Commercial rent delays could turn into abatements if crisis drags
Owners of commercial real estate in Canada are delaying rent collection and may be forced to consider rent cuts as tenants ranging from restaurants to retail stores deal with prolonged business shutdowns aimed at slowing the spread of the coronavirus pandemic.
One quarter of small businesses said over the weekend that they are not in a position to make April’s commercial lease or mortgage payments as a result of disruptions caused by attempts to slow the spread of COVID-19, according to a survey conducted by the Canadian Federation for Independent Business.
RioCan, one of Canada’s largest real estate investment trusts, which derives more than 50 per cent of its revenue from the Greater Toronto Area, has said it would grant an automatic, 60-day interest-free rent deferral to independent commercial tenants who ask for it.
But some analysts believe landlords in some cases may have to go even further, if the current crisis drags on.
“We wouldn’t be surprised if we saw some rent abatements,” said Chris Tsichlas, vice-president of real estate at DBRS Morningstar.
The hospitality industry has been hardest hit by the pandemic, with 44 per cent saying they can’t meet their rental obligations, the CFIB said.
DBRS, which tracks larger players including real estate investment trusts, or REITs, published a report last week identifying “hotels, recreational properties, and certain retail properties” as the sectors that will “experience significant stress,” at least in the near term.
Alex Avery, a longtime REIT analyst who is now a partner and portfolio manager at FrontFour Real Asset Alternatives, said many retail operators are already seeking concessions from their landlords, and he expects there will be “a number of deferrals granted for the next month or two.”
“Along with every household and every business in the world, retailers everywhere are asking for concessions of one type or another,” Avery said.
But, so far at least, Canadian tenants appear to have stopped short of the bold stance taken by the Cheesecake Factory in the United States. The company’s chief executive has reportedly advised landlords that the chain of 300 eateries — many in or near malls — cannot and will not pay rent while they are closed.
“I can’t say I’ve heard of a refusal situation like Cheesecake Factory,” said Avery, adding that he expects rent deferrals, and any potential abatements, to be handled on a case-by-case basis between landlords and their tenants based on the unique aspects of the properties and leases.
Such negotiations, or the prospect of them, are causing some large players in the Canadian REIT sector to adjust their own business expectations.
On Friday, Quebec real estate investment trust Cominar withdrew its 2020 financial guidance, citing the “growing economic and operating impact of the COVID-19 pandemic, the uncertainty with regard to its duration and the impact on REIT tenants and their ability to satisfy rental payment obligations.”
Cominar has a portfolio of 328 office, retail and industrial properties in Quebec and Ontario that was recently valued at $6.6 billion.
“We are acutely aware of the financial pressures on our tenant base, particularly on independent retailers, and we intend to work with our tenants on a case-by-case basis to support their businesses and find solutions in the short term while protecting the financial stability of the REIT,” said Sylvain Cossette, Cominar’s chief executive.
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