done, and any further accommodations from central banks will surely bolster our sector.
“The operating fundamentals are robust. We’ve had a couple equity deals get done, and any further accommodations from central banks will surely bolster our sector”
david holden
Tweedie: As the tone and cost of capital in the public markets continues to improve, we expect to see REITs once again become more active in the transaction market, which will improve deal tension and likely bring some clarity to valuations.
