COVID-19 implications for commercial real estate

  • Mar. 25, 2020
IMAGE: Colliers Canada's COVID-19 Implications for Canadian Real Estate report.

Colliers Canada’s COVID-19 Implications for Canadian Real Estate report.

As a result of the COVID-19 pandemic, investors, landlords and tenants are assessing impacts, adjusting operations and building and executing contingency plans to support people and their businesses. 

Within the short term, the public’s health and safety is of utmost importance. The longer the COVID-19 spread’s time frame extends, the higher a priority it is for businesses to mitigate economic impact.

The following assesses the impact of COVID-19 on five sectors in the Canadian commercial real estate space and how key considerations can help through this changing climate. 

This information is condensed from Colliers Canada’s full report, COVID-19 Implications for Canadian Real Estate.

Office

Impact: Areas of impact for the office sector include remote working adoption and support of technology required to make remote work productive.

Most large organizations and tech-savvy companies have already established remote working options for their employees, but others haven’t.

In these cases, this period serves as a catalyst for workplace transformation as such companies rapidly learn and adopt new practices and perspectives on where and how employees can work.

Key Considerations: Diminished face-to-face interaction may present challenges for employee engagement and collaboration. Maintaining communication should be a top priority, as should ensuring technical infrastructure and support are in place to enable large employee bases to work remotely.

Companies are also beginning to plan for cost-reduction and containment. Some relocation decisions are being deferred through shorter-term extensions.

In the long term, however, organizations may be faced with having to downsize or leave their office space. In these cases, communication with an advisor would be essential, as potential options could include sublease agreements.

Landlords will continuously monitor the safety and risk levels of their buildings and effectively communicate this information to tenants. Landlords are also going to need to assess how to respond to requests for rent relief.

Industrial/ Supply Chain

Impact: With China being the largest global manufacturer of components, the ripple effect of plant closures in the automotive, electronic and pharmaceutical industries has caused a severe disruption.

Plant closures and cancelled sailings and flights from China have also resulted in unorganized assets on a global scale. Exporters are struggling to find the appropriate containers and capacity to handle their goods.

In Canada, this situation has resulted in the Port of Vancouver reporting an 85 per cent decline in volume of Chinese container shipments with 50 per cent fewer sailings. Logistics companies in Toronto have reported 60 per cent fewer inbound containers.

Approximately 10 per cent of intermediate goods sourced from China are used to make finished products in Canada; the current climate could result in shortages for various sectors depending on how much Canadian businesses rely on global suppliers. 

Key Considerations: Industrial companies should assess their risk tolerance to determine inventory levels required to handle different disruption scenarios.

This approach might include increasing inventory levels as contingency in some cases, but it also might incorporate employing enhanced sourcing strategies, taking into consideration geographic spread and coordinated inventory management with critical vendors.

Companies may be required to restructure their financials to allow for more liquidity and seek larger spaces to accommodate the extra inventory if their model is too lean.

Doing so could be challenging, given the historically low industrial vacancy rates in Canada’s major markets, with 0.4 per cent vacancy in the Greater Toronto Area and 1.2 per cent in the Metro Vancouver Area as of Q4 2019.

Optimization of their current holdings allows businesses to redefine their operations and focus on their plans of action for when the plants reopen. As supply returns to the market, industrial companies should capitalize on the demand opportunities to regain their lost capital.

Retail

Impact: Many shopping malls and underground pathways have seen a large decrease in shoppers. Assets in a retail node with necessity-based retailers, primary grocery and pharmacy, will find their traffic remains very high. 

Depending on the governmental decrees, neighbourhood street-front retailers may find their foot traffic not significantly reduced, as the perception of safety is higher within this subtype.

Retailers may also experience an accelerated shift to online transactions, which we anticipate to cause short-term pressure on brick retailers and medium-term concern with the delivery and distribution channel workforce while COVID-19 measures take hold. 

Given the impact to Asian manufacturing sectors, some retailers can expect a delay in receiving new products due to supply chain disruption.

Other retailers will experience a surge in stockpiling from consumers as they provide essential items, from groceries to disinfectants.

Key Considerations: The consumer’s perception of safety is crucial to address. Investing in sanitization will make all the difference.

Retail businesses and landlords should communicate to their customer base safety precautions they are taking. It’s recommended there be a heavy emphasis on marketing campaigns so businesses can bounce back once the risk of COVID declines.

Investment

Impact: Uncertainty surrounding the long-term effects of COVID-19 has paused investment activity as investors are postponing marketing efforts, product launches and plans for expanding their portfolios.

First among the concerns are the short- and long-term impacts the pandemic could have on underlying property fundamentals and returns, including constraints in supply chain, consumer spending, business investment, hospitality and international trade.

Key Considerations: The decline in interest rates instituted to help deal with the crisis (five-year Canada bonds are 0.61 per cent at the time of writing, down more than 100 base points from 2019 year-end) is a significant mitigating factor.

Investors traditionally look to hard assets like real estate in times of uncertainty and the Canadian real estate market represents an attractive opportunity.

Hotel

Impact: With the Government of Canada banning all non-Canadian citizens from entering Canada, conferences and international meetings are being postponed or cancelled, leaving the hotel sector on pause.

The loss in demand from lack of tourism has sharply impacted profitability in this sector.

Key Considerations: The contingency plan for hospitality investors has been to prioritize the health of guests and staff to prevent transmission of this virus and to take actionable steps to minimize losses.

The impact may be prolonged depending on how long the social distancing policies remain in place.

Owners should continue to communicate with their lenders and other stakeholders to ensure they understand the unfortunate financial position their businesses are in, and to work to mitigate losses.

Construction

Impact: The risk to construction projects in Canada is low and it appears there will be ample warning of any increase in public health risk.

For most projects, there is no indication of a need for significant change. However, there are project risks that should be addressed, beginning with the highest probability or chance the availability and price of materials may change.

Other risks are: shortages of personal protective equipment that may affect work schedules; project team members being personally impacted by COVID-19; and provincial / municipal officials requiring non-essential workers to stay home.

Key Considerations: Any material delivery delay and cost-escalation impacts should be confirmed, with further steps to be determined based on the degree of impact on the business case.

It’s recommended to also obtain assurances from consultants and trades that they have appropriate internal protocols to contain and prevent their staff from spreading the COVID-19 virus and to ensure continuity of office work.

Changes should be continuously monitored, assessing the public health risk while also developing a response protocol to facilitate rapid response to changes.







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