“Next year is not going to be as great as last year” – Jonathan Miller, ULI

“2012 will see lower investment activity [than 2011], due to a slow start at the beginning of the year” – John O’Bryan, CBRE Limited

“Are we pushing the limits? Yes we are.” – George Carras, RealNet

It was unanimous: 2012 will not be any better than 2011.

That was the major theme that ran through the ULI’s annual Emerging Trends in Real Estate event on November 1st, where 250 real estate professionals appropriately crowded the iconic trading floor of the Design Exchange in downtown Toronto to listen to the prognostications of real estate veterans about the 2012 real estate environment and how it will be affected by global economic uncertainty. Jonathan Miller, author of the 33rd edition of the “Emerging Trends in Real Estate” publication, led the discussion and was supported by two of Canada’s leading authorities on real estate: George Carras, president of RealNet; and John O’Bryan, vice-chairman of CB Richard Ellis.

Before looking into the crystal ball for 2012, the presenters painted a picture of what has transpired in 2011. The message was clear: by and large 2011 was one of the strongest years ever for Canadian real estate. Mr. Carras, bolstered by an array of data, provided a simple but powerful statistic: “The GTA investment market and condominium market have both set records [on a year-to-date] basis.” Mr. O’Bryan pointed out that REITs were a major factor in 2011, buying assets across all investment classes and largely from institutions. Mr. Miller added that a strong and regulated banking system, employment growth and increasing immigration, fuelled a strong real estate environment in 2011. However remarkable 2011 was, all three forewarned this was by no means a proxy for 2012.

Mr. O’Bryan indicated he didn’t see the same velocity of investment occurring in the first half of 2012 as opposed to 2011, due to a myriad of reasons including volatile public markets (affecting REIT purchasing activity) and limited quality product available (institutions have offloaded excess inventory from 2008-2009). Mr. Miller cited a tightening credit culture that, despite offering historic low interest rates, the debt will only be available to the best players. Further tempering 2012, according to Mr. Miller, will be a flattening of cap rates which has the possibility of discouraging some potential vendors. Mr. Carras, perhaps the most optimistic of the presenters, cautioned that the major risk in 2012 will be for developers paying too much for land as the availability of downtown development sites continues to tighten. Mr. Carras acknowledged Canada is pushing the limits but believes this isn’t necessarily negative as it also brings opportunity.

Certainly there is no crash on the horizon for 2012, but perhaps we will see more of an alignment between lowered expectations and current market trends. Mr. Carras pointed out that despite some calling the GTA a condo bubble, strong immigration and stable employment will continue to drive condominium sales. Mr. O’Bryan pointed out that no Canadian markets have vacancies over 10 per cent and this will catalyze development, particularly for new office buildings in major Canadian centres. Mr. Miller concluded that amidst European and U.S. fiscal problems, the best bets for 2012 include acquiring and holding infill land in urban centres, and increasing positions in multi-residential real estate which has consistently been the safest real estate investment.

The message of lowered expectations will probably not shock most real estate professionals—it would only be naïve to think Canada will be insulated from growing turbulence emanating from Europe and to a lesser extent the United States. Ultimately, while 2012 may not be as strong as the record-breaking 2011, there are signs of optimism in the forthcoming year.
Braiden Goodchild
BMO Capital Markets Real Estate
ULI Communications Committee