2020 was a difficult year for Canadian retail and office real estate. Despite heavy losses and uncertainty, investors are finding their feet and looking for strategies to improve their market position in 2021 and beyond.

Retail & Office Losses in 2020

For retailers especially, the pandemic hit 2020 profitability hard. Even high-credit tenants and top brands around the country sought relief from rental payments and support from the government to help cover their costs.

Some landlords have taken to the courts to collect unpaid rents in the millions from tenants who were forced to shut their doors in early 2020.

Small businesses have been hit especially hard. While many were able to make full or mostly complete payments in April, cashflow was impacted by the shutdowns in the beginning of the year. Since then, they have been limping along through repeated shutdowns and general reductions in traffic.

As of Q4 in 2020, retail rental rates were 6.14% lower nationwide than in that same period in 2019, with the most significant drop in rates happening in late 2020. Toronto saw the worst reduction in retail rents.

Restrictions on movement and indoor traffic have hurt retail real estate the most. While office spaces do need open access, the lifeblood of many retail businesses is foot traffic.

Despite a lower demand for office space in 2020, rental rates for office real estate are still seeing some growth around the nation. The larger issue is the shift in demand for office spaces and the need for office to adjust to new market conditions.

It’s expected that impacts to office real estate will be permanently altered, even once the pandemic is in the rearview mirror.

Shifting Investments

Moving forward, investors are looking at what’s next for retail and office real estate. There’s some overlap in what tenants may prioritize in the future, but these two sectors of the CRE market still present a lot of unknowns for investors.

Tenants want to be able to keep their own employees and their customers safe. Rapid change of COVID policies have made it difficult to plan for employee needs. Sanitation and the ability to actively manage rental spaces remotely have become higher on tenant priority lists in 2021.

While many workers will return to offices rather than working from home, it’s likely that companies will also be adopting more technology, adapting workspaces, and allowing flexible work hours.

Industry insiders also predict a shift in usage for office spaces. Because there may be a lot of office space flooding the market in the near future, some office spaces may convert to hotels, apartments, or condominiums in hopes of finding tenants and increasing cashflow. While there is risk involved, it may be a greater risk to hold onto an office building with a high vacancy rate. There is also a shift in scale, particularly in markets like Toronto for sub-15,000 square feet, leases.

Retail spaces may be facing conversion as well. With the growth of ecommerce there has also been a growth in demand for industrial real estate, leading landlords of some retail spaces to consider a switch. This is a trend that was already happening, but it’s gaining momentum in 2021 and beyond.

The Digitization of CRE

In an effort to future-proof existing real estate and new investments, many Canadian landlords are looking at digitization.

There are a lot of benefits to focus on digital, including:

• Enhanced Tenant Data
• Better Financial Models
• Centralized Account Management
• Improved Productivity & Operating Efficiency

Digitization in real estate enhances the bottom line. Better data on tenants, markets, finances, and productivity leads to better decisions. Ongoing account management and general property management can also be handled more efficiently with a centralized system connecting tenants and property managers.