Commercial landlords should prepare for hard days ahead as tenants face months of reduced business, according to the head of one of Canada’s largest real estate groups.
It will be 2022 before a “new normal” takes hold in the property market, said Michael Cooper, chief executive officer of Dream Office REIT and president of Dream Unlimited Corp.
“I’m planning for tough, tough times ahead, just because I think it’s prudent,” Cooper said on BNN Bloomberg TV. “People talk about what percent of rent they got in April. That was only two weeks” of the economic shutdown.
Companies still need to get through July and into winter. When they do open up it won’t be easy for them to “make enough money in their restaurants or elsewhere to cover their variable costs, let alone their rent,” he said.
Canada’s federal and provincial governments crafted a plan to help companies with rent for April, May and June. The program offers forgivable loans to commercial landlords, while business tenants pay no more than 25 per cent of their usual rent.
But only firms with less than $20 million in gross annual revenue can apply for the subsidy. And those who are eligible must show at least a 70% drop in revenue compared with pre-virus times.
Cooper said his companies would try to use the program. “But in the meantime, people have paid April’s rent, tomorrow’s May 1, so there’s a lot of confusion,” he said. “Hopefully it will work out over time, but it won’t be working out smoothly.”
Dream Office REIT holds a portfolio of office buildings with about 6 million square feet of space, the majority of it in downtown Toronto. His group also runs Dream Industrial REIT, which owns industrial property in Canada, the U.S. and Europe.
The commercial real estate market won’t return to normal for a couple of years, Cooper said.
“Really, 2022 is going to be a time frame where you can look at what the value of a building is and deal with it with confidence — you know what the rental rates are, what the demand is,” he said.
Why office real estate landlords aren't panicking just yet – Financial Post
With tens of millions of employees working from home or laid off, the future of the workplace is now a primary concern for commercial landlords and tenants.
A recent report by Cushman & Wakefield (C&W) found that 73 per cent of workers would like their employers to adopt “some level of working from home.” Also, 90 per cent of employees believed their employers trusted them to work remotely.
But do these developments mean the end of “the office” as we know it? Not really. The report describes a new normal that will involve a “total workplace ecosystem” comprising more than a single destination and including a combination of virtual and physical places.
Critics of telework often argue that collaboration weakens when workers are confined to remote silos, but the C&W report suggests otherwise. It found collaborative work increased by 10 per cent with telework over the pre-COVID-19 period, with technological advances being credited for the big shift.
Roelof van Dijk of the CoStar Group sees two opposite forces simultaneously pushing and pulling on the demand for office real estate. On the one hand are the pandemic-related social distancing regulations that are behind the surge in working from home. As the number of workers, especially in the knowledge economy sector, continue to telework on most days, the demand for office space is likely to decline.
At the same time, social distancing regulations will require more space to be maintained between workers. The same floor space in the future will, therefore, hold fewer workers if they are spaced farther apart. Hence, even if a segment of employees continues to telework, spatial distancing measures requiring more space per employee should counteract the decline in demand.
In the short-term, landlords are unlikely to reduce rents drastically if the demand for office space decreases. It is also unlikely that office tenants will seek additional space if social distancing measures mandate more space per employee. Instead, tenants are likely to stagger schedules by having workers come in on alternating days or at different times, allowing tenants to maintain the same amount of space until their leases are up for renewal.
Office real estate markets present a mixed picture for demand today. According to data provided by CoStar Group, vacancy rates are exceptionally low in some parts of Canada, where the demand for office space is high, and the supply has not kept pace. While in other places, ominous signs of growing weakness are apparent.
CoStar data shows that office vacancy rates in Vancouver averaged 2.9 per cent in the first quarter of 2020, down from 3.3 per cent a year ago. While Vancouver’s office real estate market is tightening, Calgary’s shows increasing signs of weakness. Already, Calgary’s vacancy rate in the first quarter of 2019 at 14.4 per cent was more than four times that of Vancouver. That vacancy rate increased to 15.6 per cent in the second quarter. By comparison, Toronto’s office vacancy rate was around 4.4 per cent in Q1, down slightly from 4.7 per cent in the same period last year.
What may happen in the future depends on current local market conditions. For Canadian office markets as an aggregate, CoStar is forecasting an increase in vacancy rates from 6.2 per cent to 7.1 per cent a year from now. Local office markets present a mixed picture. Vacancy rates are expected to remain mostly unchanged in Vancouver and Edmonton but are expected to climb in Calgary and Toronto.
Commercial leases, unlike their residential counterparts, are of longer duration, often ranging from five to ten years. It may take up to a few years for most leases to go through renewal. A lot, therefore, depends upon the state of the economy in the near future. If local economies can shake off the pandemic blues sooner, one would expect growth in economic activity, an increase in hiring and a resulting increase in the demand for space, which may still be moderated by a higher prevalence of telework. If local labour markets fail to recover, and job losses become permanent, office markets are expected to struggle with or without telework.
Unlike landlords who hold retail real estate, office real estate owners are likely to fare better with rent collection. With malls closed during the pandemic, their tenants face massive cash-flow challenges, which compromises their ability to pay rents. The good news is that online retail sales are up for some retailers. The bad news for retail landlords is that a shift from brick-and-mortar retail to e-commerce would further lower the demand for retail real estate.
Whereas offices are also closed to employees except for essential workers, office work continues from home, thanks to telework. The business models of office-based firms are thus disrupted, but not discontinued. Hence, many office-based firms can conduct their business remotely and can meet their rent obligations.
A shift in demand for more modern and better-quality office space might also occur. Higher-end office real estate equipped with, for example, advanced HVAC systems and fast elevators, are more likely to adapt readily to social distancing requirements. In comparison, older B Class real estate may find it hard or prohibitively expensive to comply with regulations for improved ventilation and greater distancing between employees.
Telework may not be for everyone. The C&W report revealed that while younger cohorts, i.e., millennials and Gen Z workers, expressed the strongest desire for flex-work options, they found telework more challenging than older cohorts. Shared living arrangements, smaller dwellings, and a lack of dedicated space to work from home could be the reason for younger workers’ struggle with telework.
Real estate markets are in flux, and nothing about the future is known with certainty. Contingency planning based on probable future outcomes will allow smart landlords to cope with the changes heading their way. Waiting for a return to the old normal may not be a wise strategy.
Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.
Alberta overhauls real estate regulator in wake of prior dysfunctional board – CBC.ca
Alberta is restructuring its real estate regulator, eight months after the government fired the previous board on the grounds it was irredeemably dysfunctional.
“Bill 20 … is the next step in the process to reform the governance of [the board] and to restore the faith of Albertans and the real estate industry in the real estate regulator,” Service Alberta Minister Nate Glubish said Wednesday prior to introducing the legislation in the house.
“The end result will be a new governance structure that will increase transparency, improve accountability and ultimately restore good governance to the real estate regulator.”
The Real Estate Council of Alberta licenses and regulates residential and commercial real estate agents and brokers, mortgage brokers, and property managers.
Lack of oversight, poor dealings
Last October, Glubish fired the existing board and appointed an interim administrator.
The move followed a third-party audit that reported the previous board had broken down, foundering under fractious interpersonal relationships and poor dealings with those in the industry.
The report outlined poor relations with the industry associations represented by the council and a tendency for members to spend 80 per cent of their time discussing governance issues, instead of considering the strategic and regulatory matters that are the reason for the council’s existence.
The KPMG report also found key committees were left empty, meetings were not held and there was a lack of oversight on spending.
‘Common sense regulation’
The bill would restructure the council overseen by a board of directors, with four new industry councils: residential real estate agents and brokers; commercial real estate agents and brokers and commercial property managers; mortgage brokers; and residential property managers and condominium managers.
These new industry councils would identify and address issues related to their parts of the real estate sector, setting standards and rules and determining licensing requirements.
There would also be a new dispute resolution process and board members and industry council members would not be allowed to sit on disciplinary hearings. Those hearings would be staffed by industry people or members of the public at large.
The council would also have to make public staff salaries and meeting minutes.
Greater openness and transparency standards will help rebuild eroded trust,”– Kristie Kruger
Condominium managers would be added to the groups overseen by the regulator while real estate appraisers would be removed, given they are self-regulated through their own industry association.
The Alberta Real Estate Association called the bill a critical first step towards reform.
“Refocusing the real estate regulator on common sense regulation will better protect the public and improve the real estate industry, while greater openness and transparency standards will help rebuild eroded trust,” Kristie Kruger, chairwoman of the association, said in a statement.
The association represents more than 10,000 realtors and 10 real estate boards.
Pandemic continues to impact local real estate sales – BlackburnNews.com
Pandemic continues to impact local real estate sales
June 4, 2020 12:46pm
Residential home sales and listings plummeted over 40 per cent in May.
Sarnia-Lambton Real Estate Board President Donna Mathewson said the COVID-19 pandemic continues to impact the industry.
“We were facilitating essential sales, now we can deal with any purchases or sales, but still keeping in mind that we are under a state of emergency for the province and we have to follow proper COVID protocols,” said Mathewson.
She said the market drive from buyers is still present, but sellers have been hesitant.
“We are starting to see more listings come on the market. People are a little bit more comfortable that we do have their safety in mind. When we sit down with a seller and we go over the risks of putting their house on the market and what we’re going to do to mitigate those risks, they seem to be more comfortable now than they were before, so we’re proceeding.”
123 homes sold last month, down 40.87 per cent from May 2019 and there were 171 listings, down 40.83 per cent from the same month a year ago.
Mathewson said they’re doing what they can to get homes back on the market.
“All the agents are well versed in what to do, making sure that buyers have as few touch points as possible when entering a home and that we make sure to sanitize after we’re finished.”
Volume sales dropped to $42 million, down 41.54 percent compared to nearly $72 million recorded in May 2019.
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