Hotels and event space are absorbing the most immediate COVID-19 fallout in the Canadian commercial real estate market, but already challenging circumstances for bricks-and-mortar retail venues have become even more uncertain. Market analysts foresee a varying degree of short-term and long-term impacts among real estate asset types, as well as supply chain interruptions that could increase costs and slow activity at construction sites and in the booming distribution/warehouse sector.
However, that comes with the codicil that it is still too early to tell how intense or lasting the economic repercussions will be. “Long term, all these sectors will return to some form of normalcy, depending on how long it takes for the virus to be contained,” notes Keith Reading, director of research with Morguard.
For now, invocation of a state of emergency in several Canadian provinces is anything but normal. For example, the Ontario government’s decree, issued March 17, shuts down all leisure, entertainment, recreational and social establishments and prohibits public events for more than 50 people until March 31, with the potential of further extension after that date. Although many retailers are exempt, much of what’s defined as experiential retail is captured in the ban.
“Ironically, some of the most successful areas of the market could be hardest hit,” muses Bill Argeropoulos, a principal and research practice leader with Avison Young. “Tourism-related retail, food and beverage outlets, supermarkets, major city centres and dominant malls will all suffer from compulsory or self-imposed restrictions as people avoid locations seen as higher risk for transmission.”
Similarly, health concerns are expected to diminish the attractiveness of co-working’s space-sharing and collaborative interaction model, but boost interest in virtually replicating the experience.
“The virus will hamper expansion of the co-working sector as businesses offer more employees opportunities to work at home or in other less populated locations,” Reading submits. “Luckily, technological advances have made this possible and, in the near term, preferable.”
Over the long-term, wide scale uptake and entrenchment of work-from-home options poses competition for both co-working and conventional office space. “This could accelerate the adoption of new technology and further flexible working practices, with a proportion of businesses and workers continuing to work more flexibly on a permanent basis,” Argeropoulos suggests.
Meanwhile, the hotel and leisure sectors have already begun to suffer business slowdown, which is expected to flow through to slumping investment activity. That follows a year when Toronto attracted an unprecedented tally of 28.1 million visitors, up from 27.5 million in 2018.
“The hotels sector is particularly vulnerable to a decrease in tourism and measures to limit public gatherings at conferences and sporting events, many of which are now being cancelled or postponed,” Argeropoulos says. “Real estate transaction activity, both leasing and investment, is likely to decline significantly, at least for the duration of the current crisis and potentially for a period beyond.”
Silver linings to the COVID-19 fallout are relatively thin, but Argeropoulos sees some opportunity for high-street retailing to regain market share from malls. Spinoff growth in the warehouse/distribution sector could also come with increased online shopping. Ultimately, too, a “bounce back” is anticipated as the outbreak subsides.