Great Recession benefited commercial sector

by Neil Sharma15 Oct 2018

The financial crisis of 2008 has proven a boon for the commercial real estate sector, and with most forecasts predicting another recession soon, investors are realizing the benefits of tangible, illiquid asset.

When the Great Recession hit, demand for real estate remained strong while debt markets froze up and the financing environment remained trying.

“There’s always going to be strong demand for hard real estate assets, even in recessions,” said Mark Hannah, a managing partner at Nicola Crosby Real Estate. “The financing environment was very challenging for most of 2009 and what appeals to these groups investing in real estate is it provides cash flow to weather the economic ups and downs, and even though asset values may fluctuate on paper, the cash flow remains constant provided you have a well located, quality asset with accredited tenants.”

For the last decade, everyone from pension funds, life cos., publicly traded REITs, syndicators, private high net worth individuals to wealth management companies have invested in the commercial sector thereby keeping liquidity in major Canadian markets robust.

“Another reason it’s attracted all these groups in the last 10 years is there’s less volatility in property valuations during a recession compared to other investments, which are more liquid, like equities,” said Hannah. “This is partly due to the illiquid nature of real estate, which prevents irrational behavior in the short run. A typical process to sell a commercial asset is four to six months, whereas equities can be sold instantly.”

As rents consistently increase, they hedge against inflationary pressure.

“To reinforce this point, what we focus on at Nicola Crosby is keeping the assets leased,” continued Hannah. “The tenants pay the rent, they are our partners, and they’re critical to the success of our investments. Cash flow is everything.”

Alberta has emerged as a promising commercial market now that the oil sector has entered recovery. The province is not reeling from the slew of jobs that were lost, but brighter days lie ahead.

Edmonton in particular rescinded the Airport Protection Overlay, thereby removing height restrictions and opening the city’s skyline up to the possibility of taller buildings.

“Edmonton was in a similar situation to Calgary with high downtown office vacancy,” said Elton Ash, REMAX’s regional executive vice president. “The Ice District has had a huge positive effect for city of Edmonton. The municipal airport removed height restrictions and there’s been tremendous development in Edmonton over the past five years. From an investor point of view, the future is very positive for Western Canada.”


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