Covid and real estate in Canada has not found a Eureka moment yet. The real estate sales have dropped to the lowest level in a generation. The volume for the April month was the lowest since 1984 - when the population was a third smaller.
The Covid pandemic has led to an unprecedented cash and credit crunch and impacted the real estate companies in different ways. In a short-term perspective, landlords will be struggling to maintain liquidity, keep tenants safe while complying with government policy. And the key question remains whether real estate market in Canada is resilient enough to recover from this crisis.
In this post, we will be exploring the implications of Covid on the residential, commercial, and retail markets exclusively in Toronto and Vancouver.
Residential Real Estate
The Toronto real estate board (TTREB) reported a 69% decline in home sales in a recent mid-April update, which is a good indication of how the sales are going to be in the second quarter of 2020.
According to Michael Collins, president of TTREB, measures to counter Covid have led to a decline in the number of transactions, which is likely to persist until this pandemic subsides. He further stated that sales are expected to skyrocket post-Covid since buyers are going to satisfy the pent-up demand.
As of the first quarter of 2020, home sales in Toronto were 1,654, new listings at 3,843, and average cost at $820,000, with the most significant decline recorded in condominium apartments partly because such properties primarily attract first-time buyers who halt their commitments in times of crisis.
While real estate agents and brokerages are deemed essential service providers, residential construction and new developments have been put to a temporary pause to ensure profound, flattening the curve, efficacy. Still, the agents and brokerages qualify for federal government incentives like CEBA, CERB, TWSFE, and CEWS despite the temporary halt in home construction.
Covid has led to a colossal number of lost jobs as well, reduced incomes, and immigration shrinks, which, looking ahead, the severity of rental impact and occupancy remain speculation at this point.
Shaun Hildebrand, market research lead at Urbanization, reported that over 10,000 condominiums were supposed to reach full occupancy by the end of June, but most of it will likely occur in the next 10 to 18 months. However, because such apartments are owned by investors who want to rent out their units as fast as possible, condominium investors will consider lowering rents than the current market price while still maintaining healthy liquidity.
Vancouver real estate is yet one of the least impacted. Winnipeg saw the smallest drop with 739 sales in April, down 36.2% from last year. Vancouver follows with 1,119 sales, down 39.5% from last year. Halifax came in third with 354 sales, down 47.2% from last year.
The largest drops are notices in the Eastern Canada, with Montreal and Toronto taking big hits. Montreal reported 1,890 sales in April, down 67.1% from last year. Toronto followed with 2,975 sales, down 67.1% from last year.
Commercial Real Estate
Commercial real estate (CRE) has had uninterrupted liquidity significantly higher than conventional sources of income, like corporate debt, with relatively higher risk. However, unlike past economic recessions, the implications of Covid stretch out globally, both immediate and long-term, in terms of asset prices and transaction activity.
Rather than a small lag CRE is affected immediately mainly because occupier's businesses and trade activities are grounded to a halt. This shutdown of businesses has resulted in owners facing short-term liquidity crunch following delays in rent collection and high operational costs on essential maintenance operations like sanitation, thermal and security checkpoints.
Between February 1st and March 16th, capitalization rates for mall REITs and hotels spiked by 206 and 402 basis points respectively with data centers and cell towers manifesting more resilience of an average increase in a cap rate of about 30 basis points. With increased uncertainty, a low of new investments, and government policy on social distancing, more than 70% of customers have put their investment plans on hold, and close to 63% are concerned about property appraisals.
While most markets remain accessible, creditors are treading with caution, leaving most uncompleted property owners resolving to get credit from Non-banking financial institutions (NBFIs). Low credit coupled with closure of several shops, malls, offices and living spaces has led to the suspension of new developments due to material and PPE shortage.
In a post-Covid context, commercial real estate may never be the same again, considering that realtors and owners are continually adopting behavioral measures that could outlive the crisis. Consumers will be forced to shift to e-commerce, and agents will have to centralize cash management, make informed tailored decisions, and acquire operating companies (not just assets).
Retail Real Estate
The deliberate closure of local economies was unprecedented, and there is no doubt that this crisis has induced a potential recession and shutdown of businesses, particularly in the retail sector.
Tenants and landlords have been equally struck as most landlords depend on the rental income to operate, yet tenants are having a significant liquidity issue. New developments have been put on hold since the social distancing policy has termed construction as 'non-essential'. As banks take extra caution in lending, the amount of empathy that landlords will give tenants entirely depends on how resilient the owner will be, and how much time they can give.
The risk of businesses entering a total state of insolvency is still a speculation. While it is the tenants' responsibility to comply with the lease agreement, landlords may consider it best to hold taking stern action on the basis that it may be hard to fill the void once all restrictions are lifted.
Unquestionably, there is a lot of government's emergency loan, but it is not yet evident whether all of it will reach the real estate market. Though the re-opening of shops and offices entirely depends on measures taken by the government, landlords, and tenants, all sectors of the Canadian retail real estate will emerge in more debt than when they started.
Covid is unprecedented and has left everyone - tenants, landlords, financial institutions, and governments - working on how to manage it. In the short-term, creditors may require guarantors and borrowers to re-negotiate deals, and borrowers should reach out to loan issuers for guidance. This is because this crisis has not only caused a job apocalypse but also found many Canadians in a household debt trap. Fueled by the fear of future uncertainties in the real estate landscape, borrowing has left the average Canadian household paying around $1.75 for every dollar they earn, particularly on mortgages.
According to David Lay, UBC geographer, households in Vancouver's metro suburbs hold the highest debt ratio, particularly in areas where people are purchasing starter homes. With a debt ratio of $3 for every $1 income, this figure is incredibly high, the kind that precedes a financial crunch, that has made hundreds of homeowners who bought properties to sell no longer able to service their mortgage costs, hence opting to sell the units.
The piling pressure to service mortgage loans will find lenders receiving and reviewing forbearance requests, especially on retail, hotel, and parking. While it is expected and reasonable for landlords to hear requests for rent relief from tenants, there wouldn't be a generalized solution since it is going to be a deal-by-deal conversation with a necessity on value-check to reach reasonable agreements.
Since Covid does not have a defined end-date, landlords and tenants are relying on mutual agreements without necessarily relying on regulatory acts to provide clear information. Although some reports are indicating that some landlords will be applying forceful measures which will likely end up in court, lessons from the 9/11 and great recession reveal that having mutual agreements is the way forward.
The ability of the Canadian real estate market to come out of this pandemic is still speculation, but what is evident is that there is likely to be long-term alterations on the market. Space per employee could skyrocket as more companies would adopt work-from-home approaches, which could reduce demand for commercial real estate units.
My feeling is that the residential real estate and storage spaces would be first to bounce back. Commercial and retail would take a long term hit.
Hope you enjoyed this post on Covid and real estate in Canada. If you have any questions, let me know through the comment section below.