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Commercial real estate owners has had to deal with their fair share of problems since the onset of COVID-19 pandemic; however, as the world finds ways to battle the pandemic, the end of these issues could be in sight.
It is still unknown when businesses will be able to reopen their offices again, but the commercial sector is expected to make somewhat of a comeback in the near future, according to recent surveys conducted by Altus Group. Let’s see how office and retail properties plan to make a comeback.
It is no secret that the pandemic has forced many businesses to switch to remote work from home. While some commercial real estate owners expect their tenants to reduce their office space post-COVID, others are expecting a considerable drop in overall demand, leaving more questions about when office space demand will increase.
According to the president of research at Altus Group, Colin Johnston, most companies, banks, and law firms are looking for a way to reduce staff and office spaces. Many of the top-quality office locations in Toronto, Montreal, Vancouver, etc that are vacant will see an increase interest from smaller companies that want to move to prime office location at a discount. As these smaller companies move, we will likely see many B- and C-class office properties choosing to maximize long-term value by transforming into multifamily properties.
When it comes to rents for office space most Altus’s survey respondents, “expect either no or modest rent decreases of less than 10% for both top- and lower-quality office buildings in 2021”. This is good news for Canadian CRE prime office owners. Due to their pre-pandemic strong fundamentals, rents and low office vacancies, expecations remains high.
According to seperate survey by Altus Group, the one retail asset that is keeping investors interest is strip malls, especially grocery-anchored strips. They have done well with surviving the pandemic and are now considered the most desireable retail property to own.
Beyond the strip mall, many agree that the long-term viability of malls were already in question before the pandemic. The current situation has simply pushed many malls and retail stores over the edge and accelerating the inevitable. As such, retail rents for lower-quality retail and some malls are expected to fall by more than 10%; however, for top-quality enclosed malls, it is expected to fall by less than 10%.
The survey also notes that months after reopening, countries that have exited their lockdown before Canada reports a drastic drop in pedestrian traffic when compared to before the pandemic. This is not too surprising as some people are being cautious.
However, similar to B- and C-class office space, low-quality retail and some malls are planning to redevelop their spaces to mixed-use, by choosing either retail mixed with multifamily (i.e. apartments) or retail and industrial (distribution centres) are favored redevelopment strategies for commercial retail real estate.
Accurately predicting the future of office and retail commercial real estate is dependent on the success of defeating COVID; however, the current trends show that most Canadian commercial real estate owners plan on adapting unused office and retail space into multifamily or mixed-use real estate. This will help the owners maximize the long-term value of their asset.
Therefore, as we move through the early stages of defeating COVID-19, there is hope that the uncertainty plaguing office and retail will come to an end sooner rather than later.