investors seeking new deals despite COVID-19

Investors express interest in seeking new deals

Tuesday, July 21, 2020

Commercial real estate players entered June expressing uncertainty mixed with some traces of cautious optimism about the state of Canadian office markets, Altus Group’s recently released survey results show. Many of the respondents — 136 individual practitioners working for institutional investors, publicly traded and private companies and in brokerage services — foresaw the possibility of a bounce-back, contingent on avoidance of a renewed phase of pandemic-triggered business disruptions.

Compared to an earlier round of questioning during the height of April’s widespread lockdown, a greater percentage of respondents indicated they would be seeking new deals in the second quarter and beyond. Pension funds and life insurance companies appeared most anxious to get back into the game, with more than 50 per cent reporting they were pursuing acquisitions.

If or when those deals transpire, the majority of respondents expect cap rates for prime office properties will be relatively on par with pre-pandemic times, but cap rates will rise for Class B and C product. That said, a significant minority of 18 to 19 per cent project that cap rates will rise by 25 to 50 basis points for both prime and more moderate quality properties.

Ultimately, they tie a full return to normal to the arrival of a COVID-19 vaccine and/or effective treatments. However, in the interim, prospective investors are seeking some clear gauges of risk, including clear underwriting guidelines and understanding of the depth of the recession.

Survey respondents were generally more apprehensive about the potential for a longer-term economic downturn than they were in April. In particular, commercial landlords fear what layoffs and business closures would mean for office space demand, leasing timelines and rents.

Looking at near-term financial concerns, many cited the mounting operation costs related to heightened cleaning protocols and implementing social distancing measures. Although office rent collection exceeded 80 per cent in both April and May, there is some concern about whether deferred payments will be forthcoming soon or at all.

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