Canadian real estate companies are at a defining junction. In contrast to the booming conditions of the past few years, interest rate hikes, runaway inflation, and turbulence in the geopolitical environment have cast a shadow of uncertainty over the global economy and the business of real estate.
At the same time, uncertain times are perhaps most ideal for a reset. As real estate players head into 2023, a new report from PwC Canada has identified the top trends expected to define Canadian real estate in the year ahead, including some big shifts to business as usual.
“There is no doubt that the real estate market in Canada is experiencing a reset,” said Frank Magliocco, Real Estate Leader, PwC Canada. “Players in the industry are navigating this disruption in different ways. For some, it has led to a pause in development decisions and transactions.
“However, now is not the time to pause on actions necessary to set the industry up for sustained outcomes and growth. It's time to focus on digital tools and other innovations that enable the business, and to capitalize on new opportunities that emerge during this period of change and embrace long-term fundamental trends.”
According to PwC's report, tightening borrowing requirements and higher financing costs will continue to put a damper on the ability to raise capital and progress projects forward. As a result, competition between companies will continue to deplete as some players choose to “stay on the sidelines” until the market settles.
This is converse to last year’s concern, when an overabundance of capital was intensifying competition and pushing valuations up.
Another trend forecasted by PwC is a push towards sustainability and net-zero emissions. While this is expected to be a priority amongst investors, companies may embrace the change a little slower. Separate findings from PwC's 2022 global CEO Survey showed that only 19% of real estate executives were committed to reducing net-zero greenhouse gas emissions within their organizations.
However, with financing being tougher (and more expensive) to come by, a business model that prioritizes sustainability is likely to give companies an edge, helping them to attract institutional investments over their competitors and source new forms of capital.
In addition, the implementation of ESG strategies is expected to affect both publicly owned and private real estate companies in Canada. Richard Joy, Executive Director for ULI Toronto calls this “a key ingredient imperative for growth.”
Finally, supply will be the big-ticket issue of 2023, as companies and economies alike grapple with the looming housing affordability crisis and impending immigration levels. According to PwC’s report, real estate companies will be likely to shelve housing development projects because of cost, financing challenges, and the high interest rate environment. And this may even persist even after the housing market cools.
On the flip side, industrial real estate -- including subcategories like warehousing, fulfillment, data centres, and self-storage -- and real estate for health-related uses are shaping up to emerge strong in 2023. Multifamily residential housing will be something of a mixed bag, with immigration levels rendering it an in-demand sector, but affordability concerns putting a damper on meaningful development.
