Two recent reports offer insights into how the pandemic has affected property sectors
By Ed McCarthy
The pandemic’s impacts on Canadian investment real estate and the subsequent recovery have varied widely among property sectors. Two informative recent reports examine Canadian real estate’s 2020 performance and discuss the market’s outlook.
4 Takeaways from the 2021 Canada Real Estate Market Outlook
The CBRE report examines the economic and capital market outlooks from the national and regional perspectives. The authors also discuss the major property market segments and the trends likely to affect each segment. “Despite current challenges, Canadian commercial real estate offers many reasons for optimism and we are in a better position to capitalize on what comes next than many of our global competitors,” said CBRE Canada Vice Chairman Paul Morassutti in a press release announcing the 2021 CBRE survey’s availability. “Canada’s economic and political stability and thoughtful immigration policies are a launchpad for growth and we expect to see a real pop in the economy before the end of the year.”
Key points:
1. Asset Class Preferences Shift: The pandemic’s influence showed in buyers’ preferences “for countercyclical asset classes, properties with potential for income growth, and sectors whose fundamentals were most insulated from the impacts of the pandemic.” Among the strongest sectors: Multifamily housing, industrial properties and land. Weaker performers included hotels, office and retail space.
2. Alternative Asset Classes Favored: Several alternative property categories benefitted from relative market scarcity and buyers’ search for yield. Per the report these conditions “should result in significant demand for alternative asset classes including data centers, life sciences real estate, and cold storage facilities.”
3. Office Space Impact: The shift to remote working led to significantly reduced worker presence in offices, but the authors remain generally positive on the office market. Under the new hybrid model of combined remote and in-office, they note that 67% of employees desire a balance of office and remote work. Nonetheless, the pandemic’s impact will linger as “remote working will lower the utilization of office on a regular basis. Recent analysis suggests that this could cut the need for office space by 10% to 20%, but it’s still too soon to know.”
4. Retail Closures and Opportunities: This statistic was an eye-opener: According to the Canadian Federation of Independent Businesses, “up to 225,000 small businesses could permanently close because of COVID-19 restrictions.” Those closures will create retail space vacancies, which in turn will create opportunities for new retailers to find space at reduced rates.
The report’s authors believe: “New and emerging retailers will capitalize on market conditions to absorb some of these resulting vacancies. Digitally native brands, medical, health and wellness, pet services, and franchisee-driven operations will look for real estate opportunities. Grocers, convenience stores and quick-service restaurants are also anticipated to grow.”
5 Emerging Trends in Real Estate 2021 Canada and US
The 42nd edition of the study was produced jointly by PwC Canada and Urban Land Institute and considers major developments and trends in both Canada and the United States. The report cites several niche assets that investors believe hold promise, including emerging alternatives.
Key points:
1. Single-family rental housing: The pandemic has led to more people seeking to move from apartments to single-family homes to increase living and remote working space. However, the note observes that “this type of housing is more common in the United States, particularly where excess land near big cities is available.”
2. Life sciences facilities: The pandemic and the vaccine search highlighted the need for life sciences research facilities. Combined with aging populations, the result has been what the report characterizes as a “growing investment and development opportunity.” In addition, “some Canadian cities, like Montreal, have vibrant clusters of life sciences activities, as do several U.S. markets, where companies are eager to be near the top research talent.”
3. Self-storage: Several survey respondents described self-storage as a niche worth considering as people encounter home-space constraints during the pandemic. “Others noted that the strong demand for self-storage reflects an ongoing trend as more multifamily housing has been built in Canada.
4. Blurring lines: The study found “a blurring of the lines between property uses.” For instance, they cite a demand for “flexibility around office space,” as hybrid work arrangements’ evolution is leading some office tenants to request short-term leases for at least the near term. With residential properties, the hybrid work model increases the need for private spaces in the home that can be used as offices.
5. Greater ESG focus: Environmental, social and governance (ESG) considerations continue to gain acceptance and prominence in finance and the report notes that this trend is also influencing real estate. Not all property investors are fully on-board with ESG, but others believe addressing the issues “makes good business sense and can be key to creating value.”
That attitude fits well with many larger Canadian pension plans’ emphasis on responsible investing/ESG within their portfolios. Per the report: “Having a good ESG profile is a significant focus for many investors, particularly on the institutional side, since reputational risks and other ESG considerations have a growing impact on a property’s attractiveness and competitiveness. One interviewee noted that investors will price in the costs of addressing ESG deficiencies, while another said that their organization had turned down potential partners because of ESG issues.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
