ALREADY A MONTH OF PROGRESSIVE DECONFINEMENT FOR QUÉBEC CITY'S REAL ESTATE MARKET

Marie-France Benoit Senior Director Strategic Development Altus Expert Services

While the COVID-19 pandemic has forced the Québec government to extend several emergency health measures for the hard-hit Montréal region, phased deconfinement has been progressing as planned over the last month in the National Capital Region, giving us a glimpse of what recovery of activity looks like. Faced with a curve of cases under control, non-essential businesses have been able to reopen since May 4th. One week later, elementary schools and daycare services welcomed schoolchildren on a volunteer basis. Also, on May 11th, non-essential retailers with direct access outside opened their doors. On June 1st, shopping centres and personal services businesses were able to resume their activities, applying the physical distancing and disinfection measures that we will have to get used to in order to regain a semblance of our pre-COVID life. One month later, the different steps towards deconfinement have not spurred a surge in new cases. Since the beginning of the pandemic, the provincial capital region has accumulated less than 1,700 cases of contagion and 140 lives have been lost. In the administrative region of Chaudière- Appalaches, which includes Lévis on the south shore of Québec City, the number of confirmed cases is approximately 500 and the number of deaths was 8. The two regions account for only 4.1% of confirmed cases and just under 3.0% of deaths, which is low considering their combined demographic weight of 13.5% of the Québec population.

Three months into the pandemic, these relatively low number of cases seems to be giving the population a (false?) sentiment of safety and economic activity has been recovering more enthusiastically than many would have expected a couple of months ago.

Canadian Real Estate Forums / SPRING 2020

Renewal probabilities are over 90% and revenues will remain stable or increase. In addition, many survey respondents anticipate more cap rate compressions, which are already at historically low levels.

Impact of deconfinement on the real estate market

As elsewhere in the country, victims who succumbed to COVID-19 virus are over-represented in the 80+ age group, and the main outbreak sites are in CHSLDs, senior residences and intermediate care centres. And this psychological trauma may impact demand for the senior housing market, especially in the assisted-living category. On the Independent living segment, there were no significant surge in cases and the current slowdown in rental activity is expected to be temporary. On the other hand, the labour shortage in this industry, which was already problematic before the pandemic, is being exacerbated and the rising costs of this valuable labour force will have to be taken into account by Seniors Housing owners.

For projects that target an independent clientele, competing directly with high-end multi-unit housing for the 55+ segment, the rising costs will be more modest. As shown by the most recent Altus Group survey on the impact of COVID-19 on real estate investment market, the multi-residential market is the least affected by containment measures. Renewal probabilities are over 90% and revenues will remain stable or increase. In addition, many survey respondents anticipate more cap rate compressions, which are already at historically low levels. The multi-residential segment is impacted mostly on the supply side, with delays due to construction being halted for several weeks. Financing conditions could tighten for projects that have yet to be launched and the impact of the new health measures on the productivity of construction sites remains to be seen. The decline in immigration flow, which has a significant impact on demand for multi-res in major Canadian cities, will probably be less of a concern in Québec City. Population growth attributable to newcomers, while increasing in recent years, has not reached desirable levels despite a clear political will to attract new workers and students. For the industrial market, given the pre-COVID shortage of sites and spaces, market is still tight. For the many leaders in the technology and biotechnology sectors, such as Medicago or GSK, as well as Laval University spin-offs, advances in the search for a solution to the pandemic can serve as an accelerator in their areas of excellence. As for the office market, as everywhere else, working-from-home is now a reality. Most office workers are still teleworking, but elementary schools and daycare centres being functional has given a breather to many young parents. Day camps will also be available this summer. In a society where both parents working is more the norm than the exception, and where the labour market participation rate of women aged 15-44 years exceeds 80%, this certainly has an influence on the ability to work from home. Little change in vacancy will be observable until leases approach expiry date. It should be noted, however, that 25% of the leasable space in Québec City is occupied by the Government of Québec or government agencies. The pandemic could accelerate the 5-year strategic plan for more efficient office-space use the provincial government had already started with a clear objective to save tax payers dollars. The shift towards densification will most likely reverse in favour of hoteling and flexible WFH policies. Since the beginning of the crisis, 70% of public servants have abandoned their cubicles to work from home, speeding up their employer’s digital shifts. When excluding government-owned office buildings, it is worth noting that nearly 25% of the office inventory in the Québec City metropolitan region is owned by large financial and insurance companies. Desjardins’ head office, in Lévis, SSQ Financial (currently being merged with La Capitale) on Laurier Boulevard and the head office of the Industrial Alliance in Sillery, all of which have already taken an avant-garde turn towards densification and the development of collaborative spaces, will probably face the current situation with agility. That leaves the small tenants, who occupy between 3,000 and 5,000 sq.ft. on average in the Québec City office market. Are they ready for a massive shift towards teleworking, which requires significant investments in IT. And unlike workers in the big city centres, Québec City workers are much less likely to be crammed into high-rise buildings accessible by metro. The car remains the main means of transportation for many. The most appropriate solutions will be adapted to each company's situation. As for shopping centres, the asset category hardest hit by the forced closure of its tenants, the opening of non-essential businesses with exterior access since May 4 and of all businesses since June 1 augurs well. According to centre owners, customers are returning, at levels above expectations (even if below 100% pre-COVID). The pandemic will have had the positive effect of accelerating the shift of many local businesses to online shopping and delivery services. Vacant spaces will mushroom, but landlord see it as an opportunity to redevelop centres and convert excess retail spaces into more profitable use.

However, there are still several clouds on the horizon; many fashion retailers have or will go bankrupt, restaurants and entertainment-based business models may not survive the ordeal of physical distancing. Not to mention accommodation and tourism. The cancellation of the Québec City Summer Festival and several cruises, the closing of borders to international travellers, represents a huge loss of revenue for tourism, hotels and retail. On the other hand, the number of Canadian and Québec tourists looking for a change of scenery could partly compensate for this loss. Too soon to tell, as we are now accustomed to say. ■