[00:00:00.00] – Chase McWhorter

This is Chase McWhorter, Managing Director with IREI, and I'm with Erin Patterson at Manulife. First, thank you for joining us, Erin. Appreciate your perspectives. Wanted to touch base on the Manulife research report that came out, your house view for 2025. Just to set the stage, there's obviously a lot going on with macro concerns, interest rates, tariffs, all those things. And we know that's ever changing. So we're not going to necessarily hold a lot of these perspectives just over you because we know the world could change in a week. We're in a day. I just wanted to get some of your insight. Yeah, exactly. I appreciate you taking the time. First question, what are some emerging trends you're tracking since publishing this? To our point, has the last few weeks impacted any these forecasts?

[00:01:01.50] – Erin Patterson

Yeah. So I think, I mean, honestly, none of what's happening today is a shock, right? We saw the writing on the wall even before the end of 2024. So these were always things that we were tracking as potential upside, downside risks in our go forward for our strategy. So we actually started writing our year-end 24, 25 Outlook house view back in November. We were on top of whatever potential shifts there could be, whether it be political wins, Fed policy, et cetera. Because Manulife is a Canadian firm, we're investing in Canada and in the US as well as globally, we're trying to think about how these potential trends and shifts could impact investments outside the US as well. We're not thinking in a US vacuum, as it were. Really, I think our strategies generally are rooted in long-term conviction and creating a creative positioning of our portfolio allocation to really benefit from diversification and risk mitigation. When we're thinking about political wins and economic shifts and interest rate changes, we're really still maintaining conviction in some the sectors that we went into year-end at the start of the year, that conviction has not budged because we really believe, again, in the most potential for outperformance really being due to underlying fundamentals.

[00:02:45.57] - Erin Patterson

We look at the long term structural demand drivers that are present for whatever sector it is we have conviction in and really push through on that. For instance, we're really still pretty… We lean heavily into multifamily industrial and selective retail, and we believe that the long term demand drivers for those sectors are really not moving much. That being said, we are, of course, thinking about tariff implementation. That's probably the big thing that we are addressing the most. As we wrote our house view, we're, again, we are well aware of potential tariff impacts, which, by the way, can be to the upside as well as to the downside. We're looking at opportunities that come out of that as well. Again, so we remain in favor of residential, industrial, and retail based on these long term structural demand drivers. Yet in thinking about our underwriting and business plan execution, we're now certainly baking in more tangible risks related to economic distress triggered by tariff implementation. I think the way I really to think about it is the reality is we're not in a tariff tunnel. It's not just the tariffs themselves. They absolutely do have a defined direct impact on these sectors, such as increasing the cost of materials for construction or supply chain disruption.

[00:04:19.75] - Erin Patterson

But we're really thinking about the indirect effects that are rooted in the tariffs and the changes that result. When we think about the trickle down into household spending patterns, labor market conditions, wage growth, business investment. All of these things will ultimately change the near term demand side fundamentals, but that will take some time to materialize and spill into leasing activity and capital markets activity. So long story short, our focus is really on the long term. Where do we see longevity and sustainability and investment? And again, we really believe that materially, it doesn't change our allocation. It just may change our business plan, execution, the specific types of assets that we're investing in, really paying attention to how people are using real estate. And again, we're not going to see the impacts of these tariffs indirect or direct quickly. It's going to take some time to materialize. And then I'll end on a positive note where we do see upside in tariffs. So there potentially could be tailwinds for manufacturing in the US, as we've talked about. It's not all to the downside, but we're definitely well aware of what that could look like.

[00:05:40.90] - Chase McWhorter

Okay. Well, I'd say two things that stuck out to me. First is one thing that's somewhat stuck out to me in different conversations is just the... I wouldn't say this is real estate, but broadly, just economics, finance in general, the level of shock at the tariffs and all these things that, again, to your point, it wasn't necessarily... It was telegraphed during the election, these are the issues we're running on. That's one thing. I go back to, I think it was a Bloomberg conference where Trump's out there saying, Tariffs and this is their effective tools. I would say a beef I have with the finance industry in general is the level of shock I've seen since April second. I appreciate you saying, November, we knew, won the This was what he ran on. This is the way of the world. And the other thing is finding the opportunity. Like you said, it's not all this tariff tunnel. It's not all bad. Again, there's obviously going to be chaos, short term, medium term, long term, different ways it will impact. But I do like the idea of there's naturally going to be opportunities. And I think investors that identify that are going to be well positioned.

[00:06:56.70] - Chase McWhorter

Those are just two things from what you said. That stuck out to it was telegraph what was going to happen and there can be a positive side. So you noted the report that investors have been caught in a circling pattern with many forces at play. Again, what we've talked about here, interest rates, and we've heard this for two, three years, a lot of the things that just investors go into the sideline. What is there? Is there a force that you believe weighs on those sidelined investors the most, or is it just wave after wave that just keeps them on the sideline?

[00:07:32.55] - Erin Patterson

Yeah, it's like, honestly, Chase, it's the rip time right now, right? So I mean, I think, to be fair, I think as volatile as things are and as much as they're changing daily, the underlying force or current that's really weighed on US investors and put them on the sidelines prior to this year was certainly the uncertainty in liquidity and interest rates. You not knowing really or knowing where they were going, but not quite getting there yet. Higher being the new normal and adjusting to that, adjusting between buyer expectations and seller expectations. I think there was a lot of that, definitely a lot of chess playing there. I think going into '25 and being here today, we were optimistic that that piece would have more clarity as inflation was approaching the Fed's target at year end and the economy overall remained strong. And then we're here today. And so I think today the force is still uncertainty. But unfortunately, that uncertainty is not targeted at interest rates. It's actually broad-based, right? So we've got inflation rearing its ugly head again, quite stubborn rates. And of course, we're more risk of inflation with tariffs and then any knock-on effects, like an economic downturn.

[00:09:06.50] - Erin Patterson

That will challenge the Fed direction even more because they're battling against economic growth versus inflation. How do we deal with that? Are we going into a stagflationary environment? So these are things we haven't really seen before. We've never had tariffs like this. So the other piece, as you mentioned before, is also just market sentiment about that. The reactions can be catastrophic, even though we might have seen the writing on the wall. What I think from an investor standpoint then keeps you sidelined in this uncertainty is, again, before there was uncertainty about interest rates, where the Fed might really go. And then you've got now this piece that might actually start to shake up demand drivers and fundamentals. We didn't really have that before. We closed out very strongly with the economy. We were very happy with labor market growth. It was chugging along, GDP growth, chugging along. Now we're seeing some wavering there. I think from a real estate investment standpoint, that's another really important layer that we have to really dig in carefully and understand near term. How do these demand drivers change? What does this mean for real estate consumption and absorption?

[00:10:30.00] - Erin Patterson

How are tenants going to be making decisions and behaving? I think that's the real key piece right now that's potentially going to squash activity a bit, at least until we get more clarity around tariffs if anything changes there. But I think we're not going to see any of that until the mid-year point at soonest. Then, as I said, we invest in Canada as well. I think we're seeing a lot of the same trends. It's different dynamics, certainly. Canada is feeling the wrath of these tariffs. Unfortunately, we're experiencing that retaliation as well. Canada, I think we're even more... The risk is heightened because Canada went into this period already with a comparatively weaker economy. But again, it's not to say we don't think long term. We think, what are the long term demand drivers there? So that continues to be our focus. But I think the near term demand driver shake up is what investors are going to be concerned about.

[00:11:45.64] - Chase McWhorter

Yeah. Well, I do think one thing, a recent discussion interview for the publication, it was brought up that the human mind can absorb good news, bad news, but uncertainty is the hardest thing to deal with. So, again, all these things to go from COVID to just crazy fundraising, putting money to work in '21, then inflation, then interest rates, denominator effect. It's just, look at all these waves of just the exhaustion, let's say, that investors might be feeling. So what sector, again, going back to the house view, that was one area I was definitely intriguing. I know it's between Canada and the US, but what sector is most intriguing to you? I don't know if you want to speak for Manulife, but headed into 2025, what's the most intriguing? I'll even preface it with, IRI, we do a big annual investor survey and we rank investors, rank their favorite property types. You have industrial logistics, multifamily data centers all crowded at the front. Then you've got scattered all in the middle. And then at the end is suburban office. And it was brought up at some of the discussions we've had around the survey was, if you're picking a horse in a race, that might be a crowded trade up at the front.

[00:13:08.12] - Chase McWhorter

So some of those in the middle and even maybe at the very bottom, as far as favorability, could be those outperformers long term. So suburban office was one that for the surveys, the investors we surveyed, it was one of the most out of favor. But again, the contrarian mind is like, okay, well, that's probably a good opportunity there. So I'm curious, not maybe necessarily what you're expecting to be the best performer, but what's just maybe the most intriguing sector to you right now between Canada and the US?

[00:13:38.36] - Erin Patterson

Yeah, sure. So we love a contrarian play. Why not? Because that's where you shine. Our contrarian play is not suburban office. It's funny. I started my career really focused on office. That was my area of concentration. I guess, thank goodness, I broadened my skill set because here I am. But I do love office. I think that there is, ultimately, the pendulum swings. Really, office's biggest problem is it's under demolished. If one's supply, and it's going to take a long time, look how long it took retail to reinvent itself. Now retail is one of the few sectors actually boasting consistent growth. So I think office is on our... It's not off our radar, but it's not necessarily the contrarian play that we would want to make right now. We are invested in office, and we have high conviction in the investments that we're making. We're extremely strategic in that. We look for best in class, highest quality, for sure, and we do think that can outperform. I mean, I guess as We move into this year, again, I called out the three major suspects, multi-industrial and retail. I think the key in sector selection this year is layering in market selection and prioritizing that.

[00:15:18.81] - Erin Patterson

Within those sectors, the key is highly strategic market selection. We have a robust process for identifying not only the markets we want exposure to, but also at a hyper local level. As you mentioned, with geopolitical influences so in flux, we're paying attention to local resilience. What markets and locations have those ingredients or boast countercyclical qualities to potentially weather a storm. I think that's true for both the US and Canada. Then in particular, in both the US and Canada, we're also focusing on diversification. We want to mitigate our risk. We want to vary our exposure. A lot of our focus is what I like to call the artist formerly known as niche, looking at more alternative sectors like IOS, attainable housing, student housing, cold storage. I think some of these more alternative plays can also offer those countercyclical qualities. I would call out maybe my dark horse is cold storage. We're really interested in cold storage right now. It's It's a difficult sector to penetrate because of supply-side complexities, the cost to build, the cost to maintain. You really need a very in-depth operating expertise. But we also believe innovation has the potential to significantly change that market and long-term demand fundamentals really point towards continued absorption of this product.

[00:16:54.43] - Erin Patterson

Many of the demand-side fundamentals that we're looking at for cold storage have countercyclical qualities. We're talking food storage, we're talking pharma storage, biotech. So these are things that even as the economy might lift and shift and go different directions, that demand is always there. And when we think about cold storage, again, it's pretty undersupplied. There is supply out there, but it's similar to data centers. It can become obsolete very quickly. Cold storage is also often built to suit. It's sticky for it might not work for another tenant. So I think you have to have a very intentional strategy with it. But we like looking at cold storage. And then some of the other ones I mentioned, attainable housing, student housing. In those sectors, you're also seeing chronic supply shortage. When we think about the risks in multifamily investment right now around the supply side, there is absolutely a risk of supply shock in certain markets. Again, folding in that market level piece. But that supply shock is in the form of luxury product, high-end product, often priced in a way that is misaligned with where the bulk of demand is. Again, really paying attention at the local level, where are the ingredients that really drive absorption of whatever product we're pursuing.

[00:18:32.25] - Erin Patterson

Then I think with industrial space, we're also thinking creatively, we're big fans of industrial outdoor storage, and especially going into a potential downturn, industrial outdoor storage does serve as... We look at industrial outdoor storage in two ways: as a function of point of transfer, where it serves as a storage location off container ships onto trucks, onto trains. But also another purpose of IOS is to be supplementary storage space for an industrial user. In that sense, especially with some of the stockpiling we saw running up to tariff implementation, there might be some additional need for this space where an industrial user doesn't want to go invest in a building. They don't want to take on more real estate. Maybe they just want some land to throw some containers on. Those are some of the sectors that we are really interested in and tracking closely. Again, it's rooted in more supply constraint areas.

[00:19:50.34] - Chase McWhorter

Interesting. Yeah. Well, no, I appreciate you taking the time. Again, the report, Manulife's Real Estate House view for 2025. We have it on our resource center. Anyone listening, check it out. Obviously, we only scratch the surface with this conversation. It's very robust. Just want to thank you for taking the time. We'll catch up soon.

[00:20:15.62] - Erin Patterson

Awesome. Thanks so much, Chase, for having me. I appreciate it.

[00:20:19.13] - Chase McWhorter

All right. Thank you.

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