The pandemic has led to a deep bifurcation of the country’s CRE market while substantially slashing overall investment activity in 2020. The sale of office, industrial, retail, multi-family and ICI land across Canada’s six major markets (Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver) reached almost $18 billion through the first three quarters of 2020 – down from the $26.1 billion sold in the same period one year ago. The full-year 2020 sales tally is estimated to reach nearly $23 billion – about half 2019’s total sales volume. As industrial and multi-family assets continued to capture investors’ attention, interest in retail properties slumped significantly. Meanwhile, the ongoing tug-of-war between WFH and RTO policies resulted in investors typically interested in office assets remaining on the sidelines until there is greater clarity around valuations.
The unpredictability of cash flow served as a further throttle on investment in office and retail properties across Canada. ICI land sales nationwide were also down significantly year-over-year, falling 43% to $2.6 billion through the first three quarters of 2020. On the other hand, pandemic measures provided a boost to investment in industrial assets, a trend likely to remain through 2021. Just six months after the initiation of COVID-19 containment protocols, a material change in cap rates had begun to appear in select markets and product types. A widening bid-ask gap has emerged as pricing has largely held firm despite fewer bidders and expectations of a “COVID discount”. This has slowed deal velocity, further constraining transaction volumes.
Office investment in Canada’s six largest markets plummeted to approximately $3.1 billion through three quarters of 2020 from $7.9 billion a year earlier – down almost 61%. Toronto and Vancouver posted the largest declines in dollar volume. While downtown markets have typically registered burgeoning sublease availabilities since spring 2020, their suburban counterparts have proven more resilient. Suburban office assets could potentially become more valuable in 2021 if downtown tenants look to move to a hub-and-spoke model with those making recent bets on suburban office space well-positioned to benefit.
In comparison, investment in retail properties, the asset class widely perceived to be the hardest hit by the pandemic, declined 20% to $2.8 billion at the end of September 2020 from $3.5 billion a year earlier. Already a less favoured asset class pre-COVID-19, retail will remain a riskier investment as the pandemic persists and capitalized owners are likely to re-position assets where possible.
Even investment in one of the most sought-after asset classes, multi-family, fell in 2020, slipping 10.5% year-over-year to $4 billion through three quarters. However, the benefits continue to outweigh the negatives in this sector with low-cost capital underpinning consumer confidence despite risks including the end of some government wage-support programs, restricted immigration, the absence of students from campuses and provincial moves to restrict residential rental rate increases for at least 2021. In addition, potential oversupply in the condo sales and rental markets could accelerate declining rents and occupancy, as well as increasing concessions to tenants, in the multi-family market.
Industrial investment rose to almost $5.5 billion through September 2020 – up modestly from almost $5.3 billion one year earlier, surging primarily in Toronto and Montreal as investors were drawn by strong tenant/user demand and rental-rate appreciation in virtually all Canadian markets.
Meanwhile, investors will continue to benefit from low-cost financing for the foreseeable future. Abundant capital currently sidelined will be available to acquire assets as investors become better informed and more comfortable transacting in these unprecedented times. While distressed asset sales remain in check thus far (outside of Alberta), the ongoing pandemic could result in a rise in such transactions in 2021.
A new approach to investing in CRE will also assist in the post-pandemic recovery that optimistically takes root in 2021. Public investment vehicles are increasingly adopting greater environmental, social and corporate governance structures as a way of not only generating strong returns but also providing positive societal impacts. An example of this is the October 2020 renaming of Dream Hard Asset Alternatives Trust to Dream Impact Trust, and the growing movement toward adding value beyond the bottom line to CRE transactions could proliferate post-pandemic.
Ultimately, uncertainty arising from the pandemic will dictate investors’ appetite to deploy abundant sources of capital in 2021.
Investors will continue to benefit from low-cost financing for the foreseeable future. Abundant capital currently sidelined will be available to acquire assets as investors become better informed and more comfortable transacting in these unprecedented times.
