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New forces of change, new opportunities
Many Canadian real estate companies have fared well during the COVID-19 pandemic and are optimistic about the year ahead amid signs of strength for several asset classes.
With key forces of change reshaping the Canadian market and rising concern about housing affordability, it will be important to think differently about these challenges while accelerating transformation and innovation.
Best bets in the Canadian real estate market include warehousing and fulfillment, rental housing and uses related to health care and life sciences.
Explore the trends, markets to watch and property sectors by clicking on the skyline below:
We’ve seen significant workplace shifts reverberating across the real estate market. While interviewees have diverging opinions on how permanent those changes are and what the future of work ultimately will be, there’s little doubt that the workplace will be different from what it looked like before 2020. This will have implications for business decisions across key asset classes as well as for the users of real estate themselves.
Key trends include a shifting landscape for offices, changing migration patterns and an even greater focus on mixed-use communities. In the residential market, low interest rates, increased savings by some Canadians during the pandemic and the desire for more living space have helped boost the demand for housing and, consequently, home prices and affordability challenges.
As one of our interviewees put it, Canada needs to look at unconventional approaches to the housing market and affordability by “fracking” for new supply. And while there are diverging opinions among interviewees about the feasibility of expanding single-family rental housing in Canada, it does have the potential to address affordability as well.
There’s a fairly strong feeling among many interviewees that ESG performance will be a business imperative for Canadian real estate companies, but there’s a significant divide between private and institutional players. For institutional investors, ESG matters are becoming a key criteria for investment decisions; on the private side, there needs to be a return to justify the additional upfront costs.
In addition to addressing key environmental matters, such as sustainability and climate change, as well as governance issues like diversity and inclusion, many interviewees believe supporting the growth of affordable housing options is an important social aspect of ESG performance.
Overall, we found clear signs that ESG performance will be a rising factor in long-term value creation for the real estate industry, whether by attracting premium rents and pricing, accessing lower-cost financing, increasing efficiencies or reducing risks.
Despite a strong outlook for many asset classes, rising prices for land and critical supplies are just some of the factors creating cost pressures that, in turn, are affecting rates of return, investment and development decisions and affordability.
Adding to the challenge is the increasing competition for deals and development opportunities. The ongoing rise of Canada’s real estate market has helped spark what one interviewee called an “insatiable appetite” by investors for assets. Another interviewee expressed concern about maintaining prudence in investment decisions in this environment, with falling yields creating a fear of overbidding among some industry players.
So how can Canadian real estate companies successfully navigate these forces of change? More than ever, it will be important to embark on a transformation program focused on strategically managing costs and accelerating innovation and investment in the most promising business opportunities. Key elements of the transformation journey include:
Optimizing portfolios: The current environment will require real estate players to scrutinize their investment decisions even more carefully than in the past. Opportunities to optimize portfolios include considering smaller and, in some cases, off-market transactions. Redevelopment activities will also be important, although being creative in pursuing them will be key.
Accelerating digitization: Digital transformation can play a significant role in both delivering efficiencies and creating the services and experiences customers want. Key areas of focus for real estate companies include embracing construction technology, digitizing operations and increasing their data analytics capabilities.
Investing in the workforce: As the industry transforms, companies will require a broader range of talent, adding to the importance of having the right mix of skills to drive success and building a positive culture to attract and retain employees as the war for talent heats up.
Building digital trust: Alongside accelerated digitization, organizations will need to continue to manage their cyber risks. Securing your organization by uniting your lines of defence to see the big picture will help you stay agile to emerging innovations and threats and keep your operations running securely as you introduce new technologies.
In embarking on a digital transformation program, it’s important to remember that it’s not just about the latest property technology (proptech) solution. While interviewees said they’re keeping a close eye on proptech innovations, many are focusing on more effectively implementing their existing investments in technology and data.
A key way to address this is to take a more intentional and business-led approach by aligning digital investments with goals and outcomes. It’s also important to consider other elements of the transformation journey, such as how processes might have to change and developing a data strategy to generate the insights you need. It all comes back to taking a more strategic approach that delivers efficiency gains while positioning the organization to seize new business opportunities and accelerate growth.
While Vancouver was our top market to watch for the third year in a row, every region has its own opportunities and challenges. Explore perspectives on the top business issues in Canada’s largest cities and the key investment and development opportunities across the country as we look ahead to 2022.
Which types of property have the best prospects for real estate development and investment in 2022? The phrase “beds and sheds” offers a good overview of the top bets, although one interviewee’s description of key opportunities in the retail market—”breads and meds”—provides some insight into why uses related to health care and life sciences are on the agenda of many real estate players.
Warehousing and fulfillment: While some interviewees said intense competition for assets meant industrial assets were no longer a best bet for them, warehousing and fulfillment remain attractive to many real estate players. These were the top two subsectors for investment and development prospects in our survey.
Rental housing: Also ranking high on the list of investment and development prospects were two categories of rental housing: moderate income/workforce apartments and single-family rental housing. The demand for more space is one factor raising the prospects for single-family rental housing, which can offer a more affordable alternative to buying a low-rise home.
Health care/life sciences: Medical offices remain attractive for their stability, and some retail players, noting the current focus on tenants offering essential services, highlighted the potential of incorporating more health-care uses into their properties. And with the Canadian government continuing to work with pharmaceutical companies on expanding that industry in Canada to ensure supplies of products like vaccines, the biotechnology and life sciences sector is a growing opportunity for the real estate industry.