Investing in commercial real estate means an uncertain future

The post-pandemic world looks to be one of fewer workers in offices and a reimagined shopping experience

Investing in commercial real estate means an uncertain future
Steve Randall

Bricks and mortar have long been held as a relatively resilient investment. After all, prices and demand fluctuate but the market typically rebounds.

But the current climate is not typical. Together with trends that were already intensifying, the pandemic has driven a shift to greater working from home and e-commerce.

So, what does this mean for investors in commercial real estate?

A new report from the Altus Group focuses on Canada’s office space, eerily quiet during lockdown but as people return to work there are some key questions.

Firstly, to what extent will companies and employees want to continue with work-from-home policies – and how will this impact on their space requirements?

The survey of 115 Canadian CRE executives from pension funds and life companies suggests that, in the short term, revenues from office investments won’t be impacted much, except for parking income.

It shows that funds and insurers have not seen a significant change in the financial models applied to vacancies and bad debts between the April and June surveys. Most respondents collected at least 90% of rents due in April and expected to do so in May.

Longer term though, the requirements of physical distancing within offices including additional cleaning and training regimes, will add to operating costs and will endure until a vaccine is found or the threat of a second wave dissipates.

Alongside increased working from home, large businesses may decide to utilize smaller, satellite offices in the suburbs.

However, while there is a likelihood that more employees will work from home, at least for part of the week, the physical distancing rules will mean fewer employees in the office will not necessarily mean less floor space.

Industrial sentiment remains
Investor confidence in the industrial sector was maintained in the June survey with 80% expecting cap rates to remain stable and just 12% expecting decline.

There was a significant increase in the share of respondents who plan to acquire industrial real estate assets in the next year; up from 38% in April to 58% in June.

Between the two surveys, there was also a decrease in the share of CRE execs who are planning to delay acquisition of multi-family assets, the class least impacted by lockdown restrictions.

However, there is growing concern that the end of government support programs could lead to a growth in missed rent payments.

What about retail?
There were encouraging signs for Canadian retail Tuesday as Statistics Canada reported a sharp rebound to pre-pandemic levels.

The 19% jump in receipts and expectation of a further, larger jump ahead, was positive news for a sector that has been under pressure for some time, not least from the rise of e-commerce.

For Canada’s malls, a recent report from Deloitte said that a reimaging of retail space was ahead.

“Now more than ever, landlords and retailers need to work hand in hand in an effort to get ahead of the evolving trends and create a reason for Canadian consumers to return to in-store shopping post-pandemic and have a smooth, stress-free experience,” said Marty Weintraub, partner and national Retail leader at Deloitte Canada. “The mall of the future will be a destination that feeds the functional requirements of our lives as well as our need to be social. It will be a thriving community where people will live, work, play, and eat. It will not be your parents’ mall—so much so that we may no longer call it a “mall” at all.”