Key Assumptions Survey
New results for Office & Retail sectors
In response to industry requests for an update on the impact of the COVID-19 pandemic on real estate conditions and key assumptions underlying values, our professionals reached out to market leaders across Canada for another Key Assumption Survey focusing specifically on Office and Retail assets.
This abbreviated update summarizes key investment parameters and budgetary assumptions as well as an outlook on cap rate trends for the 2021 fiscal year.
Based on evolving market conditions, asset categories were further segmented into downtown and suburban office as well as enclosed vs. open format shopping centers. Participants’ responses from the June survey are included in this presentation for a reference in time rather than for a comparison and provide different context and assumptions for the two survey periods.
Office | Key Assumptions Survey
November 2020
Vacancy & credit allowance – downtown and suburban office
What general vacancy and credit allowance (%) are you forecasting for the 2021 fiscal year?
Source: Altus Group
Key findings in the office sector:
- More concerns now about WFH becoming permanent (hybrid), expecting 10%-20% space downsized – maybe more in 2022
- Downtown vs. Suburban: no clear consensus on which will be preferred ‘post-COVID’
- Pessimistic outlook for lower quality office assets, regardless of location (but worse for downtown)
- Increasing availability (direct but especially sub-lease) leading to more leasing incentives to maintain face rates, flight to quality (less but better space), flexible lease terms, sub-lease opportunities will continue to flood the market
Retail | Key Assumptions Survey
November 2020
Vacancy & credit allowance – retail all categories
What general vacancy and credit allowance (%) are you forecasting for the 2021 fiscal year?
Source: Altus Group
Key findings in the retail sector:
- Rental rates forecasts remain pessimistic, but not significantly more than in June – grocery anchored retail is the exception
- More mentions of possibly turning to percentage rents for struggling tenants
- Higher vacancy and bad debt ratios are anticipated – especially bad debt
- Tenant renewal probability (and replacing tenants) will be challenging
- Mall sales productivity for 2021 expected to be better than in 2020, but not back to 2019 levels
- Good quality open format suburban assets are still in demand, especially when leased to essential retail
Industrial | Key Assumptions Survey
June 2020 [We did not survey our Industrial participants in November]
Industrial market rents (face rents) – by region
Top quality
Lower quality
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.
Previous reports:
Multi-residential | Key Assumptions Survey
June 2020 [We did not survey our Multi-residential participants in November]
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.
Previous reports:
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