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Canadian CRE Still A Strong Investment Play, Report Finds

Canadian commercial real estate is well-positioned to survive and even thrive beyond a lengthy pandemic, says a new brokerage report.

“While the coronavirus will weigh on the Canadian economy through the second quarter, a recession is not imminent,” according to a a new Canadian coronavirus outbreak assessment from Marcus & Millichap.

“Expectations of weaker exports, reduced tourism and supply chain-related shortfalls will moderate the pace of economic growth, but low unemployment and comparatively strong consumption levels should offset the headwinds.”

Canadian CRE Still A Strong Investment Play, Report Finds
Even during a pandemic, Canadian CRE remains a good long-term investment — unless things get worse.

Marcus & Millichap was quick to point out that the spread of the coronavirus, both globally and in Canada, could render any earlier expectations moot if it is not contained.

“Unless the outbreak amplifies significantly or confidence levels drop dramatically,” is the report’s major caveat.

“Things have changed so much in just a couple of days,” Marcus & Millichap Vice President Mark Paterson said. “We should have these [reports] weekly, not monthly, given the speed of change.”

Paterson said he does see a lot of CRE investment activity despite the volatile times, adding that bigger players like REITs are actually the cautious ones in these volatile times.

“We’re still doing trades. People are buying and selling. Everything is worth less today. But it’s more about fear and caution than reality. There’s still buyers out there, and there’s opportunity,” he said. “[REITs] are a little more reserved in this type of market. It’s the private clients who are taking the opportunity to buy. They’re still looking for a deal right now.”

The report said commercial real estate offers buyers stability, especially now. Apartments, office and industrial space are expected to receive little long-term impact from the pandemic.

“While the flow of goods from China may taper over the short term due to the shutdown of several Chinese factories, this poses little risk to industrial space demand,” the brokerage reports.

The retail and (especially) the hospitality sector remain riskier investments.

“The volatility of equity markets reiterates the stability of commercial real estate and the compelling 4-7% yields," the report continues.

“Strong capital market liquidity and sound underlying real estate space demand remain pillars of support for commercial real estate.”

Canadian CRE Still A Strong Investment Play, Report Finds
Nathan Phillips Square remains deserted as Toronto citizens self-isolate.

Still, Paterson said he is cautious about things remaining in flux. One big unknown comes April 1, when rents are due everywhere. While the federal and provincial governments have moved to help out renters, including a temporary moratorium on evictions, how the landlords will react is still not known.

“Are [the landlords] going to be forgiving when it comes to rents?” Paterson said. “April 1 should be interesting. We’ll see at that point if people are getting out.”