An uncertain business landscape, a nervous population and a new attitude towards the role of public space in daily life has sent ripples through the real estate industry. Those invested in commercial and industrial space are left trying to parse a considerable number of variables which cloud the future. Although it’s impossible to draw solid long term conclusions with COVID-19 causing or accelerating so many paradigm shifts, careful analysis can point toward certain expectations.
The Future of Retail Rent
Retail, restaurants and other businesses that rely on the physical presence of customers are certainly taking a short term hit and owners of malls and other retail spaces are already experiencing difficulty collecting rent.
“There’s lots of talk among the retail and landlord community about what rents look like going forward,” says Tim Sanderson, head of Canadian retail at Jones Lang LaSalle. “People have had a major, major impact to their sales.”1
Stay at home measures have moved the needle on e-commerce, with those who were slow to adapt finally participating full scale. This will likely have long term ramifications on the retail real estate market and we may see more and more malls incorporating office and living space into their structures.
Remote Workforce Threatens Office Market
Another trend that has been accelerated by the pandemic is that of the remote workforce. Much like shoppers who finally tried e-commerce as a matter of necessity, companies who had resisted the idea of working remotely have now seen first hand that it can work, posing a long-term threat to the office space market.
While companies like Facebook and Shopify have announced measures to move toward a decentralized workforce on a permanent basis, others believe that the trend is overstated.
“To me, working from home is like holding your breath,” says Jon Love, CEO of Kingsett Capital. “You can still survive, but you can only do it for so long. It turns out that all these things, Zoom and so on, work best when everybody is doing it. But when we start to go back to the office, the appeal will start to break down.”2
Opinions vary regarding the rate at which companies will continue to work from home in the long-term, but at the very least it would seem to be an ascendant practice.
Possibly offsetting the trend of fewer bodies in the office will be a desire for a greater number of square feet per worker.
“People are going to want more social distancing within their work environment. That is going to offset some of the pressure on the downside ,” says Jeff Olin, president and CEO of Toronto-based Vision Capital Corporation. “We’ll want to create more distancing, and that will help put a floor on that reduction in square feet per employee.”3
An Era of Accommodation
As workers return to the office there will likely be a move away from centralized common work areas. Increased sanitization methods and careful elevator management will also be necessary. For commercial real estate investors, it’s the latest development in an era of change.
“Amazon.com Inc. has stolen footfall from malls. WeWork Cos. redefined the office. Airbnb Inc. challenged the very idea of hotels. Now the Covid-19 pandemic is leading companies to rethink their need for communal workspaces,” summarizes BNN Bloomberg.4
Landlords hoping to remain viable are finding that flexibility is key.
“With commercial real estate no longer a passive investment in which landlords could sign up long-term tenants and then sit back and collect rent, investors and developers are being pushed by a series of disruptions to become much more active.”4
While e-commerce is putting pressure on shopping malls, it’s simultaneously expanding the need for industrial space.
“You need three square feet of industrial space for an e-retailer compared to every one square foot you need for a store,” says Olin citing higher return rates as a factor in this discrepancy.3 Supply chain uncertainty could contribute toward a move away from globalization, leading to higher stockpiles of inventory and a possible upswing in domestic manufacturing.3
Further good news for industrial space owners was the extremely healthy pre-COVID market, which should help the sector weather the storm.
Optimism for the Future
JLL Canada CEO Alan MacKenzie believes that the office markets in Canada’s major cities are likewise in solid shape, with the exception of Alberta, who owe their troubles to the soft oil and gas market.
“This is not a five-year crisis,” MacKenzie told RENX. “It’s probably a five-month sort of scenario before things start to stabilize.”5
1 Bickis, Ian. “As Malls Re-Open across the Country, Worries Grow That Consumers Won’t Come Back.” Journal, May 25, 2020. https://www.chroniclejournal.com/business/national_business/as-malls-re-open-across-the-country-worries-grow-that-consumers-wont-come-back/article_1dfc5e2d-66a8-5480-b2e0-b3d7de4abc0f.html.
2 “Will COVID-19 Lead to an Exodus from Crowded Offices in Downtown Towers? Don’t Count on It, Experts Say | CBC News.” CBCnews. CBC/Radio Canada, May 22, 2020. https://www.cbc.ca/news/business/downtown-offices-pandemic-1.5577487.
3 Dalgetty, Greg. “What Will Covid-19 Mean for Commercial Real Estate?” Investment Executive, April 29, 2020. https://www.investmentexecutive.com/news/research-and-markets/what-will-covid-19-mean-for-commercial-real-estate/.
4 Bloomberg News. “Commercial Real Estate’s Survival Plan Looks a Lot Like WeWork – BNN Bloomberg.” BNN, May 15, 2020. https://www.bnnbloomberg.ca/commercial-real-estate-s-survival-plan-looks-a-lot-like-wework-1.1436689.
5 “Canada’s Office Sector Well-Placed to Survive Pandemic: JLL CEO: RENX – Real Estate News Exchange.” RENX, April 28, 2020. https://renx.ca/office-sector-canada-survive-pandemic-jll-market-reports/.