So far in our “Lessons for COVID-19” series, we’ve looked at the recession of the early 1990s and the dot-com bubble bursting in the early 2000s. In this piece, we’ll explore the financial meltdown of 2008 which still lingers in many people’s memory due to its recency.
Real Strategy Advisors would like to compare similarities and contrast differences between the 2008 recession and where we are now with COVID-19. We’ll go from macro to micro to better understand how the larger economic situation played out in Ottawa more specifically and what can be extrapolated from that experience. So what are these lessons and what do they potentially mean for Ottawa’s commercial real estate market going forward?
Rewinding to 2008 and the Great Recession…
There were many factors that contributed to the subprime mortgage crisis but the precipitous causes were the failures of major US financial institutions, participation in undue borrowing and risk-taking, and lapses in regulatory oversight. These failures didn’t just trigger another synchronized recession between Canada and the US (now a half-century-long trend), but a crash of the entire global financial system.
Throughout the latter part of 2008 in Canada, and spurred by the global economic meltdown, there was a rapid decline in business investment and consumer spending alongside a delayed government response. The country’s GDP declined by 3% over nine months because of heavily decreased exports, meanwhile, business expenditures on things like new buildings and equipment dropped a staggering 22%. Eventual federal government spending, a lowered interest rate, and increased cash supply helped ride out the worst parts of the initial decline but also created massive spending deficits.
In 2010, the Stephen Harper government took to reducing this deficit through a variety of public services and workforce contractions over the following years. Over 19,000 federal jobs (almost 5% of the federal workforce) were mandated to be reduced through layoffs, retirement, and voluntary departures. Changes to salaries, severance packages, pensions, and technologies aimed at cutting travel/accommodation expenses were implemented during this time as well. Although this was the worst level of economic decline since the recession of the early 1990s, it wasn’t as bad and Canada faired relatively well compared to other countries and enjoyed a quicker recovery period (still a long one though).
The Ottawa Experience During This Time…
As is the story with Ottawa, a significant portion of its economic activity comes directly from public administration. Although the federal government did not initially shed huge amounts of office space during the 2008-2009 recession, job cuts in the private sector alongside the government’s subsequent austerity budgets did create a rise in office vacancy rates throughout the following years. In terms of Ottawa’s commercial real estate sector, a couple of notable trends started to present themselves as we moved from the early to mid-2010s:
- The vacancy rate in the downtown core increased as tenants, especially the federal government, started to transition to more modern and reduced workplace footprints (aka Government Workplace 2.0)
- As government and private sector demand plummeted, class A and B landlords dropped their rents significantly and increased financial incentives for strong tenants
- Increased vacancy took time to appear as many organizations were forced to wait until the natural conclusion of their lease (which took a few years) before reducing their space
Moving Forward Under COVID-19…
As seen in previous recessions, the market impact is felt long after the economic contraction has officially ended. Real Strategy Advisors is already seeing early signs of a surging sublease market and a decrease in overall office demand because of remote work and business disruption. There seems to be budding interest in companies taking a long-term perspective (which we’ve dubbed practicing patience) and an encouraging willingness among executives and employees to come back to the office safely. While we’ve previously commented on how this situation actually presents an opportunity for tenant savings, especially if you’re in the position to take on a long-term lease, the best deals are still ahead of us!
It’s no secret that Ottawa is a government town and, as we’ve seen with previous recessions when budget cuts and constraints show up in the years following the incipient fall off, Ottawa’s commercial real estate sector is certainly affected. We’ve already begun to see the shedding of office space and anticipate the increased supply will create a more tenant-friendly environment. There is one stark difference this time around though, this recession was not a result of follies and mistakes in the banking system, it stems from a virus. Purging the paranoia and re-establishing faith in financial systems is an easier task than making people comfortable and confident with respect to an invisible contagion — especially in the office.
In what’s been referred to as the COVID-19 catch-22, the only way we lessen the spread of the virus is with temporary closures and social distancing (short term pain for long term gain!) which obviously impacts the economy adversely. It boils down to being able to take stock of your strategic positioning within your landlord’s property portfolio. Here’s what we mean by this:
- Realize your value as a critical partner in the overall investment of commercial property owners and building operators (who rely on keeping their assets leased).
- Position yourself strategically by knowing the nuances of your building’s ownership, tenant base, and their ability to replace you as a tenant in a timely and cost-effective manner.
- Look to your balance sheet — cash flow is everything normally but now more than ever so the more you can demonstrate that this is a non-issue, the better we can position you as a desirable and attractive tenant that landlords will fight over!
Even though this COVID-19 crisis is unique, recessions do tend to follow similar patterns. They arrive, they inflict damage, and they’re recovered from through economic innovation. Scientific ingenuity will be needed to ultimately defeat the health threat that the coronavirus poses, but forward-thinking creativity will be needed to ensure that we don’t miss an opportunity.
If you’re currently wondering about your situation, navigating a lease negotiation, or just looking for consultation on commercial real estate, please contact Real Strategy Advisors today!