Shift in Canadian Real Estate Market is Creating New Opportunities for Investors, Says New PwC Canada and Urban Land Institute Report

Vancouver and Toronto continue on a path toward growth while Calgary and Edmonton slip due to broader market forces

TORONTO, Oct. 7, 2015 /CNW/ - The Canadian real estate market is in a period of transition and the factors that have traditionally driven the market are changing according to Emerging Trends in Real Estate® 2016, jointly released by PwC Canada and the Urban Land Institute (ULI). The low Canadian dollar and slumping energy prices are creating real estate opportunities in warehousing, transportation, manufacturing and other sectors across the country that are traditional strongholds during times of economic decline. In residential real estate, housing costs continue to grow faster than the average Canadian income which is leading towards an expanding rental market.

Now in its 37th year, Emerging Trends in Real Estate® is one of the most highly regarded annual industry outlooks for the real estate industry. It includes interviews and survey responses from more than 1,400 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.

"Despite slower economic growth, opportunities in the Canadian real estate market abound but they are changing. Investments that have traditionally been sought after are shifting in favour of safer, more stable market sectors," said Frank Magliocco, national real estate practice leader, PwC Canada. "New trends are disrupting the Canadian real estate market. From Canada's aging population creating opportunities in market sub-sectors like healthcare, to technology transforming the demand for space, the way investors do business and construction itself, industry players that recognize these opportunities will benefit from an evolving market."

"The complex land use and real estate story of the Toronto Region is about to become even more complicated. Competitive global forces demand a heightened need for all of Canada's urban regions to achieve greater urban efficiencies to drive increased social, environmental and economic value into land use development," said Richard Joy, Executive Director, ULI Toronto. "It's a future where the demands of mixed-use intensification will further intensify as the constituent parts of a city become increasingly interconnected, and the distinctions between built form, mobility, and intelligent systems become increasingly blurred."

10 Trends to Watch in Canadian Real Estate:

  1. Caution Rules
    Having been on a path of continuous growth since the global economic crash, this year's report points to a shift from west to east rather than a downturn. Investors are being more cautious by seeking out more stable investment opportunities like warehouses, fulfilment centres and neighbourhood shopping centres. However, this heightened level of caution appears to be driven by pragmatism, not pessimism. More than anything else, it seems that respondents believe that the Canadian market is due to take a breather rather than take a dive.
  2. Liquidity & Lack of Investable Assets
    This year, respondents call out the lack of quality product available for purchase, given the current cost of capital. Prized, top-tier Canadian properties are increasingly in the hands of pension funds, institutional investors, and REITs. As a result, transaction volumes have picked up for secondary assets which are often older and require investment to suit current market needs.
  3. Office Leasing: An Evolving Market
    With so little top-tier product available, respondents are maximizing their existing holdings and seeking out new tenants and longer leases in order to maximize yield. Leasing itself is changing, in part due to tenants' own business challenges. Tenants are reducing space per employee, and some tenants are sharing offices, or opting for value over high-end, luxury amenities.
  4. Stronger U.S. Dollar Generates Some Optimism
    Economic uncertainties in China and Europe have Canadian firms once again looking to the United States to drive growth. It's not without risk, of course: the U.S. recovery is not especially strong, and many U.S. trading partners are not growing. The U.S. dollar's relative strength could well benefit Canadian real estate markets, particularly in eastern Canada in the industrial development and distribution centre sectors.
  5. Lower Oil Prices: Mixed Impact
    The sharp drop in oil prices has led some to speculate that eastern Canada will regain its position as Canada's economic engine. Investors appear to be biding their time with little to no large real estate purchases or sales taking place in Alberta. Elsewhere, low energy prices may generate growth in certain sectors and their related real estate markets. Gas pump savings could also boost business and consumer spending, potentially benefiting retailers, among others. This could, in turn, drive activity in industrial, office, and commercial real estate, especially in the east.
  6. Foreign Investment: Canada Retains its Allure
    Global investors continue to see Canada as a safe haven for their capital, and the lower Canadian dollar only adds to the allure. Many respondents expect foreign investment to continue to flow into Canadian real estate—not only into traditional markets like Vancouver, Calgary, and Toronto, but also into Montreal and even Saskatoon, where interest in farmland and development land is rising.
  7. Housing Affordability Concerns Rise
    While developers are building condominiums and mid-density products like stacked townhouses to meet municipal and provincial urban density demands, it is getting harder for developers to build affordable housing in the urban centers that people covet—which could have consequences for Canada's urbanization trend. Land prices continue to rise, and many believe that provincial government policies are a key factor. In addition, lengthy approval processes and significant development charges also are limiting supply and driving up costs across the country. And then there are the construction costs themselves, which continue to rise.
  8. Rise of the Renter
    As concerns over housing affordability grow, a rising number of Canadian households are choosing to rent rather than buy which is creating new opportunities across the country. Renting is no longer seen only as a temporary step on the road to homeownership, but as an alternative. Today, we are seeing the rise of permanent renters—a new demographic in many Canadian markets, especially as a growing proportion of the population cannot assemble the down payment for a new home.
  9. Resilience of the Suburbs
    The urbanization trend remains strong in Canada, but this year's report dismisses suggestions that the suburbs are in decline. Suburbs around the Greater Toronto Area are also becoming more expensive due to government policies, immigration, and higher demand. Respondents believe that major investments in transit infrastructure, especially in and around the Greater Toronto Area, will make the suburbs more attractive to a wider group of people. And as demand continues to drive housing prices higher in the core, they expect to see a growing number of people choose more affordable homes in the suburbs. In terms of commercial real estate, though, developers acknowledge that suburbs need more services, better tax incentives, and lower operating costs to compete with the downtown core.
  10. Technology Creates New Opportunities and Challenges
    E-commerce, cloud computing, mobile, and data analytics are just a few of the technologies that continue to reshape the way that people live and work each day. In the process, they are creating new opportunities—and challenges—for Canadian real estate players. This year's report highlights numerous ways that technology is changing how market players do business. Specifically, technology is having a direct impact on the demand for space in the office sector as well as demand and store format in the retail sector as e-commerce continues to grow.  In addition, real estate players are harnessing the power of data to make better business and marketing decisions and improve their investing and financing decisions as well as financial reporting. They're also using technology to improve how they design and build new developments and share knowledge across their enterprises.

Top 5 Markets to Watch

  1. Vancouver – This year's report names Vancouver as the top investment, development, and housing market in Canada. Vancouver's economic growth may have hit a recent peak in 2014, but growth in 2015 and 2016 is still expected to remain strong, with gross domestic product (GDP) growth at 3.1 percent in 2015 and forecast GDP growth of 3.2 percent in 2016, according to the Conference Board of Canada. Manufacturing, transportation, and warehousing are likely to drive this growth in 2016, owing to the Canadian dollar's weakness against the U.S. dollar. The construction sector will be kept busy by a number of larger-scale mixed-use development projects in 2016; some observers believe that the industry could also benefit should the low Canadian dollar attract further additional foreign interest in Vancouver housing.
  2. Toronto – Toronto achieved its strongest economic growth in four years in 2014 at 2.9 percent, and 2015 and 2016 are expected to be even better, with forecasted growth rates of 3.1 percent and 3.2 percent, respectively, according to the Conference Board of Canada. While many industries are expected to play a part in this growth, key drivers include manufacturing, transportation, and warehousing, as well as trade and business services. Once more, the disparity between the U.S. and Canadian dollars, as well as low energy prices, are seen as playing a positive role in spurring economic activity. Several high-profile construction projects may offset any potential drop in residential building activity in 2016.
  3. Montreal Montreal's economy is in for a period of stable but relatively low organic growth, though the region's GDP is projected to grow 2.6 percent in 2015 and 2.7 percent in 2016—the fastest rate of growth since 2002, according to the Conference Board of Canada. Major infrastructure spending should benefit the construction sector, though whether this will offset any potential slowdown in housing starts remains to be seen.
  4. OttawaPublic sector austerity measures have kept the government dominated economy of Ottawa relatively stagnant in recent years. The outlook for 2015 and 2016 is a bit brighter: the federal government has recently announced that it is in a surplus position and expects to remain in surplus for 2015–2016. The region's goods production sector is projected to expand by 1.7 percent in 2015 and by 2.5 percent in 2016. Slow demand for single-family homes and a possible oversupply of multi-residential units are clouding the forecast for residential building, but the construction industry should be well supported by infrastructure projects in 2016.
  5. SaskatoonAccording to the Conference Board of Canada's spring 2015 Metropolitan Economic Trends report, Saskatoon's economic growth rate is expected to see a significant drop in 2015, bringing it to 1.8 percent from the 6.1 percent in 2014, a level just below the national average of 1.9 percent. The ripple effect of the slowdown in primary industry and utilities could cause slower growth across all sectors of the Saskatoon economy.

While Calgary and Edmonton have been on a long standing trajectory of growth, economic uncertainty has led to it falling out of the top five cities to watch this year. Supply in the office sector, vacancy rates and the falling price of oil are all factors impacting the Calgary real estate market however this market has a history of short-term volatility while experienced investors in the market have typically taken the long view.

Property Type Outlook

Retail
The rise of e-commerce and changing consumer behaviours are driving profound shifts in Canadian retailing, with significant implications for retail real estate. Retailers are rethinking their real estate needs in the online shopping era. Smaller store footprints, locations that combine both retail and distribution functions, and click-and-collect facilities will become increasingly common. Destination retail properties—outlet malls or large centres with premium brands—are poised to do well as Canadians search for memorable shopping experiences along with good deals.

Purpose-Built Multi-Residential Rentals
Faced with rising and increasingly unaffordable housing prices, Canadians across the country are instead choosing to rent. Rental demand is likely to remain strong in locations such as Montreal, where a traditionally strong rental market already exists—as well as centres like Toronto, with its housing prices and solid population growth. Focus has now shifted to the development of purpose-built multi-residential units to meet the needs of a changing marketplace.

Single-Family Homes
Continuing demand, increases in development charges and other costs, as well as government policy impact on supply, will continue to impact home prices and housing affordability. Developers believe that if the trend continues, many Canadians will grow more comfortable with living in smaller spaces. Those Canadians who want more space will come to terms with commuting long distances in order to find affordable housing.

Condominiums
Demand is good, with both younger Canadians and older retirees eager to purchase condos and embrace the urban-core lifestyle. The drivers for international investor interest have changed from yield and capital appreciation to yield and capital preservation. Vancouver and Toronto are still seen as attractive, safe places for foreign investment capital, which is keeping condo demand steady.

Industrial
Distribution and logistics are driving industrial activity, as e-commerce grows and consumers and businesses alike demand shorter and shorter delivery times. Height is in demand, with 30-foot ceilings far more attractive to tenants than the squat, sprawling properties suited to yesteryear's manufacturing sector.

Office
Canada's office segment will see millions of square feet in new office space come on stream over the next couple of years and concerns over the impact on local vacancy rates and the impact of older existing space vary across the country. Industry players are particularly worried about the prospects for the older properties left behind. Of chief concern is that these older buildings are not well suited to the needs of the modern workplace. Private offices are shrinking to make way for large, open collaborative spaces; bike racks and showers are needed more than parking spaces; sustainability, energy efficiency, and multipurpose or outdoor spaces are becoming "must-haves."

The full Emerging Trends in Real Estate® 2016 report, which includes the latest industry figures and trends can be found here: www.pwc.com/ca/emergingtrends.

Follow PwC on Twitter at @PwC_Canada_LLP and on Facebook at www.facebook.com/pwccanada.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

About PwC Canada
PwC Canada helps organizations and individuals create the value they're looking for. More than 6,500 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with more than 195,000 people in 157 countries. Find out more by visiting us at www.pwc.com/ca.

© 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved.

PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

About the Urban Land Institute

The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 36,000 members representing all aspects of land use and development disciplines.

SOURCE PwC (PricewaterhouseCoopers)

For further information: David Gollom, T: 416-869-2386, Email: david.i.gollom@ca.pwc.com; Bryson Parks, T : 416-941-8383 ext. 14625, Email : bryson.j.parks@ca.pwc.com

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