So its that time again... the Urban Land Institute has just released its 38th annual edition of its highly regarded, and widely forecasted report, Emerging Trends in Real Estate. As a real estate and ULI junkie, I have to say that I get a bit excited for the release of this report each year! Both US and Canadian markets are covered in the report, as well as submarkets and if you do business in these markets- this is a report that is well-worth the read.
The top Canadian trends were somewhat predictable but surprising at the same time. Below is a synopsis of key trends for 2017 in Canadian real estate:
1. More Than Mixed Use, It’s about Building Communities (and Placemaking is Essential)
From millennials eager to live where they work to downsizing baby boomers to new arrivals from other provinces or from around the world, Canada’s urban populations are set to continue to grow—and their needs are evolving. Because of this, mixed-use projects combining residential, retail, and commercial components continue to thrive—and there’s a growing consensus that developers must do better when designing public spaces. Developers have responded by continuing to rethink their approach to mixed-use projects: instead of focusing on building “stand-alone” mixed-use buildings, they’re increasingly building mixed-use neighborhoods and communities that pack residential, retail, and commercial space into a dynamic whole. Most respondents noted that this type of “placemaking” is a reality that developers need to seriously consider.
Placemaking— or creating a 24-hour destination that provides energy, walkability, and security—is often the overlooked factor in real estate development. If you have density without placemaking, you have missed the ball and left significant opportunity on the table - both in return to your investors and return to the community. The skills of placemaking are critical in real estate.
2. Affordability on the Decline – No Surprises Here
Housing affordability has become a major point of concern in Canada—and respondents said it won’t let up. High prices in Vancouver and Toronto will continue to squeeze affordability, with both cities’ mortgage-to-income ratios forecast to remain well above the Canadian average in 2017. In the short term, Toronto’s and Vancouver’s markets are set to diverge slightly. Even before the additional property transfer tax on nonresidents, Vancouver had embarked on a modest correction that started in early summer 2016. TD Economics reported that, by mid-2017, it anticipated a 10 percent decline in home prices, which was then expected to stabilize by the end of the year. In Toronto, it’s business as usual—and barring a similar tax, foreign investors may see that city’s market as increasingly attractive.
With no real factors reducing the demand for real estate in Toronto and Vancouver, developers and builders will continue to face supply-side issues. As well, a common issue in nearly all regions was municipal red tape and lengthy approval processes, which are also limiting supply and driving up costs.
3. Renting for the Long Term
With housing prices in Toronto and Vancouver out of reach for many prospective homebuyers, many are choosing to rent. Attitudes toward renting are shifting and people are choosing to rent longer—some even permanently, as they weigh the costs of homeownership against the benefits. As Toronto and Vancouver become more similar to world-class cities like New York, Paris, and London. It is a trend that is sparking ongoing interest in purpose-built rental units—and raising questions about the size of units and the need for supporting infrastructure (e.g., schools, medical facilities, daycare, etc.) to accommodate millennials’ inevitable move toward parenthood and boomers’ downsizing. In fact, some older homeowners are opting to sell their homes and cash out, moving into high-end or luxury rental units and keeping the proceeds of the sale for spending.
4. Technology Disruptors Hold a Competitive Advantage – Lots of Thought- Provoking Ideas!
The real estate industry is getting to the point where if people don’t recognize technologies are existing and, moreover, how to integrate them, opportunities are being missed. Given that the industry is so slow to change, there is a real advantage emerging here for those who can grasp onto to these technological innovations.
And so, where are these technology disruptors having the biggest impacts?
Leasing- Technology is changing expectations and how they interact with potential tenants. Nearly endless information is available thanks to the internet, so customers are more informed than ever before. They’re doing extensive research online before buying.
Development- Development firms are doing more 3-D computer conceptualizations in the planning stage, offering virtual tours to help potential buyers and reducing the need for physical showrooms. They’re also harnessing the power of data to make better business and marketing decisions.
Office Market- Technology and a changing workplace are creating new demands for office developers and owners. Respondents said tenants are continuing to move toward smaller, open-concept spaces because of “workplace 2.0” changes like office hoteling (reservation-based, unassigned seating), flexible hours, and telework. With more people working remotely thanks to advances in teleconferencing, much less need exists for big, traditional offices. These new workplace concepts are especially appealing to millennial workers and are transforming even the most traditional of office tenants, such as law firms, accounting firms, and banks.
Residential Market- Technology is also transforming the residential market. Buyers and renters alike are increasingly expecting more energy efficient properties and amenities. As hydro costs rise and technology prices fall, the value propositions for things like LED lights, green roofs, and Energy Star appliances become far easier to make. New systems in waste management and energy conservation will help achieve net-zero-impact buildings, which are likely to become more popular as concerns over climate change continue. As well, new technologies have emerged to improve residential homes’ air quality by reducing off-gassing from products like plastics and paints.
5. Waiting for Deals
While eagerness for investing in property abounds, there still isn’t much to invest in. This was a significant trend in 2016, and continued demand—especially in Toronto and Vancouver— looks like it will continue to outstrip supply through 2017. Respondents said current players seem likely to hold onto. Access to capital is not seen by most respondents as a problem, with one stating that there’s a “lineup of money looking to be placed.” Overall, real estate is still seen as a good asset class, and its historic returns will continue to make it an attractive investment opportunity for both local and foreign investors.