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COVID-19’s potential impact on CRE valuations, by asset class

How will the recession brought about by government measures to combat COVID-19 impact commercial...

IMAGE: Otera Capital executive vice-president and chief investment officer Paul Chin. (Courtesy Otera Capital)

Otera Capital executive vice-president and chief investment officer Paul Chin. (Courtesy Otera Capital)

How will the recession brought about by government measures to combat COVID-19 impact commercial real estate valuations?

That was the focus of a Real Estate Forums webinar moderated by Stephen Sender, a man with more than 30 years of investment banking experience in Canada and abroad who’s now a board member of H&R REIT (HR-UN-T), Sienna Senior Living, Centurion Apartment REIT and Centurion Real Estate Opportunities Trust.

While it’s still too early to know long-term repercussions, companies are currently carrying out stress tests, forecasts, analyses and covenant-checks of assets to try to avoid surprises later.

Theoretically, property values should be moving lower as risks have increased and cash flow has likely weakened. However, as long as companies and high-net-worth investors seek to deploy large amounts of capital to buy real estate, the trend of high property valuations could continue.

Following is an examination of various sectors and how the panelists think they may be affected.

Retail valuations

The retail sector has been challenged in recent years, and COVID-19 is accelerating existing trends, said Otera Capital executive vice-president and chief investment officer Paul Chin.

Otera is the real estate lending arm for Caisse de dépôt et placement du Québec, the second-largest pension fund manager in Canada.

While trophy assets such as CF Toronto Eaton Centre and Yorkdale Shopping Centre should still be very strong, there will be a widening gap between good and bad malls, according to Colin Johnston, Altus Group president of research, valuation and advisory. The commercial real estate services, software and data company does about 10,000 valuations, worth about $300 billion, annually.

Enclosed malls in secondary and tertiary markets that were already ripe for redevelopment opportunities may have those plans hastened.

Johnston said some already had weaker tenancies and leases with rents based on a percentage of sales, which amounts to nothing for the large percentage of retailers which have been closed due to COVID-19 restrictions.

Not all of these tenants are likely to return when malls reopen, and many of those that do could need rental support moving forward. Rent collections for some retail landlords were as low as 15 to 20 per cent in April, Johnston said, and many rent deferrals could turn into abatements.

Grocery and pharmacy-anchored retail strips have generally performed well, as those stores have remained open to provide essential goods. However, those locations often also feature small businesses such as salons, bakeries and dry cleaners that may be in for tough times.

Experiential retail was becoming more prominent at shopping centres, but Johnston is unsure if people will rush back to the food halls, restaurants, entertainment centres, bowling alleys and movie theatres which were driving traffic before the pandemic.

Johnston said higher vacancy allowances and longer lease-up horizons for vacant spaces are being factored into valuations. While some retail properties could become very attractive because of lower valuations, he noted it would depend on whether the pricing is appropriate for the risk.

Migration to online shopping isn’t likely to end.

Other factors which could make it difficult for retail owners to raise rents over the next five years or so include an expected higher tenant churn rate and global retailers who have no commitment to particular malls or markets and thus have flexibility to move around.

“I think it’s going to turn into a tenants’ market for some period of time,” said Sender.


IMAGE: KingSett Capital COO and CFO Anna Kennedy is also part-president of the Toronto chapter of CREW (Commercial Real Estate Women). (Courtesy KingSett)

KingSett Capital COO Anna Kennedy. (Courtesy KingSett)

“Multifamily real estate has historically been the most resilient asset class and we think that continues today,” said Anna Kennedy, chief operating officer of KingSett Capital, a private equity real estate firm with $13 billion of assets under management.

Kennedy cited low vacancy rates, upward pressure on rents and an existing need for more rental apartments in key Canadian urban markets, which she believes portend continued strong performance.

Sender said people who are renting typically don’t have a lot of alternatives, and need to live somewhere, so “it makes sense that multifamily will be more resilient than commercial asset classes.”


The majority of office workers across Canada have been working from home for about two months, and Kennedy said it’s been “quite remarkable” how they’ve adapted.

However, the consensus of the panel members was people still long for human interaction, working in teams and innovating, as well as creating new business relationships instead of just maintaining existing ones. All of this can best be done in office environments.

“If anything, they may well need more space because they’re concerned about the higher densities in their office space,” said Kennedy.

Increased workplace flexibility through hoteling systems and having more people work from home, at least part-time, could reduce demand for office space. However, Johnston believes it will be balanced by the desire for increased buffering and distancing.

Calgary office

While the office markets in most major Canadian cities have performed well of late, Calgary was a glaring exception. The most recent collapse of oil and gas prices has exacerbated the problems there.

Johnston said Altus was seeing light at the end of the tunnel with absorption and had forecast rental growth for the next few years, but that will now be amended.

Long-term leases signed years ago now have rents well above market value, and rents have decreased dramatically upon lease rollovers, according to Johnston. With Calgary’s downtown office vacancy rate hitting 24.6 per cent in Q1 2020, and expected to rise, rents should continue to decline.

One note of optimism was expressed by Kennedy. KingSett has four per cent of its income fund invested in Calgary and owns a couple of office buildings there that have “already been written down substantially over the last four years.”

She said rent collection for April was more than 90 per cent.

Seniors housing

Johnston said Altus was doing a lot of feasibility work for companies interested in building more seniors housing, which had been acknowledged as a growth sector because of Canada’s aging population.

The large COVID-19 death tolls in seniors homes has likely put a pause on that. Down the road, however, there will continue to be a need for such facilities — albeit with increased staffing, cleaning, security and other improvements.

“It’s not all seniors housing that’s being hit hard,” said Chin. “It’s long-term care which is the most vulnerable.”

Johnston said the children of seniors often decide if their parents will go into these facilities. Their personal wealth has potentially been decreased in this pandemic-caused recession and they may no longer be able to afford to pay for it.


Johnston believes the industrial sector should remain relatively unscathed and companies will want to build more if they can find the land. Industrial space close to cities will continue to be especially important for last-mile delivery of goods.

Small-bay properties may be challenged, depending on where they fit in the supply chain, according to Johnston.

Chin said supply chain issues might prompt some companies to stockpile certain goods to ensure availability, and places will be needed to store them.

“We’ve lost some of our confidence in relying on global supply chains,” said Kennedy. “I think we may bite the bullet and pay more for certain strategic goods that we may want to manufacture at home.”


IMAGE: Stephen Sender, an investment banker with more than 30 years of experience, moderated the Real Estate Forums webinar. (Courtesy Centurion)

Stephen Sender, an investment banker with more than 30 years of experience, moderated the Real Estate Forums webinar. (Courtesy Centurion)

Hotels will get “kicked in the teeth the hardest,” according to Sender, who believes the asset class is “in for a tough go for a period of time.”

Johnston said tourist-oriented hotels will suffer because people may be wary of going to them, travel may continue to be restricted to some extent, and disposable income could be impacted over the next few years.

Downtown hotels in major cities catering to diverse clientele – business clients as well as vacationers – may recover more quickly.


Some new development has been temporarily put on hold due to COVID-19-mandated construction stoppages or slowdowns, which is likely to impact project budgets. Chin said the primary issue with development is delayed registrations because of municipal offices being closed.

Johnston said Altus is still performing development appraisals, however, and it’s too early to say if land values have been negatively impacted.

Although Otera is being conservative with its loan structures, Chin said the company is “looking at new development on a very selective basis. It depends on who the sponsors are.”

Otera has been repaid on three large condominium loans through the COVID-19 crisis and Chin expects to be repaid on two more in the next month, which are positive signs.

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