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Part 2: Lots of activities, including commercial, industrial, retail, …

Many people misunderstand the role of real estate in the Canadian economy.  Residential real estate is part of the industry but not learning the full dimensions of that role is sad since space and location matter in so many ways to so many people. For example,

On a personal level: People leave their homes to play in park space that could have been used to build houses.  We may work in an office building or a manufacturing facility or a warehouse.  We shop in small strip malls, large malls and “big box” stores.  We go on vacation at hotels and eat in restaurants which are located some place.

As a business: McDonald’s restaurants are famous for their food but, from a business perspective, the value of property and equipment is almost as big as their annual sales.  (See the spreadsheet and compare Total Revenue on the 6 Year Summary worksheet to “Net Property and Equipment on the Balance Sheet” worksheet; I apologize to readers who notice why this comparison is slightly flawed but, it gives a sense of the magnitudes involved.)  That means that it is much bigger than McDonald’s annual profit.

Sears is in trouble these days and part of its recovery strategy is to sell some of its assets.  The question which many are asking is: why is it getting rid of some of its most high-profile locations?  Since activity depends on both sides of the market, the answer depends on who is buying.

Managing property, either directly or as one part of a strategy, could have the dominant effect on shareholder wealth.  The real estate industry is part of the “FIRE” sector (Finance, Insurance and Real Estate).  According to the government of Canada, the Real  Estate and Rental and Leasing Industry has more than 44,000 identifiable employers and contributes about $170 billion in value added annually.

As an investment: Investors such as the Canada Pension Plan and the Ontario Municipal Employees Retirement System (in the guise of Oxford Properties) control hundreds of billions of dollars in assets: instead of stocks or bonds, it is invested in shopping malls and airports or other bits of property around the world.  Real estate has always been an important aspect of pension fund portfolios, because pensions represent long term liabilities and it is nice to have an asset which produce income over a similar time period.  At the same time, some international investors are looking to buy Canadian real estate, and not just rumours of Chinese billionaires looking for a safe home.

If you think that the next technological revolution, cloud computing, will make real estate and location irrelevant then you may want to check your history; many people claimed that the early internet would make traditional retailing obsolete and predicted the bankruptcy of retailing giants.  It hasn’t.  And the warehousing sector (i.e. another aspect of the real estate industry) has done fairly well.

An even more interesting activity might be to talk to some of the people connected to our major whose job is to maintain the buildings which make the next technological revolution possible.  Their challenges differ from what you might think.  And those differences are part of what makes the real estate industry interesting, really.

PA

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