Real Estate in 2025: Mixed outlook opens doors to new investment opportunities

Report highlights GenAI and Regional Markets as bright spots in a challenging landscape

TORONTO, Nov. 7, 2024 /CNW/ - This year's PwC Canada and ULI's Emerging Trends in Real Estate (ETRE) report identifies opportunities for investors in 2025. Higher financial costs, heightened geopolitical risks, and other industry pressures have, more recently, made the industry less attractive compared to other investment opportunities offering potentially higher returns with less perceived risk. While the outlook is mixed, new asset classes, Generative AI, and regional differentiation offers a bright spot in the year ahead.

"Canadian real estate companies are closely monitoring catalysts like declining interest rates, government policy changes and business model reinvention to reinvigorate investment and development. At the same time, they are exploring new technologies such as GenAI to enable productivity improvements," said Fred Cassano, Partner, National Real Estate Leader, PwC Canada. "The use of generative AI in the real estate sector though still evolving, offers significant competitive advantages."

Emerging asset classes: The condominium markets in Canada's largest cities, Toronto and Vancouver, have paused. As pre-construction slows down in these major cities, investors are shifting their focus to other regions and asset classes. Niche assets like data centres are a promising investment area driven by the significant power demands of GenAI. They also require large amounts of energy, pointing to the need for sustainable solutions that draw on sources of clean energy.

Regional opportunities: From a regional perspective, Western Canada, particularly Calgary and Edmonton, continue to emerge as top markets to watch, with housing affordability being a strong draw to the region. This region also faces increasing climate-related concerns, making sustainability a growing focus.

Focus on sustainability: Amidst an industry downturn, Canadian real estate companies are facing difficult decisions about how to respond to the challenges associated with climate change. Despite successive extreme weather events highlighting its impacts, real estate players are divided on the path forward due to high costs. Competitive advantage will likely go to those who can assess and prepare for the direct and indirect impacts of climate change.

"Real estate companies who are ready to take the lead on climate resilience can start with a portfolio-level analysis. In times of significant business pressures, competing priorities, and complex assets, creative deal-making and expert operations become essential for success," added Cassano.

"2025 will be about taking a fresh approach to investment and development," said Richard Joy, Executive Director, Urban Land Institute, Toronto. "Capitalizing on newer opportunities like GenAI and data centres requires real estate players to act with creativity and conviction, which may involve developing new capabilities, forging strategic partnerships, and entering new markets." 

Key Trends in Canadian Real Estate for 2025:

1. Shifting investment strategies for those with capital: With more conservative lending standards, capital constraints continue to be a trend heading into 2025. With traditional capital remaining scarce, private investors, including family offices, high-net-worth individuals, as well as those willing to take a chance on distressed real estate will find opportunities in the new year.
2. Technology shifts like Gen AI are becoming ever more critical: Generative AI is emerging as a significant opportunity to help organizations maximize efficiencies and accelerate innovation during a time of significant business and capital pressures. That includes everything from leveraging AI to create architectural renderings, support developers with land due diligence, and monitor rental supply and demand trends.
3. Capturing Value in Emerging Asset Classes: Investors are increasingly interested in niche property types like data centers, cold storage facilities and student housing as traditional real estate investments slow down. These opportunities blend real estate and infrastructure, appealing to investors who can think creatively to capture significant value. Infrastructure investments, such as those in digital connectivity (i.e. GenAI) and sustainable energy, are also gaining traction, offering stable cash flows and diversification benefits. This shift reflects a broader trend towards integrating real estate with infrastructure to meet evolving economic and technological needs.
4. Sustainability a key factor for long-term resilience of real estate: Sustainability is crucial for the long-term resilience of real estate due to increasing climate risks like wildfires, floods, and hurricanes. These events threaten property values, prompting investors to consider climate resilience in asset pricing and insurance costs. Sustainable practices, such as energy-efficient systems, not only mitigate risks but also offer market differentiation and attract tenants focused on sustainability goals.
5. Foreign investors eyeing Canadian real estate: Real estate can also expect a resurgence in dealmaking from foreign investors with available capital.  These investors plan to take advantage of emerging distress in real estate with less domestic competition for these assets, including investments in multifamily and industrial properties.

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SOURCE PwC Management Services LP

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