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episode # 262

Why Big Money Buys Canadian Real Estate & Why You Should Too with QuadReal’s Shawn Gilligan

So you think your real estate portfolio is big? QuadReal, a Global Real Estate Investment Group headquartered in Vancouver currently has 10,000 residential suites across Canada and a portfolio of over $171 Billion. Yes, Billion! Shawn Gilligan heads up Research and Strategy for QuadReal’s Canadian Division and joins Matt & Adam today to discuss recession-proof real estate, where the metrics favour, and why he’s bullish on Vancouver real estate in general. Which Canadian markets will outperform? Can prices continue to rise at an alarming pace? And what are the biggest risks our market faces? We went long on this interview for a reason – it’s information packed and value dense. Stop everything and listen up.

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Episode Summary


Tell us about yourself.

I head up the research and strategy for Canada with QuadReal and have been with them for about four years now. Real estate has always been a major interest of mine. It was always a practical application of everything I was learning in school. Early on, I knew I wanted to gain more experience in real estate in an academic capacity. I started working at the University of Toronto looking at the macro drivers that fuel innovation and productivity growth within real estate. Those broader trends have always been of interest for me. From the macro perspective, it all really flows down to our day to day real estate.

What does QuadReal do?

We manage the real estate and mortgage programs of BCI. We also manage real estate on behalf of RBC and our portfolio is international. We look at development, asset management and existing properties across all asset classes, from office to land lease. QuadReal is one of the biggest owners and operators of real estate in Canada. Being headquartered in BC and being involved with BCI, BC and Vancouver are a big part of our portfolio and day to day. 

How does Canadian real estate compare to real estate more globally? 

My main expertise is in Canada so I may come off a bit biased. If we look at the Canadian market performance since the GFC (Global Financial Crisis), it’s been fantastic. The relative stability is a big positive for any real estate investor. It’s a positive when we think of all the macro demand drivers to own and operate real estate for the long term in Canada. 

Why are you a fan of Canadian real estate? 

When we look across the country, the growth profile in places like Toronto and Vancouver – employment, population, education, etc. – is all very highly rated. We’re also seeing that softer indicators like liveability and quality of institutions are also quite high. So continued investment and growth look good in Canadian markets. When we look at global liveability indexes, they’re positive across the board in our major Canadian markets. 

Have you been surprised by the real estate market since covid? How has QuadReal pivoted? 

The nature of this pandemic and recession has been a surprise to everyone. Everything we’re going through is uncertain. But in terms of the resilience, especially across certain asset classes like the industrial market, has been very surprising. We always believed in it and had high conviction in the industrial market. But it has surprised many. 

In terms of QuadReal specifically, we have extremely strong conviction not only in Canada but in metropolitan areas. There’s been a lot of talk of people moving out but I believe our major cities will still be our major economic centres going forward. I’m betting on cities. Secondary and tertiary cities are trying to grow but main cities are still outpacing them. So I’m continuing to bet on cities. 

We’ve seen growth in prices in some of those secondary cities. Are some of those markets slightly vulnerable?

Personally, I would say so. There is opportunity in secondary markets, like Kelowna or Ottawa. But I don’t believe that growth has been subtractive of Vancouver or Toronto, or that it’s fueled by speculation. Pre-covid, we would say Toronto and Vancouver were under-supplied. So some of the demand going to Kelowna or Ottawa wouldn’t be considered high-risk speculation, in my opinion. 

In thinking of downtown Vancouver, we’re seeing that while we have the highest rental prices for one-bedroom condos across the country, the rates have taken a significant dip. Do you see this as a blip because of covid?

Yes. The impact on the demand has slowed due to immigration, lack of international students, closure of office buildings and closure of amenities in our core. These are short term impacts in my opinion. There are many reasons why people choose to rent downtown. People pay to be within a short distance to their work and the amenities they value. I don’t believe a structural shift has taken place where individuals no longer value those things. 

Have any new opportunities come up over the past year?

From an investment perspective, the demand for industrial space is a big opportunity. It’s only expanded and proven more resilient through the pandemic. The opportunity was there before covid but it’s been really cemented now. On the operational side, the ability to provide a high quality of service as a landlord to meet tenants’ changing needs is an opportunity. In my opinion, the demand for a high level of service will still be with us in a post-covid world. 

On the other hand, are there other property types where covid has been the final nail in the coffin?

Of course, some of the impacts on the retail segment cannot be ignored, as well as the impact to small businesses. In markets with an excess of retail supply pre-pandemic, the shift to online sales during covid will remain a challenge for them. In secondary and tertiary markets, that effect will really be felt. 

What factors do you look at when analyzing markets?

Macro economic conditions impact all real estate. Some of these indicators take a while to flow through to what we’re seeing on the ground. I always come back to population growth and employment growth as most important. When do we reach pre-pandemic levels of employment and increase from there? When do we return to our population targets? 

Do specific policies work to attract people to certain Canadian cities?

That is slightly outside of what I look at. Of course, policy does affect a city’s population and employment. For example, policy decisions that increase the supply of housing allow for more growth in regions like Toronto and Vancouver. So it’s very important.

What areas in the Lower Mainland are you most excited about? What about outside of Vancouver?

In my opinion, I have a positive view within the city of Vancouver and the surrounding suburbs. Bunaby, Coquitlam and North Vancouver are places I personally see substantial growth. These are places that are homes to newcomers and new businesses. The population growth in these suburban communities will continue to be noticeable.

Outside of Vancouver, Kelowna, and the GTA and Toronto suburbs have great growth profiles. I do believe there’s opportunities in markets such as Kelowna as we all wait to see where the Baby Boomers go. Lifestyle communities are attractive so I’m very positive on Kelowna. 

Every market is on fire right now across Canada and many say interest rates aren’t rising anytime soon. How does this play out? What are the biggest risks? Is this sustainable? 

So much of it rests on the micro perspective of what buyers are doing, what they’re able to pay and what they value. From a macro perspective, we look at household debt to income and household debt to GDP. What drag will that have on the economy going forward? It’s not a risk for a market crash but we need to consider the drag of individuals putting so much of their income into mortgages.

Overall, when Vancouver returns to its pre-covid trajectory of population and employment growth, there’s the risk of affordability and lack of supply. As Vancouver attracts the best talent, housing affordability is of the utmost importance. 

There’s a risk if prices go too high, that will be a deterrent to newcomers to Vancouver. If prices are pushing beyond local income thresholds and beyond local activity, that could be a concern. The caveat is how BC specifically has handled covid. The province has flattened the curve quite well and avoided harsh lockdowns. So what are people willing to pay to live somewhere like that? While affordability is a concern, Vancouver is still able to attract many newcomers globally. 

I agree that interest rates will stay low and the government will continue supporting the economy; I don’t foresee a major crash. The risks I’m thinking about are the overall economic conditions of Vancouver going forward that fuel down to the individual asset classes. How does the amount of income put towards rent or mortgage affect the broader economy?  

There’s been a lot of policy trying to crush demand but we haven’t seen it make a huge impact in the market. So where does this end? Is supply the answer? 

Yes, I would agree that supply is the answer. We’ve seen a lot of the run up of prices in Toronto and Vancouver taking place in the detached and suburb markets, which pull up the average price. Places that might have been deemed more affordable for detached homes, like Surrey or Coquitlam, are now seeing way more demand than they have supply.

New York City is a place where everyone rents, sometimes for their entire lifetime. Do you see Toronto and Vancouver becoming more like New York? Has covid affected this?

Yes, I do believe Toronto and Vancouver are already there. Renting is going to be the only choice for many individuals. Owning a home is not possible. There will also be many who choose to rent. I think both of these groups, people who are forced to rent and people who choose to rent, will grow in Toronto and Vancouver. 

In terms of the K-shaped recovery, we’ve seen a major negative impact on lower-wage industries where people have to be physically present to work. And these are important services to the economy. The ability of those jobs to be reabsorbed into the economy is a very important topic. 

What would you buy in BC and in Canada overall? 

I personally am very positive about our cities for the long term. I would look to these major markets. Within that residential market, it always comes down to local fundamentals. What’s the rental rate? What’s your carrying cost? What are the income dynamics of individuals in the area? Local fundamentals are what I would focus on. If I was looking outside of residential, I’ve said from the beginning that I’m a big believer in the industrial market. Industrial condos and industrial strata have been great investment opportunities. 

Outside of Vancouver, I’m excited about Toronto. I also look at nearby municipalities, like Mississauga and Brampton, that have become top cities in their own right. Toronto and the GTA have a lot of opportunities available within their sub-markets. 

We’ve talked a lot this past year about people leaving cities. It’s inspiring to hear the case for cities. 

I am positive about cities but I’m not downplaying risks within the economy. Productivity growth and household debt are real risks. But from an economic perspective, the ability for us to have a large scale structural shift where everything is uprooted from cities just doesn’t seem plausible to me. There’s just not enough evidence for it. 

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