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Looking back at initial predictions for the Canadian real estate market at the beginning of the COVID crisis, you might think you were reading a dystopian nightmare. All logic pointed to a crash, not unlike what certain markets saw in the wake of the 2008 recession. With unemployment rising, it was reasonable to assume that Canadians would encounter difficulties meeting their financial obligations, including mortgages and rent payments, leading to a collapse.
Thankfully, perhaps against all odds, this isn’t the outcome that transpired. Though the market has indeed shifted, there have been many positive trends as well. Even in the hardest hit sectors – industrial and commercial real estate – the forecast is still relatively sunny. There are opportunities to be had, and many Canadians have been taking advantage of them. Let’s take a closer look.
Residential trends
Though the residential market did dip initially, it rose steeply thereafter. Detached homes saw the biggest gains, and home sales demonstrated the trend towards buyers leaving urban neighbourhoods for suburban and rural areas.
In addition to the desire for more space, buyers are taking advantage of record low interest rates. And while from the outside it seemed as though Canadians were borrowing a dangerous amount from lenders, another interesting trend emerged: Canada’s debt service ratio has fallen to the lowest point in 16 years[1]. Why? With lockdowns in place, Canadians were suddenly spending much less on travel, entertainment, and commuting. Simultaneously, government programs were rolled out to assist families hit hard by the crisis. As a result, many families used the time and funds to pay down debt. Further, they’ve refinanced their mortgages to take advantage of lower interest rates.
Condo woes
Unfortunately, the condo market did not see the incline in prices experienced by detached homes. Toronto was particularly hard-hit with the average condo sale price in December 2020 4.7%1 less than the year prior. By January, it had dropped to 8% lower than the prior year.
The decline can be traced to renters wanting more living space in light of remote work, job loss in the service industry, and lower immigration numbers.
Commercial real estate
With so many industry giants switching permanently to remote work, it’s likely that retail and office space owners will need to establish a new strategy if they wish to remain profitable. Though it’s a timely and complicated process, it is possible to re-zone or de-zone to give new life to vacant spaces. Experts have presented a couple options that could possibly ease the process:
Office to residential
Where NIMBY syndrome often gets in the way of subdivisions, new developments, and condo builds, utilizing existing office infrastructure to repurpose for residential use could represent a loophole.
Retail to distribution
While bricks-and-mortar retail has been hard-hit by lockdowns, online retail has surged. And while in years past, a “just in time” strategy for inventory has been the norm, COVID’s characteristic empty-shelf syndrome has given retailers pause for thought regarding increasing inventory storage. An obvious transition? Under-used bricks-and-mortar retail sites.
Industrial real estate
Before COVID, the Canadian industrial real estate market boasted some of the best fundamentals in the real estate industry as a whole. Today, not much has changed in this regard! Impressive demand and limited supply have continued in Canada’s biggest markets – Toronto, Montreal and Vancouver – and throughout most of the rest of the country as well. The trend has prompted businesses to snap up industrial real estate at a record clip. About 10.4 million square feet of warehouse space was leased across Canada in the first three months of this year. The result? Vacancy rates in the largest markets tightened to the lowest levels in all of North America[2]. It’s more proof of the fact that while the real estate industry has undoubtedly shifted, in many cases it’s a game of “Musical Chairs” in which everyone still has a seat when the music stops.
Estate freezes
For Canadian real estate business owners who have experienced extensive loss, one option is to seek an estate freeze – a strategy employed to lock in or freeze the value of shares. This is a particularly appealing option during a time of financial crisis because business valuations are often lower than before the crisis. When the economy does eventually recover, the future growth of the company will accrue to new shareholders, thus reducing the eventual capital gain on the disposition of the shares by the original shareholders.. Like a financial silver lining, undergoing an estate freeze during an economic slump can allow business owners to avail themselves of significant tax savings down the road.
Looking ahead
As the Canadian economy continues forward momentum throughout 2021 and beyond, there is ample hope. Vaccines are being distributed as we speak, and with each dose we get closer to a return to “life as we knew it”… or as close to that as we can in the wake of such a massive occurrence as a global pandemic.
In times of great change such as this, it helps to work with a trusted advisor. At Zeifmans, we have over 6 decades of experience assisting Canadian real estate business owners in achieving their financial targets. We’ve supported our clients through many economic storms, and COVID is no different in this regard. Our keen eye for opportunities, extensive experience base, and finger on the pulse of the trends will keep our clients on the path to success, regardless of the challenges we face.
To learn more about how we can help you, contact our team today.
[1] Globe and Mail, “Off the Charts: How Canada’s real estate market defied expectations in the COVID-19 pandemic”, https://www.theglobeandmail.com/business/article-off-the-charts-how-canadas-real-estate-market-defied-expectations-in/
[2] Financial Post, “Warehouse space seen running out in Canada by the end of this year”, https://financialpost.com/real-estate/warehouse-space-seen-running-out-in-canada-by-the-end-of-2021unning-out-in-canada-by-the-end-of-2021
