Article
How Canadian Commercial Real Estate is Weathering COVID-19
April 17, 2020 3 Minute Read
Canadian commercial real estate finds itself in a world changing day to day and hour by hour.
As the COVID-19 outbreak continues, it remains unclear when the economy will reopen, and what that will look like in Canada and around the world.
But it’s increasingly clear how the industry is faring during the crisis.
From the issue of rent collection, to questions around property valuation and the viability of retail, there are many challenges being confronted.
We’ve broken down the current state of the industry and mapped out some of what you can expect in the coming weeks.
Read on for an analysis of this unprecedented situation, including insights from CBRE Vice-Chairman Paul Morassutti as featured in CBRE’s inaugural Virtual Market Outlook webinar.
Short-to-Medium Cashflow
While there are many challenges to managing commercial properties or underwriting assets in the current climate, rent collection is one of the more significant.
Many tenants impacted by COVID are, or will be, unable to make rental payments. While major rental income loss was expected in April, many owners reported higher than expected payment levels in the multifamily, office and industrial sectors.
It remains to be seen if this trend will continue heading into May and the summer months. Though government relief programs won’t solve the current crisis, they could go a long way towards mitigating economic damage.
Cash flow reliability depends upon the composition of portfolios and varies from asset to asset and tenant to tenant.
Cap Rates
If there is not long-term value impairment on the other side of a recovery, cap rate expansion should be relatively modest.
Right now, there is no indication that this won’t be the case. While some buyers believe that what was a 4.0% cap rate should now sit at 5.0%, the market has not adjusted to reflect this opinion.
It is possible that rent growth could impact cap rates in the short term – the previous standard of below 4.0% assumed continued strong rental growth.
Still, while there will likely be a pause in growth during the crisis, the long-term fundamentals support growth in the long run, making cap rates stickier than some might think.
Capital Markets
Deals that began in early March are moving towards closing, though with extended due diligence periods. Meanwhile, sellers have taken a wait-and-see approach to how buyers will price assets.
Debt availability is now heavily relationship based. While 10-year Canadian bond-yields have fallen nearly 100 basis points this year, the cost of financing is higher, as most banks have introduced interest rate floors.
These facts reflect the uncertainty of the current market and the sharp increase in corporate bond yield spreads. In many cases, re-financings are being deferred. This “kick the can down the road” approach makes perfect sense in today’s market, where underwriting value is murky. It also suggests that we may not see many distressed sales of assets in the short-term.
Though REITS saw a decline of 47.0% in March, they have since rallied and are now up 36.0%. At times like this liquidity in the form of cash and access to lines of credit is essential. Thankfully REITS currently have all-time high levels of liquidity.
For more insights, listen to CBRE’s Virtual Market Outlook.
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