Potential impact of COVID-19 crisis on Canadian CREMarch 17, 2020
The Canadian commercial real estate market’s prolonged period of strength continued through the first part of the year, but the COVID-19 virus and reactions to it have introduced a time of uncertainty.
Keith Reading, research director for Morguard (MRC-T), an integrated real estate company with $21.3 billion of assets owned and under management, talked to RENX about how fallout related to COVID-19 could affect Canada’s commercial real estate sectors and economic growth.
Taking a big picture look
“The commercial real estate sector is typically impacted by any event that leads to a feeling of uncertainty for its participants,” said Reading.
“For example, tenants become hesitant when looking to expand and hire new workers if they are uncertain about the direction of their future business.
“The resulting hesitancy leads to a slowdown in demand for rental space and economic activity. At the same time, the resulting slowdown in purchasing and hiring leads to a broader softening of the economic growth trend and overall activity.
“Many Canadian companies have strengthened their balance sheets over the past few years and will be able to weather the storm of any slowdown in economic and business activity over the near term.
“However, should the crisis last for an extended period, some organizations may be forced to adjust to the new economic reality by downsizing, which could potentially lead to reductions in staffing and real estate demand.
“Most forecasters are predicting a recession at this time, which will most certainly impact commercial real estate performance, given its positions as a service provider to the broader economy.”
Assuming the COVID-19 crisis is prolonged and results in a sharp slowdown in economic activity, which is likely given the added weakness in the oil sector and its importance to the Canadian economy, a recession isn’t out of the question.
The predicted recession will likely be global in scale and cause job losses among both large and small companies — something that has already started.
Reading said this could make the commercial real estate sector more attractive to investors looking to park their money somewhere deemed relatively safe until the downward cycle bottoms out and recovery begins.
Resiliency in commercial real estate
As of March 16, the Toronto Stock Exchange had dropped by about 5,600 points in the last month in response to a virus that has infected hundreds of people across Canada and thousands around the world.
Commercial real estate has shown more resilience and held values better than the stock markets during past crises, however, and Reading said investors are now looking for opportunities in the sector.
“During times of crisis, the multi-suite rental sector generally outperforms, as tenants hold off on making changes in their accommodation plans given a less than certain employment outlook.
“Retail will likely be the hardest hit sector, as consumers grow more concerned with their financial health and spend less. In the past, commercial real estate has come through various crises relatively well.
“Typically, necessities-based retail has performed relatively well through economic downturns. That is, people need food, shelter and healthcare no matter what the circumstances.”
Reading believes regions with greater depth, breadth and diversity in their economies will perform better and handle the downside effects of COVID-19 more effectively.
He expects the commercial real estate markets in larger cities possessing those characteristics to weather the crisis better.
“Alberta will suffer through the double whammy of the COVID-19 crisis and the sharp drop in oil prices that has unfolded over the past month,” said Reading.
“Similarly, an export-driven region like Saskatchewan will see reduced demand for its resources in the event of a global economic slowdown.
“Newfoundland and Labrador has already seen adjustments in demand for its seafood products in China, for example.”
Despite the diversity of Vancouver’s economy, Reading said its connections to China may make it more vulnerable to the COVID-19 crisis as well.
Impact of interest rate cuts
Banks around the world have been cutting already low interest rates to help counteract the impact of COVID-19 to stimulate spending and growth in light of the negative shocks to economies.
“Lower rates will benefit consumers looking to buy homes, which will partially offset the economic slump,” said Reading. “In addition, lower interest rates will benefit some businesses looking to upgrade equipment or lower the cost of carrying debt.
“Both businesses and consumers will look to refinance, resulting in lower debt servicing costs, and will provide a financial buffer as sales and service activity softens. In other words, lower interest rates should soften the blow to some degree.”
Reading believes the COVID-19 crisis will eventually pass and a recovery will ensue, especially as individuals and businesses take the necessary steps recommended by authorities to reduce the risk of contracting or spreading the virus.