Property Investment during Covid-19

A common question experienced commercial real estate investors hear is “What commercial properties is safe to invest in with maximum return"? Though the answer is not as straight-forward as one might think, especially given the current COVID-19 pandemic, the effect on commercial and industrial real estate in Ontario, a clear-cut answer has become much more difficult.

Speaking in general terms, it can be stated that the sudden change - at global level - has created uncertainty. This gives us a general idea but offers no real basis for predicting what will happen in commercial, retail or industrial real estate market.

A solution is to look at the underlying long-term fundamentals of these markets. The key aim of investing after all in real estate is to generate a stable cash flow. That cash flow, in the form of leased property and rent comes from a business‘s sales income. Most retailers are an excellent example, meaning as long as retailers continues to generate sales and income, they will obviously continue to pay rent on leased property. If however, income stops short sooner or later a tenant will ask that you reduce there rent. The alternative is liquidation and/or bankruptcy.

There is another possibility to consider which is what the alternative is for tenants particular business? To use a retailer as an example, increasing vacancy rates mean most most leasing tenants will have many more options for relocating their business to another premises. The consequence of such a possibility is declining rental income, less cash flow from leases and an overall diminished real estate value.

Does that mean investing in commercial property is not worthwhile in the long run? No, not at all as there is a great number of tenants that have did not experience a drop in sales income, or if they did, it was a minor decline. Large grocery stores and essential service tenants being an example.

It can be conclude - when we measure against income stability and the availability of other locations - that these fundamentals are are fairly solid. An ongoing demand for both current and future tenants, the limited options for moving to another location translates into stability for any business and thus, the investor as well.

This analysis works very well for other markets like multi-residential and mixed-used real estate. Without overlooking current land developments, expect a continued demand from tenants to remain relatively stable in these two markets in the long run.

If we look at logistics of rental properties, there’s certainly no doubt that there is an upward trend towards e-commerce, which is comprised of a whopping 27 percent of consumer spending in Canada and will continue to increase. The only remaining question to be asked is how big will that annual growth in terms of rental income. In the immediate future, this growth will be amplified by the lack of retailers with physical retail locations, and there’s increasing difficulty acquiring strategic locations, since the stock of suitable available real estate is limited.

And in the Ontario residential market, there may be an even more stable footing. With Canada’s population expected to grow and increase up to 2020, this market will only get better. Everyone needs a roof over their head and the country already has a shortfall of approximately 300,000 homes. With construction of new homes going up, the residential shortage won’t change much for at least a decade.