Economic Impact of COVID-19
COVID-19 has driven Canada’s labour market into an unprecedented level of decline as major industries throughout the economy grind to a halt. This has resulted in the filing of nearly 1 million unemployment claims in the past week alone. Capital Economics has predicted that this number will continue to rise over the coming months, and has projected that the unemployment rate in Canada could reach as high as 15% (currently at 5.6%).
This new economic realty has left many tenants unable to pay their rent, and many landlords wondering how to cover overhead (taxes, mortgages, maintenance fees, utilities) with an impending revenue decrease. 97% of landlord revenue ($1.2 billion in Nova Scotia) comes directly from tenant rent. This problem is exacerbated in Halifax, where according to CMHC, 40% of households are rented.
As the April 1st rent deadline looms for nearly 390,000 tenants throughout Nova Scotia, the provincial government has implemented a 3-month moratorium on tenant evictions where income has been affected by the COVID-19 pandemic.
Both residential and commercial landlords in the province could have cause for concern. A large portion of the tenants in Halifax exceed CMHC’s 30% rent-to-income affordability threshold and according to the Canadian Centre for Policy Alternatives, almost 50% of tenant households in Canada have less than 1 months’ worth of savings. For commercial landlords, many small-business tenants have been forced to close their doors due to the Health Protection Act order.
In an effort to cope, large regional landlords such as Killam Apartment REIT and Southwest Properties have frozen rental increases and introduced case-by-case rent deferral programs. Crombie REIT has deferred commercial rents for small-business tenants until June 1st (2-months).
On Friday (March 27th), the provincial government announced a commercial rent deferral program, whereby landlords are asked to defer rent for commercial tenants for 3 months. In return, the government will guarantee up to $15,000 per tenant for landlords who are unable to recover the deferred rent. For individuals, the province has also increased income assistance (an extra $50 per month) and suspended all Nova Scotia student loan payments until September 30th, 2020.
The federal government has responded to the crisis by implementing the Canada Emergency Response Benefit (CERB) which would provide up to $2000 per month for individuals whose income is affected by the virus. The government has also increased employment insurance benefits, deferred all Canada Student Loans until September 30th, and deferred the tax-filing deadline for businesses to August 31st. Temporary wage subsidies for 3 months have been implemented to allow landlords and other employers to reduce the amount of payroll deductions to the CRA.
As of Friday, March 27th, The Bank of Canada has made a second interest rate cut, lowering the benchmark rate by 0.25%. This is in addition to the unscheduled 0.5% decrease from one week prior. The bank also plans to begin buying federal government bonds in the secondary market at a minimum of $5 billion per week.
In conjunction with the big-six banks, CMHC has also implemented a 6-month deferral program for homeowner mortgages (primary residences), and increased flexibility on payment deferrals for CMHC-insured mortgage loans. Landlords with these insured loans may be uniquely positioned to weather the storm.
Will the measures taken by the public and private sectors be enough to mitigate the impact on the bottom line of commercial and residential landlords? Time will tell, although the strength of the underlying market fundamentals may provide optimism of a quick rebound when economic activity returns to normal.