It’s not out of the realm of imagination to say that Canadian investment in U.S. commercial real estate is easy to take for granted. After all, the longtime ally and neighbor to the north has topped the list of inbound foreign investors for years. Last year brought more of the same, with Canadian funding sources pouring a whopping $14.4 billion into 314 U.S. properties, according to MSCI Real Assets.
This outlay constituted a staggering 40.8% of total cross-border volume in 2022 — so impressive that it’s sometimes difficult to contextualize. Consider, for example, that the second-place country (Japan) invested a paltry $2.2 billion in comparison. In fact, one could combine the deal volume of the next seven countries on the list and the output from Canadian investors would still come out on top.
After vaulting upward during the commercial-property frenzy of 2021, buyers based in Canada scaled back their spending by 48% in 2022 — not surprising because of how the real estate sector evolved as the year went on. Still, while Canada’s outlay into U.S. properties remains robust, one can’t help but note the shifting sands of the nation’s investment landscape in 2022.
For one thing, Canadian investors showed more of a domestic appetite than their historical wont. Canadian capital sources deployed more than 42% of their money within their own country’s borders last year, compared to a pre-pandemic average of 36%, MSCI reported. And while the U.S. remains the primary beneficiary of Canada’s cross-border purchases, its share of global Canadian investments has backtracked. From 2015 through 2019, spending on U.S. properties comprised nearly 40% of Canada’s global capital flow. Last year, this share slipped to 28%.
Part of the slide can be attributed to persistent weakness in the U.S. office sector. With remote work continuing to hurt office demand, MSCI reported that the dollar volume for all U.S. office transactions was sliced by 25% annually in 2022, the highest of any major asset class. A prime illustration of the Canadian pullback from the office sector came in March 2022, when Toronto-based Brookfield divested a 49% stake in One Manhattan West to Blackstone.
It will be interesting to watch Brookfield’s movements relating to the office sphere moving forward. In February 2023, a fund managed by Brookfield Properties defaulted on more than $750 million in loans on two prominent Los Angeles office towers. The default wasn’t entirely unexpected as Brookfield declared late last year that the two properties might face foreclosure.
Brookfield declined the option to extend the loan terms for one of the buildings. Preventing the other asset from default was likewise in Brookfield’s court, but in that case, the company elected to forgo required interest rate protection and the default was triggered. A report from Fortune placed the rationale behind Brookfield’s decisions squarely on waning office demand and the impact of remote work, while Real Estate Capital USA noted that the move could lead to a rise of “strategic defaults” in the future.
In response to the defaults, a special report from Barclays noted that the moves increased the risks for other loans within the same Brookfield portfolio. Certainly, office-sector observers will be on the lookout for similar actions in the near term. With the company at the apex among global commercial real estate investors, its strategy will go a long way toward defining what the 2023 office investment environment looks like. More moves like that may mean not taking Canadian investors for granted any longer. ●
