Commercial property investment risk spiked in Q1 2020

COVID-19 crisis worsened already-ongoing slowdown from second half of 2019, with further near-term deterioration expected

Commercial property investment risk spiked in Q1 2020

The coronavirus crisis has turned what was already a bad situation for Canada’s commercial property investment space into something that’s more untenable and riskier.

In an update to its 2020 Canadian Economic Outlook, Morguard _ noted a spike in Canadian commercial property investment risk in the first quarter, mainly due to the global spread on COVID-19.

“The spread  of  the  virus  during  the  quarter  had  a  materially  negative  impact  on  investor confidence, given an increasingly uncertain global outlook,” the report said.

Aside from concerns related to financial markets, particularly with respect to credit markets, investors braced for weaker performance from their existing commercial property portfolios. Rental income was anticipated to erode due to the closure of “non-essential” businesses; concerns surrounding retail-sector properties grew with the prospects of some stores closing permanently.

Commercial investment property sales also slowed in Q1, extending a trend that had already been ongoing in the last half of last year.

“The slower pace was initially a product of availability,” Morguard said, adding that increased uncertainty over the future of the retail industry also played a role. “As the first quarter progressed, it was clear that a broader-based slowdown in investment sales was about to unfold.”

Investors became hesitant to a degree as uncertainty surrounding COVID-19 spread and economic activity plunged. As a result, some negotiations have been halted, leading to a likely continued reduction in closed transactions. Investors are expected to adopt a “wait and see” stance as the global economic and financial-market situation develops.

“Canadian commercial investment property market conditions will deteriorate over the near term,” the report said.

Due to greater challenges in maintaining portfolio income performance coupled with broader market uncertainty, it predicted a decline in property values. Landlords with secure long-term leases are expected to outperform, and portfolios exposed to necessities business sectors such as groceries and health care are anticipated to see more stable overall performance.

“On balance, however, market conditions will soften over the near term until the global economic and financial uncertainty has abated,” Morguard said.


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