Emerging Trends in Real Estate® 2024

Strategies for resilience and growth during uncertain times

At a glance

  • Canada’s real estate sector is facing the “years of the great staring contest” as high interest rates, capital scarcity and uncertainty about valuations put a damper on deals activity.

  • As market challenges intensify, Canadian real estate companies need to pay even closer attention to exactly how they’ll create value by optimizing their assets and portfolios, investing in digital transformation and staying on top of trends like generative AI and ESG performance.

  • Industry players are keeping a close eye on this year’s best bets— industrial real estate, multifamily residential housing and necessity-based retail property—that offer the right opportunities to deliver growth in 2024.

     

Industry challenges balanced by long-term confidence

This year, we saw the continued deepening of recent trends—such as higher interest rates and more expensive and increasingly scarce capital—that are creating yet more difficulties for many Canadian real estate companies. But the companies we interviewed for this year’s report were generally confident about overall demand for real estate, with many pointing to Canada’s immigration-fuelled population growth as a source of long-term strength for the industry.

Unlike previous years, interviewees are approaching all asset classes with a fair amount of caution as the market overall becomes increasingly bifurcated. In this challenging environment, companies are also looking at emerging growth opportunities, such as debt funds, as they navigate market pressures. And while a number of industry players say current business challenges are leading companies to take a more measured approach to key trends like environmental, social and governance (ESG) matters, this remains an important issue that some interviewees are embracing as a way to create value.

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Declining capital availability a key concern for Canadian real estate companies

We can see the evidence of industry challenges in our annual survey of Canadian real estate companies, which asks them about business prospects for the year ahead. A key issue is the outlook for capital availability in 2024. As you’ll see in the charts below, a significantly higher number of survey respondents expect various types of debt and equity capital will be undersupplied compared to 2023 and previous years, which will add to the financing challenges facing real estate companies and impact their investment strategies and development plans in 2024.

Note: Figures for each year come from surveys done the previous summer and reflect a forward-looking outlook among real estate industry respondents.

1. Costs, deals and capital markets

One of the issues we asked interviewees about this year was whether the environment of price discovery would continue in 2024. While some interviewees felt they were getting a better sense of valuations, there was a general feeling that uncertainty around asset prices would remain a key factor in holding back transactions for the time being. One interviewee summed up much of the industry sentiment in their description of the ongoing trend around price discovery now and in the year ahead: “2023, 2024—the years of the great staring contest.”

Among the factors holding back industry activity are interest rates predicted to stay higher for longer, rising financing costs and less capital being made available for real estate. And while costs pressures and labour shortages have been issues for the industry for some time, these challenges continue to deepen along with the added impact of productivity concerns.

So what are companies doing in response? For some, the answer has been to shore up liquidity while others embrace the emerging trend, at least for the moment, of starting up debt funds. Real estate players are also carefully eyeing other ways to create value by strategically repositioning their portfolios, optimizing assets through further investments in digital transformation and considering the possibilities of fast-evolving technologies like generative artificial intelligence.

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2. ESG strategy, reporting and performance

The ESG agenda has continued to evolve for Canada’s real estate industry, with sentiment about the importance of environmental, social and other concerns shifting among some interviewees. “Quietly, the sentiment among investor feedback is that it’s maybe less important than the year before,” said one interviewee, suggesting the focus on ESG matters had diminished given current economic pressures. Balancing this were our survey findings ranking environmental matters like climate change as a top issue for respondents this year as well as a noteworthy segment of interviewees who felt that the importance of ESG performance has risen.

While some companies might take a slower approach for now, there are several reasons to remain proactive about ESG matters. These include the evolving regulatory environment, especially in light of the pending adoption by the Canadian Securities Administrators of two key standards finalized by the International Sustainability Standards Board (ISSB) in 2023: general requirements for disclosure of sustainability-related financial information and climate-related disclosures. While the ISSB standards will apply directly to publicly listed companies, they’ll affect privately owned businesses in a number of ways given, for example, expected requests to landlords from tenants for a building’s sustainability and climate-related information.

ESG also remains important in light of increasing evidence that some companies and investors are seeing ESG considerations as a strategic lever to create business value. This can mean not only mitigating the array of risks associated with environmental issues like climate change but the benefits captured by more sustainable buildings in the form of higher rents and reduced operating costs from energy efficiencies. And even for companies taking a more measured approach to environmental and social matters due to rising business pressures, it’s helpful to consider how technology-enabled ESG reporting tools, sustainable building solutions and incentives and partnerships can help them continue to make progress in their journeys.

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3. A deepening affordability crisis as the housing market reaches a breaking point

Concern about housing affordability continued to grow in 2023, and we can expect this trend to deepen in 2024 given current trends around homebuilding and the current pace of population growth. Amid the growing recognition of the need to increase housing supply, governments at all levels have announced policy changes recently, with some provinces introducing measures to streamline approvals of new housing projects. A notable move by the federal government was the announcement of plans to remove the Goods and Services Tax charged on new purpose-built rental housing projects, which the industry is paying close attention to given the possibility of corresponding provincial sales tax changes.

Another key issue mentioned by interviewees is the need to better distinguish between deeply affordable homes for low-income Canadians and attainable housing suitable for a broader spectrum of homebuyers and renters. Both are in short supply and require different supports, solutions and incentives targeting varying needs and circumstances.

While interviewees emphasized that governments need to take the lead on ensuring the supply of deeply affordable housing, they also acknowledged their role in helping support housing attainability for more Canadians. Ideas raised included creative measures to make units smaller and less expensive while enhancing common areas of buildings to help make up for reduced space. This is also another key reason for companies to adopt construction technologies, building innovations and process changes that help mitigate the pressures raising the cost of housing. 

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Best bets for the Canadian real estate industry in 2024

What do this year’s trends mean for the top opportunities for real estate investment and development in 2024? We identified three key opportunities through our interviews and survey of industry participants: industrial real estate, multifamily residential housing and retail property. Besides these three best bets, an honourable mention goes to debt funds, which were an opportunity cited by many interviewees this year.

Industrial real estate: The industrial segment remains a best bet, although there’s greater caution around the outlook for the year ahead. With industrial real estate perfectly priced and a sense that the recent fast pace of rent growth is unlikely to continue, sentiment around this asset class was more reserved compared to previous years. But given strong fundamentals like a very low vacancy rate across Canada, industry players still see opportunities in industrial properties, particularly in the manufacturing and warehousing segments and niche areas like data centres.

Multifamily residential housing: While talk of condo and rental project delays or cancellations reflect challenges in the multifamily residential asset class, this segment, like industrial real estate, boasts of solid fundamentals. Within the rental segment, some interviewees were bullish on specific types of opportunities even with current cost and financing headwinds, and the recent federal government announcement of GST relief for new construction projects has already started to generate further industry interest. We also saw more discussion around niche assets in the multifamily segment, such as student and senior housing, in light of trends like the growing numbers of international students in Canada as well as the country’s aging demographics.

Necessity-based retail property: A perhaps surprising addition to the best-bets list this year is this segment of retail property. Sentiment around the retail asset class overall has improved significantly, especially when it comes to grocery-anchored developments that serve communities seeing strong population growth. Neighbourhood/community shopping centres ranked particularly high for investment prospects in our survey this year.

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