Canada’s commercial real estate confidence barometer offered a more positive reading in July 2020 than it registered three months earlier, with comparatively more upbeat signalling than could be found in the United States. Nevertheless, newly released third quarter results from the REALPAC/FPL Canadian Real Estate Sentiment Survey reveal senior executives typically looking forward more hopefully, while reflecting on last year’s better times.
Drawing from those executives’ responses to questions about general market conditions, asset values, and access to debt and equity capital, analysts with FPL Advisory Group conclude: industrial and multifamily assets continue to hold favour; limited deal activity is complicating valuations; there are more obstacles to borrowing; and investors are slower to commit capital. Ultimately, too, Canadian executives link their outlook to broader social and health forces.
“Real estate trends have been accelerated by the pandemic,” the report submits. “The duration of this downturn will be directly correlated to the timing of a vaccine.”
The overall index score of 46 on a scale of 100 demonstrates a drop in confidence from the 60+ range measured in the third quarter of 2019. Looking solely at perceptions of current conditions, a score of 32 shows that the majority of Canadian respondents see Q3 2020 as somewhat or much worse than Q3 2019. In contrast, a score of 61 for future conditions reveals the majority expects Q3 2021 will be somewhat better.
Q3 readings for the U.S. Real Estate Roundtable Index — which the Canadian report provides for comparison — shows similar trends, but with more disparate results contributing to the overall index score of 42. Real estate executives in the U.S. were both gloomier about current market conditions, reflected in a score of 21, and more optimistic about 2021, generating a future conditions score of 63.
Just 13 per cent of Canadian respondents deemed third quarter market conditions “much worse” than one year earlier — a marked improvement from Q2 when 36 per cent of respondents offered that opinion. Sixty per cent called it “somewhat worse” and 15 per cent gauged it as about the same as Q2 2019. Meanwhile, 59 per cent expect conditions to be somewhat or much better by Q3 2021.
U.S. respondents were more inclined to negativity, with 39 per cent calling Q3 2020 much worse than the equivalent three months of 2019. They were also modestly more positive about next year, with 62 per cent projecting somewhat or much better market conditions.
Although 72 per cent of Canadian respondents report asset values have dropped since Q3 2019, that pales beside the 91 per cent of U.S. respondents confirming that outcome. They were also more apt to call those values “much lower” — 16 per cent — than the 6 per cent of Canadian participants who delivered that judgement.
Almost a third of U.S. respondents predict asset values will continue to decline during coming year versus 18 per cent of Canadian participants. About a third of Canadian respondents expect asset values will increase somewhat from current levels, while 48 per cent expect they will remain relatively static into next summer.
Canadian responses show debt and equity capital became easier to obtain in Q3 than in Q2. More than three quarters of surveyed executives reported lenders were less obliging in Q2 than they had been in the previous year, but that proportion shrank to 57 per cent in Q3. “Construction financing still holds strong for borrowers with strong track records in promising asset classes,” FPL analysts note.
That experience was not mirrored in the U.S., where 81 per cent of respondents reported it was more difficult to secure debt financing. However, by Q3 2021, the majority of executives in both countries expect access will have improved.
On the equity capital side, 53 per cent of Canadian respondents reported it was less readily available than in Q3 2019, but that compares favourably with Q2 when 83 per cent said it was more difficult to obtain. Again, U.S. respondents tended to be more frustrated, with 64 per cent reporting the availability of equity capital was somewhat or much worse.