Hot Markets

Insights from Emerging Trends in Real Estate

Strategy Talks

Podcast Series

Hot Markets:
Emerging trends
in Real Estate

Vanessa Iarocci
Chris Potter
Jonathan Miller

Episode 47: Hot Markets: Insights from Emerging Trends in Real Estate

Release date: November 14, 2011
Host: Vanessa Iarocci
Guests: Chris Potter, PwC; Jonathan Miller, real estate analyst
Running time: 23:13 minutes

In this episode of Strategy Talks, guests Chris Potter of PwC and Jonathan Miller, journalist, real estate analyst and author of this year's Emerging Trends in Real Estate, discuss the state of Canada's real estate market in these volatile economic times.

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Episode 47 transcript:

Voiceover: Welcome to Strategy Talks, the business podcast series from PwC Canada. Hosted by Helen Mallovy Hicks, National Leader of PwC’s dispute analysis in Valuations Practice; and Calum Semple, an operations in consulting partner. This interview series featuring new topics and guest every episode is designed to give you valuable insight into some of today’s hottest issues affecting your business.

Vanessa:  Canadian real estate markets remain the most stable in North America. Institutions hold on to the best properties and avoid boom/best frenzies over pricing, while conservative fiscal policies discourage lax underwriting and licentious lending. A resource rich economy does not hurt either. So reads the opening paragraph of this year’s Emerging Trends in Real Estate. I am Vanessa Iarocci, your host for today’s episode of Strategy Talks. We are joined by Chris Potter, leader of PwC’s Canadian real estate talks practice and by special guest Jonathan Miller, real estate analyst and author of annual Emerging Trends in Real Estate report.

Welcome Chris and Jonathan. So before we get into the content, tell me about the Emerging Trends in Real Estate report, Chris.

Chris: Vanessa, Emerging Trends in Real Estate is a publication and thought leadership piece that is owned by PwC. The 2012 report marks the 33rd year of the publication. It is a predictive forecast report in that is a compilation of the industries views in the next 12 to 18 months, what’s going to happen in the industry and what trends are emerging in the real estate industry.

Vanessa: Great, so industry views, so you get to actually get out and chat with industry participants.

Jonathan: Yeah, we interview 950 industry leaders in North America and, or survey them. So it’s a tremendous slice of industry leadership, including in Canada and because of that as Chris points out, it can be very, very predictive because we do it off the record. They’re confidential in views: people tell us what they’re really thinking as oppose to what they want the market to think.

Vanessa: Indeed.

Chris: We are actually quite pleased this year in particular. We had over 100 face to face interviews with all aspects of the real estate industry players in Canada this year.

Vanessa: Fabulous, so a lot of first hand intel. Having a read through to the report, what jumps out at me, is that it seems that the prospects for real estate in Canada continue to be better than those in the U.S. Why is that Jonathan?

Jonathan: Well the U.S has a lot of issues on the demand side, with the job market as everyone knows, unemployment is very high. Job growth is very constrained. There are a lot of headwinds impacting the U.S market that Canada isn’t dealing with. Canada has had strong financial industry regulations which has tamped down the investment activity here and restrained it, in a very positive way. The government is not in debt. Consumers here traditionally are much more conservative and are not over their skis, so that’s very positive. Canada benefits from tremendous natural resources including energy, which the rest of the world including the U.S wants and needs. This really provides a great foundation for the economy. So when you take all these  factors together, Canada is in a relatively strong position not only vis-à-vis the U.S but worldwide. Especially where we have all these sovereign debt issues in  Europe, and also probably China’s economy ramping down a bit as a reaction to the fact that its two major markets, the U.S and the Europe are somewhat compromised — so Canada is in a relatively strong position as a result.

Chris: It’s interesting. This has been something that’s unusual for Canadians, and it’s been a few years now that we have been in a much better relative position. It seems that every time we turn around there’s another reason to feel good about what we’ve done — not there are no storm clouds in the horizon but we definitely have a much better situation than most of the other developed countries.

Jonathan: But the fact of the matter is, there are a lot of these storm clouds. It’s a real royal ocean around this  kind of island of relative  stability. Not to take metaphors too far, but I think you’ve got to be concerned about some of these waves and storm action rolling up onto the island shores. So we think that activity here for 2012 is going to be more muted and impacted to some degree by these unsettling trends elsewhere. This in no way means that the market is going to be poor, it’s just not going to as robust as you might expect in the second to third year of recovery.

Chris: It’s interesting. These things came out loud and clear in the face-to-face interviews that we had across the country. There’s definitely a recognition and awareness of both the strength that Canada has that contribute to why things have done so well but also very much of an awareness of what is happening in the rest of the world and the fact that we won’t be and can’t be immune forever.  So looking forward, I think this year more than ever, there’s cautious optimism. With recognition that we have great fundamentals but also that these storm clouds and the waves washing up on the shore that Jonathan referenced is there, and we need to be mindful of it.

Vanessa: Indeed. So Canada as an island but perhaps not for long was definitely one of the major themes in the report, and we’ll come back to that in a moment. What were some of the other themes  that you found via your interviews?

Jonathan: I think when you look at the different property sectors, they are all in relative equilibrium, which is not the case in the States — apartments are very strong, retail — you’re not over-stored here, in fact you’re under stored in some of the downtown cores which are experiencing considerable residential growth. So, some of these markets are underserved. On the industrial front there are issues here, especially in greater Toronto area, which are impacted by the dollar at par and the export malaise with regard to the U.S. because of the troubles in the Midwest Manufacturing sector there — but in balance the industrial warehouse market is fairly good and the office markets are very much in equilibrium here. These major cities — can see rates in the mid single digits, which is fantastic. There is not a lot of development ramped up, so owners are going to do very well. The only sector that’s not doing that well is hotels — again U.S. travel is down — both business and vacations because of the U.S. issues and that does impact hotel activity here. So that’s probably the weakest of the sectors here.

Chris: You know it’s interesting, going to the point of vacancies and balance and equilibrium, one of the things has characterized some the problems in the U.S. market that we haven’t had, it’s the sense that you need to go out and build something new as soon as you get the lease ups to a certain point — it’s like great there must be more demand — whereas I think we had a much more constrained approach to development and that theme has been throughout.

Another theme coming out of the report this year that does follow up into the development side is urbanization.  This is something that we’ve seen in Vancouver for a lot of years, but is now really hitting the rest of the country — where the major centres are seeing a resurgence of people wanting to live in the city as oppose to the suburbs. We’re certainly seeing this in Toronto. You don’t look too far without seeing cranes in the sky and all of the condominium developments and this hit also continues in Vancouver. We’re seeing this now in some of the other major centres including Calgary and Ottawa, even in St. Johns and of course don’t forget Montreal

Vanessa: So on the condo front, I think everyone in Toronto is asking this question: is this sustainable? Are all these cranes in the horizon — is this a sign of a coming bubble? Or will there be inhabitants for all these new units?

Chris: You know it is an interesting question. Certainly you’ve seen a lot of it in the media over the last number of months talking about the concerns of the level of housing prices. Certainly the government took action and changed some of the mortgage lending rules, in terms of the length of amortization for example. They did what they’ve done well over the last number of years which is to make sure that the regulatory environment for our financial institution is sound, so that loans are being made on the right basis.

You know as to sustainability, there are a lot of drivers that are affecting the condo market in Toronto. If we just focus on that market for a moment — invariably a large number of the condo sales become part of our rental market. We have not had a lot of rental apartment buildings built in a number of years and effectively the condo market supplements that. We have a large amount of immigration into the greater Toronto area every year and these people have to live somewhere. If you look at some of the stats coming out of groups like RealNet for example and talking to George Carras,  looking at the number of housing units that we have built on a sustained basis each year, it doesn’t come anywhere near the level of demand for housing units. When you add in other factors like the green belt and the lack of land that continues to be available for development, we have quite a good balance it would seem of demand and supply that’s just not enough to meet that demand and that’s part of what keeps things in check.

Jonathan: But that said, a lot of your buyers or speculators, a lot of it is offshore Asian capital looking to park money here. The question — will any decline in Asian economies cut back on that. Also the whole issue of affordability: prices have really ramped up for condos. At some point, you have an affordability issue, so I think there is room for there to be at least a levelling, if not maybe a little decline in terms of pricing on the condo front.

Chris: I think that’s fair and I think we’ve heard that loud and clear as well from the industry. Even the industry is recognizing that affordability is being pushed and the limits of affordability are being pushed. One has to question whether the notion or the desire for a young family to raise a family in a single detached home in the suburbs is becoming a dying dream. It is a concern; there is a lot of movement of people into the city in search of lower cost housing and condos in some parts are being able to provide that. And Jonathan that is another trend, and certainly something you’ve looked at some of your other markets in North America is just how family friendly that development is and that’s another factor that has to be considered when looking at it.

Jonathan: Arguably a lot of the new condo developments are not that family friendly. It’s really tailored for Generation Y, 20-something, singles and couples — relatively small units in bright light and big city neighbourhoods with bar scene and entertainment and sports venues. This is not particularly oriented to families with kids — you do not see a lot of park recreational amenities that are good for kids or even schools, things that make for a really attractive family environment.

The units are small so you have to question what happens when the 20-somethings and singles who are buying these, or renting them — what happens when they’re ready to have families?  Then there’s the issue, OK, it’s kind of unaffordable back in the single family entering suburbs — so where does this leave the folks in five to 10 years down the road?

Chris: Interesting questions. And the rest of it is even while they’re there we get into other issues we’ve discussed around infrastructure. As we do see Toronto becoming more vertical with a lot more condo projects, a lot more — again going back to urbanization and the same thing is happening in Vancouver and as we said other markets, we start building a concentration — again how are we going to move these people? Again if we’re not going to have a natural movement where they are in condos for a period of time and then move to the suburbs again so that there is that rejuvenation and keeps it young in the core. If they’re staying longer, there are more people, you need more infrastructure. How do we move them and how do we deal with some of the amenities that they need?

Jonathan: The intensification policies that are going on in a lot of the Canadian cities — there are a lot of thought to encouraging condo and high rise growth. But again there hasn’t been a lot of thought on the park front and on the hub and spoke transport systems to get the people in and out, and to move around from residential neighbourhoods to business and commercial centres. As I was pointing out before there are not a lot of stores in these new residential neighbourhoods, so people have moved in and would like move in to these downtowns because of convenience. However there are a lot of inconveniences built in and forgotten about in the planning, and it’s hard to come back and retrofit and fix some of these problems once you have put up all this construction. Also it’s much more expensive to build infrastructure in fully developed places than it is in places that haven’t been fully developed. This is going to be a major issue for Canadian cities going forward. That said again, I think you are ahead a lot of U.S. cities that are considering Step 1, which is considering people to want to live in downtown cores near commercial offices for the convenience features, and they get maximum benefits out of every square foot. So I think Canada is well ahead there.

Chris: I think the governments are paying attention to it, and certainly one can debate whether it’s too late or too little too late, or way past due. I think most people in fact would agree that it should’ve been looked at a long time ago. I guess some of it is being driven by the fact that this trend is happening. There have been some announcements certainly in Toronto and in other places, of some infrastructure but I agree with you Jonathan, there’s an awful lot more needed. Hopefully governments are turning their attention to that and are thinking of the longer term implications.

Vanessa: So, interesting. So that’s all on the residential front. What about the commercial real estate front? It seems like a day doesn’t go by where I don’t see a commercial real estate acquisition by one of our wreaths or pension funds. What is driving all this activity?

Jonathan: Well I don’t know, there is activity but it’s in the order of business I think. Most of the commercial markets here, the major commercial markets, the owners buy the hold and your trophy properties and most of the  familiar properties in major cities are held for a long time, they’re managed to maximize income and it’s a very healthy... that’s what real estate is all about! Real estate advertises sort of an income plus investment and drives off keeping buildings full and well managed, and that’s what the institutional owners who dominate the Canadian markets do. Same with fortress malls, big regional shopping centres — they’re owned by long term owners and investors who are either REITs or very sophisticated institutions who know how to manage them to maximum effect.  So yes, there are properties that are bought and sold on the margins, but I think in general this is a hold market and that’s very positive.

Chris: I think coming back to it, it sort of drives to the discipline that we’ve seen in the Canadian market. I agree entirely with what Jonathan said in terms of who’s building, buying and holding these — and again you got to remember that they’re very capital intensive projects, so you do need large pools of money available in order to complete them. But I think what we’ve also seen is quite a bit of discipline. We haven’t seen over the last number of years a lot of office or commercial properties being developed. When they are developed, I thinks it’s typically been in response to real demand. This is why we’ve been able to see even coming out of the financial crisis over the last few years Toronto and markets like Calgary rebound as well as they have. This time last year we were looking at vacancy rates in offices in Calgary in the mid to high teens, where now they are in the mid to high single digits (8% or less) and in the prospect of needing more space built. It takes time to build, and certainly as energy companies and as the economy in Alberta continues to boom, there is more interest. I think the response of the market has been again in typical Canadian fashion, quite disciplined so there has not been a lot of over-building. Certainly you heard Jonathan talk about that in the retail space, and I think that has been very true. We don’t have the same amount of commercial space or retail space per capita as they do in other places. So we’ve been quite balanced about what gets built, when and why.

Jonathan: Also, a tip of the hat to lenders. That’s when discipline can get out of whack easily, and that’s just not the case here. It’s the combination of discipline among lenders will rigour in terms of underwriting, and in some degree government regulation which helps keep things in line. So markets have stayed in relative supply—demand balance which is very healthy for investors.

Chris: I think we need to give applaud to the industry as well. As I look back over the last few business cycles, and certainly to look at where things were at in the late ’80s, I think the industries learned a lot as well about appropriate use of leverage and making sure they paid attention to the balance sheet. I think that the industry has been quite disciplined and aligned with conjunction of our financial institutions to build their business.

Jonathan: Canada did have its day, and the early ’90s was not a good time here and not everybody learns those lessons. You know there’s a whole turnover in the industry, but it’s a real credit I think to the whole financial, real estate industry government, how it works to the benefit in the end. There’s a lot of frustration out there among the developers, there’s government red tape, they complain about, very high development charges and they would like to do more, and they have some real legitimate issues. On the other hand, less building can be more for the marketplace, so maybe it isn’t all bad.

Vanessa: Indeed, well definitely some interesting insights. So Chris , Jonathan, where can the listeners get a copy of your report?

Chris: Well, that’s easy. They can call me. Or they can visit

Vanessa: Wonderful, thank you Chris, thank you Jonathan. Visit our website to obtain a copy of our report. This is Vanessa Iarocci for strategy talks. Thank you.

This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again soon for another episode. To download or subscribe to this podcast series, or to find more information, please visit The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting, tax, or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009, PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario Limited Liability Partnership, or, as the context requires, the PricewaterhouseCoopers global network, or other member firms of the network, each of which is a separate and independent legal entity.

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Hosted by Helen Mallovy Hicks, a Partner and National Leader of the Dispute Analysis & Valuations Group, and Calum Semple, a Partner in the Operations and Consulting practice, Strategy Talks is a series of audio podcasts that explore key issues affecting businesses in Canada, and share strategies that companies can use to help address them.