From millennials eager to live where they work to downsizing Baby Boomers to new arrivals from other provinces or from around the world, Canada’s urban populations are set to continue to grow — and their needs are evolving. Because of this, mixed-use projects combining residential, retail, and commercial components continue to thrive — and there’s a growing consensus that developers must do better when designing public spaces. Developers have responded by continuing to rethink their approach to mixed-use projects: instead of focusing on building “stand-alone” mixed-use buildings, they’re increasingly building mixed-use neighbourhoods and communities that pack residential, retail, and commercial space into a dynamic whole. Most respondents noted that this type of “place making” is a reality that developers need to seriously consider.
Investments in transit infrastructure also are contributing to this evolution, as cities look to establish new areas of development and density around key transit hubs. This is enabling developers to build mixed-use communities both inside and outside the downtown core. And it’s also giving homebuyers more of a choice between “live where you work” and “work where you live.”
But as mixed-use grows and evolves, developers are discovering that projects are becoming increasingly complex and creating new risks they haven’t had to deal with before. To mitigate this, some developers are partnering with others to pool their respective specialized expertise. Some respondents have also observed more cooperation between former competitors, with one noting that partnerships and joint ventures have become more acceptable than ever before. “Our approach is to continue building relationships for potential alliances of this nature,” one developer said.
Affordability on the Decline
Housing affordability has become a major point of concern in Canada, and respondents said it won’t let up. High prices in Vancouver and Toronto will continue to squeeze affordability, with both cities’ mortgage-to-income ratios forecast to remain well above the Canadian average in 2017 (figure 1). Montréal will stay a distant third — still below the national average — with Winnipeg and Québec City being the most affordable. On the whole, 2017 looks to see a pullback on double-digit, year-over-year housing price increases, with Toronto leading the way with under five per cent growth this year (figure 2).
In the short term, Toronto’s and Vancouver’s markets are set to diverge slightly. Even before the additional property transfer tax on non-residents, Vancouver had embarked on a modest correction that started in early summer 2016. TDEconomics reported that, by mid-2017, it anticipated a 10 per cent decline in home prices, which was then expected to stabilize by the end of the year. In Toronto, it’s business as usual — and barring a similar tax, foreign investors may see that city’s market as increasingly attractive. But some interviewees have expressed concerns of a pullback by consumers, especially as the cost of single-family detached houses eclipses wage growth.
Significant increases in immigration over the next five years (figure 3) will continue to keep demand high and put even more pressure on affordability unless more supply is made available. Because of this, demand is anticipated to remain strong, but provides growth opportunities not just in Toronto and Vancouver but also across the rest of the country. As it stands, the average home size in Canada tops that of most other countries (figure 4), and with increased immigration on the horizon, those arriving in Canada may not have the same size expectations, creating demand for smaller units. As well, due to the high cost of moving, and the lack of affordable options for moving up, one interviewee said that existing homeowners are choosing to invest in renovations, putting further pressure on the supply of resale homes.
With no real factors reducing the demand for real estate in Toronto and Vancouver, developers and builders will continue to face supply-side issues. Many believe that provincial government land use policies — like greenbelt legislation and intensification requirements in Ontario and British Columbia — together with increasing time requirements to get local government approvals are factors holding back the supply of available land for development. “Government needs to increase the supply,” one interviewee noted. “If there was enough supply, there would be no affordability issue.” Another said that if government would release even 10 per cent of the restricted land, it would solve a big part of the problem. As well, a common issue in nearly all regions was municipal red tape and lengthy approval processes, which are also limiting supply and driving up costs.
While interest rates have stayed low and respondents don’t see any signs of a natural increase anytime soon, any jump could make housing even less affordable than it currently is and drive more significant changes in real estate markets. The sustained low interest rates may be lulling Canadians into a false sense of security, thus spurring them to increase their debt loads. In fact, if interest rates rose by only one per cent, a significant number of Canadians may not be able to absorb the increase in their monthly payments. If this were to happen, the current affordability issue would be further compounded.
Renting for the Long Term
With housing prices in Toronto and Vancouver out of reach for many prospective homebuyers, many are choosing to rent instead. Attitudes toward renting are shifting and people are choosing to rent longer — some even permanently, as they weigh the costs of homeownership against the benefits. As Toronto and Vancouver become more similar to world-class cities like New York, Paris, and London, it is anticipated that renting will become the norm.
It is a trend that is sparking ongoing interest in purpose-built rental units, and raising questions about the size of units and the need for supporting infrastructure (e.g., schools, medical facilities, daycare, etc.) to accommodate millennials’ inevitable move toward parenthood and Boomers’ downsizing. In fact, some older homeowners are opting to sell their homes and cash out, moving into high-end or luxury rental units and keeping the proceeds of the sale for spending.
Technology Disruptors Hold a Competitive Advantage
Last year, the idea of disruptive technology was gaining traction among property developers and investors. Looking ahead, they now feel that real estate firms must take significant steps to adapt to customers’ growing tech needs or risk falling behind. Luckily, some technological advances are getting easier — and cheaper — to implement.
Many of those surveyed spoke of how technology is changing expectations and how they interact with potential tenants. Nearly endless information is available thanks to the internet, so customers are more informed than ever be-fore. They’re doing extensive research online before buying. On the development side, firms are doing more 3D computer conceptualizations in the planning stage, offering virtual tours to help potential buyers and reducing the need for physical showrooms. They’re also harnessing the power of data to make better business and marketing decisions and improve financial reporting.
Technology and a changing work-place are creating new demands for office developers and owners. Respondents said tenants are continuing to move toward smaller, open-concept spaces because of “workplace 2.0” changes like office hoteling (reservation-based, unassigned seating), flexible hours, and telework. With more people working remotely thanks to advances in teleconferencing, much less need exists for big, traditional offices. These new workplace concepts are especially appealing to millennial workers and are transforming even the most traditional of office tenants, such as law firms, accounting firms, and banks. Owners of older buildings are finding it harder to compete with newer properties that have taken their future tenants’ needs into consideration; the way forward isn’t necessarily clear, but upgrades and re-development don’t come cheap.
Technology is also transforming the residential market. Buyers and renters alike are increasingly expecting more energy-efficient properties and amenities. As hydro costs rise and technology prices fall, the value propositions for things like LED lights, green roofs, and Energy Star appliances become far easier to make. New systems in waste management and energy conservation will help achieve net-zero-impact buildings, which are likely to become more popular as concerns over climate change continue. As well, new technologies have emerged to improve residential homes’ air quality by reducing off-gassing from products like plastics and paints.
These new technologies are also making their way into building codes, though not everyone feels this is necessarily a positive. One respondent, for example, said that sometimes the new codes go too far, legislating features that provide “little to no actual benefit”—or benefits purchasers either don’t understand or don’t use.
Global Uncertainties Weigh on the Mind
Despite some regional differences, Canada’s real estate market has delivered few surprises. While the domestic front has been stable, developers, investors, and property owners alike express concern over global political and economic uncertainties. Many worry about the potential impact of Brexit and the U. S. election, while others also cite the global refugee crisis and Europe’s economic and terrorism struggles as areas of concern. Observers’ chief fear is that any one of these issues could have an outcome that sends markets and economies spinning, though whether Canada gets taken along for the ride isn’t clear. Most respondents believe these global uncertainties, along with the low Canadian dollar, will continue feeding demand for Canadian real estate; for now, Canada is seen to be a steady, low-risk place for investors to put their money.
Ongoing Oil and Gas Woes
Slumping oil and gas prices continue to weigh on the economy, and they’re hitting Alberta hard. The province has grappled with a recession for the second year in a row, with real gross domestic product (GDP) growth of –2.9 per cent in 2015 and –1.1 per cent in 2016, according to the Conference Board of Canada. While some expect oil and gas prices to rebound from their lows, how high that rebound will be remains to be seen.
Calgary has seen its share of ups and downs over the years, and experience has taught real estate investors to wait and see where the market goes before committing themselves to anything new. Oversupply of office space has not stopped some projects from being completed, but the Calgary market has hit the pause button. And while Edmonton isn’t immune to the challenges of low oil prices, the impact on its real estate market has been softened thanks to the city’s more diversified economy and significant investments in redeveloping its downtown core.
Waiting for Deals
While eagerness for investing in property abounds, there still isn’t much to invest in. This was a significant trend in 2016, and continued demand — especially in Toronto and Vancouver — looks like it will continue to outstrip supply through 2017. Respondents said current players seem likely to hold onto their assets longer, with bigger players taking greater control of the marketplace. But respondents have seen newer players on the outside paying any price for land or projects just to get into the market. Some institutional investors are also looking to rebalance portfolios that are now disproportionately weighed to the West due to British Columbia price increases.
Access to capital is not seen by most respondents as a problem, with one stating that there’s a “lineup of money looking to be placed.” Overall, real estate is still seen as a good asset class, and its historic returns will continue to make it an attractive investment opportunity for both local and foreign investors.
The preceding is an excerpt from The Emerging Trends in Real Estate 2017, a joint publication between Urban Land Institute and PwC. It can be found at pwc.com.
Andrew Warren serves as the Director of Real Estate Research for PwC.