ULI Toronto News

These are the Top Trends to Watch in Canada and US Real Estate in 2017

By Seemal Saif, Economic Business Analyst, Region Municipality of York

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On November 4th, 2016, ULI Toronto hosted the presentation of the annual ULI/PwC Emerging Trends in Real Estate report for 2017 at The Carlu in Toronto. The event space was packed with an audience of 700, all eager to hear an in-depth analysis of the real estate market in North America for the upcoming year. The event was moderated by Nadia King, Partner at PwC Canada.

Andrew Warren, Director of Real Estate Research at PwC, was first to present, providing a summary of the major trends in the report. He explained that the report is developed by conducting anonymous interviews with over 1,500 professionals from various sectors of the real estate industry. He said that while 70% of the professionals viewed Canada favourably, the level of optimism in the US was much higher than in Canada. However, he warned that in both markets, professionals believe that a high degree of caution has to be exercised in coming year.

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He said that the present market was characterized by more discipline and self-regulation than that previously experienced. When discussing trends in the industry, Warren said that the US election will play a very crucial role in how the markets react in 2017. This report was completed and the event held prior to Donald Trump’s surprise victory over Hillary Clinton on November 8th.

The survey of the Canadian real estate market uncovered several notable trends. First, the real estate market is now more geared toward developing communities and not just “stand alone” buildings. The need to develop livable communities with amenities and green space is viewed as a key component of profitability. The industry believes that there is a need to provide people with more than just mixed-use buildings. Instead there is a requirement to develop a sense of place and the role of placemaking is crucial to the real estate industry of the future.

Housing affordability is another trend that will dominate North America in 2017. Warren said that eroding affordability was leading to an increase in demand for rental as opposed to ownership housing and there was more scope for the purpose-built rental market. Developers, however, still need to determine the formula that would make purpose-built rental properties profitable.

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Technology is a disruptive force affecting the real estate market. Both the scale and pace of technological advancement are shifting the traditional relationship between tenants and owners. Office spaces are changing as employers are encouraging team members to work from home. Tenants prefer smaller, open concept spaces with flexible hours and telework. The tenant-owner relationship is being challenged by various new models in which shared work spaces are moving to the fore. Additionally, Warren highlighted that property developers must take significant steps to meet their customers’ growing tech needs. He pointed out that when tenants are deciding on new property locations, technology readiness was one of the top factors that they consider.

Warren also pointed out that the survey uncovered how industry professionals were increasingly concerned about threats of terrorism, war and epidemics. City safety was also raised as an issue for the first time, however, it was more of a concern in the US markets of Chicago and Dallas and less so in Canadian markets. The effects of slumping oil and gas markets will also have greater impact on markets in Alberta. Warren said the real estate market in Calgary was holding on and it was a much more stable market than in previous energy cycles. Nevertheless, the impact of the decline in oil prices has been significant.

Moving on from the review of the trends to the outlook for various property types in 2017, Warren highlighted that industrial properties had the most positive outlook primarily because they’ve morphed into another segment of the retail industry. This is a result of e-commerce businesses that are increasing the demand for warehouse facilities. These facilities are classified as industrial properties. In terms of residential properties, there was a growing interest in multi-generational households and a less age restrictive real estate market. Urban high street retail near residential areas was very attractive and has an unlimited upside potential. The office market in Calgary was seeing higher vacancy rates after the drop in oil prices, but the rest of the Canadian market — including the cities of Toronto, Montreal and Vancouver — will be stable and demand for Class A office space near transit hubs will be high.

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Warren’s discussion was followed by a panel discussion moderated by PwC’s Nadia King. Blake Hutcheson, President and CEO of Oxford Properties, was the first to comment on the report. While he believed the report was definitive and had been reading it for 30 years, he disagreed with some of the sentiments expressed in the 2017 report. Firstly, he said that the report highlighted that small developers are doing most of the innovation. However, he pointed out that many larger firms, including Oxford Properties, were also innovating and the Hudson Yards project in Manhattan was proof of that.

George Carras of Real Strategies Inc. agreed that innovation is a key theme in the real estate industry and welcomed the change at the Canadian federal government level to focus more on innovation rather than the resource economy. He cautioned that Canada does not have many unicorn companies (a start-up valued at over $1 billion) and said that it was necessary for Canada to increase immigration to be able to place itself on the innovation map.

Paul Morassutti, Executive Vice President of CBRE, spoke about how the low growth environment is expected to continue for some time and will impact debt, interest rates and capital. He also warned that geopolitical instability is a real source of concern and the fact that there is a growing disenfranchised population in the US and Europe will have a major impact on Canada.

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These insights were followed by a vibrant discussion by the panelists. There was a great deal of discussion on how government regulations were impacting the development industry. Concerns were raised about the potential of a parking tax in downtown Toronto which was labelled as “double taxation.” The panelists agreed that there was a need for more investment in public infrastructure with the support of the federal government. It was also suggested that there was a need for greater alignment between the federal, provincial and municipal government. One example that was provided was the need for all levels of government to use the same data set so that there is a consensus on how much a particular infrastructure project costs to allow for a better understanding of the cost-benefit analysis.

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