Market Confidence Falters: Canadian Real Estate

OPTIMISM FALTERS

Investment Confidence Awaits Vaccine Boost

A SURGING SECOND WAVE of COVID-19 tempered investment confidence in commercial real estate during the fourth quarter of 2020. Results of the REALPAC/FPL Canadian Real Estate Sentiment Survey show participating senior executives expressing slightly less optimism in market conditions than exhibited three months earlier. Notably, though, data was collected in October before the confirmation of approved vaccines.

In assessing both survey responses and accompanying insight from interviews with more than 50 influential Canadian players, analysts with FPL Advisory Group conclude that some indicators aren’t telling much of a story. In particular, the survey’s conventional focus on real estate asset pricing has shifted more to macro-level observations, but there are more details to report on access to capital.

“Transaction volume remains low, resulting in inconclusive asset valuations. Distressed transaction activity has yet to emerge in Canada,” the survey summary states. “Lenders remain active. There is an increased level of scrutiny during the due diligence process with many less willing to engage in higher risk investments. Equity capital is available; however, investors are increasingly discerning when evaluating investment track records and leverage ratios.”

Analysts also suggest “uncertainty” characterized the October snapshot, but that came with some perspective on a potential stabilizing force. “Many remain hopeful that a vaccine is imminent,” they advise.

Survey respondents — representing owners, asset managers and affiliated professional service providers in all property sectors — collectively nudged the overall index score down to 43 on a scale of 100. Confidence ebbed in both current and future market dynamics compared to the third quarter outlook.

Canadian executives were somewhat more positive about current conditions than were their U.S. counterparts — delivering an index score of 28 versus the U.S. consensus at 27. However, Canadian expectations for a future bounce-back were more modest — translating into an index score of 58 compared to the U.S. score of 61.

Nearly one-third of Canadian respondents deemed market conditions in the fourth quarter to be “much worse” than they had been 12 months earlier. That’s a significant jump from the 13% expressing that view in Q3. Nevertheless, there was a small gain in respondents who perceived conditions were “much better”— climbing to 14% from 10% in Q3.

A larger share of respondents expected a longer-lasting downturn, with 27% suggesting that market conditions will be somewhat or much worse by Q4 2021 compared to 23% in Q3. Accordingly, fewer respondents foresaw “somewhat better” times ahead, with 47% making that prognosis for 12 months in the future versus 51% in Q3. A steady 18% of respondents in both quarters predicted conditions would be about the same one year hence.

Despite the lack of transactions, 86% of respondents pegged asset values at somewhat or much lower than they had been one year earlier. That’s an increase from 72% expressing that view in Q3, which also encompasses a sizeable jump — from 6% to 24% — in the quotient calling values much worse. Looking forward, 35% of respondents expect asset values to drop further during the next 12 months, while 39% of respondents expect “somewhat” improvement. That’s also more pessimistic than Q3.

The report’s selection of anonymous quotes from leading industry sources

reiterate many common themes of 2020, including: preference for industrial and multi-residential assets; the pandemic’s hard hit on already struggling retail assets; and unease about tenants’ prolonged absences from office space.

Those are consistent trends among lenders and equity investors, as industry sources note that wariness of office and retail assets is serving up competitive jockeying to lend on industrial and multiresidential assets. Alternative lenders are also forging more presence in the market.

Generally, respondents reported more hurdles to secure capital in Q4, with 69% gauging it was somewhat or much more difficult to get debt financing and 67% saying it was more difficult to obtain equity capital than it was in Q4 2019. Looking forward, 56% anticipate that equity capital will be somewhat or much more abundant by Q4 2021, while 45% expect lenders will be somewhat or much more amenable. zz For more information about the REALPAC/FPL Canadian Real Estate Sentiment Survey, see the website at www.realpac.ca/page/ CanadianRealEstateSS.

LIFE SCIENCES GROWTH POTENTIAL FLAGGED

Growth potential in the life sciences sector has investors assessing opportunities to meet demand for laboratory, manufacturing and associated support space. Real estate analysts likewise point to burgeoning momentum in Canada’s strong research institutions, increasing calls for domestic production capacity and the STEM (science, technology, engineering, math) job creation engine.

“Employment growth in scientific R&D has outpaced even the tech sector,” observed Paul Morassutti, CBRE’s Vice Chair, Valuation and Advisory Services, during the recent online release of the firm’s 2021 Market Outlook.

He cited Oxford Properties’ recent foray into the sector in the United States with a USD $276 (CAD $350 million) deal for four buildings and announced plans to invest a further USD $500 million (CAD $635 million) on expansion and redevelopment of those facilities.

“Here in Canada, we have seen considerable activity in Montreal and Vancouver. We fully expect this sector to follow a similar trajectory that we witnessed in the U.S., albeit on a smaller scale,” Morassutti submitted. “Supporting sectoral fundamentals include: increased life expectancy; technology and AI facilitating scientific breakthroughs; on-shoring of the medication supply chain; and strong funding availability — all of which has been accelerated by the pandemic.”

JLL’s 2020 review and 2021 projections draw similar conclusions. “COVID has exposed Canada’s undersupplied life science and lab sectors. Growing employment and private investment on the demand side are making the case for more investment in this space. Real estate investors, especially long-term-oriented institutional groups, are taking a closer look at this space and we expect a supply response over the next few years,” it states.

Avison Young’s examination of global trends influencing real estate in 2021 also highlights two factors in life sciences growth potential: deglobalization and governments pouring stimuli into the economy.

“The pandemic has understandably led to a focus on medical facilities and life sciences. Venture capital funding for medical research has increased substantially, with medical infrastructure and R&D spending now increasingly seen as relevant to national security and demand for lab space likely to increase,” it forecasts.

Raising the alarm:

The need for certified fire safety support

Avoidable disasters and regulatory changes have underscored the need for stronger fi re prevention measures in recent years. And for building owners and property managers, this means applying extra due diligence when adopting the fi re safety systems, training, and certifi ed professionals to keep occupants safe.

It’s a risk that can hit close to home. In February 2020, for example, an eighth-fl oor fi re at a Toronto apartment led to the tragic death of a tenant, the hospitalization of six occupants, and the destruction of 29 units. Upon investigation, The Offi ce of the Fire Marshal (OFM) concluded that the initial smoke alarm had been dismissed as fake and - despite best intentions - occupants did not follow the correct evacuation process.

“This tragic fi re reinforces the need for those who live in highrises, and other occupancies where tenants live, to learn what to do if a fi re occurs in your building,” said Jon Pegg, Ontario Fire Marshal, in a follow-up statement to press. “[It’s important to] learn about the fi re safety features in your building and the emergency procedures outlined in the building’s fi re safety plan.”

Yet, while awareness and training are crucial to fi re safety, they are not the complete solution. In fact, had the abovementioned alarm not triggered the apartment’s monitoring system, the story could have been much worse. As such, this incident demonstrates how critical it is to combine fi re response training with fi re safety systems that are correctly installed, tested, and maintained.

“Both sides of the fi re equation put their life on that fi re alarm system,” says Essa Fire Chief and president of the Ontario Association of Fire Chiefs, Cynthia Ross Tustin. “The people in the building rely on it for themselves and their children to be notifi ed to get out of the building, and the fi re department relies on the quality of that fi re alarm system - that it’s installed and maintained properly.”

“For us, it’s easier to fi ght a fi re in a building that’s empty,” she adds. “We want to arrive when everyone’s been notifi ed and waiting on the lawn for us.”

Certifi ed support

Ontario’s building owners and property managers are not alone in managing crucial fi re safety responsibilities. Today, they have access to certifi ed fi re safety system installation and maintenance professionals who can help ensure systems will perform to expectation and that buildings (and their teams) are meeting the most up-to-date Fire Code regulations.

“That’s where our Certi-Fire program comes in,” says Cathy Frederickson, a spokesperson with Electrical Contractors Association of Ontario (ECAO). “The fi re alarm and protection industry is continually changing, and one of the key changes has been in legislation regarding the installation and testing of fi re alarm systems. It is important to keep up with technology by undergoing comprehensive training with new skills and standards. Hence, we are proud of our certifi ed fi re alarm electricians, and to provide them with the professional training and certifi cation approved by the OFM to meet the requirements and resolve all types of fi re alarm concerns.”

The Certi-Fire Program has evolved over 20 years to meet the requirements of the Ontario Fire Code O. Reg. 213/07. It is also one of only two fi re system certifi cation courses of its kind recognized by the Ontario Fire Marshal. Through the four-level program, 309A licensed electricians undergo 160 hours of intense academic and hands-on training covering all facets of fi re system installation, testing, verifi cation, and maintenance, as well as Fire Code regulations. Recertifi cation (Level 5) is mandatory every fi ve years to stay current with changes of the code and standard.

“Typical life safety systems -- your smoke detectors to your carbon monoxide detectors - that’s all you see. But how it was installed, and how it was wired behind the walls, is what makes the system function and keep you safe,” says Dave Kester, Certi-Fire electrician with ProWave Electric, adding, “Certi-Fire ensures not only that your [building’s] life safety outside of your walls is in good working order, but ensures the installation itself is good.”

“Fire alarm systems are complicated and different from typical electric work,” adds Mark Llyod, T. Lloyd Electric, an ECAO Registered Fire Alarm Contractor . “Participating Certi-Fire ensures our clients have a fully functional, codecompliant system.”

With required re-certifi cation every fi ve years, the intent of ECAO’s Cert-Fire program is to produce electricians who can not only provide a full breadth of electrical services but tackle a building’s full fi re safety needs. And to date, the program has certifi ed nearly 2450 professionals to do just that.

It takes a team

Fire safety is as much about systems as it is people. It’s programs like ECAO’s Certi-Fire and the Association’s additional building owners and property managers awareness training initiatives that are working to unite all building stakeholders in turning down the heat.

“Certi-Fire training is critical,” insists Monte McNaughton, Ontario Minister of Labour, Training and Skills Development. “It’s very important that we protect families, people, and businesses right across the province. It’s all about that consumer protection, and this training is essential to that goal.”

Certi-Fire is supported by the Joint Electrical Promotion Plan (JEPP), which is managed and funded by the Electrical Contractors Association of Ontario (ECAO) together with the International Brotherhood of Electrical Workers Construction Council of Ontario (IBEW CCO). Learn more about ECAO’s CertiFire program at www.certifi re.org and fi nd more building owner/manager fi re safety training initiatives at www.ecao.org/all-your-fi re-alarm-needs.