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(Bloomberg) — Private equity executive Rob Kumer sees a buying opportunity as global financial markets grapple with the turmoil in commercial real estate. 

The current angst about how much office buildings are worth overlooks the healthy income the good properties are still bringing in, according to Kumer, chief executive officer of KingSett Capital. And he said malls, another out-of-favor property type, are still performing well for his Toronto-based firm. 

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Those unloved properties are exactly where Kumer is looking to deploy the C$2.5 billion ($1.9 billion) of fresh investor capital he currently has waiting in his war chest. With C$18 billion under management, KingSett is one of Canada’s largest specialized property investors.

“We’re in a spot where in my view the risk has been mispriced in office and retail in Canada,” he said in an interview. “I like the idea today of buying assets that are high cash-flow.”

Commercial-property values have been pummeled since interest rates started surging in 2022. No type of property has been hit harder than office buildings, where the challenges from higher borrowing costs are compounded by the prevalence of remote work. And for malls, the rise in e-commerce has raised similar questions about long-term demand.

Higher interest costs and the prospect for diminished rents have pushed high-profile landlords to walk away from some office properties. The challenges have stung lenders from Japan to New York, with banks having to set aside more money for souring property loans.

But Kumer believes many of those concerns don’t apply to Canada. While some Canadian property owners exited office or mall investments in the last year, many of the assets they’ve bailed on have been in the US. 

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Read More: Office Tower Deal for $1 Reveals Anxiety Among Longtime Buyers

In Canada, many commercial mortgages are recourse loans, meaning lenders are able to seize an owner’s other assets if the value of the mortgaged property itself no longer covers the debt. That differs from common practice in the US, and might help limit losses for Canadian lenders, according to Kumer, even if landlords such as KingSett still feel the pain of falling property values.

“There’s going to be some pressure on valuation metrics and we’re going to have to sort it out,” he said. “But because Canada is more conservatively levered, it’s more institutionally held, it’s all recourse — I think these things will drive a much more stable market and landlords will be able to sort themselves out.”

Downtown Toronto

His outlook means he’s bullish on certain properties in troubled sectors such as office and malls. Kumer points to one of KingSett’s trophy assets, Scotia Plaza, a 68-story office building in Toronto’s financial district that the private equity firm owns with a pension fund. It’s one of a handful of landmark towers that serve as headquarters for Canada’s five largest banks in that downtown area.

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He says tenants at a building such as Scotia Plaza still want an amenity-filled property to attract employees to come in a few days a week, meaning the companies haven’t actually reduced their office footprint even if the space isn’t used as much. The last of Canada’s big bank towers to trade was Royal Bank Plaza down the street, which was bought for C$1.2 billion in 2022 by Amancio Ortega, the billionaire behind the Zara clothing brand. Kumer says if another property like that one came up for sale now, KingSett would consider it.

Even some malls are still bustling with foot traffic. KingSett owns Saskatoon’s Midtown mall, which labels itself “Saskatchewan’s premier fashion destination,” along with another mall just outside Toronto and a third in Ottawa. Kumer says vacancies at those malls have remained low and rents have held up as major retailers lure in shoppers eager to have an in-person trip over an online purchase. 

“The core of real estate investing is cash flow and that’s where I’m focused today because the capital appreciation, I don’t know where it’s going,” he said. 

After a relatively slow year for commercial-property sales in 2023, Kumer said he expects more offices and malls to come up for sale as many owners including pension funds seek to cut exposure relative to benchmarks. But despite these technical pressures, and all the negative sentiment, Kumer says many of these investors are still reluctant to sell.

“They say they will, but then you offer them a price and they say, ‘Eh, maybe I’ll just hold on to it,’” he said. “The right value is where sides come together and agree on price, and we haven’t quite found that yet.”

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