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Real Estate

COVID-19 has interrupted vital supply chains, driving up the costs of materials and forcing developers to build and sell more cautiously

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Paul Fitzpatrick, broker of record at Home Group Realty Inc., has noticed a change in the types of buyers making inquiries at his Guelph, Ontario–based offices. A lot more of them are coming from the Toronto area, and many are interested in a very particular type of product: a newly built detached home.

“Two years ago, they would not have considered moving this kind of distance from the GTA,” Fitzpatrick says, referring to the Greater Toronto Area. But now, with interest rates near record lows and work-from-home arrangements more available than ever before, something has shifted. Fitzpatrick says his volume of inquiries from buyers based in the region has doubled during the pandemic.

A new intensity of consumer desire for single-family homes, stimulated by forces unleashed by the COVID-19 pandemic, has put the low-rise home development industry in something of a double bind: it’s being flooded with buyers at a time when developers are especially ill-equipped to meet increased demand.

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That’s because the COVID-19 pandemic has interrupted vital supply chains, driving up the costs of materials and forcing some low-rise developers to build and sell more cautiously than they have in the past.

“We’re not selling as many presale homes as we normally might, because we have no guarantees on material supply,” says Sue Wastell, president of Wastell Homes, a housing developer based in London, Ont. that specializes in single-family communities. “We’re being a lot more cautious going forward. We’re not releasing too far into the future.”

The construction of new homes in Canada’s suburbs and exurbs is never a quick or easy process. Even in normal economic times, Canada’s housing developers are constantly at odds with municipalities and provincial governments over planning permissions for new residential communities. “We already had a shortage of supply well before the pandemic,” says Kevin Lee, president of the Canadian Home Builders’ Association. “It was probably the biggest issue driving up housing prices in our largest urban centres.”

But the pandemic has added a new set of complications to the supply side of the new-home market.

I’ve gone out and bought skids of garage door openers, because where they’re manufactured in Mexico they had to close for COVID

Sue Wastell, president of Wastell Homes

Although residential construction has continued throughout the pandemic, new health and safety practices have hampered the process of building homes. Tradespeople can no longer work shoulder to shoulder. “We’re separating various crews so that there’s very little chance of spread happening among people on site,” says Al Libfeld, president of Tribute Communities, a Pickering-based developer that builds both low-rise single-family homes and condo towers. “It has slowed down construction to some degree.”

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Lockdowns have also caused some municipal permitting offices to operate more slowly than they ordinarily would. Developers report delays in flows of building and planning permits, which they say has created additional drag in the construction pipeline.

One of the most vexing virus-related challenges for builders has been getting — and paying for — vital construction supplies.

Some wood products have more than doubled in price. Photo by Bloomberg

Essential items such as windows and doors have become scarce as home builders in Canada and the United States attempt to keep up with strong buyer demand on both sides of the border. “We’re buying products and having them stored, where we’ve never done that before,” Wastell says. “I’ve gone out and bought skids of garage door openers, because where they’re manufactured in Mexico they had to close for COVID. I’ve already sold 60 homes that include a garage door opener. We’re thinking much farther ahead than we’ve ever done before.”

But the biggest material concern for low-rise builders is wood. Single-family homes are usually framed entirely in timber, which means they require several times the amount of wood, per unit, that would normally be used in the construction of a taller, multifamily building.

Lumber prices, apparently buoyed by increased demand for home renovations and construction during the pandemic, have surged. Some wood products have more than doubled in price. The random lengths composite, a broad measure of lumber price performance, was trading at US$983.80 per thousand board sheets, up around 118 per cent higher from the same period last year.

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Valérie Gonzalo, a spokesperson for Lowe’s Companies, Inc., told the Financial Post that increased demand and decreased supply has had an impact on the availability of products to consumers.

“Dealing with COVID-19, several suppliers (including lumber, building materials, windows, doors and appliances) were forced to limit their production as they had to reduce the number of employees in their plants to be compliant with the health measures in effect and deal with longer lead times for parts supply,” Gonzalo said.

Developers typically pre-sell properties months or years before the actual start of construction. Now, they’re left to perform an uncertain calculus. If they pre-sell a home today, will future increases in material costs erase their profit margins before they even begin to build? With lumber prices fluctuating so wildly, it’s impossible to know.

“We definitely need to be more cautious,” says Mike Taylor, vice president of business development at Granite Homes, a low-rise housing developer based in Guelph. “One of the things we need to be careful about is not selling too far in advance. You have so much demand right now, you want to supply the market and sell units. But if you do that, all of a sudden your closing dates are getting much later, and there’s increased risk.”

Despite the industry’s pandemic-related challenges, Canada’s overall amount of single-family home construction activity has not diminished. Canadian single-detached housing starts in 2020 were up six per cent over 2019. But the pace of sales of new-build houses during the pandemic has been so quick that buyers, in some cases, have fewer properties to pick from.

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Whatever new-build houses are available for sale are tending to fetch high prices. Photo by David Bloom / Postmedia

In the Greater Toronto Area, there were just 1.8 months of low-rise inventory remaining at the end of December, according to statistics compiled by Altus Analytics. Toronto-area buyers of new single-family homes haven’t faced such tight inventory conditions since early 2017. In Vancouver, single-family new-build inventory stood at 3.5 months.

Buyers who are put off by inventory problems in the new home market currently have nowhere else to turn, because resale markets are in similar shape. A February analysis by RBC Economics found that Canada’s nationwide resale housing inventory is now the lowest on record, at just 1.9 months.

Whatever new-build houses are available for sale are tending to fetch high prices. Statistics Canada’s New Housing Price Index — which tracks the sale values of detached, semi-detached, and townhouse properties — was up 4.6 per cent year over year in December, the largest monthly year-over-year increase since 2008.

Those rising prices may prove to be a saving grace for low-rise developers whose margins are being squeezed by increased material costs. “If you didn’t have that kind of balancing effect on the pricing side, I think it would be a bigger challenge that it has been,” Taylor says.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Expect a record-breaking year for Canadian real estate

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Royal Lepage CEO Phil Soper speaks with Financial Post’s Larysa Harapyn about how we can expect a record-breaking year for Canadian real estate.

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High demand has put upward pressure on housing prices for scarce waterfront properties

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Bidding wars are to be expected when buying a house in a big city market, but now they have spilled beyond even the suburbs to otherwise calmer, more remote areas, known as peri-urban regions.

The pandemic-driven outward migration of households from central parts of the city to the towns forming the extended urban boundary has generated quite a lot of hype. Nowhere is this hype more visible than the cottage country surrounding the Greater Toronto Area (GTA).

It used to take months to sell a cottage before COVID-19 hit. Now, such homes are being sold within days, sometimes even hours, of being listed. Offer nights and multiple bids are the new norm, and they have delivered both unexpected riches to many cottage country sellers and loads of disappointment for outbid buyers.

Real estate professionals in the famed Muskoka region north of Toronto initially panicked when the lockdown in March 2020 shut things down. However, a once-in-a-lifetime turnaround in housing markets took place within weeks. Cottage country realtors have not been this busy in years and there are no signs of a sharp slowdown on the horizon.

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The demand for cottage country dwellings has increased for two reasons. The first is the rise of working from home or teleworking, making it possible for knowledge economy professionals to live and work from spacious residences near nature and water. Even if they can only partially work from home, they can trade in their urban dwellings for a cottage and a pied-à-terre in the city for the days when they must visit work.

Second, it is not apparent when vacationers may board a plane for trips abroad. A holiday within commuting distance is the compromise, which has increased the demand for vacation properties near urban centres.

Cottages are being sold within days, sometimes even hours, of being listed.
Cottages are being sold within days, sometimes even hours, of being listed. Photo by Getty Images/iStockphoto

In remote towns where multiple bids were once unheard of, the new norm involves offer nights that turn housing markets into an auction of sorts, where the bidders are at a unique disadvantage since they do not know what others have already bid. The fear of missing out kicks in, and some end up bidding outrageous amounts that they would otherwise not have if the other bids were not kept secret.

Kevin Ali, the broker of record with Zolo Realty, is all too familiar with the hyperactive housing markets in Ontario’s cottage country. He noted that a recently listed house in Severn, some 165 kilometres north of downtown Toronto, received more than 70 offers. The two-bedroom dwelling sold within four days and for almost twice the list price.

But there is more driving the hype than just the pandemic-driven demand for recreation properties.

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One factor is the chronic undersupply of decent waterfront properties. The number of buyers seeking such properties far exceeds the number of dwellings listed that meet the necessary criteria. Another factor is that some sellers are listing their properties at prices far less than comparable sales to attract buyers. The waterfront property in Severn was strategically priced at less than $400,000 to attract attention — and it did.

Of course, that’s anecdotal evidence of the demand, but let’s look at the empirical evidence to see whether this cottage country gold rush is due to a shift in market demand, or is merely because there isn’t enough housing available.

We asked the Canadian Real Estate Association (CREA) to provide custom tabulations showing how sales activity changed once the initial restrictions on mobility and assembly were relaxed in May 2020. We specifically focused on the cottage country markets to the north of the GTA, namely the Barrie District, Kawartha Lakes, Muskoka and Haliburton.

These markets rebounded in July 2020 with unprecedented high levels of sales. But there is a catch. The housing markets near Toronto have been struggling since early 2017, when the Ontario government introduced the foreign homebuyers’ tax and new rental regulations. The bump in July 2020 sales, therefore, seems large relative to the sales since 2017.

Prior to 2017, cottage country housing markets had been steadily growing since the Great Recession, with sales in 2015 and 2016 reaching new heights. For example, sales in Kawartha Lakes in June 2015 were higher than those recorded in July 2020.

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What is different now is that a larger pool of prospective buyers has jumped into the market, competing for even fewer properties. The relatively high demand has put upward pressure on housing prices in cottage country.

CREA’S Composite House Price Index (HPI), an estimate of average housing prices that controls for housing quality and size, shows that housing prices in Simcoe County, also north of Toronto, accelerated faster during 2020 than they did in the GTA. Similarly, the growth in housing prices in Barrie, another area north of the GTA, was faster than that in urban centres to the south.

Cottage country housing will continue to attract city slickers in large numbers while the pandemic-related uncertainty remains. As a result, bidding wars will continue to be fought for scarce waterfront properties.

Once more housing is made available by prospective sellers, who have been patiently watching the markets from the sidelines, cottage country markets are likely to return to calmer conditions to match the serene and tranquil environments that distinguish them.

Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website hmbulletin.com.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Building small businesses, institutional relationships and creating more home ownership leads to a ‘thriving community,’ says Isaac Olowolafe Jr.

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When Isaac Olowolafe Jr. was 15, his family moved from Toronto to nearby Woodbridge, Ont., where he recalls seeing what a tight-knit community could build: thriving small businesses, widespread home ownership, institutional relationships and the accumulation of wealth.

By the time he embarked on an economics degree at the University of Toronto a few years later, the now 37-year-old businessman says, he was already set on bringing that formula to the Black community.

“Since then, I’ve been sort of planting the seeds to do what I can from an economic (point of) view,” said Olowolafe Jr., founder of Dream Maker Ventures, a venture capital and real estate company that focuses on startups led by diverse founders.

Olowolafe Jr. is one of a number of Black business leaders who are bringing their expertise to the BlackNorth Initiative, a group founded by Bay Street veteran Wes Hall that is seeking to use the power of business to end anti-Black systemic racism in Canada.

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Olowolafe Jr. is head of the group’s housing committee, and is also championing entrepreneurship through plans for a Black Business Development Hub.

“The Hub will be the centrepiece and physical space which the Black community can leverage to increase access to institutional relationships like banks and universities and government,” Olowolafe told the Financial Post in a recent interview.

The project is a twist on a plan that was already under way when he was recruited to join BlackNorth.

The mixed-use development near Toronto’s main airport will feature more than a dozen working rooms, hotel and event space, and a commercial kitchen — all of which will be used to incubate and develop Black-owned businesses.

Now a partnership between BlackNorth, the Dream Legacy Foundation and Ryerson DMZ, the plan is to raise $10 million in funding to expand the hub from 13,000 square feet to 30,000 square feet, Olowolafe Jr. said.

He says he hopes the business hub will open this summer and ultimately be able to provide services to more than 100 Black entrepreneurs.

Encouraging entrepreneurship through the hub will lead to more successful small businesses and help build institutional relationships, such as with banks, he said. This, in turn, will generate more income and opportunity for home ownership, a pillar of wealth creation.

“Home ownership leads to other ripple effects (that help individuals and communities) over a long period of time,” he said.

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To that end, the BlackNorth Initiative’s housing committee is embarking on an effort to create a $65-million fund to provide bridge financing to bring up to 200 working, lower-income Black and racialized families into the homeownership game.

The committee is in talks with all three levels of government about contributing to the home ownership bridge program. A handful of well-known developers including Tridel, KingSett, DiamondCorp, and The Daniels Corp. and other potential donors have also been approached.

“They’ve all raised their hands to say: ‘How can we help and support and give to this housing initiative?’” Olowolafe said of the developers. “I think that that is a great sign.”

Home ownership leads to other ripple effects (that help individuals and communities) over a long period of time

Isaac Olowolafe Jr.

The idea behind the BlackNorth Initiative’s homeownership bridge program is that prospective home buyers would be assessed for mortgages based on the usual criteria of income and assets, with the difference between the mortgage they qualify for and how much credit they need to buy a home “bridged” by a pooled fund.

The bridge financing would, in some ways, be treated as a second mortgage. When repaid by the homeowner, either after the regular mortgage was paid down or when the home is sold, the money would go back into the pool. The homeowner and the pool would share in any gains on the home’s value when sold, with the ratio determined based on how much of the bridge financing the homeowner had paid down.

The intention is to keep the fund rolling, in order to get more people into homes, Olowolafe Jr. said, noting that even if the homeowner were just able to get their own money out of the home it would be more equity than they would have accrued over the same years renting a home.

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While Olowolafe is a supporter of initiatives undertaken by the Canada Mortgage and Housing Corporation to get more Canadians into affordable housing, he stands firm on the idea that ownership — not rental options — will be the key to greater success for the Black community.

“I’ve always known that for the Black community as a whole to be able to be an economic leader there were some major things we needed: institutional relationships, building small businesses, and creating more home ownership,” he said.

“All that leads to a thriving community.”

Financial Post

• Email: bshecter@nationalpost.com | Twitter:

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Canadians would invest in better alternatives if they could

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The Canadian love affair with homeownership continues despite the pandemic-mandated lockdown in many parts of the country, with year-over-year sales volume and housing prices in the Greater Toronto Area rising 50 per cent and 15.5 per cent, respectively, in January.

That sales and prices grew at rates significantly higher than during comparable periods before the pandemic reveals how much Canadians value investing in housing.

As a result, forecasts of a double-digit drop in housing prices have grudgingly given way to optimistic outlooks. The Toronto Regional Real Estate Board is predicting that the average home price in Toronto will for the first time cross the $1-million mark during 2021.

The gold rush in housing is not just confined to the biggest urban regions. Smaller towns such as London, Ont., are also witnessing unprecedented demand. Housing prices there rose in January by more than $50,000, an increase of 9.4 per cent in just a month.

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But some pundits believe this sustained love of real estate spells trouble for the economy and may pose significant financial risks to the households.

“We’ve resumed, after a brief cooldown, plowing a ridiculous amount of money into assets that do nothing to improve the country’s ability to generate wealth,” Financial Post columnist Kevin Carmichael recently wrote, adding that instead of investing in digital technology, like the rest of the smart world, Canada is investing in housing.

Furthermore, such high growth rates in housing prices are not sustainable. Yet households are not dissuaded by the possibility of overpaying for an asset that may stop appreciating or lose value in the future.

The increased investment in housing is neither accidental nor speculative. Canadian households are responding to incentives by investing in sectors of the economy that allow them high leverage. Canadians can borrow millions to invest in housing by putting down just 20 per cent of a dwelling’s purchase price. First-time homebuyers can borrow up to 95 per cent of the price.

Both borrowers and lenders feel encouraged to be part of the market as housing prices have steadily risen over the past few decades, but what is the alternative to investing so much in housing? Should Canadians invest less by buying cheaper (smaller) properties or forgo homeownership altogether and adopt the renter-for-life model?

A quick look at the demographics reveals that the average household income of renters lags far behind homeowners. Furthermore, the forced savings of homeownership accumulate as equity that provides an additional cushion at retirement. The lure to be a stakeholder in the housing market is, therefore, too strong to ignore.

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Perhaps the reason why predictions of a housing market decline have failed to materialize is that the pundits have underestimated the innate desire for homeownership.

Housing prices and sales have accelerated even during the pandemic in and around Canada’s populous urban centres, where immigrants are the dominant population growth source. To expect that immigrants would travel thousands of miles to be renters for life is likely one assumption that has misdirected housing market forecasters.

Furthermore, research has demonstrated that investing in housing enables immigrants to close the wealth gap with the Canadian-born population in a span of only 17 years.

To present the decision to either invest in housing or technology as a binary choice is also not practical. Households are familiar with the housing markets, since they are already invested in the market as either owners or renters. But housing is not merely an investment: households consume shelter. The same cannot be said of investing in tech stocks, sometimes listed on exchanges located in distant lands.

Before the Great Recession in 2008, financial institutions would cold call Canadians inviting them to invest in registered retirement savings plans (RRSPs). They would mail brochures about the gravity-defying growth of investment vehicles with charts depicting lines only heading upwards.

But the Great Recession wiped out trillions of dollars of investments and swept away the confidence that retail investors had in stock markets. Since 2008, the cold calls have all but stopped.

It is due to this lack of better alternatives that Canadians have turned en masse to housing. They would invest in better alternatives if such existed, but until then they will likely continue to seek the shelter and financial safety of housing.

Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at info@hmbulletin.com.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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CIBC economist Benjamin Tal on why the pandemic-fuelled recession hasn’t had as big a mark on housing in Canada

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CIBC Deputy Chief Economist Benjamin Tal speaks with Financial Post’s Larysa Harapyn about why the pandemic-fuelled recession hasn’t had as big a mark on housing in Canada.

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Dennis Mitchell CEO of Starlight Capital on the REIT market amid the pandemic

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Dennis Mitchell CEO of Starlight Capital, speaks with Financial Post’s Larysa Harapyn about the REIT market amid the pandemic.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Their nuanced findings confirm what industry watchers have observed since the onset of the pandemic: Commercial real estate in cities that “rely heavily on subway and light rail” has been affected more by the adverse impacts of COVID-19 than cities where commuting is dominated by the automobile.

The authors caution that these trends do not suggest that downtowns are done for — far from it. The analysis revealed that businesses, even since the onset of the pandemic, have been willing to pay a premium for commercial real estate in the city centre and near rail-based public transit.

A passenger on the Toronto subway during the evening commute on March 25, 2020.
A passenger on the Toronto subway during the evening commute on March 25, 2020. Photo by Cole Burston/Bloomberg files

The paper shows transit cities reported a higher density of employment in the urban core, reflecting businesses’ preference for central locations. On the flip side, commercial rents declined faster in transit cities than it did in auto-centric cities as the distance from the city centre increased. Furthermore, “COVID-19 reduced the value of density by 21 per cent” in transit cities.

The authors said COVID-19 does “weaken” city centres, but they still remain attractive, and the weakness is only in the largest and most dense cities.”

There are only three urban centres in Canada where public transit accounts for more than 20 per cent of work trips: Montreal, Toronto, and Vancouver. Just behind them is Ottawa-Hull, where almost 19 per cent of work trips are made on public transit.

Downtown Toronto constitutes the country’s largest employment hub, with almost 500,000 pre-COVID-19 jobs packed tightly in a small space. Neither downtown Montreal nor Vancouver is as large and dense as Toronto, yet both are still bona fide large employment hubs.

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The BMO report, though, questions the assumption that supply constraints are behind the rapid house price inflation in Canada.

The report points out that residential and non-residential real estate prices were moving in sync until 2015, when residential prices took off, reaching a 15-per-cent difference with non-residential real estate prices. If supply constraints were behind escalating housing prices, BMO argued, they should also have affected the non-residential real estate.

Supply-side constraints are acute for developable land in urban areas where most new residential developments occur in Canada. Non-residential construction, except for high-end office and retail development, often occurs in places where land supply is not scarce and where land prices constitute a smaller portion of development costs.

Hence, prices for residential real estate could have grown faster than non-residential real estate because of the former’s likely urban location.

Also, according to statistics by the Organisation for Economic Co-operation and Development, Canada is neither much more urban than the U.S., nor do Canadians live disproportionately in large populous cities.

It could be that the higher prices in Canada are essentially driven by the greater Toronto and Vancouver areas, where pockets of high-priced housing are numerous. A comparison of housing prices in Toronto and Vancouver with ones in Boston and San Francisco might suggest that the gap is much narrower than the one highlighted in the BMO report, Dunning opined.

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The most vulnerable are those with exposure to lockdown-sensitive businesses such as clothing retailers, gyms and movie theatres. “Certain types of retail have been impacted in a big way, and the move to online shopping has accelerated rapidly,” says Canaccord Genuity analyst Mark Rothschild.

Office-focused REITs have not been as intensely plagued by rent collection issues, but are seen as vulnerable to longer-term adjustments in work culture. A report from real estate consultancy CBRE Group Inc. pegs the national office vacancy rate, as of the end of 2020, at 13.4 per cent, the highest level since 2004.

“I think the office business has changed for a long time, if not forever,” Rothschild says. “Many people will not be back in the office five days a week any time soon. And that is something that is going to weigh on office REITs for many years.”

I think the office business has changed for a long time, if not forever

Mark Rothschild, analyst, Canaccord Genuity

At least 11 Canadian REITs have responded to pandemic-related cashflow issues by reducing distributions to unitholders, an unusual course of action in the normally placid REIT space. Among the companies who have recently chosen to cut payouts are two of the biggest names in Canadian real estate.

One of them is RioCan Real Estate Investment Trust, which announced on Dec. 3 that it would be cutting its monthly distribution by one third, from $0.12 per unit to $0.08 per unit — the first time in the company’s 26-year history that it has reduced its payouts. In a press release, the company said the distribution cut would bolster its balance sheet by $152 million per year.

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