Fiera Capital Corporation (FSZ) Earnings Call Transcript & Summary

Thank you all for joining us today. My name is Ksenia Zoutkis and I will be your moderator for today's session. So the TELUS team acknowledges that our work spans many territories and treaty areas and we are grateful for the traditional knowledge keepers and elders who are with us today, those who have gone before us, and the youth that inspire us. We recognize the land and the benefits it provides all of us as an act of reconciliation as recommended by the truth and reconciliation commissions, 94 calls to action and gratitude to those whose territory we reside on or work on or are visiting. So we'll begin with a few housekeeping items. So this webinar is being recorded live and the recording will be available to participants and those who couldn't join us after the event. The presentation will be in English, but there will be a separate French session tomorrow at 02:00 p.m. Eastern time. [Operator Instructions] A copy of the presentation deck will not be circulated. However, as I mentioned earlier, we are recording this session, and we will make it available to you after the webinar. And so finally, we would love to have your feedback on the session, and there is a survey that you can access either from the console view or at the end of the presentation, and we would encourage you to complete that. So moving on to the next slide, a few words about ourselves and about the manager speaker circuit for those of you who are perhaps less familiar with these events. So the investment consulting team here at TELUS Health launched the manager speaker circuit about 2.5 years ago to share our views on a range of investment topics and to give our highest conviction investment managers the opportunity to share their perspectives. This is a quarterly webinar, and we do generally start the year with an economic outlook event, which is what we'll be discussing today. And you can see on the slide how the investment consulting team fits within the overall retirement and benefit solutions line of business at TELUS Health. As you can see, even though we are now under TELUS Health, we continue to do the same work as before, and this is just a snapshot of the services that the team provides both in Canada and in the U.S. So now, just a little bit of background before we dive into the presentation. As we begin the new year, a few topics are top of mind for many investors [indiscernible] interest rates go. How quickly will inflation come down? And how will this affect the economy, is what many of us are wondering. So as we saw from the Bank of Canada announcement today, for now, they are keeping the overnight rate at 5%, but a lot of us are wondering how things will evolve from here. Upcoming elections, with roughly half of the world's population estimated to be electing a leader in 2024 and the geopolitical issues that we are seeing are adding to some of this uncertainty. Now while there may be different views out there about some of these topics, one trend that is quite clear and that we are seeing with many of our pension plan clients is that -- is the impact that the current economic environment has had on funded positions. So the higher interest rates mean that many plans are at funded levels that they haven't seen for some time. And this often does raise the question of whether or not it may be a good time to de-risk. So we do think that because many plans are in very different funded situations than they were, let's say, 2 years ago, it is a good time to review the asset mix, the end state goals of the plan and perhaps do an asset liability study. And of course, pension plans are not the only clients where the effects of the current economic regime can be felt. For example, on the endowments and foundations side, we are seeing some great returns from fixed income right now. And so this new regime has also brought some drilling down on specific asset classes. One asset class, of course, that comes to mind is real estate. We have seen some doom and gloom headlines surrounding this asset class lately. But we do think that real estate can play an important role in an investment portfolio and that this asset class is much more nuanced than the headlines would lead you to believe. So we will hear more about this during the webinar. And so today, we are excited to have Fiera capital here with us during the webinar. And I am happy to welcome our speakers Nicolas Vaugeois, Portfolio Manager, Global Fixed Income at Fiera Capital; and William Secnik, Senior Vice President and Fund Manager at Fiera Real Estate. I will let Nicolas and will introduce themselves. So maybe if you can start -- if you could say a few words about yourselves. Starting with Nicolas.

Bonjour, Ksenia, and everybody on the call today. So Nicolas Vaugeois, Portfolio Manager Global Fixed Income at Fiera. So managing every global fixed income strategy such as multisector and global green at Fiera Capital. Will? William? I think you're on mute. But you'll have the chance to present yourself a bit later in the presentation. So if you want me to go, Ksenia, let me know.

Yes. So thank you, Nicolas, for the introduction. I guess we'll hear from Will a little bit later, so we will kick off the presentation right now with Nicolas, who will share Fiera's economic outlook for 2024 and that will be followed by William, who will dive into the topic of Canadian real estate and discuss the Fiera real estate process. So I'm going to hand it over to you, Nicolas.

Thank you very much. So in the next 20 minutes, I'll go over a review of the economic outlook and also how the fixed income landscape is. So showing some opportunities also. So if we just take a step back and look at 2023, coming out of that year has been a really good year in terms of return for every asset class, basically. So if we look at the stock market return of 26% on the S&P TSX and Canada front also. A lot of the return in the U.S. was coming from the Magnificent Seven. So the Apple, Amazon, Google, which represent almost 25% of the index. And the low-risk type of return it was Apple at 50%. So the 26% is huge, and it's mostly driven by the big tech. And if we exclude them, it was closer to the 10% mark. So a big push toward like the AI buzz and technology last year. And then even on the fixed income side, when central bankers across the globe hiked in the developed world, we've seen rates pretty flat in the longer part of the curve in the 10-year, and even in Canada, lower. So we've been able to see positive return in that asset class. If we look at Canadian fixed income only at the index level, we were up 6.5% close to 6% in the U.S. And if you were in a global mortgage sector, our funded 12% last year. So really, a really good year last year for fixed income and the equity market as well. Now going into 2024, what do we need to look at. It's basically the same major theme as 2023. But the difference between the 2 years is basically when we started 2023, the consensus and the positioning in the market was for a recession. So credit spreads were wider, positioning were a bit more defensive. And now we're coming into 2024 because of the year we had last year because of the resiliencies of the U.S. consumer. The expectations are for a soft landing and maybe avoiding a recession. So this is where we -- our team tend to disagree on that front, but monetary policy, inflation and employment will be key to watch for in 2024. So really positioning and consensus where this year is different than 2023. And on top of that, we have U.S. election. So I don't think it's going to be a big surprise to see Trump the nominee of the Republican party versus Biden at the end of the year. What are the implication if Trump wins, let's say, while we know what he did for his tenure for the last -- well, the 4 years between 2016 and 2020. He will be pro tax cut and pro business for sure. So I don't think it will create any sort of surprise or necessarily uncertainties on the market. But the way we'll manage the global, let's say, trade might be different than the one that Biden was doing. So Biden was on the same page as Trump on the e-commerce, global commerce against the China, but he was more working with his ally instead of going solo and come into hostile. That's a big difference. And of course, you still have in the mind of a potential spillover effect in the Middle East, we're seeing some Red Sea issue in terms of transport and the Houthis sending some missile on cargo. The U.S. and the U.K. are taking care of that, but that can be a source of disruption for trade in 2023. Now let's move for the, let's say, cover -- trying to cover the monetary policy, inflation, and employment, and what it looks like. So this morning, we had Central Bank of Canada coming out and keeping their overnight rate at 5%, and the message is pretty the same as is previous meeting. So basically, consumption is subdued. They're seeing softer demand on the consumption side. So they're seeing and starting to see that the monetary policy is starting to bite. So that's why they're kind of sending the message that they are done hiking, they left the door open for potential -- another hike if, let's say, inflation start picking up. But it's kind of normal to have that kind of message where the CPI is not fully under control. So it doesn't mean that they will go for another hike, but I will say just to say that if it has to turn around, they will be ready to act. But that's typical of central bank. In our opinion, that they need to be open for every scenario. In our mind, the next move will be for rate cut. The market was pricing aggressively at the end of last year. And then in [indiscernible], we thought it was a bit too excessive. So we're seeing some sort of a readjustment early on in 2024 in terms of market expectation. On the U.S. side, it's the same thing. Credit conditions are also having their effect. The U.S. consumer seems to be in better shape than the Canadian one, but we are in the camp that they will be staying on the sideline for at least a couple of months and potentially cut also as we are heading into a softer than slowdown economic scenario in the U.S. So in terms of monetary policy indication, of course, Canada, at lower rates than the U.S. And one of the reason is the way also the need to hike more is less than the U.S., meaning the direct implication of rate hike has more effect in Canada than in the U.S. because of the way the mortgage are structured. So we, on average, have to renew every 5 years and 1/3 of the mortgages are variable, where in the U.S., it's less than 10% now. That has a big impact. So everybody that was on the variable rates took the hit. Now 40% of the Canadian household level mortgage, will need to refinance this year or next year. So they will take the hit, and this is a factor of a slowing economy also, so less cash to consume discretionary. But let's see if the Fed and the Bank of Canada are doing a good job in terms of bringing down inflation. So this is the U.S. CPI. In the U.S. it's basically the same thing in terms of component in Canada. So in terms of inflation in goods, it's close to 0. So that's very good news. Energy is a negative contributor to CPI as we speak. Inflation now has been a big driver, inflation in 2022. Now that the barrel of oil is around $70, that having a negative impact. What they need to focus on is on the service side. So on service side, the big chunk of the service side is the word shelters and real estate. So if that can come down or not necessarily crash just stabilize and stop going up, that will be a good news for central bankers. And the [indiscernible] will be set maybe to start cutting. So they need to control that part of the inflation in CPI basket, and it is really in the service basket. On the food front, even though food goes up, I don't think they're going to start hiking or panicking about it. We don't control any new effect. We don't control mother weather. So it's all about services that they need to calm down. So we're starting to see month-over-month number that are lower, even in Canada last month was negative month-over-month, still too high on a year-over-year basis, but we're seeing some clear sign of stabilization on the inflation front. But now another topic that we'd like to look at is employment. So shortage -- labor shortage was a big topic last year, and I would say, for the last couple of years. One thing we'd like to look is the jobs number in the U.S. So this is the jobs opening. So basically, how much opening there are in the U.S. to fulfill opportunities in the marketplace. And that has been coming down lately. And this is a sign that corporation are less inclined to hire. So maybe because of weaker expected demand on their side. So instead of starting to fire people, they start to realize now maybe I don't need extra working people in my company, and I'll wait to see if there's a real economic slowdown coming up. But we're starting to see some sort of decline in jobs opening and that to us is a sign of economy softening. Other point that touching maybe more growth or the inventories level. So I picked the car inventory because that was a hot topic also in the last 3 years regarding inflation. So we've seen inflation coming up because of used car and car in the last 2 years. Now we're seeing the level of inventory of car back to pre-COVID level. So people are buying less car and also -- of course, there's a price effect. It does in those kind of series, but volume-wise, and inventory levels are back to pre-COVID. So a company is not only on the car's part, but also other corporations that are seeing their inventory level going up, not because they expect to sell more, but because they can net sale as much as expected. So that's another sign for us of economic slowdown. So I picked that one that if we look in Europe, for instance, Germany released a number about export recently to the U.S. and China and they were down 9% and 15%. So Europe is not doing great at the moment, taking Germany as a proxy for Europe, which is the biggest economy. And China are adding big issue with their real estate market and stimulating their economy. So they will cut, they'll try to inject some cash, but they have, I think, and we think, bigger issue right now. So China won't be an engine of growth in the coming years and maybe have some ripple effect on the world also. So we're seeing also Canada having anemic growth and also negative in the last quarter. So there's only the U.S. remaining, and we think they're going to start seeing weaker number down the road in 2024. Now if we look at the fixed income market, how it react? Well, you all know all the asset class they move in the last 2, 3 years and even beyond that. So on the developed world, rates have been moving in tandem. Maybe not -- tandem yes, sometimes a little bit with a little lag. Sometimes there's all the volatility in the U.K. in September of 2022 because of the LDI story. But all in all, they all moved in the same direction. They waited too long before hiking. And what we're seeing is really attractive level of yield across developed markets, but especially in the U.S. So we're seeing U.S. 10-year treasuries right now above 4%, 4.15% or Canada 10 years are 3.50. So from a duration point of view, we really like U.S. duration as we speak. Something that is worth mentioning is on the emerging market front. And maybe more on the LatAm. So this is where we see more value, local currency and some specific opportunities on the hard currency one. But LatAm has been pretty responsive and they did act quickly on the inflation worry when COVID started. Because of the past in the history of a higher inflation in the region. So they didn't wait to see higher inflation number and play the card is transitory and is temporary or whatever they want. So they went and the hike to fight it as fast as possible. And they decided that they were able to cut last year instead of hiking rates like most of us developed central banks in 2023. So they went the other way. And also that was a source of positive return for those countries. When you look at the inflation, let's say, for Brazil and Mexico, we're talking about 4%, but they have the overnight at 10%. So you have positive real rates in those regions, which is quite attractive in our opinion at the moment. Now we've touched base in the introduction about derisking. Why derisking? Because of the actual level of rates across the fixed income asset class. So I would say in the last 10 years, fixed income hasn't been attractive. Rates were close to 0, investors are trying to find all sort of alternatives to get some yield, but now you can sleep tight and get 4.15% on a 10-year U.S. treasuries without taking any risk about the duration one. But that's not a credit risk. In our opinion, the U.S. will be able to pay. So 4.15%, and you'll get pretty good opportunities also on the credit side, if you are about to be flexible in terms of security selection and sector selection. So what we've been seeing is more requests, more interest also on the fixed income side and the opportunity we're about to find. But that's mainly because of the level of interest rates. So we're not -- we haven't seen those type of yield before since 2008, 2007, before the Great Depression. So very attractive level of yield as we speak right now in the fixed income space. In terms of what's priced in, in the market. So I mentioned it a bit earlier in the presentation, there's 6 rate cut pricing as we speak. It doesn't really change since December. So in our opinion, if they have to do 6, it's because we're heading into a recession. If the soft landing scenario is the one happening, they don't need to do more than 3 because with the soft landing scenario, inflation will return normally to 2. Everything will be awesome. And but if they need to do more, inflation will go lower, consumption and unemployment rate will go up, and this is when they will have to be more than 6. So it's just the pace in the fast the way we get there, we don't think they're going to cut in the first quarter, maybe more a story of a second half of 2024 or late in the Q2. So we don't expect rate cut this quarter later into the year. But I would say we are more in the camp of 4% to 5% than the 6%, okay? So you will say it's not a big difference, but sometimes some 25 bps readjustment if you're an active portfolio manager you'll make a difference at the end of the year. In terms of opportunity and traction. So yes, derisking is a big theme because of the level of rates we're seeing. So this is a table of what type of yield you can find per asset class level in the fixed income universe. That was as of the end of December of last year. As we speak, you can add 40 basis points pretty much across all the asset class. So we are at 4.15% in the U.S., 3.5% in Canada. So pretty decent type of yield for the amount of risk you're taking and you can also dig in and go lower in the capital structure for additional Tier 1 or at RCN, if you are familiar with that, to get a decent yield of 7.5% to 8% on average. So I would say a topic of interest, our global multi-sector income fund, global credit and also CORE plus solution are popular or at least on our side or we're seeing some demand to have fixed income asset, but to be able also to gain some cherry and credit exposure. So you can easily do with security selection and sector allocation, a good diversified fixed income portfolio, I think a yield north of 7% if you're going global. So I've told you what we like in the fixed income space, but what we don't like at the moment. If we go back in Canada only, we like Canadian corporate spread but we don't like 30-year Canada. We think 30-year Canada are too expensive. We don't like the shape of the curve either. So keep in mind that Canada is the only developed countries where the 10, 30 is inverted. So that's an anomaly in our mind and see it negative 5 to 10 basis points, where on average, there's a steep, steeper by 40 basis points. In our Canadian portfolio, we are really underway 30-year and favor the belly 10-year. And we expect, as we're going towards a slowdown in a recession and potential rate cut the 10, 30 will steepen and go back to a historical level. So that's in terms of positioning. And another way to look at it also is versus the U.S. So I mentioned that we like U.S. duration versus Canada. So when you look at 30-year Canada versus U.S., we're talking about almost 1% full difference. So this is too much in our opinion. [indiscernible] should compress by at least 50 basis points in our opinion. And because the slowdown is already more priced than in Canada and a bit less in the U.S. We see more potential upside and spread compression with the U.S. versus the world because this is the strongest economy, and this is the only place we think right now in the world where the odds of a recession is not where it should be. So we think the market is too optimistic on that front. So at the moment, we're starting to see weaker earnings and a negative or weaker leading indicator. We think that could turn around and see an outperformance of U.S. bond. That being said, before I move it to Will for the real estate, another advantage of the going global in our opinion about fixed income is the fixed income opportunities and the vast area of sector and security, a name that you get access. So that's a key plus. If we look at the widest credit spread right now in the U.S. are the office REIT, okay? So I don't know if you see it pretty well on the table here, right, or Will highlight it. So office REIT, you've seen it in the news and it made the headlines. We've seen some private real estate and private credit shops selling their office for $0.50 on the dollar. Those have some loans in the U.S. giving the keys to the lenders, lenders not being able to sell at full price and they get $0.50 on the dollar. So that's an issue because offices are empty in the U.S., well, almost empty and having a hard time collecting the rent. So that's an issue. Do we like it? Office REITs in the U.S., No. We still see value elsewhere in this area. But it doesn't mean that all real estate are equal. And you'll see in the next couple of minutes why maybe Canadian real estate is the best place to be in the real estate world. So all in all, I would say, I think we highlighted the fact that in our opinion, the economy will start slowing down. It's already happening in Canada. We think it's going to happen also in the U.S. Fixed income is attractive. And the merits also are going global with the type of yield and diversification you can get is a big plus for investors in our mind. And I think in this 20 minutes that I had, I will leave it to Will to give you a view on the Canadian real estate and why this is having a really good value added to have it in your portfolio. Will, I'll leave it to you.

Thank you very much, Nicolas. I appreciate the context, and we'll build on the work that you put forth here and explain the virtues of why Canada is relevant both domestically and internationally to investors and how we construct our portfolios towards performance. And so that I think is relevant to our investors and stakeholders. As we move through the deck, well, I'll outline that Canada's strong fundamentals after some broader challenges in the last 18 months, related to inflation rates and impacts of cost of capital and interest rates. We'll continue to be well poised to deliver income and capital returns given its growth with the backdrop of rate cuts and improved repricing by way of context, capital market improvements, et cetera. So I think that backdrop will give us someone behind the rings as we move forward. And part of those fundamentals at its core is Canada's ability to grow and attract immigrants and increase its population. So that fundamental base of population is, again, somewhat beneath our wings as we -- as I speak to this slide and how it relates to real estate cap for growth in Canada certainly benefited from its population story. And again, we'll go through a bit more detail as to how that influx of people, in particular, will create higher demand for real estate and this chart shows it in terms of the G7 context as Canada is at the top end of that curve. And we'll also outline that Canada is undersupplied in terms of context with respect to most markets, we'll touch on each asset type as we go through this deck as well. Now Canada is as a new integration leader is quite important within the broader underpinning. We know that Canada is a high migrant acceptance score globally. So it's obviously allowed it to increase the and counteract the lower fertility rates that we're seeing across the G7. And we could see that from this chart and going forward, the 12.5% is going to be one of the highest in the G7 with that backdrop of the immigration story and certainly propel its strength within the real estate space, given the sheer demand that is created with respect to immigration. As we go through some of the further elements of the population growth driving one part for sure is the retail sales and the effect of e-commerce on industrial. We can certainly see that the growth of retail sales and through the many years, several years going forward, that positive impact is going to not only improve the situation for retailers, but also cause industrial absorption to maintain its strength and this is, again, a strong backdrop in regards to the fundamentals of real estate. Further, on the demand side of an industrial equation, what we're seeing is continued strength in the industrial space as warehouse and distribution space absorbs the demand of online sales. And this slide is quite detailed in nature, but really outlines that the demand for space is going to be quite substantive to the tune of an undersupply situation and the broader scenario of Canadian real estate. And again, it's a great underpinning as part of our research at Fiera. Supplementing that industrial story is certainly the shortage of housing on a residential basis, where as we look at the amount of dwellings within the Canadian context and then in the G7 context, you can see here, we've got one of the lightest dwelling counts per 1,000 habitants. So that undersupply situation will continue to create pressure within the context of the real estate story. Now we further see this by province, with Ontario highlighting the steepest under supply, if I can use that word, and on a broader context in the Canadian total undersupply as well. So this is important in the sense of the federal situation we're seeing with the federal response to the sector by trying to support this, whether through the CMHC initiatives. But Fiera has also been actively involved, and we'll explain that a little bit later on. But needless to say, the underpinning of low supply with just demand in context of immigration and general population growth will mean continued growth in this sector. As we look through the deck here in terms of the Canadian market. I think the context, I would say is we don't always hear that Canada is a substantive market. Sorry, I think my slides here, just one second. I just want to double check one item here. Now I think we're good. I just want to make sure that as an audience, we outlined that Canada has a substantive market size and position in the Canadian context as an investable universe. Relevant from a transparency standpoint as well, ranks Canada as a formidable investable universe given that context around how we're positioned here relative to a peer set. So it's a bit understated sometimes from a Canadian positioning, but that means there's opportunities for the marketplace. And this essence is highlighted here. As we roll through the attractive returns of real estate, I think the long-term profile is highlighted through this and particularly the income story with an overall return of 8.6%. I think it really highlights the long-term nature of this asset type. Obviously, the capital growth, which has been impacted due mostly to capital markets and global events. But you can certainly see that's how volatility in this slide. But the income store is really quite consistent. And I think that really resonates with investors who have particular needs to meet the income side of their investors. Jumping to how Canada has been performing on a global basis, again, with that underpinning of insured or immigration and population growth. You could see that with the Canada in the red is a general outperformer on a global basis. I think that's quite helpful. We outlined and are able to quantify volatility how it compares to the range of risk tolerance as well within the context of a G7 set. And again, Canada is situationally in a good position and historically has delivered performance. What we're also seeing throughout this piece is the changes in the marketplace over the last many years, and this highlights some of the stresses that have been experienced with respect to cap rate expansions and the ultimate compression that we're seeing right now between the bonds and the cap rate. Ultimately, this has put some pressure in the last 18 months. We're starting to see that come back, recognizing the drop in rates. And again, that will benefit real estate going forward. As we think about Canada in the context of those fundamentals, will highlight that it's certainly been quite robust because of the elements that we've outlined here from immigration leader, all the way relatively politically stable, slow GDP relative to other G7 nations along with the fundamentals of its market with respect to size, transparency and less volatility, again, providing context of a quality investable numbers. And how does this dovetail in our day-to-day construction we have of our portfolio. We have a strategy planning and analytics team at Fiera which gives us forward-looking models, which has helped deliver performance in our context. But briefly, what we have is a target market's model, which outlines that this is an important element to the funds and the entire Fiera platform as to how we articulate and drive performance by looking forward by each market and subsector. And this example here shows our demand and supply equations that we factor into the macro and underlying real estate fundamentals to examine each market and as such, able to navigate what is otherwise a rather illiquid investment product by looking forward to the future and our investments, our divestments, where we're developing. So that is important in our overall modeling at Fiera. And when we have assets in our portfolio, we undertake quantitative and qualitative assessment with a risk management formula that again gives us some weightings. And illustratively on this chart, you'll see on the far right our risk/return ratio. And those are goal below and above that react across that line rather will cause a reaction from our asset management team and the fund manager to behave in a fashion towards performance. So a highlight and not enough time to really go through the detail here. As we work through our portfolio, but it certainly is an illustrative tool for the fund managers to address risk and opportunities within the portfolio. I'll talk a little bit more about real estate. Nicolas mentioned about the office market, but we'll start off with the industrial segment, again, quite strong in terms of the profile. What we're seeing is continued demand. It is not at the robust pace that we've seen around the last 4 or 5 years, but we're still seeing continued growth, where it was high double-digit growth. We're seeing kind of mid- to high single-digit growth now, high strong rates within the portfolio or within the market rather. Some reduction in construction given some of the interest rate movements that have come into play. And that has meant still undersupply generally in the market. But if we think about the challenges on the supply side, i.e., geopolitical issues with the Suez Canal, low water in the Panama Canal is a change in the marketplace and it's resulting in tenants and manufacturers coming and storing their goods and creating their goods locally. So that has certainly put increased demand to the Canadian marketplace in this respect. So all in all, a long-term view around industrial. And you can see here that it's quite a positive chart in terms of the fundamentals between supply absorption and availability. With the backdrop on the fundamentals of immigration and population growth, the multi-residential story, again, is quite positive. Unfortunately, we have a little bit of a delay in what CMHC delivers in terms of statistics. But needless to say, it's quite topical around the marketplace as to the lack of product, the affordability issues, cost of owning housing on a home ownership basis has really, has really improved the fundamentals of multifamily real estate in the rental market, and this chart again shows that scenario. And our long-term outlook with that fundamental backdrop of population growth will continue to drive this challenges of constructing entitle land, service land, again, will support a scenario of low supply, generally speaking, relative to demand. Jumping to retail, an asset class that is [indiscernible] type rather that is quite [ strength ] some challenges during COVID, as you can imagine with the number of closures. What we're seeing is that a number of retailers had failed have in that duration, but you've got a period of stability with strong tenants in place, particularly in the food and drug space. Fashion is a little bit more challenged. But we've seen that open air centers, what we call unenclosed ones and neighborhood ones, are seeing improvements with rental rate increases not any new supply really in the retail space, and that has really stabilized this segment of the market. And as again, in a situation of strength, particularly relative to what we had seen during the full COVID lockdown period. In office, something that we have looked at quite dimly for the near term, our outlook, as you can see here, is tempered by what you're seeing on this slide with almost record vacancies, negative absorption. Class A buildings, certainly outperforming class B and C assets, but the challenges for a landlord to induce tenants to stay and come to the properties, requires higher incentives, so it's becoming a more expensive proposition. Lenders are quite shy to fund them, given that fundamental backdrop related to the hybrid usage and use of space. So that, again, is a context that we've under -- we've written about in our white paper effectively seeing this market in the near term being quite weak. And not really getting back to stability only with the population growth coming in place to increase office usage, and that's more of a midterm context. Okay? So I think we'll pause there, and I will turn that back to you [indiscernible]

Great. This was very interesting. Thank you to both of our presenters. And this does conclude the official part of the presentation, but before we let Nicolas and Will go. We do have some questions that we have received. [Operator Instructions] Okay. The first question that we have received, somebody is asking -- so this question will be for William. If you could comment on the U.S. real estate market.

Yes. I mean it's certainly one that's bifurcated, obviously, larger scale, would comment on they have the ability to build more. They don't have the same entitlement restrictions we generally have in Canada, meaning it's more difficult to produce lands that as our produced product or real estate and build. So that context is important. They have an ability to build quicker and have on land in essence and we have a little bit more restriction and a cost structure that is less, I guess, I would say, induces development as much. So with that backdrop, and lenders that are not typically in the same context or Canadian context, which has fewer institutions, financial institutions and relationships. It's a challenging market in the American context, from the perspective of oversupply and lenders that aren't treated as well as they are in Canada. So you hear stories around giving back the keys in the U.S. more frequently than you do in Canada because if you do that in the Canadian context, you're basically going to be out of business because the lenders will not come back and provide debt to you going forward. And in the U.S., there's just a bit more [ loss save ] fair approach to that. And that's why you hear a bit more of particularly in the office context of keys being given back. So I mean, it's a broad question there as to the U.S. market. It's really a very different one than the Canadian one, not that I'm obviously familiar with it, but not that I -- one that I play with it, exclusively with the context again of coastal cities performing generally a little bit better than in the interior of the U.S., et cetera. So you'll have your growth states like Florida and California, carrying some of the least [indiscernible] belt. So I mean a lot studies said around the U.S. So just a brief touch point around that. Hopefully, that answers your question.

Great. And another question for you, William. So it is a twofold question. So I'll probably just read it out because it's fairly detailed. So can you please explain the difference in performance between publicly traded REITs and private real estate even within the same sectors such as office or industrial, the difference is significant with the REITs performing considerably worse than private real estate. And the second part of the question talks, so I'll also read out, there was a big drop in the private commercial -- there was a bit of a drop in private commercial real estate. This was due to a sale of a Class A office building at a lower price than it's not resulting in the reval of other Class A buildings in major cities. Any concerns that there could be reval in other office sectors such as suburban spaces or Class B or C buildings.

Yes. I'll touch upon the first one in terms of private versus public. Certainly, the public market's driven a lot by sentiment. So we see that situation where moods actually influence values and unit values. I would also say that there's a general higher debt exposure in that -- in those private -- sorry, the capital markets. So that laddering of debt, which is generally near term, has certainly caused them a lot of pain, if you will, in terms of returns as they adjust to the new interest rate environment. So that would be one of the key variables that we're seeing within that context. So yes, sentiment and they're laddering in their debt portfolio and the level of debt that they have in their portfolio would be the key sentiment drivers, again, by asset type, certainly, industrials and multi-res would be viewed as stronger than say, retail and close an office. So again, you'll have those differences as well. And your question on the office space, sorry, that was about whether there's another shoot or drop or there is revaluations going on. And I would say there is -- there are some challenges until we get clarity on office usage and underpinning of that. It seems to be improving. So there is a lot of wait and see in respect to that office type. But again, Class A would do better than Class B and C, whereas tenants who have choices will quote a better space that just reasonably relatively more cheaper than it was previously. So it will go for value, it can go to a space. Well, the suburbs that perform differently. I mean we've seen those who are looking at competitive costs would go to the suburbs. So I think there is a balance that's going on where we are seeing improvements in the suburban office space because of that cost because it is closer to the users, i.e. office workers who are working in a suburban setting and maybe not want to go in transit right now as they kind of recover from post-COVID distancing desires. So it's certainly in play, but there's a story for each of them where we see Class A office buildings downtown, not necessarily having all the retailers open because people are in only 3 days a week at best. And that certainly adds pressures to operating a cafe and the parking lots that are in those buildings, which should certainly have less income and that would have valuation impacts. So a lot to unpack in that point, but we are, as a house, certainly very conservative around that space and focusing our energies on industrial and multi-res in that context.

All right. We do have another question about the office space. So it is a hot topic like we mentioned. So do you anticipate that some of the office vacancies can be repurposed to residential housing to alleviate some of the supply concerns?