Assetsoft - Blog #Industrial

The Road To Recovery For Canadian REITs: A Look

Tue, 16 Mar 2021 08:00:00 -0500

REITs are a mixed bag regarding how they perform during economic recessions. Mainly, REITs focused on short-term leases are among the worst victims. COVID-19 has proven that there's a lot of truth behind this "rule of thumb."

However, have all REITs in Canada gone through the same hardships? We've commented extensively on how real estate has come with a handful of unexpected statistics. Some markets plummeted, whereas others flourished amid the crisis.

Now, the vaccine has started its first rounds throughout the globe. Several industries promise recovery, but is that true for REITs? The answer is a bit more complicated than “yes” or “no.”

The first stop of the road: Impact

Naturally, the first step in the road is to resist the initial impact. Yahoo! Finance offers excellent insight into the worst-hit REITs in Canada. They also highlight how travel restrictions signified a considerable handicap for some firms.

Luckily, curbing this damage has been possible with exemplary leadership and technology implementation. We’ve personally helped and witnessed how modern solutions have helped several clients overcome the initial struggle.

Let’s analyze the three examples from the article to see what we’ve been through.

American Hotel Income Properties

AHIP is an apparent victim of the pandemic, entirely focused on hotels. Additionally, they were undergoing a rebranding and renovation project that halted its cash flow. The pandemic was the last straw, resulting in job losses and ceasing operations.

In April, the trust had to suspend its monthly distribution, and management needed to defer March distributions. As a result, directors and executives took advantage of the situation and bought hundreds of thousands of assets.

Cominar

This diversified trust suffered the most damage from its mall assets. The order to close non-essential spaces was disastrous for a company with nearly 80% of its portfolio consisting of non-essential services.

It marks the second REIT primarily dedicated to non-essential services. Therefore, it's easy to see why portfolio diversity is decisive regarding a company's quick recovery chances. It's a worthy consideration even for those less affected.

RioCan

Finally, RioCan focuses on mixed-used and retail-focused properties. It's not difficult to spot the problem with that sentence. Again, it's proof of how REITs focused on retail, office, and other non-essential sectors faced the most significant struggle during the pandemic.

It's also worth noting that the main advantages noted in the article related to portfolio diversification. While it might be "too late" to implement said strategy, it can be a necessary adaptation for embracing recovery.

The second stop of the road: Surviving

After overcoming the first hit, the next step is to implement damage control measures to reduce the damage. The first stop tests a company’s preparedness. The second stage focuses on emergency measures.

The best way to assess the “survival” episode of the pandemic is this article from MSN money. The main question is whether REITs can overcome the current downturn. This point of view should shed light on how companies can face the upcoming recovery period effectively.

With the sudden surge of COVID-19 spikes, we can say we’re still exiting this stage.

Most vulnerable REITs

Naturally, the most vulnerable REITs are those focused on sectors affected by lockdown measures. That includes the ones we’ve mentioned already, but also gyms, cinemas, and office spaces.

Additionally, the article mentioned that office space hasn't been as affected as retail spaces. That doesn't mean it's free from scratches. Office demand has been plummeting, and, likely, it won't recover entirely due to the popularity of remote work.

Could the future look optimistic?

Not everything is grim, even for those sectors. The vaccine is excellent news for everyone, but even that's not everything. For instance, bond yields remain at a decade-long low. Cheap debt can help property values to increase with more robust demand.

Additionally, most of the worst-affected REITs entered the pandemic in stable conditions. Therefore, the pandemic's hit could've been much worse. Projects like redeveloping unused space into residential assets can prove a vital advantage during recovery.

Vaccination efficiency

The upcoming vaccine is still a significant development for all industries. The efficiency of the initial and following rollouts will determine how quickly recovery makes its way to REITs. Proper vaccination is crucial for reactivating several sectors.

Hospitality, office space, and similar markets depend on crowding to an extent. Social distancing and lockdowns were the biggest hit to these markets. As these measures become less necessary, the rebound could be significant.

The third stop of the road: Immediate recovery

Now, we can say we're finally in 2021, but we're not ready for recovery. COVID-19 infection spikes hit the world during this first quarter. That means we're not in the recovery period, but we're close to it.

The immediate recovery "stop" refers to the initial re-balance in demand. Vaccination means people will slowly go back to their offices and "normal" lives. That's a slow period, and that's what we mean by "immediate" recovery.

The Smart Investor provides an excellent analysis about REITs and their chances for recovery this year. It’s worth noting that the article focuses on the Singapore market, but we can still learn great insight from the article.

Hospitality

As we mentioned, the hospitality sector will remain slumbering as long as borders remain restricted. For instance, the article mentions Asia Pacific’s largest REIT, which lost 28% of its year-on-year revenue.

Sustained recovery is unlikely to come as long as borders are closed. Repurposing spaces for healthcare and similar flourishing industries is a considerable advantage for companies suffering similar losses.

Retail

Retail REITs have experienced excellent recovery rates with Singapore’s reopening phases. Some trusts even enjoyed over 60% recovery. While footfall will remain low thanks to social distancing, telecommuting can make up by increasing spending considerably.

Again, this report proves the importance of adequate vaccination. Allowing people to return to their favorite malls and stores is critical for ensuring recovery for REITs in Canada. Malls with open space amenities also enjoy a considerable advantage.

Commercial real estate overall

The article also mentions a hybrid approach for commercial real estate. The need for office space has been through significant reconsideration. We've already mentioned repeatedly how remote work can become the standard for many workers.

That’s where hybrid models come in: combining office presence and remote work. Not all employees enjoy working from home full-time. Some will come back to their office entirely, and others will prefer to divide their time between telecommuting and their company’s offices.

Industrial

Finally, industrial REITs have been the most vital sector during the pandemic. According to the article, the main advantage comes from their tenant and portfolio diversification. Most of these tenants can withstand the crisis's damages.

Curiously, that’s also true for industrial REITs in Canada during the start of the pandemic. It also seems to be the same for REITs with properties around the world.

The last stop: Long-term implications

Finally, long-term recovery won’t come this year. Several experts agree that the world won’t go back to pre-pandemic times. That doesn’t have to be a negative outlook. Most industries will probably recover almost completely, and that will benefit most REITs.

For instance, the office and hospitality sectors are some of the biggest victims. They’re also expected to go through the slowest recoveries. However, not everyone enjoys working from home, and a majority of people will likely return to offices—at least partially. Travel demand has been low solely because of travel restrictions.

Once various industries start to gain their strength back, REITs will follow suit.

An optimistic outlook

Even before 2020 ended, some experts were already advising which REITs to buy for this year's recovery. The Motley Fool is a great example. In its article, it mentions two REITs to keep in mind for investment.

Regardless of opinion, it's promising to see investors' interest in REITs and their chances of recovery. We can also learn what's attractive about these companies, which helps us understand what to do for a full recovery.

SmartCentres

This REIT endured significant damage, mainly because of its retail-centered portfolio. However, SmartCentres benefits from excellent retail tenants, with retailers who already demonstrated their resilience during the pandemic.

That's why we always say that the tenants' quality decides the future for REITs. For optimal recovery, companies must reevaluate their current tenants and which ones are showing good numbers. Shifting focus can be a lifesaver.

Inovalis

Inovalis is somewhat similar to SmartCentres, but instead of retails, it focuses on office space. Again, many workers will prefer to stay home after the pandemic if possible. But that doesn’t mean office space will disappear.

Remote work doesn’t always mean working from home. Coworking space is a vast market to look out for as social distancing subsides. Repurposing office spaces accordingly is a worthy consideration.

Should we wait for things to go back to normal?

After reading all the data, the answer should be obvious. Things will go back to normal, at least as much as possible. However, recovery won't come from waiting but from adapting and seizing opportunities.

That means that the road to recovery begins with making good choices before the pandemic, but that’s not the end. Make sure to stay on top of market developments, assess your assets and learn how to adapt when you need.

How is Canada's industrial sector growing resilience despite the pandemic?

Sun, 28 Feb 2021 20:00:00 -0500

COVID-19 turned 2020 into a year of uncertainty, and it seems like it’s extending to 2021. Don’t get us wrong, 2021 promises a lot, especially with the upcoming vaccine. However, no one can be sure about what’s coming for all sectors.

Thankfully, not all sectors are going through the same hardships. For instance, The industrial sector hasn’t been doing half as bad as you’d think. That’s not to say that it hasn’t faced any hardships. However, its performance has proven that it’ll take a lot to bring it down.

It’s been a tough road

We don’t want to come off as too optimistic. Last year, the manufacturing industry experienced considerable losses. As the CBC reports, over 30,000 jobs made it to the Ontario casualty list for the first quarter of 2020.

Of course, the article is quite dated, being from June 2020. However, the insight is still crucial to understand where the sector is going,

On the other hand, Quebec experienced only 1,200 jobs lost in the same industry and period. Cash flow and supply chain disruptions also made it difficult for more vital industries, like food production.

It’s not just because the pandemic

Some of you might have noticed that the pandemic was still away from a global crisis during March. Therefore, can we attribute all those lost jobs to the pandemic? The CBC article mentions that the industry has been declining steadily.

Revenue in the sector had been falling for the months leading to that report. The pandemic essentially acted as a catalyst for this decline. The demand decrease ensured recovery would be problematic. However, it seems like experts overestimated the crisis’ impact on the industry sector.

The future might be promising

The report also mentioned that the sector would change considerably in the future. Now that we’re in that “future,” we can say it’s proving to be true. However, it doesn’t have to mean something negative.

The pandemic has provided vital insight regarding the flaws in many sectors. Manufacturing isn't the exception. It's led different regions to adapt their industries to make up for the pandemic's needs.

Additionally, several practices—like remote work for departments that don’t require office space—have streamlined many operations.

The second wave has been surprisingly optimist

Those aren't the only good news. The industrial sector has proven to be incredibly resilient during the pandemic’s second wave. Real GDP saw a 0.7% increase in November, and roughly the same held for December. While 2020 still saw the toughest real GDP hit in years, the damage seems lower than expected.

It’s worth noting that November’s rise nearly doubled previous predictions. The general financial landscape has been surviving quite comfortably amid the crisis. Several official measures and private sector adaptation have been crucial for these results.

November brought significant strength

November was the most important highlight of 2020’s last quarter. According to the linked report, nearly 75% of the industrial sectors experienced output increases. Industries producing goods saw 1.2% growth, and it was 0.5% for services.

Mining, gas, and oil were the most important contributors to that gain, with a 3.9% boost. Energy prices have gone through continuous rebounds, and natural resource sectors are likely to keep growing. Manufacturing was a surprising highlight with 1.7% growth.

Short-term predictions are still somewhat weak, with unemployment still being an issue.

2021 starts slow but shows promise

That said, the long-term outlook is a different story. The pandemic's second wave has been a setback for 2021. GDP projections for the first quarter are relatively pessimistic, but the economy overall still promises growth for this year and 2022 as well.

The main advantage this year is the upcoming vaccine, arriving earlier than many expected. However, securing this treatment is another challenge. Canada has experienced delivery difficulties regarding the vaccine. However, most experts agree that recovery should pick up noticeably once the vaccines arrive.

However, commercial construction still shows uncertainty

According to ConstructConnect, the commercial construction sector has been experiencing activity recovery. However, that doesn’t mean that uncertainty isn’t a problem anymore. Project delays and deferrals translated into prominent dips for the sector.

The forecasts for the 2021-2030 period are still waiting for release in March. However, the article goes through several factors that can aid experts in predicting what could happen next. For now, it seems as if commercial construction demand might need years to recover completely.

Just like other markets, the construction sector has moved to modern solutions to fight this decline. For instance, Procore enables your company to manage construction projects remotely.

Engineering construction offsetting declines

One of the article's essential points is how engineering construction could be a significant driver behind the sector's revenue. There's a long project list for non-residential construction, and that could become the most robust uptick for Ontario's industry.

It’s worth noting that engineering construction had been driving investment before the pandemic. Utility upgrades, public transit expansions, and mining commanded for engineering projects. The pandemic didn’t slow down these operations as noticeably as other sectors.

Regarding ICI constructions, healthcare seems to be the most significant driver behind it. 2021 shows promise for both institutional and industrial construction as the economy starts to reopen.

Employment issues

After the economy's reopening post-spring, employment saw a significant boost. However, it's still far from pre-pandemic levels. All provinces underwent significant impacts, with over 90,000 jobs lost between March and April alone.

The unemployment rate has been decreasing, yet it’s been challenging to recover from a 14% spike. Interestingly, the article also mentions that employment has been slightly outgrowing the labor force. That’s another factor to consider when it comes to analyzing unemployment statistics.

The challenge of worker mobility

Movement flexibility for workers is another obstacle across multiple regions. Moving resources from one province to another amid health regulations is cumbersome, to say the least. These setbacks are essential factors at play for 2021 and 2022.

That’s why moving toward remote collaboration platforms has been a lifesaver for countless companies. Office 365 is an excellent example of accessible administration software that enables resources to work seamlessly without moving to an office.

There haven't been too many changes for current projects. Most implications are related to scheduling, with various projects under proposals. The milestone isn't to find the workforce but to encourage final investments to get the projects going.

Is Sault Ste. Marie an exception?

One of the most exciting reports from this year is how Sault Ste. Marie has fared during the year’s end. The city amassed over $90 million in permit levels for more than 1,500 buildings.

It’s somewhat less than 2019, but not for much. The construction industry has been exceptional during the pandemic in Sault Ste. Marie. However, we’re not here to talk about the construction industry again. What matters here is what has allowed for that growth.

The importance of province collaboration with companies

One of the most critical points made by The Sault Star in its report is that government restrictions were minimal for construction. It allowed project completion as long as they abided by some regulations. The city's administration was crucial for this performance.

Other housing projects are also waiting to begin, including recent approvals, like the Trinity Towers. Even more, projects are under review. Renovation permits also experienced a massive boost during the pandemic, with over $20 million in renovation-related permits.

Even the commercial sector experienced significant issues for new projects and renovations, totalling over $20 million. However, the industrial sector only accumulated $12.2 million in construction.

Saskatoon: an impressive defiant to the pandemic

When it comes to industrial sector resiliency, Saskatoon is one of the best examples. Industrial vacancies saw noticeable declines during 2020's last quarter. The industrial market has recently driven investor interest, making it a significant exception amid the general landscape.

Saskatoon has proven to be a promising commercial real estate sector for retail, office, and industrial investment. The vacancy rates are even expected to break under the 5% mark during 2021. If it does, it would be the first time in a decade.

The only risk would be an increase in spec building, which could slow down market demand while it absorbs the new supply. Overall, Saskatchewan's economy offers a promising outlook for growth in 2021 and 2022.

The RBC predicts the province's GDP to climb to 4.7% this year, virtually a double increase from the -4.7% from 2020. Unemployment is also expected to drop from 7.8% to 5.9% by 2022, surprisingly close to levels from 2019.