Real estate update

COVID-19: Real Estate Update – January 19, 2021

With 2020 now behind us, we can take in the year that was in order to look at the year ahead. Hillmount Capital continues to confer with industry peers, as well as statements from government, financial regulators, and our stakeholders. Our observations continue to evolve, and we are focused on opportunities in every asset class as follows:

Residential

The residential market is historically cyclical, but 2020 added new layers of uncertainty and risk. The effects of ‘lockdown economics’ disrupted a residential market that had spent the last two decades focused on densification and transit-oriented development. Instead, the past nine months saw a migration to low-rise housing in more affordable secondary markets as remote work, higher savings rates (as a result of limited travel, retail shopping, and restaurant dining), and low-interest rates gave people the opportunity to pursue homeownership. Meanwhile, condo sales in major markets like the GTA were hardest hit in 2020. Growth in listings outstripped growth in sales and caused condo prices to scale back to early 2019 levels.

The year ahead holds more uncertainty as we navigate our way to herd immunity through vaccination. Forecasts and opinions are simultaneously optimistic and cautious, but there is a nearly unanimous attitude from bank economists and the brokerage industry that single-family home values will not decline materially this coming year. Even as local migration slows, we can look forward to Canada opening its borders again, bringing new households to support the residential market.

On the rental side, many investor-owners of rental condos have seen their income and yields disappear as a result of short-term rental vacancies and a lack of immigration to fill the long-term rental pool. Purpose-built rentals have also seen vacancies rise with rents softening and landlords offering incentives to attract tenants.

Fiscal stimulus, by way of government support programs and monetary policy, has kept many mortgage-holders and condo or apartment tenants afloat over this past year.  The government has made statements that they will not ease stimulus until the economy and unemployment have recovered from COVID-19. We’ll need to keep an eye on this transition, especially as it impacts low-income and part-time employment.

This pandemic will likely continue to create volatility and uncertainty in the residential market in and around the GTA for at least the next 12 months. Opinions continue to be mixed, and lenders will need to be cautious but opportunistic when making investment decisions.

Commercial

2020 was a turbulent year for commercial real estate assets and owners. Some retailers have been forced to close permanently due to lockdown measures. Lost revenue, as well as a growing consumer shift to online options, has, in turn, encouraged investors to focus away from large retail companies and toward the industrial property sector that supports warehousing and distribution.

Many businesses have successfully transitioned to a remote workplace. Leading them to assess future office space requirements and considering a permanent shift to a hybrid or entirely remote setting. Others will wait to see how society adjusts in the coming months to make these types of decisions. Businesses that do bring their employees back, whether on a full-time or rotating basis, will need to be mindful of the need for physical distancing and separations within the office. This may lead some office tenants to require larger footprints or maintain their existing space to accommodate.

We continue to see stability in industrial assets, as warehousing and logistics are being utilized to capacity. Despite the fact that there have been fewer transactions for these properties, the asset values remain strong.

Given the above, Hillmount Capital will continue to take a cautious approach to valuing assets in every sector. We are carefully watching residential real estate values as we underwrite new loans, and we remain mindful of the challenges facing the retail and commercial office markets as a result of COVID-19.  We continue to actively pursue opportunities in the first and second mortgage space, as well as lending against real estate where owners are facing financial issues.

 

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