Select Page

By Lou Iafrate, Executive Vice President | June 12, 2020

There’s no need to be to be a real estate expert to see that social distancing measures and the shutdown of non-essential businesses represent a hard blow to shopping centre owners. While the short-term impact of the COVID-19 crisis on revenues and occupancy of shopping centres is easy to measure, it is still too early to comment on the long-term repercussions of the current crisis.

Real estate investment is a long-term game, and when valuing an income property, appraisers do so on a long-term horizon, based on foreseeable market risk. However, the current situation is unique. The impact of short-term market volatility in terms of shorter term credit loss, lease assumptions and vacancy must be taken into consideration. We are also monitoring the longer-term impact of the COVID-19 social distancing policies on market rent and tenant mix through metrics such as pedestrian traffic, in-store sales, tenant renewal rates and gross rent to occupancy cost (GROC) ratios.

In our recent Key Assumptions Survey (KAS), almost all retail owners have indicated having rental relief measures in place, such as rent deferral and, to a lesser extent, abatement. Proactive landlords have engaged in risk assessment exercises for their respective tenant rosters/tenant mix. The risk assessments will not only help identify short-term issues related to non-essential tenants and small local retailers forced to close during the stay at home mandate enacted by regional levels of government; it will also help inform on the viability of their current tenant mix in the mid to longer term. This is key to understanding the potential impact on cash flow and the overall viability of the asset/retail format as we move to a new normal for the in-person retail experience.

It’s important to note that not all retail properties are impacted in the same way. For instance, open-format neighbourhood retail centres anchored by food store, pharmacy and quick-service restaurants (with direct store front access) have seen less impact than enclosed regional malls or larger open format retail centres anchored by entertainment, theatre and gyms which are still closed (or in the process of re-opening). The enclosed mall and experiential retail formats will require significant monitoring from a health and safety perspective and will have a more daunting task ensuring their adherence to social distancing measures which are necessary to re-engage with consumers.

For well capitalised investors, this period represents an opportunity to potentially acquire assets that would not typically be available as landlords look to diversify portfolio risk both geographically and by asset type. Acquisition or joint-venture opportunities may develop for well located assets entering a transitional phase as they near the end of their current economic life (highest and best use). These assets may now require a longer holding period due to the current market volatility and current owners start looking to de-risk their balance sheets.

For those like me who have seen many turbulent times, we know that it is necessary to take a step back and not give in to panic. Risk can be priced but there must be an understanding of what is typical market risk and what is risk associated with short-term market volatility. Market risk can only be priced once there is a return to a stable market without undue pressures imposed by government restrictions or atypical business activity by capital market participants limiting liquidity.

close
close
forumContact us
close
close

Thank you for contacting us. we will get back to you shortly!

This site uses cookies to improve your user experience. By using our website, you are agreeing to our use of cookies.
Click here for more information.