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By Marie-France Benoit, Senior Director | September 14, 2020

As published in Volume 29, #2 2020 of Espace Montreal Magazine

The real estate industry is facing an unprecedented situation since the COVID-19 outbreak. The last few months has allowed us to evaluate the immediate impact of the measures imposed to counter the spread of the virus, in addition to the partial lifting of those measures on the various types of real estate assets. The longer-term repercussions of this crisis on investment conditions are much more difficult to assess and opinions are divided, and at times contradictory.

In order to gain a clearer understanding of the real estate market (institutional, public and private), our professionals surveyed their clients and partners and gathered their feedback on the impact of COVID-19 on real estate market and intel on their strategies for dealing with the crisis. Those survey responses resulted in our Key Assumptions Survey. The results of both our mid-April survey and mid-June update were very informative, and we feature our latest findings in this article.

Investment activity as restrictive measures are lifted

The strong pre-COVID investment activity literally fell flat just a few weeks after the announcement of the emergency measures. More than half of the investors surveyed in mid-April said they had put all transactions on hold, while between 30% and 40% of them, depending on the type of property, were still considering investment opportunities in Q2 or later. As a sign of a gradual return of confidence, the results of the June update indicate that the percentage of ‘paused’ investors fell from 53% to 22% for the multi-residential segment and from 51% to 32% for the industrial segment. This proportion fell only slightly between the two surveys for the office market (50% to 45%) and the shopping centre market (58% to 56%).

In terms of return expectations, the majority of participants in the June survey continued to believe that cap rates would not increase for industrial and multi-residential real estate. Another indication of some return of confidence, for the prime downtown office sector, the percentage of respondents anticipating an increase in cap rates declined from 42% in April to 26% in June. The suburban Tier-2 office segment also saw a drop from 69% to 46%. For Tier-1 and Tier-2 shopping centers, investors anticipating increases in required yields remain in a strong majority for both surveys.

Source: Altus Group

Source: Altus Group

Some emerging consensus

The observations of the past few months, as well as the results of our surveys, point towards a clear conclusion: investor sentiment towards multi-residential and industrial assets remain overwhelmingly favourable. Already in strong demand before the pandemic, these asset classes are still considered a safe haven. Barring a prolonged recession, COVID-19’s impact on these market segments will be limited and short-lived.

The outlook is not as clear for the office and shopping mall sectors. Income forecasts and financial models that consider probable vacancy rates, and revenue and expense forecasts encompass a large share of uncertainty.

On the shopping mall side, retail strips with groceries or pharmacies as anchors are doing well. For others, rent losses and rent deferrals over the past three months have been difficult, as have the many closures announced in the fashion sector. In the medium term, time will tell which businesses, especially restaurants, will manage to survive prolonged physical distancing measures. The time required to re-let vacant space will be longer, according to survey respondents. The most optimistic see this as an opportunity to accelerate the repositioning of their centre with an improved retail mix.

For the office market, tenants continue to pay rent even if their employees work from home. In the short term, the timid return to the office does not have too much impact on revenues (except for parking revenues) and the vacancy and bad debts that survey respondents apply to their financial models have not changed much. However, protocols for returning to the office with physical distancing measures involve more resources for training, security, cleaning and disinfecting. These additional operating costs will remain as long as there is a risk of new waves of COVID-19, and perhaps beyond.

In the context of a pandemic, the technological feasibility of working from home is unequivocally demonstrated and satellite offices in the suburbs could gain in popularity. New tenant occupancy strategies will emerge more clearly as leases are renewed. In the longer term, the potential reduction in space requirements associated with the increase in the number of employees working from home will be offset by less density per workstation, but it is not yet clear whether the balance will be positive or negative, or in what proportions.

These unknown elements obviously add a degree of risk. That being said, even in volatile times, real estate investment is based on the long term. The situation will eventually return to normal. When asked about the essential conditions for this return to normal, many respondents to the survey answered ‘a vaccine’ or ‘a cure’ in the affirmative. In the meantime, we all continue to learn, adapt and identify new benchmarks for analyzing risks and opportunities.


More information

To review and download the results of our April and June Key Assumptions Survey, click here.

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