Financial turmoil created by the COVID-19 pandemic is a “health crisis with economic implications, it’s not an economic crisis in itself,” says the incoming CEO of OMERS, one of the country’s largest commercial real estate investors.
Blake Hutcheson, the former head of Oxford Properties, was speaking during a Canadian market outlook webinar this week hosted by CBRE. The CRE services firm and brokerage called it CBRE’s first-ever virtual market outlook for Canada.
Discussing both the impact so far and prospects for climbing out of the deep economic hole the pandemic is creating, Hutcheson said he foresees the worst of Canada’s lockdown-type restrictions lasting a few months. He’s hopeful it doesn’t stretch any longer, so the steps to recovery can begin.
“That is not here yet. It’s the $64,000 question, the one we are all watching.”
He’s also “really, really impressed” by strong actions from Canada’s central bank and all levels of government to deal with the “economic suspension.” He said this ensured there were no runs on lines of credit, as happened during the 2008 economic crisis.
Health of economy vs. health of people
Hutcheson said the pandemic has posed very difficult decisions, pitting the health of people against the health of the economy.
“It’s an absolute zero-sum game. Any dollar we spend for one is a disadvantage to the other. It’s like mutually assured destruction,” he observed. “Our (global) citizenry were voting in favour of saving people at the expense of the economy.”
“Winners and losers” will emerge from the crisis, and he pointed to three factors which will decide who falls into which category:
* governments must ensure the country’s economic fabric “doesn’t tear”;
* companies must maintain strong balance sheets and create liquidity to give themselves “elbow room”;
* and how long the economic suspension lasts.
OMERS, which has about 20 per cent of its net assets in real estate through its Oxford Properties arm, is doing what all real estate firms are doing at the moment – parking its long-term strategy and focusing on whatever has to be done to get through the crisis.
Look for opportunities during recovery
“If you were to ask me my strategy, it is to find a way to support our existing businesses so Oxford gets all the money it needs to get through this,” he said, before turning his attention to the future.
“The other thing we are doing is making sure we have 10s of billions, ideally, of dry powder to take advantage of the next phase, whatever that looks like, because we all know the greatest fortunes have been made after times like this.
“It’s not callous to dream about it; I think it’s important to try to position yourself to unlock new platforms, new ideas at multiples that are a fraction of what they were only five months ago.”
Not lost on the real estate industry is the fact “relationships do matter, particularly now,” and “strong balance sheets, strong relationships get you through difficult times like this.”
The winners and losers
As he looked ahead, Hutcheson broke down where he thinks the winners and losers will be.
“Clearly industrial is a net beneficiary during these times. Whatever was inevitably going to happen in the retail space is just put on steroids,” by the forced move to online shopping.
During his own overview of the various sectors, CBRE vice-chairman Paul Morassutti noted some sectors of retail, particularly food and entertainment, are “getting crushed.”
However, Hutcheson noted there is hope in the sector, which has already been extensively reinventing itself.
“Having said that, great retail is great retail. We own Yorkdale, we own Scarborough Town Centre, we own Square One,” he said. “They will come out of this, too, over time.
“But industrial and multifamily, clearly, in the short term look like the net winners.”
He is also bullish on office, though he sees change coming to the sector. Hutcheson cited the experience of a contact in Asia, who manages an 80-million-square-foot portfolio which is now back in operation after the virus lockdown there.
“Rough math, there is probably 20 per cent less demand for office space on a go-forward basis, but there’s probably a 10 per cent net demand for more additional elbow room because we over-served the market by jamming too many people in on a per-square-foot basis,” he observed.
“I think office is going to do just fine.”
“Step-by-step” reopening of economy
Returning to normalcy should not be confused with everything being normal, said Morassutti, who provided insights into what comes next.
“The reopening of the economy is likely to be a step-by-step gradual process and likely by region to region,” he said.
Morassutti noted signs of recovery from the virus may be short-lived. Wuhan, China recently had its lockdown lifted 11 weeks after it was imposed, but China is battling the import of new cases from hotspots like Russia, Hong Kong and Singapore.
As well, a second wave of COVID-19 “is not just possible, it’s probable,” with history showing two-thirds of the fatalities from the Spanish Flu occurred during the second wave.
Turning to real estate, Morassutti said the biggest question in the office market is whether tech demand will continue. “Without it, we’re in trouble.” However, “the current assessment is it will.”
Google, Amazon, Microsoft and Facebook have a combined $600 billion on their balance sheets. Online demand has exploded and even “my 90-year-old father knows what Zoom is.”
The Calgary office market is another story, Morassutti said: The city with the most exposure to the energy sector in North America may hit vacancy rates of 35 per cent.
This is more of an oil issue than a COVID-19 issue, given low oil prices and global divestment from high-carbon companies, he said: “It is difficult to envision what a recovery will look like for Calgary office.”
The recovery of the hotel sector is dependent on how quickly the economy and air travel normalize. “Our forecast is for significant improvement in 2021 and a return to pre-COVID conditions by 2022.”
Multifamily about to be tested
The stable reputation of multifamily is about to be tested.
“The ability of Canadians to pay their rent will depend on how quickly the economy begins to open and how well those relief packages work. The programs were meant to bridge toward a period of normalcy – but what happens if it takes us longer to get there?”
Still, the =long-term fundamentals of the multiresidential sector “remain compelling.”
Morassutti said there are several reasons to be optimistic for recovery in Canada compared to the U.S.
These include stronger real estate fundamentals before COVID-19, a stronger social safety net and coordinated government responses with an “unprecedented level of cooperation” between all levels of government.
However, there are a number of short-term risks that include people becoming undisciplined about COVID-19 precautions and the possibility government stimulus packages will be inadequate.
Still, he believes the long-term outlook is hopeful.
“The brightest minds in science are focused on vaccine solutions and you have to believe that a solution will be found.”