Following eight weeks of widespread physical distancing measures in Ontario, part of our economy is preparing a phased-in reopening. It is at this critical time that we begin to see how much Government relief programs have responded effectively to the challenges facing individuals, families, and businesses.
The following update is based on conversations with property owners, industry peers and leaders, institutional investors, and our own stakeholders. Here are some of the observations we’ve made as we look at opportunities:
Residential
Both supply and demand for homes have plummeted, leaving the market relatively balanced overall. So far, this has meant a historic drop in transactions and housing starts but has not yet had the same impact on prices. There will likely be a softening in prices over the medium term as economic pressures prevent families from buying homes and new immigration remains on hold.
Condos are faced with new restrictions. Investor-owned units that have been used as short-term rentals—aside from having little-to-no revenue through this pandemic—are facing regulatory restrictions that may cause owners to sell their units. This new supply would likely depress unit values and resale prices. In the long-term, development projects that are already underway will have some investors discouraged from closing on units, and will generally be adding supply to a stressed market.
Landlords have reported April and May multi-family rents coming in at better than expected rates, despite the disproportionate effect of unemployment on lower-wage workers who are generally renters. The longer-term viability of rent collection is still uncertain as government relief programs may taper off, but tenants are still motivated to maintain their rents over other discretionary purchases, so we think the values of primary-market assets will remain intact.
Commercial
Industrial property has been identified as a low-risk asset class, as warehousing and logistics benefit from the increasing move to ecommerce from traditional retail. As supply chains become more local, there could be even higher demand for large bay industrial space. Industrial properties had increased dramatically in value before this downturn, but whether there is normalization of values to 2018 levels or a demand-driven push to keep values high, the asset values remain strong.
Office properties are arguably the most uncertain assets. Most owners and investors in office space agree that despite the success of many businesses moving to remote-working setups, there is an inherent value in the productivity of the workplace through routine and socialization. The major obstacle will be maneuvering around physical distancing requirements for the foreseeable future, at least until medical treatments and a COVID-19 vaccine have been successfully developed.
The retail market is being severely challenged as a result of closures and a precipitous drop in discretionary spending. The sector has tremendous unemployment in retail, food service, and hospitality services. Many retail tenants have sought rent deferrals or abatements, and some have asked to apply security deposits in lieu of the current month’s rent. Longer-term, fear of new outbreaks may only accelerate the shift online. The bottom line is a correction seems likely when valuing properties that depend on retail tenancies.
When it comes to long-term forecasting, most agree that it depends on too many unknown factors, in particular, how long physical distancing will continue and how hard the forced closures will hit job losses and the economy overall.
The effects of this economic downturn and eventual recovery on the real estate market are causing lenders to take a very measured approach to any new business. In light of this lending slowdown, we expect to see promising opportunities to assist borrowers, whether property owners or businesses.