For Michael Turner, the new president of Oxford Properties, the next decade in commercial real estate won’t be as easy as the last.
Since the Great Recession, Oxford – the real estate company for one of Canada’s biggest pension funds – has benefited from ultralow interest rates and a protracted commercial real estate boom.
That helped it produce an average return on investment of 10.2 per cent over 10 years, hitting 11.5 per cent last year. Those results aided Oxford’s parent, the Ontario Municipal Employees Retirement System (OMERS), as it worked to trim a funding shortfall brought on by the financial crisis.
But those double-digit results are likely to be more elusive as interest rates rise and the market anticipates a potential real estate downturn.
“We would be pretty happy to be able to do that every single year. In an environment where you are longer in the cycle and rates are starting to creep up, I think that number becomes increasingly difficult to attain,” said Mr. Turner, who started his new job in April. He was previously in charge of Oxford’s Canadian operations.
As OMERS works to eliminate its funding deficit by 2025, Mr. Turner’s skills will be put to the test. The Ontario pension fund, which manages the retirement savings of nearly 500,000 municipal employees, has a $5.4-billion gap, as the plan’s estimated long-term funding costs are higher than the value of its assets.
OMERS has struggled to stay fully funded since the financial crisis, when its investment portfolio suffered steep losses.
“They have to invest capital because they have growing liabilities, therefore they need to grow their asset base,” Mr. Turner said.
Oxford owns properties such as the popular Yorkdale Shopping Centre in Toronto, Bow Valley Square offices in Calgary and the Olympic Tower in New York. Oxford has about $45-billion in assets under management and competes with private-equity giants such as Blackstone Group and Brookfield Asset Management for properties.
To make a name for itself in bigger markets, Oxford had to do splashy deals. When the company wanted to get into London, for example, no one had heard of it there. The fund set its sights on what it called a “monumental transaction” and, in 2010, provided capital to develop a skyscraper “on spec” – that is, without a major anchor tenant to lease the space, a risky proposition. But Oxford earned a handsome return on that building, officially called Leadenhall but known as the “Cheesegrater” because of its unusual shape, when it sold its share in the project last year.
Oxford also took a big chance on a decade-long development project in New York called Hudson Yards that will create a new business district in the city. The multibillion-dollar project is expected to be completed by 2025.
These high-profile projects have helped establish the pension fund as a major real estate player.
After the 2008-09 recession, with real estate values depressed, “the biggest mistake we could make was not buying enough property,” Mr. Turner said. But now, with the global economy on an extended growth streak, “we are quite late in the cycle everywhere in the world.” Over the next five to 10 years, he added, the winners and losers will be determined more by “skill than all boats are rising.”
The 45-year-old president’s entire career at the pension fund has coincided with a low-interest-rate environment, in which he worked with his predecessor, Blake Hutcheson, to develop Oxford’s strategy of investing in so-called global gateway cities, or in big urban places such as New York, Paris and London. (Mr. Hutcheson is now president and chief pensions officer at OMERS.)
“We believe in themes like urbanization, cities that have high barriers to entry and doing things at scale … That is not going to change,“ Mr. Turner said. “We are not turning the place upside down, nothing like that.”
What is going to change is its mix of properties. That means less emphasis on office towers, fewer Canadian properties, more logistics (such as warehouses) and more apartments or multiresidential – now the hottest type of real estate for developers and investors.
Currently, half of Oxford’s portfolio is in Canada, one-quarter is in the United States and the rest is in Europe. Offices account for about half of its properties, retail makes up a quarter, and hotels, apartments, logistics and Oxford’s credit business make up the rest.
Logistics and multiresidential businesses each comprise less than 6 per cent of Oxford’s fund. Eventually, Mr. Turner wants each sector to represent up to one-fifth of the company.
Mr. Turner says the themes of housing shortages are not unique to Toronto, where the apartment vacancy rate is around 1 per cent.
“Those same issues exists in the major gateway cities that we operate … which represents a great opportunity – which is to buy and build stock and add supply where it is needed,” he said. “There will be multiple ways that we do that in pretty much every jurisdiction that we operate.”
Oxford recently bought a luxury-apartment building in New York called Aalto57, where the monthly rent for a studio is listed at US$3,711, and a two-bedroom unit goes for as much as US$8,515. It also acquired a majority stake in a former warehouse in Manhattan, and 95 per cent of a metallic mall-like complex in Berlin, which is listed as one of the city’s tourist attractions.
In addition to New York, London, Berlin, Boston and Washington, Oxford expects to expand into Sydney, Melbourne and the West Coast of the United States.
As for doing attention-grabbing deals to build its reputation? Oxford no longer has to do that. “We are not going on a Hudson Yards replication spree,” Mr. Turner said.
With a file from Jacqueline Nelson