Where are the best places to invest in real estate in Canada? What’s ahead for the Vancouver housing market in 2023? And what are the key trends in the Toronto real estate market as we look ahead to next year? Explore perspectives on the business issues in these and other markets to watch as well as the top opportunities for the real estate industry across the country as we prepare for 2023.
The Vancouver real estate market continues to rank highest among major Canadian cities for both its investment and development prospects, according to our annual survey of industry players. The Conference Board of Canada (CBoC) is also predicting healthy economic growth of 3.3% in 2023.
Rental demand is strong, while the Canada Mortgage and Housing Corp.’s 2022 spring housing market outlook suggests construction activity won’t be enough to increase vacancy rates or reduce rents. And amid rising interest rates and slowing migration from other provinces, housing starts are forecast to decline by 15.8% in 2022 and by 6.4% next year, according to the CBoC. Among the opportunities for the real estate industry are developments along the Broadway subway project, which is finally underway.
The office market is seeing declining vacancy and climbing rents with new developments
in the works. The all-class downtown vacancy rate dropped to 7.2% in the second quarter of 2022, down from 7.7% at the start of the year, according to CBRE. Among the factors buoying the office market are a vibrant technology sector as well as a higher propensity for employees to return to the workplace in Vancouver and other cities in western Canada.
The amount of developable industrial land continues to shrink, with much of the city’s remaining inventory made up of small pockets, according to Colliers. The industrial vacancy rate of 0.1% is the lowest in the country, according to Colliers, which reported a 22.5% year-over-year rise in the asking net rent.
The Toronto real estate market remains a favourite for survey respondents, driven in part by strong population growth projections. “Toronto is going to get into a boom based on strong fundamentals,” said one interviewee who expressed optimism about the region’s prospects despite some uncertainty in the short term.
Among the factors helping to bolster the market is continued economic growth. According to the CBoC’s spring 2022 major city insights report, gross domestic product will rise by 3.5% in 2023, which is down slightly from an estimated increase of 3.8% in 2022.
But the short-term outlook for some areas of the Toronto real estate market is mixed. Amid fewer preconstruction sales, total housing starts will fall in 2023 before rising in 2024, CMHC predicted in its spring 2022 housing market outlook. Adding to the challenges are plans by the City of Toronto to raise residential development charges by 46% by 2024.
There’s also ongoing uncertainty around the office market, as tenants wait to see how return-to-office strategies evolve. While downtown foot traffic has risen, it’s still below pre-pandemic levels. The outlook for industrial assets remains strong, although there’s some concern that demand could drop if there’s a broader economic downturn.
At 2.7%, the CBoC is predicting slightly more modest economic growth for Montreal in 2023 than some of our other markets to watch. Even so, the city’s attractiveness for investment activity and a very low unemployment rate that the CBoC expects to dip to 5.3% this year continue to be sources of strength.
A key focus of activity is the rental housing market, where low vacancy and healthy rental rates are driving construction growth. Condos are also attractive, and many projects are moving forward despite rising interest rates and other industry challenges. For many interviewees, the focus is on cost controls and finding solutions to financing challenges. Developers also see opportunities around transit-oriented development, including those related to the ongoing development of the Réseau express métropolitain network.
In the office market, many large tenants are still considering whether to downsize or sublease space. Pressure remains high on landlords of Class B and C offices. While it’s hard for them to compete with newer Class A spaces and recently renovated buildings, many landlords want to make sure they have secured tenants before embarking on a major revitalization.
With a vacancy rate of 0.6% during the first two quarters of 2022, the industrial market is extremely tight, according to Colliers. Asking net rents rose by a whopping 64% on a year-over-year basis, Colliers reported.
Calgary is a key market to watch, rising to No. 4 in our survey from No. 8 last year. Stronger oil prices are welcome news for the city, which is also seeing high levels of investment in the local technology and film sectors amid the drive to diversify the economy. The CBoC is predicting strong economic growth of 6.6% in 2022 and 4.7% in 2023.
The result is a rebound in sentiment about Calgary among interviewees compared to the last couple of years. The city has a strong outlook for residential activity, with its economic recovery, job growth, relative affordability and rising recognition as a desirable place to live making it attractive for many looking ahead to 2023.
Calgary’s office market will be challenging for some time to come with too much supply and insufficient demand amid further consolidation in the energy sector and the ongoing re-evaluation of space requirements by employers. The city’s high downtown office vacancy rate continues to spark discussions about repurposing office space into residential units. One interviewee noted they have pursued opportunities with the help of a municipal incentive program aimed at turning excess office space into residential units.
The industrial market is seeing high levels of activity, with the vacancy rate falling to just 2.4% in the second quarter of 2022, according to Colliers. Calgary remains attractive compared to even tighter markets, with affordable land still available on the city’s periphery.
The economic outlook for Edmonton is bullish, with the city rising in our survey rankings of markets to watch over last year. The CBoC is forecasting economic growth will reach 5.6% in 2022, followed by another healthy rise of 4.2% next year.
Another advantage for Edmonton is the fact that it, like Calgary, remains relatively affordable. And unlike many cities where CMHC criteria for affordability supports can be a barrier to pursuing projects, interviewees see more opportunities to build affordable housing in Edmonton, where the structure of the programs is less of a challenge.
Among the trends in Edmonton are efforts by the municipal government to increase density by encouraging the development of mixed-use communities. As a result, it’s considering taxing low-density properties at a higher rate than multiunit buildings.
While the office market is beginning to stabilize, leasing activity remains sluggish as companies continue to assess space needs amid a changing world of work. And like in many cities, the industrial market is strong. Apart from the traditional demand drivers related to warehousing and fulfillment, interviewees told us some industrial users are looking for additional space to keep more inventory on hand to manage supply chain issues.
Ottawa continues to thrive alongside Canada’s top markets, with many interviewees expressing optimism about the city’s prospects. “Ottawa is … on everyone’s radar, especially out-of-town investors,” one interviewee told us.
A key source of residential and other types of building activity across the city is the ongoing expansion of light-rail transit in Ottawa. As construction of the second stage of the light-rail line continues, developers are eagerly eyeing and pursuing multifamily and mixed-use development opportunities close to transit stations. Another noteworthy development is LeBreton Flats, a government-owned site just west of downtown Ottawa that has been vacant for decades.
On the commercial side, all eyes are on the federal government, which is a major office tenant. With no singular return-to-office strategy—the government is leaving it up to individual departments to decide—landlords are facing significant uncertainty. Another consideration for owners of older office buildings is the trend towards short-term lease renewals by some federal government tenants. Among the reasons cited by interviewees are evolving government sustainability requirements.
Ottawa’s industrial market continues to see strong demand, with a vacancy rate of just 1.1%, Colliers noted in its report for the second quarter of 2022. The asking net rent was up 13.3% on a year-over-year basis.
The CBoC is expecting economic growth of 2.6% for Halifax in 2023, up slightly from 2.5% this year. The city is benefiting from people moving from other provinces. According to the CBoC, interprovincial migration in 2020 and 2021 was more than 10 times the annual average of the previous decade.
The rental market is very tight, which CMHC predicts may continue in 2022 before easing in the next two years. Temporary provincial rent control measures are also creating challenges by discouraging tenant turnover. Multiresidential housing construction is a significant source of building activity, but more supply is needed to address affordability challenges. As concerns about affordability mount, the provincial government is working on solutions to accelerate development approval timelines in Halifax.
Downtown Class A office vacancy rates are high, sitting at 26.2% in the second quarter of 2022, according to CBRE. While there’s some discussion about repurposing outdated and vacant office space into multifamily inventory, the costs of conversion—combined with challenges around labour availability—make it hard for the numbers to work.
The Halifax industrial market continues to grow, with Colliers reporting a record-low vacancy rate of just 1.8% in the second quarter of 2022. The strength of the industrial market extends to other areas of the Atlantic region, which could see a further boost from liquified natural gas terminal projects now being given another look in light of shifting global energy needs as well as from growing discussions about the prospects for hydrogen facilities.
Quebec City’s economy will grow at a solid pace in the near term, rising by 3.4% and 3%, respectively, in 2022 and 2023, according to the CBoC.
A key source of activity in the residential market is rental construction, which in 2021 helped housing starts reach their highest level in 30 years, CMHC noted in its spring 2022 housing market outlook. Still, CMHC expects demand to exceed supply.
An ongoing issue to watch is Quebec City’s tramway project. It received the province’s go-ahead in April and is expected to move forward in 2023. But delays and questions about the route are continuing to create uncertainty for the real estate community around the transit-oriented development opportunities this will create. Like in many markets, interviewees are struggling with shortages of labour for projects, with many saying demand for workers for government infrastructure activities is adding to the challenges.
In the office market, tenants are signing short-term lease renewals amid uncertainty over return-to-office strategies. The city is seeing some redevelopment of shopping centres, with retail space complemented by multiresidential towers and non-traditional tenants, such as post-secondary institutions. On the industrial side, there’s a lot of appetite for space but a limited amount of land available.
The CBoC is projecting a solid outlook for Winnipeg, with economic growth of 3.5% next year following a projected rise of 4% in 2022. Growth was even higher last year, at 4.1%.
On the residential side, home prices have risen just as in other cities, but the affordability picture is much more favourable than elsewhere in Canada.
In the office market, CBRE is reporting a downtown Class A vacancy rate of 14.5% for the second quarter of 2022. This was up slightly from 14.4% in the first quarter, according to CBRE, which found a lower all-class suburban vacancy rate of 9.4% compared to 16.4% downtown.
On the industrial side, absorption is high, rents are rising and construction activity remains strong, according to Colliers. The industrial vacancy rate was just 2.3% in the second quarter of 2022, Colliers found.
Economic growth in Saskatoon is projected to be strong as the world’s need for commodities like potash gives a boost to local prospects. The CBoC is projecting growth of 5.3% this year, followed by 4.1% in 2023.
After a projected decline in 2022, the CBoC is expecting housing starts to rise next year. While affordability remains attractive compared to many other parts of Canada, CMHC expects rising demand for more affordable types of housing, such as townhouses and condos.
The overall office vacancy rate is expected to fall in 2022 to 19.1% from 19.4% last year, according to CBRE. And on the industrial side, Saskatoon’s market is seeing an uptick in leasing activity, which helped lower the city’s vacancy rate to 2.1% in the second quarter, according to Colliers.
Managing Director, Real Estate Consulting Leader, PwC Canada
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