CANADA – During the second quarter of 2020, some segments of the Canadian commercial real estate industry remained resilient. While the office leasing market softened between April and June, the industrial and multi-suite residential segments performed at healthy levels. In the interim, the retail property segment continued to struggle as restrictions imposed due to the COVID-19 pandemic forced non-essential retailers to close.
Investors will continue to be selective when acquiring Canadian commercial investment properties over the near term, according to the latest Canadian Economic Outlook and Market Fundamentals Report issued by Morguard Corporation.
“The economic slowdown resulting from the pandemic impacted the commercial real estate sector and investor decisions during the second quarter of 2020,” said Keith Reading, Director, Research at Morguard. “Canada’s economic recovery from the downturn is expected to unfold with a large degree of unevenness in the second half of 2020 as local governments take a phased approach to reopening with caution.”
Commercial Real Estate
In the office segment, leasing supply fundamentals softened during the second quarter of 2020, driven in part by restrictions implemented as a result of the pandemic. The national vacancy rate remained at a healthy 10.8 per cent for the office segment, however, downtown cores in major cities experienced an increase in sublease availability.
As physical distancing measures were reinforced during the second quarter to reduce the spread of COVID-19, a significant number of retailers were forced to close their stores temporarily. Others adjusted their service model to supplement their income by offering curbside pickup or online ordering, such as what some food outlets implemented.
In addition to reduced revenue, retailers and landlords incurred additional costs to adapt their businesses for reopening, including reinforcing safety and cleaning measures as well as investing in signage and protective equipment to safeguard employees and customers in their return to brick-and-mortar stores.
The health of Canada’s industrial leasing market was sustained during the second quarter as leasing demand remained relatively healthy and stable. E-commerce and related logistics companies continued to drive demand with an increased volume of online shopping and distribution for both essential and non-essential consumer goods.
During the second quarter of 2020, 6.9 million square feet of new supply of industrial space was added to Canada’s building inventory, bringing the year-to-date total to 9.5 million square feet.
The multi-suite residential segment continues to be a solid investment during this period. While providing much needed rental housing to Canadians, the segment provides a steady income derived from rent collection. In the midst of the pandemic the percentage of rent payments remained stable which may have been impacted by the federal government’s Canada Emergency Response Benefit (CERB) that helped many Canadians directly affected by COVID-19 to gain financial support.
Economic Factors
The measures implemented by the Bank of Canada, including maintaining its policy interest rate at 0.25 per cent, supported consumers and businesses in meeting their more immediate debt obligations and kept credit flowing to ease the impacts of COVID-19. These measures were effective in mitigating some of the impact to the Canadian economy during the period.
In the latter half of the second quarter, Canada’s job market came back to life following an unprecedented decline as a result of the pandemic. At the end of June, total unemployment rested 1.8 million below the February levels but, despite the shortfall, June’s spike was stronger than expected.
During the same period, Canadian spending patterns improved as several regions across the country adopted a phased approach in reopening their economies, including non-essential stores.
“Consumer spending has been a major driver of Canada’s economic growth for some time,” added Reading. “We expect the economy to begin to recover in the second half of 2020. An important contributor to the recovery will be the role businesses play in strengthening consumer confidence by putting safety first in order to facilitate a return to brick and mortar shopping and entertainment. In an ideal scenario, the spending habits of Canadians will return to pre-pandemic levels, in support of the recovery of jobs, especially in the services industry.”
Lower oil prices and global demand will hamper economic progress in Alberta, Saskatchewan and Newfoundland and Labrador. Conversely, British Columbia, Manitoba and New Brunswick are forecasted to recover more quickly given relatively lower levels of exposure to COVID-19 and earlier economic re-openings.
The second quarter update of the 2020 Economic Outlook and Market Fundamentals Research Report, released by Morguard, provides a detailed analysis of the 2020 real estate investment trends to watch in Canada. The full report is available at morguard.com/research.
