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Which Property Segment is Most Vulnerable to the COVID-19 Economic Slowdown

Published March 31, 2020 by Real Estate Leads

Our blog entries for the last 2 weeks have made it very clear that we’ve been especially attuned to those of you expressing very real concerns about the health of the real estate industry in Canada in the face of the ongoing Global Covid Pandemic. It’s natural to have fears about it, and those fears certainly aren’t unfounded. There’s no debating that the economic downturn that’s already beginning in the face of the slowdown caused by the pandemic IS going to take a big bite of the real estate industry, but that’s only the not-so-good news

The ‘better’ news (we’ll still refrain from calling it good news given the current situation) is that the industry insider belief is that the residential real estate market is not going to be as negatively impacted as others. This should come as good news for realtors who have been lead to believe that home sales and the numbers of new homes coming onto the market are about to plummet in the biggest of ways. The similar belief is that there WILL be something of a longer-term dip, but residential homes sales are not where the biggest downturn is going to be seen.

How this breaks down for the individual realtor IS going to be that there’s less of the pie to go around, but in an ever-competitive profession that’s not anything new. Is it going to be worse than usual? Sure, it is. Is it going to be permanent? No, it’s not. However, a realtor’s ability to be infusing his or her business with new clients is going to be even more challenging than it always has been. Here at Real Estate Leads, our online real estate lead generation system for realtors goes a long way towards helping you get more out of your efforts there.

But back to topic – if it’s not residential real estate where the sting of the economic downturn is going to be most felt, where is it?

Commercial Property Markets Always More Easily Swayed by Economic Cycles

Yes, there’s your answer; it’s going to be the commercial real estate market that’s most prominently affected by the fallout of COVID-19. Commercial property is particularly vulnerable to economic shocks like the ones that are already being brought about by the spread of COVID-19.

In ways that don’t apply to residential real estate, commercial properties like factories, retail stores and office units are much more exposed to economic cycles. Then you have to weight in the fact that commercial property owners and real estate investment trusts already pay higher interest rates for borrowed capital.

Then there’s also the role of the tenant in making this situation what it is. Tenants are almost always leasers with a commercial property, and the relevance of that in endangering and depressing the commercial real estate market is – quite plainly – risk. Tenants are much more likely to be exposed in comparison to a new owner of a residential property with dwelling, as they’re more prone to economic collapse leaving them with no choice but to fall into a default on the property.

If we read the news these days it will be hard to not see all the shops and offices that are shut due to the national health crisis. This is a very poignant and real example of how commercial property is much more vulnerable to these types of events.  If the outbreak creates deeper dents in the economy, things will become worse – MUCH worse – for commercial properties as compared to residential ones.

Most realtors should know what a REIT is. It’s a fact that if the shutdown lasts longer than expected, things could get worse and especially for Real Estate Investment Trusts where there becomes a very unappealing need to cut dividends and mark down the value of the real estate assets.

Informed investors are of course going to be entirely aware of these risks, and that’s why it’s these buyers who will be inclined to to sit back and wait this out before making their real estate move. The risk is significantly greater for them than a residential property buyer, although of course there are still increased risks there too.

Just not to nearly the same extent, and that’s something that should be reassuring to real estate agents working in Canada.

Here in BC one part of the $5 billion federal package being offered to help companies survive the economic shocks from the outbreak is an assistance program for reduced property tax for commercial real estate. It’s estimated that relief tax savings for the average urban commercial property owner is going to be about $4,000. The idea then being these savings will flow through to tenants who have triple-net leases and then providing support to them as well.

This is going to be a tumultuous time in real estate, but anyone predicting a massive collapse in the real estate industry fuelled by precipitous drops in transactions for residential properties is misunderstanding the way this is very likely going to play out.