Affected asset classes are now shaking up COVID

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Offices and retail businesses were diagnosed as affected asset classes at the start of the COVID-19 pandemic. With some properties already suffering from pre-existing conditions, fears of impending conquests of work from home and e-commerce have abounded. However, after 20 months on the disabled list, conventional workplaces and shopping are mobilizing to fight for market share.

Speaking at an online event earlier this fall, in conjunction with the 2022 release Emerging trends in real estate According to a report by PwC and the Urban Land Institute (ULI), commercial real estate insiders have indicated that investors are engaged and most tenants are not going anywhere. In the Greater Toronto Area and beyond, the general optimism is that health uncertainties are diminishing, while recognizing that today’s challenges are more related to the economic and cultural upheaval that the pandemic has triggered or accelerated. .

“It’s more evident in the United States where you see 150,000 people attending a college football game, but they won’t be going back to the office,” said Ashley Lawrence, Managing Director and Head of Canadian Real Estate at Brookfield Property. Group.

It has become the de facto premise that, given the option, many people will choose to continue working outside of formal offices, and employers keen to attract and retain talented staff will meet these wishes. Yet it is also speculated that many people who have adapted to working from home during the pandemic may be willing to readjust to an office workplace, at least some of the time.

What has been called “the big resignation” to describe a recent escalation in career development in certain industries may heighten the latter likelihood, as new hires are brought in and seek to forge relationships within organizations. Lawrence predicts that he will also prioritize incentivizing esteemed employees to stay, ultimately shifting the focus of the office.

“If they work for Company A in their home offices, they have exactly the same environment as if they worked for Company B in their home offices. Those two or three days when they’re in the (formal) office, that’s where you’re going to establish the culture, ”he argued. “If you have employees who are only in the office two days a week, those 8 or 9 hour days become much more important for engagement with the business. “

Employers are always preparing for the return of the workforce

Many office buildings, especially in downtown locations, are expected to be lightly occupied for the remainder of 2021, but a growing number of corporate tenants will bring their workforce back in-house. in the new year. Lawrence assumes employers used the third and fourth quarters of this year to assess staff needs and demands and plan new arrangements.

“Some of the delays we see in getting back to the office are figuring out how and when and who will be back in the office, and for what purpose,” he said. “It’s not easy to change your office setup if you’re a bank. It is a lot of money and a lot of time.

Suburban space players, such as Jaime McKenna, Managing Director and Group Head of Real Estate at Fengate Asset Management, suggest low-density, car-friendly features in office parks have gained stature with employers. and employees during the pandemic. Businesses with satellite hubs outside of the city center could provide a less cluttered office environment and, remarkable for those who avoided public transport before the vaccination, would minimize frustrations behind the wheel.

“We have already seen the activity increase dramatically in 2021 and it is because of the satellite office,” she said.

The next challenge is to maintain that interest when downtown locations regain their appeal – a challenge Fengate has tackled with the introduction of a food delivery service and working to identify others. opportunities to make urban amenities more accessible.

“If we’re going to get people out of their homes and return them to the office, it has to be a little less disruptive than what we were used to before the pandemic,” McKenna said. “I’m very optimistic in the suburban office market if you can combine this convenience with the availability of satellite office space to reduce commute times. “

Positive investment feeling with no sign of falling values

Canadian executives interviewed for the Emerging Trends in Real Estate study have a similar view of downtown and suburban office assets. Both types of properties rank as “fair” investment and development prospects – below 3.5, above 2, on a scale of 1 to 5 – with suburban offices slightly ahead. In addition, the niche sub-category of doctor’s offices, which is not differentiated by location, scores “good” – above 3.8; below 4 – from potential investors and developers.

Opinion is somewhat more divided on the acquisition and divestiture with only 15 percent of respondents agreeing that it is the right time to sell centrally located offices, compared with 24 percent expressing this opinion on the park. suburb. In addition, 55% are in favor of buying a medical practice and only 9% approve of its sale.

Colin Johnston, President, Research, Valuation and Consulting, for Altus Group in Canada, highlighted the number of office property transactions in Toronto, Montreal and Vancouver this year with no sign of present value. In Toronto, 10 million square feet of new office space currently under construction is about 65% pre-let, and the city was one of the tightest office markets in North America before the pandemic. He estimates that today’s highest vacancy rates – with a Class A downtown rate of 9.9% in the third quarter – are within an acceptable range.

“The availability of leases has increased, but we have found that rental rates are not really eroding. We have seen TIAs (Rental Improvement Allowances) and owners’ packages. With plenty of institutional ownership of office buildings in all major markets, these owners can weather the storm fairly well. As long as you have a mandate and you have an alliance, the values ​​will continue to hold, ”said Johnston. “A lot of people continue to bet on the desktop. People still believe that there is a need for an office in the future and that is why people are stepping up their investments.

Investors have shown a strong resurgence of interest in almost all asset classes. Johnston cited the 56% increase in activity in the first six months of 2021 compared to 2020 and, perhaps more tellingly, the 30% increase in the first six months of 2019. That’s a trend that Canadian respondents to the Emerging Trends Survey will follow. are continuing, with 62% anticipating an oversupply of equity to invest in 2022.

Retail assets are unlikely to capture most of this, as regional sales centers, food centers and malls were the three lowest-ranked investment prospects among the 24 sub-classes of ‘assets. However, only regional malls were actually rated “poor”, with a score of 2 on a scale of 1 to 5, and neighborhood / community malls were rated “good”, with a score of 3. 77.

“I am a huge fan of our retail grocery opportunities going forward. It’s an asset class that really weathered the storm during the pandemic, ”said Andrew Duncan, chief investment officer at RioCan Real Estate Investment Trust.

Retail regroups after tough days of 2020

RioCan REIT’s shift into the multi-family rental business in the years leading up to the pandemic now looks particularly timely. Within its retail base, the reductions in activity linked to the pandemic have had various repercussions. In the third quarter of 2021, Duncan confirmed that those assets were 60% occupied by tenants offering 95% of the rents due, which was on par with pre-pandemic trends.

“What the pandemic has done is create a new bifurcation of retail in terms of asset subclasses, like the bands anchored in the grocery store versus those closed versus unclosed,” did he declare. “These are all very different assets and their subscribed value is very different. We have it all and we react to each of these asset classes differently.

“Retail owners need to reinvent their business assets to stay relevant and, more importantly, to truly preserve value,” said Frank Magliocco, Partner and National Real Estate Leader at PwC Canada. “In the recent PwC study on Buying Trends of Canadian Consumers, he found that many of the consuming behaviors that took hold during the lockdowns really persist. As retail business owners seek to adapt in response to these changes, the focus is on move towards reorientation spaces to stay relevant to consumers and find new ways to deliver value to retailers and their customers, like sharing data and delivering more diverse experiences, shared community services and better retail mix.

Johnston proposed the 16% year-over-year increase in brick and mortar retail sales for the first seven months of 2021 as proof that he is no longer giving up e-commerce market share at the same rate than in 2020. Nonetheless, e-commerce now accounts for about 12 to 15 percent of total retail sales in Canada, up from 7 to 8 percent two years ago.

“What’s nice to see is that the clothes have bounced back in a significant way,” he observed. “Clothing and fashion was one of the categories most affected and most associated with closed malls, so seeing this rebound was encouraging. “

For now, restaurants and food halls still have a lot of ground to reclaim, but for survivors their post-pandemic allure is obvious. “Food is one of the things we love. We love to go out, ”Johnston reiterated.

Abandoned sites are rarer in Canada than in the United States, where there are 24 so-called ghost shopping centers covering around 8 million square feet of space that have been completely transformed into distribution centers. The lower ratio of retail space per capita in Canada is comparatively favorable to the US scenarios, but it remains a difficult market for malls in need of renovation. Meanwhile, many are sitting in prime locations that might be in high demand for other purposes.

“The strong got stronger and the weak got weaker. I think we’ll just see this acceleration towards the redevelopment of some of these assets, ”Johnston concluded.

Barbara Carss is Editor-in-Chief of Canadian Property Management.


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