Key Assumptions Survey | June 2020
About the survey
In early June, as markets in various provinces were moving toward gradual or partial lifting of COVID-19 related restrictions, Altus Group reached out to more than 140 clients and industry partners across the country to monitor the evolution of investors outlook and opinion on the impact of COVID-19.
One survey respondent shared a quote that sums up our new normal: “We’re no longer waiting for the storm to pass, we’re learning to dance in the rain”
Our first Key Assumptions Survey was conducted in mid-April, only a few weeks after the COVID-19 outbreak, when the duration and scope of the restrictive measures imposed to control the spread of the virus were still unknown. Three months later, survey participants could express with more certainty the direct and immediate repercussions of the crisis on market conditions. However, long-term consequences of this pandemic on real estate fundamentals are still difficult to determine. While the results of this second survey point to some contradictions in terms of investment outlook and strategy for the next 12 months, they also reveal emerging consensus on what’s expected for each property type.
Industrial | Key Assumptions Survey
Industrial market rents (face rents) – by region
Source: Altus Group
Key findings in the industrial sector:
- Investor sentiment towards industrial assets remain overwhelmingly favourable. In April, 70% of respondents expected cap rates to remain stable (65%) or decrease (5%). In June, it was 80% who anticipate stability (68%) or compressions (12%). The proportion of respondents who thought it was too soon to say what to expect in terms of cap rates for the next 12 months declined from 15% in April to only 6% in June.
- The percentage of respondents who were looking at acquiring industrial assets for Q2 and beyond also increased significantly from 38% in the first survey to 58% in June.
- Already in strong demand before the pandemic, this asset class is still considered a safe haven. Barring a prolonged recession, COVID-19’s impact on this market segment will be limited and short-lived.
- For top quality industrial, the share of participants surveyed expecting COVID-19 to negatively impact face rates is outnumbered by those anticipating further increases in rents. The outlook on rents for lower quality industrial, especially older stock, may not be as favourable but it definitely points to stability.
Multi-residential | Key Assumptions Survey
Multi-residential | Cap rate trends expectations
What do you expect in terms of Cap Rate Trends over the next 12 months, assuming the pandemic would be resolved by June 30th (in basis points variation)?
Source: Altus Group
Key findings in the multi-residential sector:
- Compared to other asset classes, multi-residential continues to be the least affected by the restrictive measures put in place to control COVID-19 spread – it was marginally impacted by loss of demand from borders being closed to immigration and the uncertain return of international students.
- In terms of income, renewal probabilities are over 90% and revenues will remain stable or increase. In addition, many survey respondents anticipate more cap rate compressions, which are already at historically low levels.
- Investors appetite for multi-residential has grown and many are ready to acquire multi-residential assets. The proportion of respondents who were delaying or postponing decisions dropped from 37% to 16% between the first and the second survey. The multi-residential segment also shows the sharpest decline since April for both transactions on hold (53% vs. 22%) and kept on-hold for an undetermined period (53% vs. 30%).
- While many multi-residential landlords have weathered the stay-at-home and restrictive measures, more are expressing concern about the end of government assistance programs and the impact of a prolonged economic recession on households’ finances.
Retail | Key Assumptions Survey
Retail | Transactions in the pipeline – on hold
Source: Altus Group
Key findings in the retail sector:
- The impact of COVID-19 and restrictive measures on retail assets continues to be a challenge. However, since the last survey, landlords are more confident in forecasting income, vacancy and renewals. The pressure applied over the last three months has forced asset owners to evaluate which retailers are more at risk in the context of a pandemic as well as accelerating trends favouring certain concepts over others.
- On the shopping mall side, retail strips with groceries or pharmacies as anchors have done well despite restrictive measures. For others, some rent losses and rent deferrals from non-essential business closures will never be recovered. While many fashion retailers have or are about to go bankrupt, we have yet to see how many restaurants and entertainment-based business models will survive the ordeal of physical distancing.
- Of all asset classes, retail has the largest share of investors expecting cap rates to increase over the next 12 months. It is the only asset class surveyed with no decline in investment transactions on-hold (still above 50%, like in April).
- Tenant retention ratios are expected to be lower and vacancy and bad debt to be higher than for other asset classes. Over 60% of respondents anticipate lag vacancy time going beyond 9 months. The most optimistic see this as an opportunity to accelerate the repositioning of their centre with an improved retail mix.
- The pandemic will have had the positive effect of accelerating the shift of many local businesses to online shopping and delivery services. Vacant spaces will mushroom, but landlords see it as an opportunity to strengthen their retail mix, redevelop centres and convert excess retail spaces into more profitable uses.
Office | Key Assumptions Survey
Rent collection rates by region
What percentage of your total rent did you collect in April?
What percentage of your total rent do you expect to collect for May?
Source: Altus Group
Key findings in the office sector:
- In the short term, the timid return to the office will 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 significantly between the April and June survey. However, protocols for returning to the office with physical distancing measures involve more resources for training, security, cleaning and disinfection. Physical distancing, and the resulting additional operating costs, will remain as long as there is no vaccine or no risk of a second wave of COVID-19 cases, and perhaps beyond.
- The pandemic has unequivocally demonstrated the technological feasibility of working remotely, meaning that more flexible work-from-home policies and satellite offices in the suburbs could gain popularity.
- Tenants are currently reviewing office space strategies, but scope of changes and impact will only unfold when leases are renewed. In the longer term, the potential reduction in space requirements associated with the increase in the number of work-from-home workers 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.
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