Commercial real estate industry bounces back after sudden decline

CANADA’S COMMERCIAL REAL ESTATE industry is poised to make a strong recovery following COVID-related disruption that slowed construction projects and led to a decline in demand for retail and office space. 

An extreme lack of materials and very high costs, layered on top of restricted working conditions, have resulted in significant challenges for some developers. The cost of lumber has tripled in price due to scarcity, according to Paul Morassutti, partner at Osler, Hoskin & Harcourt LLP. 

“Start early and plan, plan, plan because everything is going to take a lot longer than you thought it was going to take, and it’s going to cost more,” says Morassutti. He suggests in-house counsel allow more time to meet deadlines in construction projects.

As restrictions forced stores to shutter during the pandemic, e-commerce surged in demand, leaving a glut of empty retail spaces. Meanwhile, demand for industrial space has skyrocketed because of the need for logistics and warehousing space for online retailers. 

“I don’t think we’ve seen the end of retail carnage due to COVID yet,” says Morassutti. “COVID accelerated greatly what was already happening gradually.” COVID has transformed the retail landscape amid prolonged closures and a boom in e-commerce in Canada, so the leasing market has suffered, opening up new opportunities. 

“We’ve naturally run into some vacancies, but we’re able now to backfill them with the most opportunistically suitable tenancies,” says Jennifer Suess, senior vice president, general counsel, corporate secretary at RioCan Real Estate Investment Trust. “There’s been a shift in making sure that we’re curating the best tenants for the centre in which the shopping centre is located.”

With office space, Morassutti expects the return will be far higher than many people initially suspected. Although work-from-home has proven to be a successful arrangement for many, it will not be a permanent full-time solution for office workers, he predicts.

Suess concurs. She does not anticipate an ongoing decline in demand for office space, saying that human interaction is essential to build culture, continue brainstorming and amplify productivity. 

Suess and her team are carefully monitoring legislative developments and entrenching themselves in the business. When there are discussions around rent, deferral situations, abatement situations, and opportunities to partner with tenants in new and creative ways, Suess says the legal group is at the forefront of these initiatives and available to offer practical advice.

“Continuing our focus on mixed-use, transit-oriented urban-located centres is the future of RioCan,” she says. Suess expects sectors such as apparel, movie theatres and gyms to come back with a vengeance as restrictions lift. It is essential to recognize the need to incorporate e-commerce with the brick-and-mortar shopping experience to maximize the customer and tenant’s benefit, she says.

Following a pause in the transaction market last year, real estate investors have regained confidence, and the market is starting to rebound.   

“Real estate investors generally take a long-term view on the investment, and so once investors regained confidence that we weren’t going to be living in a lockdown forever, I think that had a good positive impact on the transaction market, and things really started to come back,” says Alison Harnick, senior vice president, general counsel and corporate secretary at First Capital REIT.

The First Capital team focuses on finding silver linings amid the disruption, such as seizing opportunities to purchase properties that would otherwise not have been available and filling vacant retail space with different operators.

Harnick’s legal department maintains an agile approach to support the organization through the evolving market.

“We try to analyze new situations through a historical lens, but also looking through the pandemic and making sure that we’re not getting stuck in what might be a reality today, but we absolutely do not expect to be a reality forever,” she says. First Capital has seen a lot of deep demand expressed by small investors, private investors, family offices and institutional investors that want to capitalize on opportunities that they see in the market. Harnick’s team strives to address growth opportunities while also dealing with challenges. 

“We take a long-term view and see urban centres as the primary place where Canadians want to work, live and play,” says Harnick. “Our strategy, pre-pandemic, has really paid off and will continue to pay off in terms of the focus on building thriving urban neighbourhoods.”

Morassutti is also bullish on the future of the industry. 

“Once we fully come out of COVID, Canada will get back to a very upward trend in terms of population growth, and that will drive a whole lot of growth in urban areas,” he says. With 100,000 people estimated to immigrate to Toronto every year, Morassutti anticipates strong demand for housing, office, industrial and retail space. 

“Once restrictions are lifted, economies will absolutely explode,” he says.