Impact of COVID-19 on Canadian Real Estate

Written by Kyla Tanner

June 2, 2020

Cahdco and its clients’ projects were in varying stages of development when the impacts of COVID-19 first began to be felt. While some projects were still in early feasibility, others like Christ Church Bells Corners (CCBC) were preparing to submit Site Plan Control applications and Veterans’ House is currently under construction. In the face of some uncertainty in the real estate industry, Cahdco was keen to participate in a webinar hosted by the Royal Institution of Chartered Surveyors (RICS) to hear discussion on this topic.

The webinar panel included representatives from Royal Bank of Canada (RBC), Pennyfarthing Homes, and BTY Group. The three panelists discussed impacts on the lending market, budget increases and scheduling delays, supply chain issues, effects on real estate sales, and future risks and opportunities for the real estate sector due to wide ranging COVID-19 impacts. While these groups are not non-profit organizations and operate at a larger scale than Cahdco’s clients, many of the key messages provided an optimistic view for affordable housing projects:

  • Smaller, more affordable development projects are more viable than luxury condos during this time period.
  • Purpose built rental projects carry less risk during this time of uncertainty.
  • Projects that were slated for commercial development have pivoted to residential projects.
  • There have been fewer financing and construction applications submitted, largely due to uncertainty regarding construction costs.
  • Construction sites are adapting with physical distance measures and policies to avoid delays.

Projects are shifting to more affordable, rental residential projects

The panelists expect an inability to achieve pre-sales on luxury condos. The panelists operate in Vancouver and noted that while luxury tower projects will suffer, townhomes and suburb development will be viable. Instead of building towers, there will be a shift to smaller, and thereby more affordable, projects. These buildings are often wood-framed, lowering construction costs from concrete that is necessary for the taller buildings.

Projects that were slated for commercial development are pivoting to residential uses. The panelists cited low vacancy rates across the country as evidence that residential projects were more viable compared to the uncertainty of retail, office, and hospitality sector projects. There is more interest in purpose built rental projects from lenders.

Fewer financing and construction applications

The panelists noted that due to COVID-19 there have been fewer financing and construction applications. Pro forms are used to calculate project costs to determine whether a project is viable for development or not (Kiefer Maracle discusses pro formas in more detail in his blog post). The Pennyfarthing Homes panelist explained that it is difficult to have faith in a pro forma right now because of the uncertainty that COVID-19 brings. Construction costs have risen due to reliance on materials being shipped from overseas and fewer trades working on sites because of safety concerns, delaying projects and increases costs. Without certainty in a pro forma it is difficult to invest millions of dollars in capital on a project.

However, the panelists agreed that the construction cost premium will likely only last for a few months. Once a new “normal” has been established the costs will decrease – and they believe that we have begun to enter this time period.

The RBC panelist stated that the bank was no longer looking for new clients, instead focusing on existing ones. While fewer applications are being received, he noted that financing was still available and being approved with low interest rates. Comparatively, the BTY Group noted in their research that there is greater scrutiny from lenders for new projects and an increase in premiums to cover potential risk. However, this scrutiny is likely for projects with higher risks, such as the luxury condos discussed earlier. Smaller, more affordable projects that are purpose built rental likely will not have difficulty receiving loans.

Construction sites are adapting and avoiding delays

Stay at home orders rang an immediate alarm bell for the construction industry. While this resulted in some initial delays, sites have adapted quickly to install wash stations, reduce hallway traffic to one-way, not allow visitors, enforce a maximum of two people in an elevator, and have readily available hand sanitizer throughout the site.

Some developers are bringing lunch on-site for the trades to avoid them coming into contact with other locations over the lunch break. Others are ensuring that trades work on separate floors from one another to avoid contact.

Pennyfarthing Homes noted that they are operating at 90% capacity on site. The loss of 10% capacity relates to the need to social distance on the site. To compensate for this, some people are now working on Saturdays.

Slow municipal processes hold up projects

The panelists agreed that in Canada it takes a considerable amount of time to begin a project. They stated that getting municipal approval for projects takes a long time and they hope to work more with cities to get processes like rezoning and permitting to move faster.

Other opportunities

  • The BTY Group discussed the use of drones to undertake inspections, particularly for siding and roofs, that allow for physical distancing measures to remain in place.
  • Modular construction in factories could be used more because it is easier to physically distance than when building on-site.
  • There may be an increase in land for sale from projects that are no longer viable. Organizations with the capacity may purchase this land for its pipeline of projects that are 5-10 years away.
  • Canada may be seen as a country that reacted well to the pandemic and therefore an opportune place to immigrate to once we’re allowed to do so again.
  • The construction industry is demonstrating agility by adapting to the situation and keeping sites safe for workers.

BTY Group created a Briefer entitled, Pandemic, Lockdowns and Construction Cost Escalation in Canada: Recalibrating Risk Models, which included scenario modelling and regional snapshots of Canada:

Kyla Tanner

Project Manager

June 2, 2020