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Property investors see Vancouver as a safe harbour, according to a new report by PwC Canada and the Urban Land Institute

PwC’s John Bunting, co-author of a new outlook on the national property market, shares some takeaways from the survey of industry insiders

For real estate, like many other sectors, COVID-19 has made forecasting a nearly impossible task. As John Bunting talked to industry experts for the Canadian edition of Emerging Trends in Real Estate 2021, he knew that all bets were off.

“I got a few nervous giggles when I started asking about what they thought was going to happen,” recalls Bunting, a Vancouver-based senior partner with PwC Canada and leader of the firm’s B.C. real estate practice. "One of my interviewees said, ‘John, I heard this from somebody the other day, and it was good advice: Don’t try and forecast the wind speed in the middle of a hurricane.’ I thought that was such a poignant comment.”

Emerging Trends in Real Estate, now in its 42nd year, is a joint effort. For the Canadian report, Bunting and his colleagues at PwC and the Urban Land Institute (ULI) interviewed almost 1,400 people and gathered survey responses from another 1,600 or so. The interviewees and survey participants included investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants, Bunting says. As he notes, the report distills their opinions and doesn’t reflect the views of PwC or ULI. And although it’s forward-looking, things have shifted since the research took place in June, July and August.

We chatted with Bunting about what next year could hold for Canadian real estate investors and asset classes—and where Vancouver fits into the big picture. The PwC partner also shared his thoughts on how property developers and investors can improve their chances of pulling through the pandemic. For the complete interview, check out the BCBusiness Podcast.

For Canadian real estate, the overarching theme you identified in the report is resilience and opportunity amid accelerated change. Broadly speaking, how has COVID-19 impacted different asset classes? What are some winners and losers?

I’m not sure there are any real winners in this whole pandemic era that we’re in. I would say that there are certain categories that have been affected less than others. So if you want to call the winners commercial and industrial, I would say they would be classified as the winners. The market for commercial real estate has continued to be strong, and arguably, cap rates are lower now than before the pandemic started. So if there’s a fairly consistent category across Canada that seems to have fared well in this, it certainly is commercial.

Now, if you categorize office within commercial, I would say we’ve got some time yet to see where office, in particular downtown office, is going to settle out. It’s early days still. I’m sitting in my office in downtown Vancouver, and it’s quiet down here, and I think it’s going to be quiet for a while. So certainly it will be some time before we really see what the longer-term impacts on office are going to be.

And the losers are the obvious ones. I would say retail, and in particular retail that probably didn’t make sense before the pandemic, to this overall theme of acceleration of trends. It’s really accelerated the trend away from storefront retail, and in particular certain categories of retail, such as apparel. And it has companies in those industries trying to figure out how they’re going to survive—or if they’re going to survive—and how they need to pivot in the new world.

Categories within categories, I’d say residential has held up well. As recent as this morning, numbers coming out of Vancouver [show that] the real estate market for homes is as hot as it’s ever been. Prices are rising. Downtown condos would be, I would say, the exception to that, but generally, the residential real estate market has held up very well.

Why would residential real estate be so hot in the middle of a pandemic? And the answer is really, who knows? It could be a number of things contributing to that. Obviously there was 18 months were there wasn’t a lot of activity going on, sort of a standoff between buyers and sellers. So there is, I call it, pent-up demand. And obviously banks are still lending, and at rates that are record lows, so I think people are just taking advantage of the opportunity to buy.

What’s the general mood among investors in Canadian real estate? How are they feeling when they look ahead to next year?

I think the common theme in our interviews this year was obviously uncertainty. Everybody’s really, at this stage, kind of guessing what’s going to happen. We’re in the second wave now, and governments are starting to act again. And so there’s a lot of uncertainty as to what the implications are. The actions in the second wave, what longer-term implications will they have, and what are those implications on various categories?

I would say the other theme, if you like, that was consistent is the accelerated pace of change in pre-existing trends. And I hate to dump on retail, but it’s a classic example of where that sector has had to act much quicker than they would have otherwise had to, because of the impact COVID has had on that business.

That’s not to say that all retail is bad. In fact, some retail has done better than they did before COVID. [An interviewee] said if you look at Maslow’s hierarchy of needs, the first two basic needs are one, physiological, and the other one safety. So if you think of food, shelter, security, booze, toilet paper, the basic things that you need in Maslow’s hierarchy are the types of retail that actually have done very, very well in COVID. I certainly wouldn’t want to be in the luxury clothing business right now.

There was some talk in the survey about us being in a time of price discovery. Is the idea there that things are uncertain, so buyers and sellers are sitting on the sidelines to see how things will shake out?

I think that’s right. There haven’t been any, I’ll call it, major commercial transactions in the Vancouver marketplace. I have a large national client in the office space, and they sent me representative transactions in office. There are some, but not many, and I wouldn’t say that they’re at prices significantly less than they would have otherwise been last year.

The residential market last year, and over the last 18 months prior to COVID, was really buyers and sellers sitting on the sidelines, waiting to see who blinked first. And I think that’s what’s happening more broadly in real estate. I think there’s companies with very well-capitalized balance sheets looking for excellent buying opportunities, but they’re just not there yet.

And what about the matter of there being a flight to quality? If deals are going ahead, is that the main objective, to find a high-quality asset?

I think what the survey suggests, and what our proponents indicated, was that nobody’s going to take any flyers right now. They’re not going to stick their neck out and take big chances. That’s probably a motherhood statement in a situation like we’re going through, which is really generational. None of us have ever seen anything like this. So where investors and developers have opportunities, they’re certainly not going to take an undue amount of risk. So that’s what the flight to quality is—looking for quality assets that they might be willing to pay a little bit more for, as opposed to taking big bets in certain sectors where there’s a fair bit of uncertainty as to how it’s all going to shake out.

Overall, investors see Vancouver as a safe harbour, right?

Vancouver is still seen to be the most attractive place in Canada to invest by the measures that we condense into the report. It has been for some time. Toronto is usually a fairly solid second. Vancouver is arguably, I would say, probably a more attractive place to want to live and do business in today than it was before COVID…Our infection rates have been low relative to other places in Canada and certainly other countries in the world. The city’s clean, it’s safe, it’s got a good economic environment, stable government, generally. So it’s just a great place to be, and I don’t think that’s going to change.

What might we see in Vancouver when comes to disruption in the retail space?

I think we all know some traditional retail is simply not going to survive. That’s a trend that’s been happening for quite some time, and COVID has substantially accelerated it. And when I think of retail, I don’t just think of stores where you go to buy stuff, but I think of restaurants and bars and pubs.

There’s some estimates that up to 25 or 30 percent of restaurants won’t survive COVID, and if they don’t survive, those spaces will be left empty. But I think one of the more noticeable things we’ll see is the reimagination of bricks-and-mortar retail on a larger scale. So if you look at redevelopment opportunities of regional and urban/suburban malls, for example, we’ve seen it already. You look at what’s being happening in some of our large urban malls and what’s happening in malls like Oakridge, for example. That reimagining was happening prior to COVID, and I think it’ll just accelerate now.

I’ve got three clients who are in online retail, and their business has doubled and tripled in COVID. Their biggest challenge has been to try and land enough product in Vancouver to distribute it to the people who are buying and demanding it. So the volume of online commercial activity has just skyrocketed. If you’re in that business, COVID’s been good.

How can real estate developers and investors improve their chances of getting through this strange time that we’re in? Do you have any advice?

I break it into real estate investors and developers who one, are in good financial conditions, and two, aren’t. If you look at the companies that have got strong balance sheets, are well capitalized, have good fundamental businesses, good assets, my advice would be to optimize their portfolio.

For example, if you were in industrial and you were thinking of exit opportunities, with cap rates near record lows, this might be a good time to sell, and also accelerate any changes that you were going to make. And so I would say if you’re in retail, decide how you’re going to reimagine that kind of portfolio. And the third thing I’d say for companies with good balance sheets: this is a great time to look for buying opportunities. Because they will come.

If you’ve got a difficult portfolio or your balance sheet’s not that strong, I’d say hunker down, solidify your banking and investor relationships, and then do your best to reimagine your assets. And that might be focusing day-to-day on your tenants, doing everything you can to help them survive and to keep them as tenants when we come out the other side of this. Or it could be divesting of assets that just don’t work for you.