Key Assumptions Survey [April 2020]
About the survey
Between April 15th and 23rd, 2020, Altus Group conducted a quantitative survey of 115 CRE executives for pensions funds & life companies, publicly trade corporations (REITs), private companies, and consultant / brokerages. The goal was to gain invaluable insights on the short and long-term impacts of COVID-19 on the office, retail, industrial and multi-residential sectors across Canada’s major markets, including: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec.
We have compiled our findings into individual sector reports, available for download. Our May survey results will be available in mid-June.
Areas covered in the survey include:
- Market conditions: economic, social, and political
- Industry response to crisis: strategic operational changes, investment plans, transaction activity, and cap rate expectations
- Key assumptions supporting valuation of income properties: rental rates forecasts, lag vacancy, vacancy & credit allowance, and tenant retention / probability of renewals
Industrial | Key Assumptions Survey
Industrial market rents (face rents) – by region
Key findings in the industrial sector:
- Industrial properties, regardless of quality, are much less impacted by the COVID-19 crisis than lower quality office and retail.
- Rental relief for industrial tenants is mostly analyzed on a case-by-case basis. Impact of non-essential business closures and border restrictions varies depending on the tenant’s core business.
- 65% of respondents expect cap rates for top quality industrial will remain stable compared to 5% expecting modest compressions. Capitalized buyers will be well-positioned to acquire this type of asset.
- A majority of respondents expect face rates to remain stable or increase in the next 12 months for both top quality (84%) and lower quality (67%) industrial. This trend is consistent across the regions, with the only exception being Alberta.
- While the market has cooled off and industrial tenants’ productivity will be challenged to various degrees by physical distancing measures and disruption of supply chain logistics, key assumptions expressed in the survey point to a relatively positive outlook for in terms of lag vacancy, credit allowance and tenant retention ratios.
Multi-residential | Key Assumptions Survey
Top 3 risks in multi-residential sector
Which of the following possible outcomes from the pandemic pose the top three risks for commercial real estate market fundamentals?
Key findings in the multi-residential sector:
- Rent collection and default, especially for high-end product, are not much of a concern for multi-residential owners, relative to other assets. Rent deferral is offered only at the tenants’ request.
- A majority of respondents (80%) expect rental rates to remain stable or even increase in the next 12 months. The survey shows a generally positive outlook in terms of tenant retention, rental growth and lag vacancy for the next 12 months, assuming the pandemic would be under control by June 30th.
- Multi-residential investment continues to be perceived as a stable and predictable investment. Over 65% of respondents expect cap rates to remain stable over the next year. Compared to retail, office and even industrial, multiresidential has the lowest proportion of respondents expecting cap rates potentially trending upwards.
- Multi-residential is the least impacted by government measures, especially social distancing. However, many participants mentioned that travel bans, and closed borders will negatively impact demand from immigration, international students, and temporary residents, etc.
- On the supply side, more developments are expected to be delayed or phased. For current development projects, non-essential business closure and new sanitary measures on construction sites are causing delays. Some landlords had to defer planned capital expenditure as the crews could not access the sites.
- In terms of market fundamentals, rising layoffs and unemployment is perceived as the most important risk from multi-residential landlords across Canada.
Retail | Key Assumptions Survey
Lag vacancy for retail
Assuming the COVID-19 pandemic is under control by June 30th, what lag vacancy (including fixture period), will you apply to your financial models to lease vacant space or upcoming lease rollovers in the next 12 months?
Key findings in the retail sector:
- Most owners and managers surveyed (80%) already had one or more rental relief program for their retail tenants in April, while 20% were reviewing options. Retail tenants were more likely to obtain rent abatement or reduction from their landlord (30%) than office tenants (19%) or industrial tenants (10%).
- In the context of non-essential business and mall closures, many retail owners proactively designed and allocated rental relief programs based on retailers’ risk profile and exposure to dramatic impact of being forced to shutdown.
- COVID-19 is accelerating the bifurcation of weaker/stronger retail concepts that had started before the pandemic hit. Owners prioritize short term relief for retailers hurt the most by forced closures and who are more likely to survive this crisis. These programs also offer the opportunity to open discussions on extending lease terms.
- For retail and mall re-openings, physical distancing will be challenging.
- More than half of survey participants are expecting cap rates of retail properties to increase over the next 12 months. Retail is also the least likely to be the target of opportunistic buying strategies.
- Key assumptions are more significantly impacted for retail properties than for other asset classes, especially for lower quality assets, for which 87% of respondents expect rental rates will decrease over the next 12 months.For retail tenants, probability of renewals are expected to be lower than before the pandemic, and market participants also anticipate longer lag vacancy periods. These assumptions have not changed as significantly as they have for other property types.
Office | Key Assumptions Survey
Investment plans by owner type
How has the outbreak of COVID-19 change your investment plans?
Key findings in the office sector:
- The immediate impact of the COVID-19 pandemic on the office market is mitigated by office tenants that are working from home (WFH) and continuing to pay rent. However, over 60% of owners/managers surveyed in April had at least one rental relief program in place.
- Rent deferral was the most common measure mentioned for office tenants (66%), followed by blend-and-extend (30%) and rent abatement (19%). Office rental relief measures are generally offered upon tenant request and granted on a case-by-case basis for periods of between one and three months.
- Close to a third of respondents were still reviewing their rental relief policies at the time of the survey, while 11% indicated having no plans to offer such measures.
- Over 60% of respondents expect face rates for best quality office assets to remain stable or increase slightly over the next 12 months, while 61% expect rental rates to decrease for their lower quality suburban assets.
- Looking ahead, office managers anticipate increased operating expenses associated with COVID-19 back-to-the-office protocols. Implementing social and physical distancing measures in office spaces will require more training, security, cleaning and sanitization.
- Potential reduction of future office space resulting from the WFH shift is expected to be offset by increased square footage per workstation, reversing a well-entrenched densification trend. It remains difficult at this time to assess how many workers will actually go back to the office full-time once stay-at-home directives are lifted (and schools / daycares re-open), and beyond.
- On the investment front, investors expect modest cap rate increases (averaging 25 BPS for the best assets). While a third of participants are putting their investment plans on hold, an equal proportion have shifted their focus on opportunistic buying (32%). For pension funds, that proportion is 44%.
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