Upcoming 2020-21 recession should be uncomfortable but hardly unbearable

Clayton Jarvis
Mortgage Broker News

In its most recent Market Intelligence report, released yesterday, the British Columbia Real Estate Association shared its preliminary projections on how the historic economic disruption sparked by COVID-19 will play out in the provincial housing market for the next two years.

In Is It Different This Time, the BCREA attempts to contextualize the upcoming recession by examining the three recessions the province weathered in 1981-82, 1990-92 and 2008-09 and detailing how the housing market reacted in the years following each one’s conclusion.

If the comparisons can be trusted, the upcoming 2020-21 recession should be uncomfortable but hardly unbearable.

The 1981-82 recession was the worst ever recorded by the province. Unemployment climbed by nearly 10 points to 15.7% and the economy shrunk by 6.4%. But in the year after the recession began, MLS home sales increased by 31%. After the agonizingly long but less disruptive 1990-92 contraction, they leapt by 46%. Once the recession generated by the 2008 financial crisis passed, sales increased by 24%.

BCREA sees the Canadian economy shrinking by a modest 4% in the first quarter of 2020, but a more dizzying decline of 21% is expected in Q2. (On a non-annualized bases, that second quarter pullback is closer to 5%.) An overall “peak-to-trough” decline of 7% is projected for the country’s GDP, which places it well ahead of both 1981-82 and 2008-09, where national economic growth fell by 4.5% and 4.4%, respectively.

The report avoids any fortune telling when it comes to the provincial economy, but it does stress that the COVID-19 recession is unique in that it wasn’t caused by any underlying economic ills like irresponsible lending practices. “Rather,” the report goes on, “the economy has been purposely halted for the greater good. The implication being that, the shorter the duration of this unusual period, the more likely it is that demand can snap back to near where it was pre-COVID-19.”

In that best-case scenario, the BCREA expects home sales to fall by 30-40% year-over-year in April and remain at suppressed levels throughout the summer. But as social distancing measures are lifted, pent-up demand and low interest rates are expected to bring buyers stampeding back to the market. Sales are expected to return to their annual pace, approximately 85,000 units, by 2021.

During the recessions of 1990-92 and 2008-09, home prices rebounded quickly and wound up being higher than their pre-recession levels within a year of falling. (The 1981-82 housing crash remains a ghastly outlier that saw mortgage rates climb by 22%.) That is almost certain to be the case after COVID-19. BCREA’s model sees the average price of homes in the province plummeting between March and July, but it predicts a return to pre-COVID-19 levels by September 2021.

As novel as the coronavirus is, it seems to be no match for supply and demand.

“Even with this slowdown, people are still buying houses,” says Dominion Lending Centres’ Fernando Zilli, who operates out of Victoria. “There’s just so much pent-up demand. I’ve got people that are champing at the bit, getting pre-approvals and waiting for things to open back up. As soon as we go back to ‘normal’, it’s going to be a virtually instantaneous rebound.”

Both Zilli and the BCREA caution that a return to business-as-usual is far from guaranteed, particularly if communities weaken in their commitment to social distancing and the number of COVID-19 infections begins rising again, as is expected in the fall. The longer this period of suppressed economic activity lingers on, the report states, the more likely it becomes that “jobs do not return, businesses fail, and the recovery is much slower.”

Copyright © 2020 Key Media

Office space almost at 100% vacancy

Ephraim Vecina
Mortgage Broker News

Calgary’s office sector has a long road of recovery ahead of it, with perennial vacancy and COVID-19’s economic damage placing the market’s short- and medium-term prospects in doubt.

An aggravating factor is the dramatic oil price decline of more than 80% since the start of this year, ending up at its lowest level since 1986.

“It is the ultimate double-whammy,” said Roelof van Dijk, CoStar Canada director of market analytics. “Oil is being stockpiled around the world.”

But with near-zero demand due to global travel restrictions, multiple commentators have raised the possibility of oil ending up at “negative prices” – practically a death knell for petro-economies such as Alberta, and a harbinger of even more troubled times for the market’s beleaguered office landlords.

The ever-growing volume of unused space will exact a heavy toll, as well. CoStar found that Calgary has 11 million square feet of vacant space in the downtown area, with roughly 8.7 million sq. ft. managed by landlords and 2.3 million sq. ft. of sublet space.

Earlier projections by CoStar placed the city’s vacancy’s rate moderating from the current 21% to below 19% by 2024. The coronavirus outbreak has forced the predictions up to a blistering 25% by Q3 2020, Western Investor reported.

“The prospect of a reprieve has been replaced with the knowledge that additional pain for Calgary, Alberta and Canada is now on its way,” van Dijk said.

Copyright © 2020 Key Media

Fitness World and sports club has laid off nearly entire staff

Hayley Woodin
Western Investor

The company behind Steve Nash Fitness World and Sports Clubs (SNFW), which owes more than $35 million to creditors, has put the business up for sale. 

Under protection from its creditors, the company plans to seek out prospective purchasers and investors for its chain of more than 27 fitness locations. 

SNFW Fitness B.C. Ltd. sought creditor protection on April 3, owing more than $35 million to creditors.

According to an initial report from trustee The Bowra Group Inc., SNFW Fitness board directors have determined the company is not a viable business without a significant equity injection. 

Directors estimate more than $10 million would be needed to cover the company’s costs and estimated losses until the COVID-19 lockdown ends, excluding rent and lease obligations, and assuming government restrictions are lifted in August. That is in addition to $32 million owing to the Bank of Montreal, a secured creditor, and approximately $3.4 million owing to unsecured creditors. 

SNFW Fitness also owes around $1.5 million to landlords on 32 leased locations for rent due in April. None of them were paid. 

“We’re going into this fully intending to have [a sale],” explained Mario Mainella, a licensed insolvency trustee with The Bowra Group. He added that even with an extension, the sales process will take place in a short timeframe.  

“The cash burn rate is quite high and the bank’s going to have to fund that,” Mainella told BIV. 

“What this whole process is trying to do is maximize the positive impact in terms of recovery to creditors, a landlord having a tenant, employees having the opportunity of going back to work and members having their membership and whatnot honoured by prospective purchasers.” 

SNFW Fitness had 30 days to file a proposal to creditors or ask for an extension after filing a notice of intention to file a proposal on April 3. Had the company done neither by May 3, it would have automatically been deemed bankrupt, and SNFW Fitness is not in a position to may a proposal to its creditors in less than two weeks, according to the trustee. 

The Bowra Group’s first report states SNFW Fitness has engaged MNP Corporate Finance Inc. through the trustee to start a tender bid sales process. The deadline for offers will be May 20, subject to court approval of the sales process, with a sales agreement executed by May 28. 

At present, court documents list creditors who are owed $250 or more. The list excludes landlords, and Mainella says discussions are ongoing with all landlords to negotiate rent relief. 

Amounts owing to employees – such as severance – or to customers who pre-paid for memberships have not yet been accounted for, but Mainella confirmed that amendments will have to be made to reflect what may be owed to both groups.

“If there is a purchaser at the end of this, which we believe there will be, they will likely work with the customers in order to honour what was paid – we hope. That is up to them, but that would make smart business sense.” 

The trustee’s report, submitted this week, confirms that SNFW Fitness has laid off all its staff except for six key personnel. The company normally employs around 1,300 individuals. Former employees have told BIV that they have not received severance. 

Copyright © Western Investor

Nearly 60 per cent of small businesses say they can’t pay commercial rent due to COVID-19

Frank O’Brien
Western Investor

In what Laura Jones is calling a “nightmare on Main Street” nearly 60 per cent Canadian small businesses say they will not be able to pay rent May 1 on their commercial properties due to the COVID-19 pandemic.

The executive vice-president of the Canadian Federation of Independent Business (CFIB) said the results of a member survey released April 20 showed that 58 per cent will not be able to pay May rent in full, and many are concerned about permanent closures

“Last week the federal government announced a new rent program, I know many business owners are anxiously waiting for the details as the stress of having bills mount with no revenue is getting more intense,” said Jones.

Rent relief is urgently needed as only one in five businesses is fully open and revenue declines are dramatic for nearly all small firms, according to survey respondents.

Some of Canada’s largest shopping centre owners, including RioCan Real Estate Investment Trust and Ivanhoé Cambridge Inc., are offering assistance, such as a rent deferrals, to retail tenants such as hairdressers and restaurants that were forced to close under government orders during the pandemic.`

But kicking rent payments down the road may be not be enough, the survey found.

“At this point, deferring rent isn’t going to cut it, businesses desperately need rent forgiveness to help pay bills. Provincial governments have ordered many small businesses to close but very few have taken any steps to help owners with the costs of paying rent on a location they cannot open,” Jones said. 

CFIB is calling for these costs to be shared by governments, landlords and tenants. CFIB ahas also called on provinces to protect commercial tenants, otherwise in good standing, from being evicted due to COVID-19. 

Of members surveyed, 75 per cent believe the cost of commercial rent that cannot be paid due to COVID-19 revenue losses should be shared between governments, landlords and tenants. 

“April 1 was scary, and it’s important to get the right government relief in place fast to prevent May 1 from being a nightmare on Main Street,” concluded Jones.

Survey results are based on 6,881 responses from CFIB members to a controlled-access web survey, on April 17 and 19, 2020.

Copyright © Western Investor

All of B.C. will be hit but quick recovery seen, says BC Real Estate Association

Carla Wilson
Western Investor

B.C.’s housing market will take an initial a sharp dive due to the coronavirus-driven recession, but it is expected to recover next year, according to the B.C. Estate Association (BCREA).

Sales throughout the province are forecast to slide by 30 per cent to 40 per cent this month compared to April 2019, as people follow social distancing protocols, Brendon Ogmundson, chief economist for the BCREA said.

But Ogmundson expects B.C. will see the pace pick up and a return to its baseline number of sales of 85,000 units per year by early 2021.

An analysis of the impact and recovery of three recessions in Canada in the past 40 years give a clue to the future, he said.

 “One of the things we find is that the shape of recovery is pretty similar. All of these recessions have different causes, different durations.”

“As measures to mitigate the spread of COVID-19 are gradually lifted, we expect that pent-up demand and low interest rates will entice buyers back into the market,” he said in the association’s market intelligence report.

The current situation is closer to a natural disaster, he said.

This recession was not human-made and may not last as long as others, he said.

When it comes to home sales, much of the business is normally carried out face-to-face. Real estate agents have set up ways to continue, offering virtual open houses and electronic documents, for example.

“Still, a lot of that transaction activity is about being out. And across every market we are expecting to see a pretty big decline in April as the real estate industry and families across B.C. adhere to what they are supposed to be doing.”

All markets in B.C. can expect a “pretty big decline” in sales in April, Ogmundson said.

Copyright © Western Investor

BCREA Market Intelligence Report

BCREA

Summary Findings:

• The 2020 COVID-19 driven recession willbe deep, though the duration may be shorter than past recessions
• We expect that home sales will post an initial sharp decline as households and the real estate sector adhere to social distancing
• As measures implemented to mitigate the spread of COVID-19 are gradually lifted, we expect that low interest rates and pent-up demand will translate to a significant recovery in home salesand prices

The Canadian economy has weatheredthree recessions in the past 40 years, each unique in cause, depth and duration. However, there is considerable similarity in how the BC housing market has both endured and recovered from those recessions.

In this market intelligence, we examine the impact of past recessions on the BC housing market and provide preliminary projections on how COVID-19mayimpact provincial home sales and prices over the next 24 months.

The 2020 Recession –How bad and how long?

The 2020 recession likely began in February, meaning itisstill in its very early stages. Since 1980, the average Canadian recession has lasted between 8 and 25 months and is characterized by a contraction of about 4 per cent in real GDP and a jump in the unemployment rate of 4.5 percentage points.

Provincial economic data is only available annually, making it much harder to track the duration of recessions. We know that during the 1981/82 recession, the BC economy contracted by 6.4 per cent, and the unemployment rate jumped nearly 10 points in the worst recession on record for British Columbia. The provincial economy performed much better in the 1990-92 recession, with real GDP eking out meager growth over that period, though the provincial unemployment rate did spike to nearly 11 per cent. During the 2008-09 Financial Crisis and recession, we estimate the BC economy peaked in November of 2008 and contracted 3.7 per cent over the following 12 months while the unemployment rate rose more than 4 points.

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Sellers in this kind of turbulent environment have decided to wait it out

Ephraim Vecina
Mortgage Broker News

The national market can still provide some impetus for home price growth despite declining sales, according to Royal Bank of Canada Senior Economist Robert Hogue.

“Prices are determined by both demand and supply. What we saw in March is that supply came down quite a bit as well,” Hogue said in the April 15 edition of the 10 Minute-Take podcast by RBC Economics. “Sellers in this kind of turbulent environment have decided to wait it out, or maybe they have changed their minds, because they might not get the full value of their property under these conditions.”

Robustness as a fundamental feature of the housing sector was also observed by Royal LePage. Hogue said that while the market couldn’t conduct business as usual due to the pandemic, there were still some notable bright spots.

“In markets like Toronto and Montreal, for instance, prices continued to accelerate relative to February,” Hogue said. “Now, we don’t think that markets will necessarily sustain that kind of acceleration, but nonetheless, the point is that there is still quite a bit of support for prices despite plummeting activity.”

However, Hogue warned that both Toronto and Vancouver might see steeper market declines in April, and that the long-term value of Canada’s homes will depend heavily on the duration of the slowdown.

“Our assumption is that the economy starts to open up again sometime in June. Prices are probably going to stay relatively flat in most cases.” Hogue said. “If lockdown measures and the recession last longer than expected, downward pressure on prices are going to build up across the board.”

Copyright © 2020 Key Media

Oil prices and COVID-19 hitting Albertans hard

Ephraim Vecina
Mortgage Broker News

Alberta continues to reel from the one-two punch of the oil shock and COVID-19, with Calgary and Edmonton posting downward trends in their home prices.

Sales in Calgary were more active during the first quarter compared to the same time last year, but the market’s average home price was almost flat with a miniscule 0.1% annual drop to $469,156.

“With a decline in listing inventory, we had expected to see modest price gains this spring. Now we are waiting to see how long the pandemic lasts and how much damage the economy sustains,” Royal LePage Benchmark broker and owner Corinne Lyall said.

Even if the economy opens up again as early as the end of Q2, Calgary’s average home price will still fall by 0.5% this year, down to $463,000. Should the virus impact last until late summer, the aggregate might decline by 4.0% annually to $451,300.

Meanwhile, the average housing price in Edmonton shrunk by 1.4% year-over-year to end up at $371,118 during the first quarter.

“Edmonton’s softened real estate prices and continued low interest rates were attracting buyers to the market as they saw good value in larger homes,” Royal LePage Noralta Real Estate broker and owner Tom Shearer said. “Now that the market has been paused by the pandemic, consumer confidence and employment levels will determine the new norm when market activity resumes.”

The long-term impact on the region’s prices is similar to Calgary’s prospects: If business activity resumes by the end of the second quarter, Edmonton’s aggregate will likely drop by 1% annually to $370,800. An economic restart by late summer will mean a decrease of 3% to $363,300.

Copyright © 2020 Key Media