In a recent discussion, Rod Hunt, Managing Director, Real Estate Lending at RBC, shares his view of the small business and commercial real estate landscape, and how owners – and landlords – can navigate through these challenging times.
Small Business Real Estate: The Lay of the Land
When it comes to how landlords and their tenants have managed through the declining revenues of the pandemic, there’s a range in the way things have been working. Some property owners have made use of the Canada Emergency Commercial Rent Assistance (CECRA), which provides relief for eligible small businesses experiencing financial hardship due to COVID-19. It offers forgivable loans to eligible commercial property owners so that they can reduce the rent owed by their affected small business tenants by at least 75%.
Other property owners, however, have not taken advantage of the program.
“Take up of the CECRA has been lower than the expectation back when it was first put together,” revealed Hunt. “It comes down to a few issues,” he said, which include:
- Paperwork. Landlords feel that the documentation required to apply was excessive and difficult to complete;
- Missing information. For those property owners who might have a plaza with upwards of ten tenants, the requirement is to apply all at once. If a landlord is waiting for information from one or two small businesses, it makes for a cumbersome process;
- Reluctance to forego 25% rent. Under the rules of CECRA, the tenant needs to only pay 25% of their rent, while the government reimburses the property owner 50%. That leaves the property owner with a shortfall of 25%.
At the same time, some property owners have negotiated terms separately with their tenants. “A lot of landlords offered a reduction in rent for four to six months, with the expectation that they will recover that amount over twelve to twenty-four payments starting at the end of the year,” Hunt explained.
While some landlords have taken a hard line, most would rather have a tenant in place – even if they’re collecting less rent compared to the year before. “Even if you’re giving up 25% for three months, you’re farther ahead than if your tenant goes dark and you’re vacant for one month,” Hunt says.
A Move to Downsize?
When asked if small businesses are moving to smaller, cheaper locations right now, Hunt explains that there isn’t much movement right now. With businesses that have a steady clientele, they want to stay in that location – customers know where to find them, and there is a tangible cost to moving and renovating a new space. “Plus, business owners are trying to see if they can make it,” Hunt says. “Owners are hopeful they’ll do better as we approach the holiday season.”
E-Commerce Isn’t Taking Over
With the onset of the pandemic, many consumers turned to online shopping – either out of necessity or preference. And as stores have re-opened, many are continuing to do their shopping digitally. But it’s not at the expense of physical locations.
While online sales have grown dramatically through the pandemic, Statistics Canada data from May 2020 indicates that they only make up 10% of all sales1. “Most sales are still done in physical channels,” says Hunt. “Traditional bricks and mortar retailing is not dead. Most businesses, whether large or small, are realizing they need a multi-channel approach. Mirroring your online presence with your physical location works the best.”
Managing Property Costs Going Forward
For those small businesses that are concerned about ongoing – or rising – rent costs – Hunt advises to work with your property owner. “Both sides need to work together, and understand where the other is coming from,” he says. “Yes, some landlords are big national companies, but there are many landlords who are smaller, local business people who also don’t have vast resources.” He indicates that tenants can’t expect these local landlords to all of a sudden forgive all the rent. “On the other hand, landlords can’t necessarily take a hard line.”
The key is to work together, compromise and come up with solutions that work for all involved.
Commercial Real Estate: What Does the Future Hold?
With 40% of Canada’s workforce working from home during the lockdown, and 25% of Canadian businesses “likely” or “very likely” to offer their employees the option to continue working remotely, questions have been raised about the stability of Canada’s commercial real estate industry.
Hunt, however, sheds some light on the situation. Citing research by the Harvard Business Review and Stanford University, Hunt discusses how working from home comes with some productivity pitfalls. Studies have found that workers are:
- Less productive over time. When people work from home all the time, they become less engaged and have a lower affiliation with their company.
- Missing the social aspects of the workplace. Even when workers are just as productive at home (i.e. studies with call centre workers saw no change in productivity), 70% of workers asked wanted to come back to the office because of social connections.
While most people believe there will be more work from home on a permanent basis, many workers feel that the optimal mix is three days in the office and two days from home in order to maximize productivity, innovation and collaboration.
As people return to the workplace – albeit on a part-time basis – more space will be required for those employees to adapt to enduring physical distancing requirements. So, while fewer people may actually be in the physical office, the capacity for that environment has also shrunk. Given this offset, Hunt predicts that office real estate will come out of the pandemic at a neutral level.
Where Commercial Meets Small Business: Underground
Small businesses in downtown cores rely heavily on people in office buildings – particularly in centres such as Toronto, Vancouver, Montreal and Calgary, where there is a robust underground system of shops and restaurants to support the workers in the towers.
And while commercial office space may net out level post-pandemic, what about those small businesses that depend on volume and frequency to survive?
“Depending on the type of business and the location, the impact of COVID will vary widely,” says Hunt. “Retail sales for July just came out and they were above pre-pandemic levels. Collectively what we are spending is greater, but there is a major change in what we are spending on. This creates winners and losers.”
With most buildings operating at a fraction of pre-pandemic numbers, it will make the survival of some of the businesses challenging. Sure, many are large retail businesses, but franchisees in the food courts and independent shops may suffer. “Once things get back to normal,” says Rod, “the number of locations will most likely go back to pre-pandemic levels. The makeup and the ownership will change, but the numbers will return.”
1 – Source: Statistics Canada, Monthly Retail Trade Survey
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