Emerging Trends in Real Estate 2019 ®
Capital is plentiful and pushing up prices on the best opportunities, so survey respondents plan to focus on improving, redeveloping or selling assets rather than buying. Across the industry, investors are looking to optimize portfolios to produce stronger yields.
In this environment, success will come from being able to make more informed decisions, pivot, recognize innovative opportunities and act quickly. At this later stage in the cycle, investors want to “be more creative.” One interviewee said a competitive market requires “agility and precision” to get the right pricing for the right opportunity, and another said to also look at “different and not-so-popular” directions for opportunities.
In many locations, investors are recognizing the need to create more value from the properties they own. Last year’s trend of rebalancing and redeploying capital is expanding to include redevelopment with an eye toward greater density, and this has been most prominent with underperforming retail space. One interviewee said they’re “looking for more redevelopment opportunities—looking at different projects we would not typically consider.”
Going into 2019, equity capital for investing and redevelopment is forecast to stay broadly oversupplied. Some investors are rebalancing their portfolios by selling lower-quality holdings to make room for better properties. Others are expanding their focus on office properties, as well as including multi-family residential opportunities and other asset classes. One Ottawa interviewee said they’re choosing to hold onto their assets, despite record prices, because they don’t see alternatives.
“We’ll be more prudent with our acquisitions and our allocations for real estate because the valuations have reached their peak.”
One real estate trend that jumped out this year was the increased diversification of assets. “[We] can’t just be into one asset,” one interviewee remarked. For example, developers and investors are building joint ventures and strategic partnerships to help limit the risk of taking on larger, more complex projects and entering new markets. It all comes down to reducing risk by making the most of a partner’s skills and resources. As one interviewee noted, investors were “more averse to risk [this year] than several years ago.”
To diversify and adapt to the premium prices in Vancouver and Toronto, some companies are also hunting for better opportunities elsewhere, including Ottawa, where they’re able to find “well-positioned trophy assets,” one interviewee said.
Companies across Canada continue to report concerns about ever-longer waiting periods for government approvals, as well as a lack of skilled construction labour. As a result, interviewees noted some development money is starting to get redirected to cities in the United States, where taxes are lower, there’s less red tape and markets are larger.
“We need to be creative with partnerships to get projects done.”
Data analytics is proving to be one of the best digital tools available to the real estate industry, allowing companies to dig into large volumes of information and pull out actionable intelligence. When data analytics is combined with external benchmarks, interviewees said the resulting insights “move the needle for us.”
Predictive modelling is helping portfolio managers calculate the next markets they should move into and decide where opportunities lie in each asset class. Similarly, retail landlords are able to use the technology to help tenants understand consumer patterns between stores—information that can be used to enrich the shopping experience. But while these tools exist, companies still find it challenging to know which applications and data to focus on. “The question is how to deal with all this information,” one interviewee commented.
“Data analytics will become a much bigger part of the business.”
Construction costs have been rising steadily, in step with real estate prices across the country, and they’re likely to get an upward jolt from the escalating international trade battles. “Tariffs are definitely going to hurt,” one interviewee said. While the current rhetoric may be more of a negotiating tactic, the increased costs of goods could impact the number of shovels in the ground and slow new starts. For example, tariffs on foreign steel could translate into more expensive rebar for residential and commercial builders, ultimately affecting unit sizes as rising costs put further pressure on affordability.
In addition, the uncertainties around the North American Free Trade Agreement (NAFTA) are shaking up global trading patterns and affecting commodity prices, and any shocks could reverberate through the real estate sector. Trade disruption has the potential to have a big impact on industrial property, especially on logistics facilities handling imports.
Interviewees also expect interest rates to continue to increase gradually over the next year, raising the cost of doing business and carrying a home. In July 2018, the Bank of Canada hiked its benchmark interest rate to 1.5%, and there was widespread concern about the cooling effect continued increases may have on real estate activity.
“Higher interest rates and construction costs are altering the cap rate. This is all in the hands of the large institutions.”