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The Caisse de depot et placement du Quebec building is seen in Montreal, Feb. 26, 2014.Christinne Muschi/Reuters

Caisse de dépôt et placement du Québec’s chief executive officer, Charles Emond, said a three-year overhaul of its real estate holdings helped stem losses in its property portfolio last year and put the pension fund on more solid footing as he predicts that office-building owners are going to keep losing money.

Acute pressure on commercial real estate weighed on investment returns at the Montreal-based Caisse, which earned 7.2 per cent in 2023 and narrowly missed matching its internal benchmark. Weak returns from private equity also dragged down results, which were buoyed by strong gains on stocks and bonds.

The Caisse lost 6.2 per cent on its real estate portfolio, against a benchmark loss of 10 per cent, as borrowing costs soared and occupancy dwindled. Real estate “is going through not just a cycle, a transformation,” Mr. Emond said in an interview. But the pressure is concentrated in certain parts of the market, and the Caisse protected itself from steeper losses by selling off shopping malls and office buildings.

Instead, it has plowed that money back into logistics, life sciences and residential projects that are proving more resilient. Industrial properties such as storage and distribution centres, for example, became magnets for money during the COVID-19 pandemic, as consumers turned more often to e-commerce.

Owners of older office buildings facing weaker demand will see their valuations fall and will find it hard to refinance loans, Mr. Emond said, forcing some to sell at steep discounts.

“That’s where the bloodbath will be in the next two years,” he said. “Office is going to keep suffering. … I think we’re in the fourth, fifth inning. There might be some additional pressure.”

The Caisse, by comparison, has cut its exposure to offices and shopping malls in half over the past three years. That wasn’t enough to save the real estate unit’s performance last year, as investments in offices make up about 18 per cent of the Caisse’s property portfolio by value. Mr. Emond is watching seven or eight U.S. properties closely, the largest of which is 1211 Avenue of the Americas in New York, the headquarters for media giant News Corp., where the Caisse has long-term agreements in place.

But the Caisse’s real estate footprint is shifting, with a greater share of its cash flows coming from more stable sectors.

“The returns from our new assets we bought in the last three years contribute very positively,” Mr. Emond said. “I think we’re on a good path.”

More recently, the Caisse announced a restructuring of its real estate subsidiaries to bring them in-house, with the chief executive of its Ivanhoé Cambridge property subsidiary, Nathalie Palladitcheff, set to step down in April. The changes are expected to save the Caisse $100-million annually.

In simple terms, the Caisse’s overall gains in 2023 were a welcome turnaround after a dismal 2022, when the fund manager lost 5.6 per cent and wiped $18-billion from its assets. In 2023, the Caisse’s total assets increased $32-billion to $434-billion, and its assets in Quebec increased by $10-billion to $88-billion.

The pension fund manager roughly matched its internal benchmark of a 7.3-per-cent return. Publicly traded stocks and bonds were its strongest performers, gaining 17.7 per cent and 8.1 per cent respectively. Private equity investments struggled, gaining 1 per cent for the year as deal making slowed to a trickle. But infrastructure holdings, which often produce cash flows that rise in step with inflation, gained 9.6 per cent and handily beat an internal benchmark of 0.3 per cent.

Over a 10-year span, the Caisse has earned a 7.4-per-cent return, beating its internal benchmark of 6.5 per cent.

“This next year is shaping up to be a pivotal one,” Mr. Emond said at a news conference at Caisse headquarters on Thursday. Many central banks are likely to begin lowering rates but when and by how much remains to be seen, he said.

Meanwhile, inflationary pressure continues and while the U.S. economy is resisting an economic slowdown, the rest of the world’s isn’t. Global conflicts are multiplying and half the world is holding elections this year, adding another layer of geopolitical uncertainty to the mix.

“All of this is generating a volatility that’s here to stay,” Mr. Emond said, adding the Caisse invests in 70 countries.

Mr. Emond was named Caisse CEO in February, 2020, and his mandate – which was recently extended to 2029 – has been fraught with global challenges stemming from a pandemic, record inflation, the worst decline in stock and bond markets in 50 years and wars in Ukraine and the Middle East.

“This current environment is an extraordinary test” of our strategy, he said.

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