“If you’re not the learner, you’re the lesson,” said Andrew Warren, during his keynote speech at the highly anticipated annual launch event at The Carlu for PwC and ULI’s Emerging Trends in Real Estate 2020. Warren, Director of Real Estate Research at PwC, told the crowd that it’s no longer just about the space, but the services offered as the needs of consumers have changed. Fred Cassano, Partner at PwC, moderated a panel consisting of John Albright, Co-Founder and Managing Partner at Relay Ventures; Pauline Alimchandani, CFO and EVP at Dream; Phong Ngo, Director of Residential Research, Altus Group; and Andrea DelZotto, EVP of Community Development at Tridel. Four main topics emerged during the panel discussion.
Customers at the heart of reimagined spaces
There’s an undeniable shift seen through the industry where lines are increasingly blurred between what used to be distinct silos. Spaces are evolving to address the changing needs of the end-user, which can be seen in retail spaces slowly transforming into spaces with stronger distribution hub elements and smaller store footprints; the “surban” trend, where suburbs are incorporating a more urban live-work-play dynamic; and hotel and retail spaces offering co-working space services for under-utilized space.
“[On the office front], tenants want spaces to fulfill different goals: collaboration in formal and informal settings, quiet space for individualized work, available space for hoteling workers, flexible spaces that can be utilized to house staff on a temporary basis, spaces where employees can relax, eat, socialize,” said Warren. “There used to be a desire to offer people the ability to work remotely, but the interest is now in making offices so nice people want to stay there.” On the residential front, developers are cutting out spaces for kitchens and standard appliances due to the ease of food delivery services. Online shopping growth has increased the necessity for larger storage areas for packages, including cold storage for groceries.
The rise of real-estate-as-a-service has also altered the landscape of real-estate. Sites historically planned as condominiums with ground-level retail are now being reconsidered in order to address changing needs in the long run. “We see so many of our positions in real-estate become irreplaceable because it’s harder to acquire new land and get zoning approval than before,” said Alimchandani. “In the face of this, combined with very positive demographics for the need of housing stock (both market and affordable), a lot of sites we have historically planned as condo are being planned as purpose-built rental and sites are including affordable and co-living.” Moreover, as the gig economy proliferates in Canada, all spaces will progressively be seen as rentable space, whether it’s office, retail, or residential.
Powering digital transformation through prop-tech
Proptech has been a hot topic over the last two years and 2020 will be no different. “Yield in ROI for us and for land owners and developers we’re dealing with is significant enough that they’re putting their own capital towards it,” said Albright. “They’re all so aware of how tech affects them: it’s asset utilization.” With $6.5 billion invested in 2019, interest in prop-tech is driven by those looking to invest (fueling the supply side) and the demand side from students graduating from math and computer engineering worldwide, finding common ground in proptech. As tenants and small entrepreneurs want more than just services, proptech is seen as a major tool for change. Tech entrepreneurs are addressing how to reduce costs and increase tenant engagement. A focus on amenities could be a way to solve this issue. “We made 7 investments in the last year, putting about $20 million in prop-tech, one of them in Toronto called Lane, an app for landlords used by Brookfield, Dream, and launching with Menkes,” said Albright.
Furthermore, tech could attack affordability through co-ownership of condos or homes and new start-ups are putting up equity running the same algorithm developers use for land, said Albright. These algorithms could determine future worth per square-footage and have tenants buy back land. However, although this model may address some of these concerns around affordability, it could potentially exclude certain people from ownership.
Construction technology is another big disruptor where the industry is only scratching the tip of the iceberg when addressing cost and time. Prop-tech systems that blur the line between management, design, and construction are being utilized as a future-proofing strategy. DelZotto noted that using Procore, a project management software and BIM (Building Information Modelling) has allowed Tridel to quickly and easily conduct “Clash Detections” to address issues with greater speed and accuracy on larger and more complicated projects such as The Well.
As companies have started to collect data, organizations have realized the opportunities this intelligence offers to create intangible assets. Data analytics are being considered as a tool for predictive elements. “The ultimate end isn’t what the tenant is paying, it’s the upfront and process so we understand who’s using it and how, and how to deliver better experience to customers,” said Alimchandani. As more data are being collected, the intelligence gathered could lead to the development of further innovations and better services. However, cyber security is emerging as a new threat due to vulnerability to hacking attacks.
Navigating policy and geopolitical uncertainty:
There was an overall degree of uneasiness in the market around affordability, labour constraints, and geopolitical issues. Policies such as Bill 108, More Homes, More Choice Act, which received approval on June 6, 2019 with regulations to support new development in communities was designed to tackle NIMBYism (Not-In-My-BackYard-ism), characterized as a rejection by residents to a development proposal in their neighbourhood. “If you look at the new housing sector, last year was a big year of uncertainty stemming from the Fair Housing Plan,” said Ngo. “This year that uncertainty has dissipated and people are adjusting to the new reality since those policies have been enacted; buyers, builders and developers are now adjusting their behaviours.” Ngo further noted that the numbers do not indicate a slow down in the market, which has behaved well during the latter 8 months of 2019, with single-family home sales in the GTA higher than the entirety of2018. There was also an increase in overall sales in the Greater Golden Horseshoe area and one of the best performing quarters in commercial space since 2017.
Although there’s a tendency to address demand, the supply side is the challenge. In light of uncertainty, Alimchandani noted Dream focuses on having a safe balance sheet, conservative leverage, and a lot of flexibility on line of credit to ensure their developments are staggered out to supply the market as needed. Since less than 250 completed condo units across the GTA are on the market with half over $750,000 and 40% of single-family housing costing over $1 million, there’s still the missing middle left out of the equation, said Ngo. DelZotto quoted an RBC report that a projected 42% of millennials will leave Toronto due to housing affordability issues. Fractional ownership, which has been common in the United States, is projected to be utilized more often in Canada as the industry pushes towards real estate as a service.
Tackling emerging business challenges
The shortage of labour in construction is also a critical issue. “We call it the Silver Tsunami,” said DelZotto. By 2028, the average age of construction workers is 42, with 22% of the overall work-force lost to retirement. There’s a stigma attached to working in the trades, which will take effort from government and industry to remove and find ways to train existing staff and inspire another generation of construction trades. Programs such as Building Opportunities for Life Today (BoLT) offers under-resourced youth career and educational opportunities through two streams: a scholarship program for exploring careers in construction as well as skills-based training for those entering unions and trades. As a future-proofing approach, Tridel has been documenting procedures and techniques by experienced retiring trades to put towards training new recruits.
“If you can solve a problem, that will probably be your best bet for 2020,” said Warren. There are vast opportunities waiting for those with tangible solutions. The ability to address the changing needs of consumers through reimagined spaces and services, embracing innovative digital tools for efficiency, and the ability to navigate a shifting policy environment will serve as the basis to solving emerging business challenges in the year ahead.