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Amid a series of interest rate increases that were sharper and faster than expected, inflation at levels Canada hasn’t seen since the 1980s and an uncertain geopolitical environment, the Canadian real estate market is experiencing and is looking ahead to a period of significant disruption.
Key trends for 2023 include rising challenges around costs and capital availability, a growing urgency around sustainability and real estate as well as other ESG matters and the need to find meaningful solutions to Canada’s housing affordability crisis.
By focusing on proptech and other solutions that enable the business, capitalizing on new opportunities that emerge during this period of change and embracing long-term thinking rooted in fundamental trends, real estate companies can ensure continued success for the future.
Canadian real estate companies have a good and long run of success, but the sentiment has changed significantly as they look ahead to 2023. Amid converging financial, environmental and social pressures, many of the Canadian real estate companies we interviewed and surveyed in the summer of 2022 are predicting a pause in market activity as they watch how the current uncertainty plays out. But while the changing environment in 2022 has been a shock for some, the long-term outlook for the Canadian real estate market is positive. The key to navigating this complex and volatile environment is a mix of patience, agility and a willingness to take bold actions to deliver sustained growth and outcomes in 2023 and beyond.
We can see the changing outlook in our annual survey of Canadian real estate companies, which asks industry players about prospects for the year ahead. Among the biggest shifts in sentiment was around the outlook for capital availability in 2023, which is a key consideration for real estate investment strategies and development plans. As you’ll see in the charts on the left, a significantly higher percentage of survey respondents expect various types of debt and equity capital will be less available compared to 2022. And as we explore in this year’s report, there are a number of reasons why institutional capital may not be as plentiful for Canadian real estate as in the past.
Note: Figures for each year come from surveys done the previous summer and reflect a forward-looking outlook among real estate industry respondents.
Whereas Canadian real estate companies previously expressed concern about too much capital creating even more competition for deals and pushing up prices for assets, the opposite is true now due in large part to a succession of interest rate increases by the Bank of Canada.
Lenders, according to interviewees, have been tightening borrowing requirements which, along with higher financing costs, are making it harder for real estate companies to raise capital and move projects forward. This, in turn, is leading to reduced competition for deals during a period of price discovery in which sellers and buyers find themselves at odds over pricing expectations and valuations as some real estate assets come under pressure. For now, the heightened uncertainty is leading many players to stay on the sidelines as they wait to see where the market, particularly when it comes to pricing and valuations, settles.
On top of concerns about the capital markets are supply chain shortages and delays as well as significant increases in costs for labour and materials. What does this mean for real estate companies? For some, it adds further to the need to take a pause on activity.
There are many factors underpinning the growing imperative around sustainability and the real estate industry as well as other aspects of environmental, social and governance (ESG) performance, but a few issues in particular are driving the increased focus now. Key among them is the ability to attract capital. At a time when financing is both less available and more expensive, companies with a strong ESG track record will have an advantage in attracting investment from institutional players and sourcing new forms of capital that continue to grow in Canada.
Even as many Canadian real estate companies have responded by increasing their focus on ESG strategies, expectations continue to rise in key areas, including when it comes to having robust commitments to address climate change. But while real estate companies can expect more questions from investors about their plans to reach net-zero greenhouse gas emissions, our interviews showed some companies have yet to fully embrace this new imperative. And according to our 2022 global CEO Survey, just 19% of real estate executives said their organization had made a commitment to net-zero greenhouse gas emissions.
And the imperative to act quickly goes well beyond investor expectations. Another key factor is the evolving area of climate disclosures, which will increasingly affect both publicly owned and private real estate companies in Canada. Among the considerations are the draft sustainability disclosure standards from the IFRS Foundation’s International Sustainability Standards Board, which set out detailed requirements in areas such as climate-related information and make reference to industry-based provisions for sectors like real estate.
Housing costs and availability ranked as the top social/political issue among survey respondents this year, and it’s no surprise as concerns about affordability matters continued to rise and reached crisis levels in some areas of the Canadian real estate market in 2022.
Moves by the Bank of Canada to raise interest rates as part of its bid to tackle inflation are having an impact on the housing market. But higher interest rates will counteract the affordability impacts of any easing of home prices, at least for the time being. And overall affordability pressures are affecting other classes of residential real estate as rising interest rates push many potential purchasers to try to rent a home instead.
Recent policy discussions and actions have acknowledged that increasing supply is at the crux of any solution to Canada’s housing affordability crisis. While the increased acknowledgment of the supply gap is positive, the actions fall far short of what’s necessary. Governments also need to recognize the ways their actions hinder affordability by adding significant costs onto the construction of new housing. The real estate industry also has a role to play in helping address the crisis, and many interviewees say they’re ready and eager to do their part. Actions by Canadian real estate companies to incorporate technology innovations, as well as process changes that reduce the cost of and speed up the time to build housing can make a difference.
What do this year’s trends mean for the top opportunities for real estate investment and development in 2023? Explore our annual look at the best bets in the Canadian real estate market below:
Industrial real estate: Industrial real estate remains a best bet, with subcategories like warehousing, fulfillment, data centres and self-storage ranking high among investment and development recommendations in our annual survey of industry players. But the pressures affecting real estate as a whole, such as rising interest rates, are also affecting industrial properties. As interviewees noted, this will make it important for buyers to assess opportunities even more closely than before.
Multifamily residential housing: This was also a frequently mentioned best bet, although the outlook was mixed. On the one hand, factors like rising immigration activity are driving demand both now and looking further out. But how does this square with discussions about delays of condo and purpose-built rental housing projects? One explanation is that the current environment favours investment in multifamily housing as opposed to developing it.
Life sciences: While we’ve discussed health-related uses, like life sciences, as a best bet in the past, this sector was even higher on the agenda of interviewees this year and was a favourite among survey respondents. Like our other best bets, this category also has its limitations, including the fact that it remains a relatively small niche sector in Canada’s real estate landscape. Still, this category fits with the overall increased focus on niche sectors this year.
All of these trends add up to a significant reset for the real estate industry in Canada. For some, the changing sentiment has led to a pause on making big moves. While that will be part of the strategy for some companies navigating this period of price discovery, now isn’t the time to hold off on actions necessary to set the organization up for sustained outcomes and growth. So what's the path forward for Canadian real estate companies preparing for 2023?
Download our full report to learn about how investing in property technology (proptech) and other digital solutions that enable the business can help your organization adapt and grow. We also explore how real estate players can capitalize on new opportunities that will emerge amid the current reset for the industry as well as the importance of focusing on and staying ahead of long-term trends so companies can be ready to transact when activity picks up again. And with expectations around issues like net-zero commitments set to rise quickly, Canadian real estate companies can use this pause to develop even stronger ESG strategies.
While many of these issues aren’t easy to navigate, the Canadian real estate industry has successfully managed through periods of challenge and uncertainty in the past, which should give companies confidence in their ability to see value beyond the short term and deliver sustained outcomes in 2023 and the years that follow.