Real estate is persistently durable, malleable and resistant to negative momentum. Sure, there are always ups and downs, the point being, ups eventually do follow the downs. Buildings have a lifecycle – this is not new.
They get repurposed, or they get replaced. Either way, provided their location remains suitable and attractive for developed use, there will be four walls and a roof with a job to do.
Over the past 10 months, main street small businesses everywhere have struggled, while many have shut entirely. Those that could, and did, adjust to a new operating model based on e-commerce and curbside retail are the ones that have done the best job at surviving.
Investing for what comes next
The pandemic has reinforced the point that the real estate industry functions on the simple Darwinian truth that adversity creates opportunity – for those best able to adapt.
For example, Ottawa’s Whalesbone restaurant group announced last week it will take over the former Fox and Feather pub site on Elgin Street – a premier commercial strip for all sorts of pubs and dining establishments.
The plan is for the location to be converted to a high-end steakhouse. The Whalesbone team is obviously looking to what comes after the lockdowns and the stay-at-home orders have ended.
But, what about the broader CRE market – properties larger than that of a small, local business?
Here is one story of an Ottawa real estate developer responding to two market forces. The first is that the local rental market has for years been tight and in need of new stock.
The second is the new reality on the other side of the pandemic, where many people will continue to work from home and demand for traditional office space may decline. SerCo Realty Group began this new year with its notice of intention to convert a seven-storey downtown office building.
Last on my list, Dream Industrial REIT announced last week it is acquiring a 527,000-square-foot distribution facility in Montreal that also has significant land available for expansion. The deal is part of $465 million in global acquisitions which Dream has closed on in recent weeks, or is said it is planning to make.
“These acquisitions are high-quality properties that are well-suited for e-commerce use,” Dream said in a statement.
I shouldn’t have to explain the significance of that in the current environment – e-commerce still needs a place from which to operate.
Most dealmakers and lenders unbowed
All of which only serves to reaffirm what I and other sober-minded people have been saying all along – the CRE sky hasn’t and won’t fall as a result of the pandemic. Dealmakers of all sizes are still active.
And commercial lenders are still lending. In its last quarterly commentary (which reported on Q3 2020), CMLS Mortgage Analytics Group reported, “Results from our Q3 Lender Sentiment Survey indicate increasing optimism when it comes to the durability of lenders’ commercial mortgage portfolios.”
So, where did we land for commercial deal flow as of the end of 2020? I can’t speak for the rest of the country, but I do maintain my own tally of commercial transaction data in Ontario.
Looking at transactions of $10 million each or more, we did see a decline in the March-to-December 2020 period vs. the same in 2019, but by no means a calamitous one. We ended with a total of 426 transactions collectively worth $13.47 billion. This compares to 564 transactions worth $17.35 billion for the same period of 2019.
So, March through December 2020 logged 75.5 per cent of the deals, and 77.6 per cent of the value, compared to the same 10 months in the previous year.
The sky did not fall, though it has darkened for a spell. We saw a broad range of prices. Volumes were down as some investors decided to sit it out, while others looked for bargains that may or may not have been there.
I am far more optimistic now than I was three months ago (a certain inauguration last week also has something to do with that). We are in for another six months or so of rough seas and then the ship will be righting itself.
Bear in mind we haven’t yet seen the material impact of the vaccine at work – I expect that we will begin to see how this is going within the next eight weeks.
And then what?
We really are an invasive species – humans like to go all over the place. Travel and tourism will resume, though with new safety measures in place, and those industries will recover.
Sensible governments around the world have come to understand that we can’t afford to endure more lockdowns and will work to prevent or mitigate such a severe economic impact from another virus.
The Bank of Canada is predicting a strong rebound in our nation’s economy over the next couple of years – it just needs the right accelerants, such as the federal government pushing ahead with new infrastructure projects.
This is not to dismiss or downplay by any means the fact the pandemic has already left lasting scars on both the CRE and the small business/main street landscapes. But no matter who rises and who falls, real estate will always be there and so will demand, even if that demand takes a different form.
To discuss this or any valuation topic in the context of your property, please contact me at [email protected]. I am always interested in your feedback and suggestions for future articles.