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 of the retail, single-family residential, condominium, office, rental and industrial markets.

Property type outlook

“You will see a lot more experiential retail. You need to give people a reason to go to a retail location.”


Survey respondents have ranked retail real estate investment and development prospects relatively low, but stably, over the past three years. The popularity of e-commerce usually gets the blame for the softening retail market, but many forces are at play, including changes in consumer preferences, shifting demographics and the maturity of the retail sector. Some retail players—particularly those that have made investments to integrate their physical presence with their e-commerce experiences through offerings such as in-store and curbside pickup—are seeing sales and traffic growth.

The suburban big-box segment of the market is feeling the biggest challenges, but malls have also been grappling with the closure of anchor stores. The disappearance of retail icons has created new opportunities for landlords, including backfilling with more resilient anchor tenants or using non-retail tenants to generate foot traffic.

There’s also a trend around redeveloping urban malls by intensifying sites with mixed-use properties that combine retail with higher-density residential, restaurants, community services, green space and experiential attractions like gyms and movie theatres. It’s all about finding creative solutions to take advantage of opportunities in evolving markets. For example, one GTA-based shopping centre is considering a long-term plan to convert some of its parking lots into mixed commercial and residential space. But this is often easier said than done, especially for retail landlords without the necessary expertise.

As the retail sector continues to face disruption on several fronts, landlords are looking to data analytics to develop new rental models, deliver new insights about tenants and improve operations. For example, what’s the impact on purchasing patterns of placing particular retailers near each other? How can landlords capture online sales and returns in the rents they charge? And what’s the role of data and other insights in developing strategies that boost foot traffic? While analytics unlocks many possibilities, the challenge is to assess which data is most useful and how best to take advantage of it.

Some large retail real estate investment trusts (REITs) have responded to the sector’s difficulties by diversifying their positions to include residential and mixed-use development. For example, one interviewee that built its name on retail now expects to generate a significant percentage of its future income from apartments.

Canada’s legalization of recreational cannabis is set to boost commercial real estate opportunities across the country in October 2018 as emerging companies look to find industrial space to grow the plant and retail space to sell the product. At least one major retail REIT said legalization may bring premium rents and new demand. One interviewee expected to see a “nice, positive impact on retail,” while another suggested the market “will see new industrial build to address this demand.”

Single-family residential

“The underlying fundamentals of a good market are still there. No question, though, that the low-rise segment is under pressure.”

Single-family residential

Survey respondents see development prospects for single-family housing being the best compared to other major property types, a sentiment that has continued to improve over the past three years. But despite positive prospects, supply is tight in major cities and affordability remains a major concern in Toronto and Vancouver. Single-family housing accounts for a quarter of residential inventory currently under construction in Canada, with total inventory under construction on par with a decade ago.

Rising interest rates, higher personal debt levels and tougher stress tests on residential mortgages imposed by the Office of the Superintendent of Financial Institutions have had an impact on consumer affordability in Ontario and British Columbia, as well as in oil-dependent Alberta. But in markets that enjoy greater affordability, including the Maritimes, Quebec and Manitoba, pricing should remain firm. The speculation taxes imposed by the governments of British Columbia and Ontario caused prices in both markets to drop suddenly, followed by gradual rebounds. While Vancouver has swung to be more of a buyer’s market, it’s in a price range the average buyer still can’t afford. A longer-lasting effect of the levies has been a general softening of the market, especially in the GTA, but recent statistics do show a rebound. It’s expected that prices will continue to increase in response to continuing demand and lack of government action to sufficiently address supply.


“Supply is still an issue, and we will start to see some cracks in the condo market.”


Tougher mortgage rules, rising rates and speculation taxes have all played a part in cooling residential real estate prices but have yet to show a clear effect on the condo market. Residential construction starts across the country surged almost 30% in June 2018 to an annual pace of 248,000 units, driven by condominiums, according to the Canada Mortgage and Housing Corporation (CMHC). And over the past decade, most of our markets to watch have seen an increase in under-construction condo inventory, up 35% since 2007.

“While there has been some moderation in price growth and less speculative demand in the single-family home segment, prices for condominiums have continued to increase rapidly in some markets,” the Bank of Canada noted in its July 2018 Monetary Policy Report. And while consumers still want single-family homes, government policy around densification and intensification in urban areas has had a hand in the rise of condos. In fact, there has been a noticeable shift toward multi-family construction, including condos, in Canada since 2007. In 2017, three out of every four homes built were multi-family units, compared to 65% the decade before.

And although concern is rising about the sheer number of new condo projects in major urban centres, demand will remain strong as long as population growth and economic expansion continue and house prices remain out of reach for so many.


“Those successful in repositioning their assets will maintain their relevance in the office market.”


According to JLL Research, the national vacancy rate was relatively stable at 12% in Q2 2018, compared to 12.4% in the same period last year. When comparing Q2 2017 and Q2 2018 office vacancy rates, Toronto saw a steep 53% decrease in all classes, with Vancouver, Ottawa and Edmonton also taking a dip year over year. Montreal and Calgary vacancy rates went up moderately. The office market continues to be very much a regional story defined by and driven by changing tenant expectations.

The tech industry continued to fuel leasing activity, making up 27% of large deals signed in Q2 2018, according to JLL Research. What’s more, this sector’s tenants demand unique, technology-enabled space, so landlords are looking at new ways to modernize supply for their clients, who are in a race to hire the best employees. Satisfying market demand in the future is going to require innovation to create more human-focused spaces. What’s more, younger workers generally want to be downtown in large urban centres, with amenities in their buildings and nearby.

Leading the transformation is the growing co-working trend. “Co-working is real and is adding to the market infrastructure,” one interviewee said. According to JLL, co-working and flexible workspaces are forecast to make up 30% of corporate real estate portfolios by 2030. Another interviewee noted they’re seeing more office tenants “thinking about real estate as more of a community.” There’s also a growing trend around creating vertical urban forests in downtown towers and transforming large main-floor areas into more vibrant community spaces.

“Expect another 24 to 36 months where demand will continue to exceed supply,” one interviewee said of the Toronto market. And while developers are intensifying underutilized land in areas like Toronto, in Montreal, they’re more focused on redevelopment and improving existing assets. In Edmonton, the sector is expecting a positive absorption rate; Calgary has seen a spike in vacancy rates since last year, but interviewees anticipate the market will get back on its feet in a few years.

Developers of office buildings are ahead of major municipalities and retail planners in rethinking the future role of the car. They’ve begun to discard historical parking requirements in response to millennials’ tastes for ride-sharing and other transportation alternatives, as well as the prospect of autonomous vehicles.

Purpose-built rentals

“The math makes sense for large institutional investors who are looking for a steady cash flow.”

Purpose-built rentals

The construction of new purpose-built rental stock will be an important step in trying to address housing affordability. Over the past decade, the amount of rental property under construction across Canada has tripled and is now on par with the construction of housing stock built for home ownership. On a percentage basis, the largest increases in purpose-built rental construction in the last decade occurred in Vancouver, followed by Ottawa and Calgary. Montreal continues to be the largest market for purpose-built rental construction.

Residential real estate in large urban markets is stabilizing but poised for further growth as demand continues to outstrip supply. With rental rates still striking new heights and low vacancy in cities like Toronto and Vancouver, developers, including some larger retail-oriented REITs that are intensifying their properties, are starting to respond to demand for rental housing. “Multi-family rental is getting into a better position because of the decrease in home affordability,” one interviewee said. What’s more, others also suggested tougher stress tests on residential mortgages are bringing more people to the rental market. In Calgary, an interviewee noted that “the rental market will spike due to mortgage denials,” and in Halifax, another said, “We’re seeing more rentals or purchases at lower price points.”

Governments are also taking some action on rental affordability, as seen in Ontario’s move to extend rent controls to all units. And in April 2018, the Government of Ontario and the City of Toronto selected five developers that will build affordable housing on surplus provincially owned lands in the city. The two sites earmarked for mixed-income development include a group of lots in the West Don Lands and at the former provincial coroner’s office near Yonge and College streets.


“Industrial is the new retail.”


The rising popularity of online retail is driving an unprecedented need for more industrial space for distribution and return centres across Canada. As one interviewee noted, “Industrial is the new retail.” The sector is seeing significant rental increases for the first time in years, and it’s expected that demand will exceed supply for the next few years.

“Industrial properties offer strong stability and low vacancy to keep returns consistent,” said one interviewee, who noted his company is currently seeing 99% occupancy rates. Many reports during the first half of 2018 cited low vacancy rates for industrial properties in Canada, and many interviewees referred to the GTA and Montreal as particularly hot markets. And for large, big-box distribution space, vacancy rates are even tighter. Other niche areas of interest include cannabis production facilities, data centres and spaces with large electrical capacity for cryptocurrency mining.

It’s a similar story across Canada. In Alberta, for example, the industrial market is experiencing positive growth, with Calgary seeing positive absorption and showing particular strength in last-mile warehousing and fulfillment facilities. “Last-mile space may be a redevelopment play for empty big-box retail,” an interviewee said. Edmonton is also seeing strength in the industrial sector due to strong leasing demand driven by the oil and gas sector.

Contact us

Frank Magliocco

Partner, Real Estate, Assurance, PwC Canada

Tel: +1 416 228 4228

Chris Potter

Partner Real Estate, Tax, PwC Canada

Tel: +1 416 869 2494

Miriam Gurza

MRICS Managing Director, Real Estate, Consulting, PwC Canada

Tel: +1 416 687 8143