Rosy real estate outlook

Hey there, time traveller!
This article was published 07/11/2021 (1047 days ago), so information in it may no longer be current.

A new national survey on Canadian real estate conducted by PwC and the Urban Land Institute takes on the task of anticipating what’s to come in 2022, and although there are still areas of concern, stakeholders are optimistic about how the industry will fare in the new year.

So optimistic that some predict not only to return to pre-pandemic business, but to exceed it.

When asked about their expectations for 2022 as compared to 2021, nearly every category of respondent — including builders, investment managers, lenders, service providers, security investors, and commercial real estate developers — felt better about their business prospects. On a scale from 1, representing an abysmal outlook, to 5, representing an excellent one, most assessed their situations at an average of about 3.5, or slightly above fair.

Considering the dreadful predictions that abounded at the start of the pandemic, when there was concern about long-term stability, the report’s authors point out that many companies have come through 2021 better than expected, with a booming housing market, a burgeoning industrial sector strengthened by warehousing and e-commerce fulfilment, and a retail property segment that’s managed to hang on. Even the office sector, considered one of the most volatile, has shown positive signs, the authors note.

Looking forward, a few key trends — ones which were already of concern but have been reiterated throughout the pandemic — figure to define the national real estate picture in 2022, per the 24-page report.

First is the impact of a changing work world. Though it remains to be seen how the past 18 months of remote and flexible work in many industries will play out in the long run, right now, a significant number of employees remain hesitant to return to the office; a growing number are favouring a hybrid agreement. Nearly four in 10 workers surveyed by PwC and ULI favoured an even split between remote and on-location work, yet just 10 per cent chose a traditional in-person environment.

For some employees, it’s a dealbreaker. Surveys cited by PwC show a high number of workers willing to leave their jobs if flex work isn’t on the table, and in a similar vein, the distances Canadians are willing to commute are shortening. Some major financial companies have already committed to flex work being here to stay.

This presents some challenges, the report states: property owners can no longer expect tenants to simply show up. They have to better understand specific needs to make their holdings more attractive for workers to commute to each day or every other day. Customized offerings, including new leasing model structures, will need to be considered. “One interviewee noted they are thinking more about arrangements in which a tenant would have a set amount of space to cover typical space needs, but with a flexible component available to them on days when more employees than usual come into the office.”

Another expected result of this trend is an increased emphasis on mixed-use communities, with workers looking to either shorten or eliminate their commutes while having everything they’d need to access within a 15-minute radius of their homes, the report notes.

Dovetailing with a need to address housing affordability concerns, which the report calls “a glaring issue,” is an impetus to considering matters of Environment, Social and Governance (ESG). With homes and buildings being the third-largest contributors to national emissions, many interviewees emphasized the value of environmental considerations. But many attached only moderate importance to issues like climate change, income inequality, and environmental sustainability.

That can be traced to widespread concerns over a key criterion, the report notes: a return to justify the additional upfront costs. “One GTA homebuilder summed up much of the sentiment among private companies, saying, “We do it because it attracts our investors, and it’s the right thing to do in the long run. But it has to make financial sense.”

To that end, the report suggests increased investments in data, technology and innovation will be critical in tracking progress and helping companies make better decisions about optimizing energy use while keeping stakeholders satisfied. But they can’t do it alone: collaboration with governments on policy will play a major role, the report notes, while pointing out that good environmental measures can lead to lower-cost financing as well as a long-term, preserved asset value.

Supply and demand loom large, respondents said, in regard to both material and personnel. Rising prices for materials like aluminum, copper, concrete, steel and plastic, along with supply chain concerns, go hand in hand with rising job vacancies in the construction sector, Many interviewees in other sectors agreed recruitment and retention has been difficult, and competition for the same pool of talent has been steep.

Outlooks vary depending on the sector. Industrial is expected to continue booming: of all investment and development categories, fulfilment and warehouse properties were the ones interviewees felt most confident in, followed closely by apartments geared to moderate incomes, single-family rentals, and research and development facilities.

By comparison, office remains uncertain, with many employers taking the opportunity to upgrade their spaces or reconsider them entirely. Retail, the report says, will continue to trend toward a more diverse offering, with new tenant types like fitness or health centres, plus events and entertainment spaces, popping up beside traditional stores.

In Winnipeg, the overall outlooks for real estate investment and development were assessed by local respondents as fair, while the outlook for homebuilding slightly higher. Across the board, Winnipeg respondents graded the outlook 3.14 out of 5.

That’s better than how Edmonton, Calgary, Quebec City and Saskatoon respondents graded their cities’ outlooks.

In Winnipeg, the office market is expected to continue to face similar challenges as the rest of the country, while the industrial market remains strong. Supply of new and resale single-family housing is expected to keep rebounding, with renewed immigration driving housing starts.

But PwC and ULI acknowledge these are all outlooks subject to change.

The first line in the executive summary? “The crystal ball is quite murky right now.”

ben.waldman@freepress.mb.ca