How will the Coronavirus affect the Canadian Housing Rental Market?

As Canada—and the world—plunges headlong into the COVID-19 health crisis, stakeholders in the business of multifamily apartment building ownership are asking themselves the same question everyone else is: “How will the pandemic affect me, my business, and my tenants?”

The negative effects on segments of the financial markets have already been felt. Equity markets have been hit hard. On February 4, the Toronto Stock exchange cruised to a high of 125.49. Then the bottom fell out and, after a brief recovery in early March, the index plummeted to 91.34 by March 18. On the Canada benchmark, ten of eleven sectors fell, with only materials showing strength. Because of the double hit of COVID-19 and the collapse of the oil market, analysts are increasingly using the word “recession.” Bank of America forecast that during the second and third quarters of this year, Canada will experience negative GDP growth. The Royal Bank of Canada has predicted economic contraction in the second and third quarters of 2020, signaling a recession.
What can multifamily owners and investors expect if the economic woes persist into the summer? Let’s look at the issues.

Tenants

People who own multifamily apartment buildings make their income from tenants who pay rent. Therefore, every owner needs tenants who are stable and employed. In the US, Treasury Secretary Steven Mnuchin warned that without decisive federal action, the coronavirus pandemic could drive up US unemployment to 20 percent. We haven’t seen any such predictions from Canadian authorities, but higher unemployment rates are likely.

If the economy takes a long-term hit and the unemployment rate soars, then existing tenants might have difficulty paying their rents. There will be more late payments and even non-payments from tenants who have lost their jobs.

On the flip side, it’s a general rule of thumb that during a recession, homeowners go into foreclosure and lose their houses at higher rates, thus driving down the price of real estate. But these unfortunate people have to live somewhere, and they tend to look for inexpensive rental units. During the 2008-2009 recession, from a rent perspective, the multifamily market performed better than other property types. It experienced a lower level of rent decline, and a shorter period between the bottom of the cycle in Q4 2009 and when rents regained their prior peak in Q3 2011. The collapse of the single-family housing market and soaring foreclosure rate boosted multifamily demand by moving households from homeownership to rentals and by discouraging home sales during the period of falling prices. Within the overall umbrella of real estate investing, during the Great Recession the multifamily market proved more resilient than retail, office, and industrial. In addition, during the post-recession period growth remained robust.

Borrowing in Canada

While much of the work we do is in the area of seller financing, it’s important to note that bank interest rates are always of keen interest. On March 18, Bank of Canada announced the reduction of its benchmark interest rate to .75 percent. This was the second of two cuts; the first was a cut of 50 basis points on March 4. Before March 4, the Bank of Canada target rate (and bank prime rate) had not changed since October 2018. In the US, on Sunday, March 15, the Federal Reserve announced it would drop interest rates to zero and buy at least $700 billion in government and mortgage-related bonds. This put the benchmark US interest rate in a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent. The moves were the most dramatic by the US central bank since the 2008 financial crisis.

Canadian Property Values

During a recession, property values in all classes tend to decline, although the changes depend greatly on the region, the type of property, and the specific location. But multifamily buildings and real estate investment trusts (REITs) have historically held their value because tenants have long-term leases and, unlike retail stores or factories, cash revenue is less susceptible to short-term challenges.

Government Support in Canada

Federal governments in Europe are sounding the alarm and pledging to take whatever steps are necessary to slow the spread of the virus and support struggling businesses and families. In a speech on Monday, March 16, French President Emmanuel Macron said, “We are at war,” and announced that rents and gas, water and electricity bills would be suspended. He added that no French citizen would be left without resources.

On March 18, Neil Parmenter, president of the Canadian Bankers Association, announced that as part of extraordinary measures to help customers struggling with the financial impacts of the pandemic, Canada’s Big Six banks will allow mortgage payment deferrals for up to six months. The measures are “effective immediately.” RBC, TD, BMO, Scotiabank, CIBC and National Bank will also offer “opportunity for relief” on other credit products.
Earlier, Canada’s housing agency, the Canada Mortgage and Housing Corporation (CMHC), announced it would revive a version of the Insured Mortgage Purchase Program it offered during the Great Recession. The government announced plans to purchase up to $50 billion worth of insured mortgage pools.

Such measures provide assurance to property owners who have bank mortgages on their buildings that they will have support during the crisis. If the property owner is using seller financing, then the property owner will need to negotiate with the seller should it become necessary.

The Long View

Anyone who invests in a multifamily property knows that it’s the long term that counts. A multifamily property generates revenue for months, years, and even decades. Canadian properties are well positioned to remain profitable for the long term for many reasons, including robust immigration that creates a steady need for rental housing. In his 2018 Annual Report to Parliament on Immigration, Canada’s immigration minister, Ahmed Hussen, announced plans to admit over one million new permanent residents from 2019 to 2021, with the upper target for 2021 being 370,000. Canada also has enjoyed solid job growth, adding 30.3 thousand jobs in February of 2020, on top of 34.5 thousand in the previous month and exceeding market expectations of 10 thousand.

Our advice to owners and investors of multifamily properties is to keep cool and carry on!