Emerging Trends in Real Estate 2018 ®

Creating possibility: Rebalance, rethink, reinvent


 

“Looking forward, it’s not a clear blue sky—but there are no storm clouds coming, either.”

 

This year’s Canadian real estate trends are about creating possibility. Competitive forces are causing owners, developers and investors to rebalance their portfolios, rethink how they find the right deals and reinvent how they do business amid technological disruption and increasing government regulation. Staying on top of these trends will be key to helping them prosper over the long term.


 

 

 

“Having capital is no longer an advantage. Advantage comes from being able to move quickly, deal with more complexity and leverage strategic partners.”

As quality commercial property grows more scarce and prices continue to rise, some investors are rebalancing their portfolios and getting innovative in their hunt for new opportunities.

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“Government regulations will have a meaningful impact on affordability—they just won’t solve the problems. In fact, they’ll go a long way to creating new problems.”

As Canadians rethink their housing expectations, cities are moving ahead with large-scale transit and densification projects. And what’s the government’s role in addressing affordability?

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“This is one of the first times in our history that all of these disruptive technologies will have a significant impact on where and how we live, work and play.”

The power of data and technology is helping real estate companies make better decisions, understand tenants’ needs and open up new profitable possibilities.

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Property type outlook

While there are regional variations in the outlook for different property types, developers, investors and property owners did strike some common notes in their assessments.

 

 

Retail

Canada’s retail sector continues to be impacted by the rapid, relentless growth of online shopping and consumers’ changing needs and expectations. As a result, the outlook for retail property across the country presents a varied picture. For retail property owners and investors, creativity and flexibility will be important success factors. Interviewees noted that everyone in retail needs to rethink what they’re doing. Retail centres must be transformed into destinations people want to visit for more than shopping, and that means incorporating public spaces, a wider range of services, cultural programming, events and more. 

 

Single-family residential

The overall outlook for single-family residential is modest according to the Conference Board of Canada. As well, the country’s economy is forecast to grow only 2.0% in 2018, and it’s expected this will inhibit Canadians’ ability to buy new homes. The industry has also made a permanent shift toward multi-family construction: two out of three new homes built today are multi-family, up from less than half in the mid-2000s.

Two out of three new homes built today are multi-family, up from less than half in the mid-2000s.

Condominiums

By and large, the condominium sector is poised to perform steadily in the near term, with steady demand in most markets. Condo units in downtown cores remain attractive to young professionals, whose appetite for the live-work-play lifestyle shows little sign of abating. They’re joined by retiring boomers who are selling their single-family residences to enjoy smaller, more carefree condo living close to urban amenities. But the condo industry is evolving in response to new needs and pressures.

The size of condo units is increasing after years of smaller and smaller units.

Purpose-built rentals

Rental properties in Montreal, Quebec City and Halifax are performing well, for a variety of reasons. Quebecers have long looked on rentals favourably, and they’re eager to move into units centrally located in search of the live-work-play lifestyle. In fact, interest in Montreal rental property is so strong and vibrant that mid-sized players and even industrial and commercial developers are considering moving into the market. In Halifax, a lot of the rental stock coming online is condo-quality, and renting offers a significant cost advantage over owning a condo in that market. In Vancouver, one interviewee said more rental product is being built but that they face challenges with emerging taxes and regulation.

Office

The outlook for Canada’s office market is positive. According to JLL Research, the national vacancy rate dropped to 12% in Q1 2017—the first decline in four and a half years. Over that period, new office construction outpaced demand, but the market will see less new office product coming on stream over the next couple of years, which should keep vacancy rates from going back up.

 

Industrial

The rapid growth of e-commerce in Canada has sparked a tremendous expansion in the country’s logistics and distribution sector—and this is creating unprecedented demand for industrial space. Across Canada, interviewees shared that high-ceilinged, large-bay and multi-level industrial property is keenly sought after. Highly wired facilities are also in demand to support increasingly automated warehouses and distribution centres. Looking ahead, it’s certain that major markets will see more industrial space developed to meet the needs of an e-commerce-driven world.

Growth of e-commerce in Canada has sparked unprecedented demand for industrial space.

 

Markets to watch in 2018

While Toronto and Vancouver are expected to lead all Canadian cities with 2.5% in GDP growth in 2018, every market has its own real estate opportunities and challenges. Explore the 10 markets to watch across Canada.

 

 

 

 

“Rebalancing, rethinking and reinventing real estate in an increasingly challenging environment is critical to be successful today, and those that are able to move quickly and leverage strategic partners will be the real winners.”

Frank Magliocco, National Real Estate Leader

 

“There’s only so much institutional-quality real estate available. So the industry will either build more institutional-quality real estate than we need, or it will drift into non-institutional quality real estate.”

Frank Magliocco, National Real Estate Leader

 

 

 

 

Expected best bets for 2018

Given the state of the markets across Canada, where should developers and investors focus their attention? Our survey and interviews suggest the best bets can be made in the following areas.

Urban infill

With land becoming more scarce in major urban centres, industry players see opportunity in redeveloping existing, underused space for new mixed-use real estate developments. Multi-family residential in major cities is seen as a promising opportunity, as demand is projected to stay strong thanks to immigration and affordability concerns about single-family housing.

 

Fulfillment and warehousing

With online commerce showing no signs of stopping, the demand for warehouses and distribution centres continues to grow. Rents are good, and they’re rising after a long period of flat rates—which is good news, as industrial land prices will continue to rise, especially around major transportation hubs. Large bays with room for plenty of trucks, high ceilings and computerized rack systems are what’s in demand to facilitate logistics, distribution and fulfillment.

 

Toronto Office

Toronto’s office development boom shows no sign of stopping, and new supply can’t reach the market quickly enough. Toronto’s downtown vacancy rate is the lowest among major Canadian cities—and the rate masks the fact that half of that space is awaiting occupancy. According to some interviewees, demand will exceed supply for the next 24 to 36 months.

 

Senior housing

An aging population means rising demand for senior housing and quality senior living facilities. More than half of all survey interviewees recommended buying into the “age-restricted housing” subsector. The main challenge with this sector is it typically involves a mix of private and public investment—and a tricky business model. So developers that can get the right talent with enough experience to navigate the upfront regulatory hurdles and identify strategic locations could put themselves at the forefront of an area poised for growth.

 

Building communities

With an increasing focus on a work-play-live lifestyle, there remains an appetite for placemaking. And while it’s a major focus in rapidly intensifying cities like Toronto and Vancouver, other regions also have big plans. Edmonton’s ICE District, for example, has brought new energy to the downtown core and is drawing interest from buyers and investors. Developers have moved away from viewing projects as one-offs in favour of planning complete neighbourhoods that include wellness, retail, entertainment, office and more. Observers say the real estate market also needs to look at providing lifestyle services, including better integrating health and wellness services into the cities’ urban fabric.

 

 

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Frank Magliocco
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