COVID-19 and the Commercial Real Estate Collision

In July, the Uptick Team sat down with Roelof Van Dijk, Market Economist and Director of Market Analytics at CoStar, Canada, to discuss what CoStar does, how Canadian commercial real estate markets have been impacted by COVID-19, and how the Canadian government’s actions have influenced the real estate landscape.
COVID-19 and the Commercial Real Estate Collision

CoStar - Markets & Models

CoStar was founded in 1987 in the basement of Andrew Florance, a Princeton graduate who is regarded as an industry pioneer in the outsourcing of real estate research and information to third parties for brokerage services and land owners. According to Van Dijk, CoStar’s initial conception was simple: Create a central real estate listings base which the brokerage community could access and use for their services. While CoStar began as a magazine composed of listings, it has since evolved - first as CD-ROM, and now as an entirely web-based platform. Today, CoStar is widely recognized as an industry leader in the provision of commercial estate data and research-driven market analytics.

However,  Van Dijk was quick to point out that the firm hasn’t deviated from its core business offering being commercial real estate data. However, data provision is only one half of the service that CoStar provides to its clients, while the other half is the real estate forecasts which they conduct for clients. CoStar is known for their research, Van Dijk explains, with nearly half of their employees working in the research department. 

When asked about how CoStar produces these forecasts, he emphasized how the output of any model is only as good as its input. In order to provide their clients with an accurate snapshot of present day markets, “transparency is key, and data provides that transparency.” This requires CoStar to either outsource their data from independent third parties or to fetch the data themselves. CoStar’s demand scenarios are largely driven off of employment growth and economic growth forecasts which are provided by Oxford Economics, a third-party economic research firm, while the supply figures are largely acquired through CoStar subsidiaries like and LoopNet, both real estate marketplaces. These figures are then married together to fuel their demand and supply forecast scenarios. As markets move continuously, the research team is constantly fine tuning the forecasts as more information becomes available. According to Van Dijk, the team in Canada makes between 12,000 and 13,000 changes to the database every day which are fed into the models no more than 20 minutes after the update. These nearly instantaneous alterations to the market forecasts ensure that CoStar’s clients are equipped with the most up-to-date insights available, improving the quality of their decision making.

The COVID-CRE Collision: In The Short Run

In the office space of commercial real estate, Mr. Van Dijk’s research team found that the mobilization of workers from the office to their homes has naturally resulted in a sharp decline in physical occupancy, while the economic occupancy (when tenants continue to pay rent without physically occupying the space) has remained relatively stable. This is due to a number of reasons, including the newfound “work-from-home” scheme that many firms have successfully implemented. The shift of employees from the office to their homes has complemented the new social distancing measures as it has reduced office density in the short term; rather than increasing office space to accommodate all employees while abiding by social distancing measures, companies have opted to send some of their employees to work from home. 

Additionally, Mr. Van Dijk stated that CoStar had observed an uptick(!) in sublet spaces which has created an upward pressure on economic occupancy rates. 

He then noted the most important reason why economic occupancy has yet to bottom out, being the contractual lease obligations of renters. Prior to the national state of emergency declared earlier this year, Canada was witnessing historically low levels of office vacancy in its larger metropolises like Toronto and Montreal which led to rapidly rising rent prices. As a result, businesses across Canada unknowingly began to lock in to long-term lease contracts shortly before the pandemic hit. 

The COVID-CRE Collision: In The Long Run

Over the long term, Mr. Van Dijk anticipates a change in work culture that celebrates the work-from-home strategy, but he does not believe that workers will completely abandon office life any time soon. “There are dynamics that happen in the office, collaboration, and mentorship,” all factors which are difficult to reproduce in a virtual environment. 

In addition to this, while some believe that employees will be reluctant to go back to offices after a vaccine becomes available due to the psychological strain of operating in close quarters after so much time away from the office, Van Dijk believes this will be short-lived. He feels that workers will suffer from “global amnesia,” where they will not forget the hardships and suffering caused by COVID necessarily (as the name suggests), but will become comfortable enough to return to their pre-pandemic ways of life. He points to 9/11 as an example of this global amnesia when office workers refused to return to buildings shortly after the attacks, but began to creep back in after three years or so. While there are differences between COVID and 9/11, one being a health pandemic while the other an act of terrorism, the comparison serves to illustrate the human tendency to adapt to new environments, regardless of their harshness.

The Role of Government

The Canadian government has taken a critical role in relieving much of the economy from its financial stress, but not all efforts have been as effective as they could have been.  Mr. Van Dijk echoed this sentiment when expressing how programs like the Canada Emergency Commercial Rent Assistance (CECRA) have had various shortcomings, but they have been an essential bloodline for numerous businesses across the country. Without CECRA, he says, we would have seen many more businesses fail in tandem with the downward spiral of the broader economy. However, one issue was the program’s eligibility requirements, which were relatively relaxed and non-discriminatory. This inevitably led the government to provide financial support to ailing businesses that would have failed even in the absence of COVID, but nonetheless, Mr. Van Dijk insists that this was a necessary cost of supporting salvageable businesses as the government was forced to prioritize timeliness over accuracy.

With a sharp decline in physical occupancy rates and a plethora of failing firms and businesses, Canadian real estate, along with the greater Canadian economy, have faced unprecedented shocks. Having said this, the combination of  the many long-term lease contracts secured prior to the pandemic and the influx of rent relief programs have helped provide some sense of forward-looking security for both landlords and renters. 

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