Last month, for the first time in almost 18 years, I did not write my monthly real estate newsletter. Since I formed Plex Realty in 2003, I have diligently provided my thoughts on the Toronto income property market each month, and provided one or two relevant landlord articles, but last month I simply didn’t have anything to say. I mean in reality, what was there to say that wasn’t already being expressed? And more importantly, I just didn’t feel like it was right to talk about real estate.
We have all been up-ended in one form or another by the current situation and as we continue to wait it out, many of us are starting to yearn to go back to work and get some sort of normalcy back in our lives. Real estate has been considered an essential service, but the reality is that the market has all but shut down. I was about to list a four-plex in early March when my Seller received a letter from her tenant that she did not want any potential buyers coming through her apartment during these uncertain times. It was at that point that I realized I would not be able to show any more tenanted suites any time soon and that my business was effectively put on hold. I also just recently found out that the virus had arrived at my Dad’s nursing home and we would not be able to see each other again in person for some time. These are trying times indeed.
Prior to the outbreak, I felt like I was starting to sound like a broken record each month. Not enough product. Unrelenting demand. Multiple offers with no breaks for buyers in sight. And now here we are, shut down. The million-dollar question is now, notwithstanding when everything opens up again, what will the market look like when it does? Will we just pick up where we left off or is there going to be a shift in market sentiment? Is the massive demand going to be curtailed by economic uncertainty? When will consumer confidence be high enough that we can return to pre-Covid times?
Many experts believe that the market will bounce back to where we were before and that prices will tend to hold at pre-Covid levels. All the people who were looking to buy investment real estate back in February will still see its value when the market returns. Some will have lost their jobs or had their personal financial situation change, but most would-be investors will still be hungry for opportunities. Remember that prior to the outbreak, more times than not, we often had several people trying to buy one house.
For income generating properties, perhaps numbers might have to start making a little more sense again. I have said time over that a 3 cap is not a prudent investment. At least not when compared to other options outside of real estate. Not everyone has twenty years to wait for their investment to make them whole. I suspect that potential capital appreciation will still be a driving force, but interest rates have been lowered again as well which will further help drive demand.
Will this create any buying opportunities? Probably not. There are a few income properties listed for sale at present but the asking prices still seem a little high to me. Some may have been over-priced prior to the pandemic and have just been sitting for sale throughout. Others that may have hit the market more recently are being a little optimistic in their expectations. Remember that it is exceedingly difficult to sell a multiplex when you cannot see the actual suites.
Another question is does it makes sense to become a landlord when some tenants are now going to have a hard time making their rent each month? Yes, the vacancy rate may go up, but the city had a serious rental shortage just two months ago. These people did not evaporate but may just have to move a little slower now. “We’re seeing renters pull out of the market,” says my friend John Pasalis, president of Realosophy Realty Inc. While prospective renters are getting scarce, there has been a spike in the numbers of units for rent. This will be the long-term determining factor for rental properties going forward. If the rental market tanks, then there could be a little downward pressure on rents and residential investment properties.
I also think that mixed-used commercial buildings may suffer a little as they have been priced very high in the past couple of years. In many cases, the prices on these retail buildings have not been accurate reflections of their overall gross rents. A lot of small businesses are going to have shut down in the next few months and that is going to leave some commercial landlords with empty spaces. If you have a strong anchor tenant like a Starbucks or Subway, you will probably be OK, but a lot of mom & pop businesses will not survive. I live near the Danforth and I expect a lot of the local businesses, and in particular some restaurants, will not re-open.
Some lenders may become a little more stringent but over the long haul the banks are in business to write deals. They will incentivize people to get back into the market and take out mortgages. I am curious to how much our major banks are going to actually help consumers get back on their feet again. The government has offered relief packages, but let’s see what the banks do with their rates and service charges and such. I deal with three of the major banks and while they say they are here to help, I have not seen any practical evidence of this yet.
A lot of how the market will fare, particularly with residential investment properties, will be based on consumer confidence to go back to work and back into the real world. There are going be adjustments to our daily lives and new measures (distancing, masks, etc.) that we will have to get used to. The most important thing is that we stay safe and do not agitate the situation further by coming back too soon. I am a businessman and I’m anxious to get out there again but saving lives and doing the right thing for each other is far more important than a little economy uncertainty. Sorry Brad Lamb.
I look forward to the new challenges ahead. I think this time has allowed a lot of us to reflect on our lives and take stock of where we are at and where we may be heading. Times are going to be tough for some of us but remember that we are all in this together and we should all continue to look out for each other. As well as stand six feet apart. I wish you and your family all the best through-out these troubled times. Please stay safe. Stay indoors. We live in a great city in a great country and we should all be thankful for that.