Colliers Canada says 16 per cent of commercial tenants did not pay rent in May and the commercial real estate company expects a further decline in June collections before things improve . . . assuming the reopening of businesses continues.
Colliers said it anticipates a lag of six weeks between reopening dates and an uptick in collections. That’s because businesses and consumers need time to assess the situation as the COVID-19 pandemic continues.
“There are several factors contributing to the decline in rent payments from April to May,” said John Duda, president of real estate management services at Colliers Canada, in a statement.
“These include overall deterioration of conditions that many businesses are facing due to closures or decreasing demand, and the fact that some tenants and owners have been in a holding pattern regarding rent payments and deferral discussions while learning more about the Canada Emergency Commercial Rent Assistance (CECRA) program, which recently opened for applications.
“Tenants and landlords are familiarizing themselves with the government’s rent relief supports, and many landlords are taking proactive action to find mutually beneficial solutions.
“As businesses begin to reopen, we are assisting tenants and landlords by identifying additional cost-effective operational support to help them meet new hygiene, physical distancing and government requirements, and be flexible in making any reasonable accommodations, such as facilitating curbside pickup options for retail stores.”
Rent collection report highlights
The Colliers report, Rent Collection and Relief Status, checked in again with 7,100 tenants across Canada in May as a follow-up to an April survey and found:
* 21 per cent of commercial (industrial, retail and office) tenants across Canada requested rent relief in April. Of those tenants, 39 per cent did not pay rent, 19 per cent made partial payments and 42 per cent paid full rent in May;
* rent collection deteriorated by one per cent in March, 10 per cent in April and 13 per cent in May from February’s baseline;
* of tenants who requested rent relief, 23 per cent were able to negotiate direct relief agreements with their landlords outside of CECRA. Of that number, 94 per cent were granted deferrals and six per cent were granted rent abatements;
* the most common relief duration is three months (46 per cent), while 28 per cent were granted two months of relief and 18 per cent granted one month of relief;
* retail tenants are most likely to have come to an agreement on rent deferrals (18 per cent), followed by industrial tenants (14 per cent) and office tenants (11 per cent).
According to Colliers, here’s a breakdown of the percentage of tenants which did not make rent payments across the target provinces: Quebec, 27 per cent; Alberta, 24 per cent; Ontario, 19 per cent; and British Columbia, 14 per cent.
Trends becoming more clear
Jane Domenico, senior vice-president and national lead of retail services for the real estate management services division of Colliers, said we’re seeing a trend between April, May and June.
“COVID has had the most impact on retail tenancies because of the closure of their businesses and not being able to work remotely to the same (degree) of both office and industrial,” said Domenico, adding regional differences and potential improvements in the future will depend on how and when phases of the relaunch occur.
In the last several days, a growing number of provinces have indicated they will ban commercial rent evictions. The latest are Saskatchewan, Alberta and Ontario.
“Speaking from a retail lens, our assets are only as good as our retail tenants within those assets and we have a symbiotic relationship between the two,” said Domenico.
“Throughout this process, we’ve been trying to work with our tenants and I would say most landlords and most ownerships out there are trying to work with the tenants. It’s not going to change our day-to-day plans.
“At the end of the day, the importance is our landlords and tenants working together.”
Landlords, tenants share “the pain”
Michael Kehoe, lead ambassador in Canada for the New-York based International Council of Shopping Centers, called the Colliers report a timely snapshot of the commercial real estate rental market.
“The report indicates to me that the pain is shared by both sides of the tenant / landlord relationship,” said Kehoe, a veteran of more than 40 years in the industry and broker/owner of Fairfield Commercial Real Estate in Calgary.
“Commercial landlords are tempering their rent collection and lease enforcement efforts, where the legal may be different from the practical, with a view to retaining and supporting viable tenants.
“There will be commercial tenants that will not survive this ‘black swan’ event and many commercial landlords are preparing to cycle additional levels of vacant space with new tenants in the post-COVID-19 period.
“Everyone in the commercial real estate transactional chain should be working together at this critical time to avoid jeopardizing the survival of small business.”
Landlords and tenants need to keep working as partners, said BOMA Canada president and CEO Benjamin Shinewald.
“Everyone has to do its part in getting through COVID-19 and everyone will suffer in these difficult circumstances,” he said.
“Landlords and tenants have, of their own accord, entered into commercially binding contracts. We need government to help the entire economy, including tenants and landlords.”
CECRA and eviction bans
Shinewald added his voice to those critical of provincial government eviction bans.
“The challenge of these moratoriums is that they create perverse incentives wherein tenants won’t pay their rent, the relationship deteriorates and the economic pain is simply transferred from the tenant to the landlord,” he said.
“Instead, the government should be focused on alleviating that pain.
“The other challenge is that this will put a chill on investment in commercial real estate, as owners and managers of commercial real estate no longer have the confidence that they can hold their tenants to account under the terms of their lease.
“Who would invest in commercial real estate if they knew that the government might step in and retroactively change the terms of their leases?
“There are tons of stories, public and private, of landlords going the extra mile for tenants. The vast majority of landlords know that they need their tenants not just to survive but to thrive.
“We believe that the government is working hard and has done many great things to help get Canadians through this crisis, but this program unfortunately is an outlier in that regard.”
Colliers said the impact of the CECRA program on collections won’t be clear until July.
The Government of Canada opened applications for the small business financial support program May 25, but it will likely take until July for owners and tenants to know where they stand with CECRA.
There are also still areas that require further clarification, particularly the administrative process and flexibility of legal agreement requirements, Colliers said.