Toronto, November 4, 2022 – With a series of interest rate increases, inflation levels at an all time high since the 1980s, along with an uncertain geopolitical environment, it’s no surprise that the Canadian real estate market is in a current state of disruption. Canada’s real estate industry did have a good run, with plentiful capital; rents, valuations and returns continued to rise across much of the industry; and Canada’s stability and immigration trends played key roles in making the nation an attractive place to invest. Now, with the mix of interest rate increases that were sharper and faster than expected, uncertainty continues to reverberate throughout the global economy and in Canada.
“There is no doubt that the real estate market in Canada is experiencing a reset. Players in the industry are navigating this disruption in different ways. For some it has led to a pause on development decisions and transactions,” said Frank Magliocco, Real Estate Leader, PwC Canada. “However, now is not the time to pause on actions necessary to set the industry up for sustained outcomes and growth. It’s time to focus on digital tools and other innovations that enable the business, and to capitalize on new opportunities that emerge during this period of change and embrace long-term fundamental trends.”
While overabundance of capital was a significant concern last year, the sentiment has changed in 2022 with those interviewed for this year’s report expecting continuing challenges in 2023. The concern previously was 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 settles, particularly when it comes to pricing and valuations.
Real estate companies can expect more questions from investors about their plans to reach net-zero greenhouse gas emissions. The interviews this year showed that some companies have yet to fully embrace this new imperative.
Furthermore, data from PwC’s 2022 global CEO Survey shows that a mere 19% of real estate executives said that their organization had made a commitment to reducing net-zero greenhouse gas emissions.
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. Another key factor in implementing ESG strategies 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 and make reference to industry-based provisions for sectors like real estate.
“This year’s report obviously reflects the rapidly shifting economic landscape on which our industry needs to navigate, but it also points to the extension of longer term trends - such as the premium of ESG as a key ingredient imperative for growth,” said Richard Joy, Executive Director, ULI Toronto.
The top social and political issue among this year’s report is housing costs and availability. Affordability continued to rise and reached crisis levels in some areas of the Canadian real estate market in 2022. In fact, RBC Economics’ housing affordability index report, showed ownership costs as a percentage of median household income reached 59.3% for single-family homes at the start of 2022.
In Canada, the supply is insufficient to meet housing demand, for all types of homes. Demand will continue to rise, especially as the Canadian government commits to higher immigration targets in the coming years and the country welcomes large numbers of temporary residents. This year’s interviewees are looking at pausing housing developments like condo projects because of cost and financing challenges as well as rising interest rates. Supply and affordability challenges won’t go away even if the housing market cools for the time being.
The report explores 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.
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