The world’s biggest real estate investors are sitting on piles of cash, preparing for once-in-a-lifetime opportunities created by the pandemic.
With economies around the world sputtering, commercial real estate prices are expected to come down. How much they’ll fall is the key question.
Sellers are currently willing to concede discounts of around five per cent, while bidders are hoping for about 20 per cent off pre-pandemic prices, said Charles Hewlett, managing director at Rclco Real Estate Advisors. That estimated gap, which is likely wider in specific cases, has put a freeze on deals.
“The mantra for anything that hasn’t gotten started is: delay, defer and, in many cases, renegotiate,” Hewlett said. “If I’m going to have vintage May 2020 on my books, I want to be able to demonstrate to my investors that I got an exceptionally good deal.”
Private equity firms across the globe hold an estimated US$328 billion in dry powder for real estate deployment, according to the data firm Preqin Ltd. Prior to the crisis, asset prices had been pushed up as investors chased yield in riskier corners of the property market. Now, Blackstone Group Inc. and Brookfield Asset Management Inc., the largest real estate investing companies, are expected to hunt for bargains among the fallout from the pandemic.
For now, social distancing rules and a virtual travel halt have stalled transactions and led to speculation that prices will drop in coming months.
“The physical restrictions taking place are mostly preventing new deals from happening,” Tom Leahy, a London-based senior director at Real Capital Analytics Inc. said. “Far fewer active buyers, far fewer deals, an increase of deals falling out of contract — those are the preludes to seeing prices fall when the market does come back.”
The volume of deals in Europe plunged 65 per cent in April from a year earlier, according to Leahy. U.S. and Asian markets faced similar drops.
Asia, where the pandemic began, is likely to recover faster than Europe or America, as Taiwan, South Korea, Japan and parts of China reopen for business, according to Richard Barkham, chief economist for CBRE Group Inc. Transactions in the Americas will fall an estimated 35 per cent this year, compared with a roughly 25 per cent decline in the Asia-Pacific region, he said.
Still, New York-based Blackstone, which had US$538 billion in assets under management at the end of March, is “starting to see some rescue situations,” President Jonathan Gray said during an earnings call last month. He added that “distress takes time to play out.”
Brookfield, meanwhile, has US$60 billion “ready to be deployed globally as opportunities arise,” Chief Executive Officer Bruce Flatt said last week.
“In reflecting on what really matters to our business, it is liquidity, liquidity and liquidity, in that order,” he wrote in a letter to shareholders.
The firms with money to spend first have to figure out what do do with some of their more vulnerable recent investments. Blackstone said last month that its real estate portfolio, which represents about 30 per cent of its assets under management, is concentrated in “sectors that have shown greater resilience to Covid-related headwinds.”
Still, not all its bets look like winners. In late February, Blackstone announced a deal to buy a $6 billion portfolio of university dormitories in the U.K. popular with international students.
“Are they scratching their heads about having put money into the student business?” Chris Grigg, CEO of British Land Co., one of the U.K.’s largest commercial landlords, said. “You’d guess they probably are a bit.”
Brookfield made waves with a US$15 billion bet on malls in 2018. But with retail stores shuttered and more consumers shopping online, the company recently announced a US$5 billion retail revitalization program.
Until shopping, commuting and travel become routine again, it will be hard for investors to agree on what malls, hotels, offices and other properties are worth.
“Proof is really going to be when the markets start to reopen when buyers and sellers find a middle ground with what’s going to happen with pricing,” Real Capital’s Leahy said. “It’s going to be asymmetrical. Different sectors and different geographies are going to be factors. There’s not going to be a uniform recovery.”
PC Urban, KingSett acquire Richmond industrial property – Real Estate News EXchange
In an announcement Monday, the companies said current buildings on the 9.7-acre property, which include 160,000 square feet of leasable space, are 100 per cent occupied. PC Urban and KingSett plan to announce redevelopment and repositioning plans for the property this fall.
“This is our largest acquisition to date and it’s a well-positioned, well-known industrial property in a desired sub-market of Richmond where there is currently less than one per cent vacancy,” said Brent Sawchyn, CEO of PC Urban Properties, in the release. “For us, this acquisition is a natural progression of our growth and we are excited to be working with KingSett on reimagining and repositioning this property.”
Financial details have not been disclosed.
The property is located in Crestwood, the largest and most active sub-market in Richmond for industrial properties. The new owners say Viking Way Business Centre boasts a highly functional design, extensive frontage, an attractive look and design, and offers proximity to highways and transit.
Viking Way Business Centre
The single-storey, small-bay buildings are home to numerous light industrial businesses in biotech, electronics, aerospace, building products distribution, media, technology, textile and service businesses.
Demand for Viking Way Business Centre remains strong due to the park’s maintenance and appearance, along with its mix of unit sizes and dock/grade loading options.
“This partnership was attractive to us for a number of reasons,” said Andrew Kirkham, the Western Canada vice-president for KingSett Capital.
“Working with PC Urban Properties allows us to leverage local area knowledge and they have a strong track record for redeveloping industrial assets across Western Canada.”
Market rents have grown rapidly in North Richmond during the past three years, with strong demand for light industrial space, extremely limited options for tenants and a competitive atmosphere that includes multiple offers for most available spaces.
The average net rental rate in North Richmond increased more than 40 per cent from 2017 to 2019.
South Richmond has lagged behind due to the delayed George Massey Tunnel replacement and associated highway congestion. With no relief in sight for businesses located in South Richmond, PC Urban and KingSett believe demand will further increase for space in North Richmond.
PC Urban, KingSett partnership
In creating their partnership, PC Urban and KingSett are part of an emerging trend in the Metro Vancouver region, where local developers partner with institutional investors.
As noted in the CBRE 2020 Canada Market Outlook report, strong commercial real estate fundamentals attracted more investment capital to Vancouver in Q1 of 2020. CBRE is projecting that institutional investors, including Blackstone, Crestpoint and KingSett, will increasingly partner with local firms to gain a foothold in the market.
“Investors are still drawn to Vancouver in a big way and we’re seeing a growing number of institutional investors partnering with local operators in Vancouver,” said CBRE Vancouver managing director Jason Kiselbach, in the release.
“They’re looking at our fundamental lease rates and growth and buying as much as they can in office, industrial and multifamily, driving further construction of new projects.”
Oakville Real Estate Holding Its Own Amidst COVID-19 – RE/MAX News
Oakville real estate is continuing to attract buyers, despite COVID-19. The housing market in Oakville started 2020 strong, as was the case in many housing markets across Canada. Balanced market conditions and an average price of five per cent were the expectation by year’s end, according to the RE/MAX 2020 Housing market Outlook Report. A few months into the year, the global pandemic sent many industries into a tailspin, however Oakville real estate values did not decline due to the public health crisis. If current conditions continue, Oakville housing prices are expected to hold steady.
This is in stark contrast to a recent prediction from Canada Mortgage and Housing Corp., warning that housing prices in Canada could drop between nine and 18 per cent over the next year. However, based on reports from RE/MAX brokers in many of Canada’s largest housing markets, consumer inquiries are on the upswing, inventory is low and the demand for homes is there. Here’s a closer look at Oakville real estate activity over the past few months, and some insight as to what may lie ahead.
According to market data from the Oakville, Milton and District Real Estate Board (OMDREB), February 2020 saw a dramatic spike in sales activity year over year, with a total of 639 home sales compared to just 485 transactions in February 2019. Properties hitting the market also saw a significant increase, with 925 new listings in February 2020 compared to 847 in 2019.
By all accounts, Milton and Oakville real estate was primed for a busy spring market. Homebuyers emerged earlier than usual with strong sales activity, with luxury infill and detached homes sales in Oakville leading the charge in the $1M+ to $2.5M sale price range, according to OMDREB.
Despite the social distancing mandates and business closures that took effect on March 13, March 2020 actually reported an increase in transactions across Oakville and Milton. OMDREB reported 670 home sales in the region, compared to March 2019 when 650 sales were recorded. The month experienced a slight decline in the number of properties for sale, with 1,118 new listings in March 2020 compared to 1,220 in March 2019.
April marked the first month that the impact of the global pandemic was truly felt in local housing markets across Canada, and Oakville real estate followed suit.
OMDREB reported a dramatic dip in transactions in April 2020, with 289 homes sold across the region, compared to 761 home sales in April 2019. The number of new homes hitting the market also took a hit, with 559 new listings in April 2020 compared to 1,347 in April 2019.
“With social distancing measures still in place for the foreseeable future, we can expect the coming months to see a decline in home sales and listings compared to last year as well. However, while sales activity has seen a significant drop, the numbers also show us that real estate has not experienced a total shut down. Ultimately, some areas along with certain home types have been more impacted than others,” said OMDREB President Richard Weima.
What’s in store for Oakville real estate?
The Oakville real estate market has been surprisingly active during the pandemic. With the exception of the first two weeks of the lockdown – the second half of March – there has been a steady pace of buyers and sellers active in the housing market, according to Oakville-based RE/MAX Aboutowne Realty Corp. In the past few weeks, the brokerage reports a steady increase in call volume, appointments booked, and units sold.
And contrary to some widespread predictions, Oakville real estate prices did not adjust down based on the pandemic. In fact, the average home price increased 9.76 per cent year-over-year, reaching $1,251,124 in April 2020, compared to April 2019, when the average price was $1,129,093.
Some multiple-offer scenarios continue, with some properties selling for over asking. Based on these factors, RE/MAX expects that Oakville real estate will continue to be in high demand.
Luxury real estate in Oakville
The luxury housing market in Oakville starts at around $3 million. This property segment did experience some slight softening over the last 60 days, which is tied to COVID-19. These buyers may be temporarily sitting on the sidelines as the economy gradually returns to activity.
A return to “the new normal”
Are Canadians ready to return to some semblance of normalcy? According to a weekly consumer survey by Leger published on May 20, 60 per cent of Canadians think their provincial government should maintain the pace at which it is relaxing social distancing/self-isolation measures. Furthermore, 53 per cent of Canadians are afraid of contracting COVID-19; however, this proportion continues to trend downward.
Here in Ontario, while social distancing measures continue to be in effect, some businesses have been allowed to re-open their doors in an effort to reignite the local economy. They will join many businesses including real estate offices, which were classified as an essential service and continued to operate under strict guidelines throughout the pandemic. The economic, employment and general comfort level will continue to impact home-buying and selling decisions. Click here to find out what Canadian real estate might look like in the coming weeks and months.
Asset management: Pandemic forces major changes – Real Estate News EXchange
Shutdowns imposed to curtail the spread of COVID-19 have changed the way real estate assets have been managed over the past two months, a trend which will continue as more people return to work.
Cushman & Wakefield executive managing director of asset services Molly Westbrook moderated a three-person panel discussion in a recent Real Estate Forums webinar exploring some of the issues property managers have been dealing with.
Topics included: differences between the four major asset classes; rent collection; technology and innovation; and what to expect in the future.
Retail has been the poorest-performing of the four major real estate asset classes for the past few years and it’s also been the hardest hit by the pandemic.
KingSett Capital executive vice-president of asset management Bill Logar believes some retailers may have to recreate themselves. He thinks the asset class will take longer to recover than others and it will be slightly different in the future.
“The poorly located and merchandised retail is going to suffer a lot,” said Crestpoint Real Estate Investment Ltd. vice-president of acquisitions and asset management Max Rosenfeld. “I think good retail’s going to continue to be strong.
“It’s not going to be a pretty next 12 to 24 months, but if you’ve got a good building in a good location, that retail’s going to be more valuable on the other side of this.”
Panelists agreed the industrial and multifamily asset classes have largely held their ground.
“I think the most uncertain asset class is office,” said Fiera Real Estate senior vice-president of investment operations Peter McFarlane. “There aren’t many people in office buildings (right now) and the future of office remains uncertain, given that we’ve all got used to not being in our offices.”
Fiera manages about 1,230 commercial tenants and 800 residential tenants at its properties, according to McFarlane. The company approved 177 two-month commercial deferrals, to buy time to figure out more about the crisis.
“Now we’re at a point where we’re all thinking about going back to work, but no one knows the duration of this event,” said McFarlane.
“In our minds, it doesn’t make sense to keep negotiating new agreements every month for an undetermined period of time. We have a duty to collect rents.”
More rent payments were collected from industrial and office properties than retail locations, where Fiera’s April collections were more than 70 per cent.
“A lot of our retail portfolio is open-air and that’s certainly faring better than the enclosed malls,” said McFarlane.
Fiera had almost no residential rent deferral requests and had collected 98 per cent of rents for both April and May. McFarlane expects that number to decrease the longer the crisis lasts if it eats further into people’s savings.
Logar said KingSett received just 30 rent deferral requests from its approximately 3,400 multiresidential units.
The company gave three-month deferrals to non-essential retailers forced to close by government order in March.
“In the office and industrial worlds, people have been resilient,” said Logar. “Rent collections have been pretty solid.”
Technology and innovation
While the real estate industry has been introduced to plenty of property technology over the past couple of years, the COVID-19 experience is accelerating the process.
Logar said his company will be evaluating technology uses while also looking at cyber-security risks to try to establish protocols.
With almost entire office workforces doing their jobs from home these days, Logar said companies have made increased use of communications tools including Skype, Zoom and Teams to keep in touch.
“There’s a list of a bunch of physical technologies that we’re looking at now, that we wouldn’t have been looking at three months ago in the same sort of serious way,” said McFarlane.
He cited innovations including touchless door openers, remote keys for doors and elevators, more effective filters for heating, ventilation and air-conditioning (HVAC) systems, temperature-reading cameras and remote mailboxes with cameras.
“Something that has been gaining momentum is technology revolving around monitoring of HVAC, elevators, water consumption and those types of things,” said Rosenfeld.
“I think there’s going to be a lot of emphasis on things that promote security, safety and health as opposed to comfort.”
Asset management in the future
Logar expects to see: restaurants reducing capacities; more curbside pick-ups of goods at shopping centres; changing manufacturing processes; more virtual building tours; and an increased use of online lease applications.
McFarlane said security and hygiene protocols will be enhanced and more people will be encouraged to work from home if they’re sick. Office layouts will also likely change to increase distances between desks.
“It will take a lot of careful and creative design in order to ensure that, if you’re going to make those changes, you don’t do them at the expense of making the office feel like a place that people will want to be,” said Rosenfeld.
Logar believes people are less productive working from home and the lack of face-to-face interaction reduces spontaneity and creativity.
On the other hand, he thinks the experience and knowledge gained from recent events could mean the home replaces suburban backup offices for large companies headquartered in downtown towers.
People have also become used to not wearing business attire from home, and Rosenfeld said more casual dress could become more acceptable for office workers.
Online shopping and deliveries will continue to grow, according to McFarlane.
“Once you get someone hooked who sees how easy it can be, that’s a very sticky customer base and you’ve just pushed a bunch of people further along that online ordering path.
“It may have taken five or 10 years to get there anyways, but now it’s been condensed into a couple of months.”
Embrace change, be ready to adapt
Businesses will need to become more open to change, according to Rosenfeld. He’s also unsure if distinctions between real estate asset classes will be as relevant in the future, especially with retail rents expected to flatten or go down and industrial rents anticipated to keep rising.
“I think you’ll get a bit more parity between rents and gross occupancy costs,” said Rosenfeld. “It becomes more about flexibility and how people are using space.”
Office employees will dictate when they want to return and what their workplaces should look like, according to Rosenfeld.
“I think our job as landlords is to make sure we’re listening and that we’re taking in opinions from across our portfolio and from outside our portfolio and from outside of Canada, and trying to incorporate best practices in a way where we are balancing, from a cost perspective, the landlord versus tenant needs.
“Real estate has very much become a recruiting tool for companies. It’s not just a place to have a meeting because you need to have a meeting. It’s a place that you advertise as part of your culture and that enables you to hire talent and bring talent on board.
“I think the talent is going to dictate what the space requirements are in the future and what people want to see. Our job is to be flexible and quick to respond to that.”
With more store closures expected, Rosenfeld thinks people will find new ways to utilize the spaces. He believes it may benefit the arts and artists who, previously, have been pushed to the periphery but now may have an opportunity to access these spaces.
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