Canadian Сommercial Real Estate Investment Could Reach High Of $59 Billion In 2023: CBRE

Expects one to two quarters of slowed investment before activity rebounds in the spring

What Will Happen to All the Prime Retail Space Nordstrom Leaves Behind?

Last week, loyal Nordstrom — and Nordstrom Rack — shoppers in Canada were informed that the retailer would cease operations in the country.

The news seemingly came as a collective shock to consumers in Canada’s largest cities (we’re still not okay).

On Thursday, the American luxury department store chain announced it would close all 13 of its Canadian locations — six Nordstrom stores and seven off-price Nordstrom Rack locations — and halt its online e-commerce operations. All 2500 of the brand’s employees will be laid off.

“This will enable us to simplify our operations and further increase our focus on driving long-term profitable growth in our core US business,” said Nordstrom CEO Erik Nordstrom in a press release.

Nordstrom opened its first Canadian location in 2014 and its first Nordstrom Rack location in 2018. It now plans to close all of the country’s stores by June.

Breaking their lease, Nordstrom obtained an Initial Order from the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act to move closures along quickly and will rely on a third-party liquidator. The breaking of the lease is legal after a company files for creditor protection. Nordstrom said that the company had invested $775M in Canadian stores but never managed to turn a profit here. In fact, it lost money each year, according to court filings.

What Went Wrong?

Perhaps the Canadian market can only handle so many high-end department stores? We already had Canadian luxury department store Holt Renfrew. Then, Saks Fifth Avenue arrived not long after Nordstrom in 2016. “Nordstrom was a very specific tenant who was targeting the upper income Canadians in certain marketplaces,” says Jane Domenico, Colliers’ Senior Vice President & National Lead, Retail Services for REMS in Canada. “That category space [is] very competitive today. If you go back ten years, there were not a lot of people operating in that space. Then, suddenly, we had both Nordstrom and Saks come to Canada. And we also have strong Canadian retailers like Holt Renfrew, Simons, and The Bay. These are in the same marketplaces and going after the same dollars. So, it was a very competitive field.”

Domenico says that Canada is a geographically tricky area with an incredibly dispersed population, which makes it a challenge for American retailers.

“We have some fantastic US retailers who have over-performed in Canada — notably, the T.J. Maxx group — and been successful because they’ve been able to adapt to our logistics,” says Domenico.

“When you think of Nordstrom operationally, it was in Vancouver, Calgary, and the GTA and that’s a very dispersed inventory and operations. You don’t get the synergy you do when you have many locations. We thought they’d open more of their off-price locations in Canada, and that never happened. We are so geographically dispersed in Canada and that provides many challenges for our operations and makes it more expensive to operate here. Supply chain is such an integral part for retailers to be profitable. They need to supply in a cost effective way. I think it became more of a challenge than they ever thought — and Nordstrom is a strong retailer.”

CBRE retail specialist Kate Camenzuli says Nordstrom’s closure doesn’t necessarily reflect the reality of retail in Canada. “I don’t believe this has anything to do with the size or health of a specific space, or about the health of retail in Canada,” says Camenzuli. “This is a specific situation that has nothing to do with either.”

Whatever the cause, the reality remains that the departure of Nordstrom on Canadian soil will result in the loss of anchor tenants in the massive retail spaces in some of Canada’s largest malls in its major urban centres. This includes Toronto’s CF Eaton Centre, Yorkdale Shopping Centre, and Sherway Gardens, along with Ottawa’s CF Rideau Centre, Calgary’s Chinook Centre, and Vancouver’s Pacific Centre.

“In terms of a major anchor leaving, this has happened a few times in our history,” highlights Domenico. “It reflects consumer demand and tenant business decisions. We last went through this with Target and — before that in the late 1990s — Kmart and then Eatons. It’s part and parcel of retail real estate development. What’s different today, with the Nordstrom example specifically, is these spaces are located in the best malls in Canada — hands down. These are fantastic shopping centres across the country. The people who own, manage, and develop these shopping centres have a long history of success.”

When STOREYS reached out to commercial real estate giant CF Fairview to inquire about the fate of the massive anchor retail spaces — like the one in the CF Eaton Centre — reps referred us directly to Nordstrom for comment.

When we asked Nordstrom reps about breaking a lease of this scale, they said that, as part of the Initial Order from the Court, Nordstrom has received “the authorization for the Nordstrom Canada Entities, in consultation with the Monitor and with the assistance of any real estate advisor or other assistants as may be desirable, to pursue all avenues and offers for the sale, transfer or assignment of the Leases to third parties, in whole or in part, subject to Court approval of any such sale, transfer or assignment.”

What’s Next for the Retail Space?

In terms of next moves, Camenzuli says the departure of Nordstrom opens possibilities for retailers. “We are super excited, as the Canadian retail real estate market is very tight and this gives the landlords, brokers, and retailers the chance to have fun and get creative and look and super interesting opportunities,” says Camenzuli. “Canada continues to grow on the world stage as a great retail market and I’m sure we will continue to see that with brands entering the market, small, medium, and large format.”

Camenzuli says that the fate of the former Nordstrom locations involves continuing to top grade the sites with best-in-case new or creative solutions. “We are in the customer service business; it’s about delivering the best experience for the customer,” she says.

The sprawling retail spaces could get divided up or they could see the entrance of non-retail companies, like gyms or entertainment complexes.

“There are quite a few choices that developers can make,” says Domenico. “The first is to re-lease it to another large format use. Will it be a Simons? A Holt Renfrew? Those are the questions that are out there. Another option that has been very successful in our industry over the last 25 to 30 years is actually breaking up the anchor space into a combination of small retail (CRU) in combination with larger format tenants like a Winners or Sportchek. They could also be grocery or pharmacy, with a bunch of smaller CRU. Again, we’re dealing with the best malls in Canada.”

Like Camenzuli, Domenico says that the departure of Nordstrom offers a chance for developers to get creative and reimagine their sites and utilize the space differently.

“The third option involves developers asking what is my highest and best use that I think I’ll want in five, 10, and 15 years,” says Domenico. “These assets that have been impacted have been around since the 70s and it doesn’t look anything like the 70s [anymore]. So, this gives them an opportunity to say, ‘do I want to put a condo tower here? Do I want to put a hotel? Do I want to put an entertainment facility?’”

The vacant retail spaces left in Nordstrom’s absence inspires a re-evaluation for the future of the shopping mall in general. While many worried about the fate of the physical shopping mall during the COVID-19 pandemic, according to new figures released last week from CBRE, in-person retail shopping is very much alive and well.

Refreshingly, retail foot traffic levels have largely returned to pre-pandemic levels, according to CBRE, with consumers eager to engage in more lively, personalized shopping experiences that can’t be offered online.

“While it is widely assumed that younger consumers are highly engaged with e-commerce, Gen Zers are less likely to shop online than millennials, CBRE research shows,” says CBRE Canada Chairman Paul Morassutti in the report. “This indicates that despite being digital natives, even the youngest consumers are choosing to shop in-store. So much for the death of retail.”

Even so, mall space is inevitably being reimagined right now, with the new reality involving everything from pop-up spaces for local brands (as opposed to long-term leases), to the addition of condo units on their sprawling real estate.

Source Storeys. Click here to read a full story

Nordstrom Canada Began Liquidation Sales On March 21

Nordstrom Canada began liquidation sales on Tuesday March 21, less than three weeks after the company announced it would close all locations across the country.

A media spokesperson for the retailer confirmed the date to STOREYS on Monday. According to court documents filed with the Ontario Superior Court of Justice by the monitor, Alvarez & Marsal Canada, the sale will conclude no later than June 30.

The extended sale period was deemed “necessary and appropriate” to help the retailer’s respective landlords deal with the effects of the wind-down of Nordstrom’s operations. It will also allow the department store chain the “breathing space and time” required to complete the sale.

According to the documents, the liquidation will be carried out by a joint venture comprised of Hilco Merchant Retail Solutions ULC and Gordon Brothers Canada, which were previously involved in the liquidation of Target Canada, Sears Canada, and Forever 21, and are currently undertaking the liquidation of Bed Bath & Beyond’s Canadian retail stores.

Nordstrom is winding down operations in Canada under the Companies’ Creditors Arrangement Act (CCAA), which allows insolvent corporations to restructure their businesses and financial affairs. Under the CCAA, court approval is required to begin liquidation.

All gift cards, gift certificates, and Nordstrom Notes issued prior to March 21, 2023, will be honoured, and all merchandise sold during the liquidation period will be final sale.

In addition to merchandise, the liquidation sale will include certain furniture, fixtures, and equipment located in Nordstrom Canada’s stores and distribution centres.

The retailer operates six Nordstrom stores across Canada, including within the CF Toronto Eaton Centre, Yorkdale Shopping Centre, and Vancouver’s CF Pacific Centre, as well as seven discount Nordstrom Rack locations.

All stores will shutter, and Nordstrom’s 2,500 Canadian employees are expected to be laid off. Nordstrom.ca is no longer operational.

“We entered Canada in 2014 with a plan to build and sustain a long-term business there,” Nordstrom CEO Erik Nordstrom said earlier this month. “Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”

Source Storeys. Click here to read a full story

Canadian Commercial Real Estate Investment Could Reach High Of $59B In 2023

TORONTO – The outlook for commercial real estate looks “bumpy” in the near term, but CBRE’s 2023 forecast predicts a soft landing could still be in the cards.

The Canada Real Estate Market Outlook report, released Tuesday, predicts challenges such as tougher financing conditions and a potential economic slowdown will weigh on investment.

The commercial real estate company said it expects one to two quarters of slowed investment before activity rebounds in the spring.

Over the longer term, CBRE said large investors are targeting real estate and that more certainty for interest rates should be a boon for the industry.

That interest means commercial real estate investment in Canada could reach an all-time high of $59.3 billion this year, spurred by greater merger and acquisitions activity.

The better visibility about interest rates, which the Bank of Canada has paused at 4.5 per cent while it weighs their effect on the economy, should allow pricing expectations to recalibrate in 2023, according to the organization.

CBRE Canada president and CEO Jon Ramscar called 2023 “the correction year” following periods of high inflation and interest rate hikes.

“There is some optimism because we have a huge amount of learnings when we look back on when we were going through the early stages of the pandemic,” said Ramscar.

“The optimism is really around the fact that the Bank of Canada is communicating to us all that inflation is starting to taper back, they’re done with interest rate rises and that we’re expecting kind of halfway through this year that we’ll settle with inflation at three per cent and in 2024 that will come down to two per cent.”

Office vacancy continues to increase, with demand for older space being replaced by interest in more modern locations. As companies balance their hybrid working arrangements for employees, the report said spaces that help attract workers back to the office will be a priority in 2023.

“Many forward-thinking tenants will use the coming year to relocate to properties with the best amenities, commute times and sustainability profiles,” the report said.

While some property owners have considered converting their real estate to residential, office spaces are more likely to be retrofitted or demolished.

“We’ve been through the pendulum swinging from initial headlines of ‘the office is dead’ and I think there’s now a realization that it’s really an evolution of the office,” said Ramscar. “Some of these things were happening before the pandemic, it’s just COVID has really accelerated, I’d say, some of these changes in the office sector. It really is a flight to quality.”

Efforts to boost office attendance has also led to rising demand for urban rental real estate as workers seek to minimize commute times.

The report noted a growing demand for multi-family rental real estate, with Canada’s overall vacancy rate falling to a 20-year low of two per cent in 2022. It predicted high demand will continue this year, led by higher immigration targets, driving vacancy even lower in 2023.

Commercial real estate investment totalled $58.5 billion in 2022, which nearly matched the record volume set in 2021.

This report by The Canadian Press was first published Feb. 28, 2023.

Source Toronto Star. Click here to read a full story

An Outlook On Specialized Sectors That Will Define CRE In 2023

The year kicked off with a unique landscape for commercial real estate.

The market transitioned from the comfort of record-low interest rates to 14-year highs while stronger-than-expected employment data from Statistics Canada in January left central bankers uncertain of their next steps to slow inflation.

The reaction of the market adjusting to central bank fiscal policy has led to investors taking a closer look at specialized sectors.

By diversifying their commercial real estate portfolios, they are setting plans in motion for their best assessments on potential short- and long-term returns.

I sat down with Colliers’ national practice group leaders in brokerage to get their outlooks on their respective sectors, which are garnering significant attention from our clients and the market.

Warren Wilkinson, national alternative asset practice group leader

The best way for investors to mitigate investment risk is to diversify. In this current economic climate, we are seeing traditional commercial real estate assets command less attention and alternative assets begin to gain significant traction.

These assets include self-storage, medical and life sciences, retirement and long-term care facilities, student housing, data and call centres, manufactured housing and RV parks.

As interest from clients and the market continues to grow in this segment, sector experts across Canada are seeing a rise in inquiries to share best practices, research, access to available properties and knowledge to advise decision-makers on an alternative asset commercial real estate investment.

Tyler Dolan, national debt advisory practice group leader

Debt advisory is an important commercial real estate solution for 2023 given the frequent changes in the risk tolerance and appetite of lenders due to rising interest rates, along with ever-changing regulatory and economic conditions.

This makes it more important to engage experts with strategic relationships with the lending community to matchmake quality borrowers and projects with the right source of capital. That expertise can assist in putting together comprehensive loan applications tailored to the target audience, whether it be a pension fund, insurance company, bank, credit union, trust, non-bank lender or private lender.

The recent upward movement of interest rates has caused challenges for many looking to finance new construction or refinance existing properties – the result being that borrowers must inject additional cash equity into their projects or bring additional mezzanine debt.

We are also seeing complications in replacing construction debt with term debt upon completion of new developments, with shifting metrics from when deals were written versus when they are closing.

As a result, the old saying “time is money” is critical and it has become paramount for debt advisory teams to deliver a strategy that aligns with clients based on the economic factors of the year, so only viable lending partners will be approached.

Peter Garrigan, national industrial practice group leader

Our industrial advisors across Canada continue to observe a sustained demand for industrial real estate, accompanied by a shortage of new supply.

This trend has fuelled growth in the sector, particularly in our three major markets of Toronto, Vancouver and Montreal.

Since Q1 2021, these markets have experienced exponential growth with an availability rate of approximately one per cent. Notably, over 90 per cent of the new supply that entered the market was already pre-leased, indicating persistent demand.

In response to supply-chain issues that have impacted construction in recent years, many organizations have turned to technology to overcome these challenges and innovate industrial supply.

Despite the limited availability of space, with only one to three per cent of the total inventory for each market currently under construction, we anticipate further rental growth throughout 2023 and beyond.

However, tenants with flexibility in their lease terms are expected to delay major decisions as they assess the economic outlook throughout the year.

Robert Frost, national multifamily practice group leader

The multifamily sector is projected to perform well in 2023 and continues to be one of the most sought-after asset classes for both private and institutional investors.

While the current economic environment has slowed investment volume, there are early signs of the market stabilizing, which should result in a marked increase in activity for the latter half of the year.

This will largely be driven by inflation continuing to ease and interest rates holding, which should bring confidence back to the investment community.

Rental demand remains very strong in an undersupplied market and the big question will be whether new supply can keep up with the projected Canadian immigration targets set at approximately 1.5 million people over the next three years.

With high interest rates and cost to borrow, many newcomers are likely to rent for some time, fuelling rental demand and rising rents.

With the market stabilizing and strong long-term fundamentals, we should see a resurgence of capital flowing back into the multifamily sector this year, leading to cap rate compression despite elevated interest rates.

Madeleine Nicholls, national retail practice group leader

The long-term outlook for the retail sector in Canada for 2023 is positive, with anticipation of one to two years of heightened openings and closures.

Canadian retail sales outpaced inflation and climbed to an all-time high of $735 billion at the end of 2022 and are expected to continue growing throughout this year.

Additionally, retail rents have generally held steady for the second half of 2022 after significant increases in the first half of 2022. They appear to look stable into the first half of 2023, with some upward pressure on inducements.

In 2023, we expect to see new business concepts emerge, especially those with a focus on the consumer experience both in-store and online, which will continue to evolve the retail landscape.

Bobby MacDonald, national technology practice group leader

Our tech advisory team has observed the pivotal role of tech occupiers in pre-leasing new developments in major Canadian cities over the past few years.

Landlords in Canada’s three largest cities continue to consider tech tenants as downtown anchors and support the incubation of the next major tech startups.

In Vancouver, significant leasing commitments from Amazon and Microsoft demonstrate the enduring significance of the tech sector to the city’s economy, given the city’s proximity to the major global tech hub in Seattle.

In Ontario, Waterloo has earned the title Silicon Valley of the North due to its thriving tech industry which boasts the highest density of tech startups in all of Canada and ranks second in the world behind San Francisco.

In Montreal, the city’s lively culture of food, music and arts, coupled with affordable living, has created an optimal talent pool for creative and technology-focused organizations.

Despite the recent news cycle highlighting layoffs in the tech sector, many companies are simply right-sizing their employee bases and divesting from moonshot programs to reduce expensive capital.

Throughout 2023, practical programs will continue to stabilize the tech industry and demonstrate its longevity, thereby confirming the necessity of real estate requirements.

This stability is further enhanced by government funding commitments to digital technology and scale AI.

Source Renx.ca. Click here to read a full story

‘Huge Rise’ In Toronto-Area CRE Salaries In 2022: Hays

Salaries for executives in top commercial real estate positions in the Greater Toronto Area increased an average of 15 per cent last year as the “candidate-driven market” continues, says Dan McLeod, senior director, property and facilities management recruitment at Hays in Toronto.

In commercial real estate “we’ve seen a huge rise,” in salaries as employers must pay more than expected to find the top people they want.

The highest percentage increase in salaries was for high-end commercial real estate lease administrators in the GTA – up 33.3 per cent from $75,000 in 2021 to $100,000 in 2022.

The numbers are from the 2023 Hays Salary Guide, which was released recently. It was based on a survey of 5,490 employees and employers in several industries in Canada, including real estate, conducted from Sept. 22 to Oct. 16, 2022.

Hays’ real estate clients include Allied, Colliers, Brookfield, Morguard, Fitzrovia, Rhapsody Property Management and Tricon.

Some key salary survey findings

Among the study’s findings were that 58 per cent of respondents across the board intend to ask for a pay raise in the next 12 months and 37 per cent are expecting a raise of more than five per cent.

However, only 20 per cent of employers plan to offer an increase of this amount.

The survey also found 62 per cent of employers are having difficulty filling open roles.

“It looks like it will be another challenging year when it comes to the recruitment front,” McLeod notes.

The effects of COVID-19, not inflation, are the biggest driver of salary increases, he says. However, he doesn’t expect salaries to continue to increase at the same torrid pace as in 2022: “I expect there to be some sort of levelling out.”

There are fewer candidates for some positions than there were six to 12 months ago, he says. As a result, companies are paying more to find the right people or to retain existing staff.

“If you can pay a little bit more, you can be equitable within the market (and) you’re probably going to do a better job keeping your staff,” he says.

Motivators for seeking new employment

The study found the main motivators for considering a new job are higher compensation (51 per cent), opportunities for promotion (28 per cent) and new challenges (21 per cent).

Just under one-third of employees (33 per cent) would leave their current job if the economic situation was better. Similarly, almost a third (32 per cent) of employees are nervous they could lose their job because of the current economic situation.

While property managers, maintenance workers and other on-site staff cannot work from home or remotely, real estate employees in administrative and corporate roles that do not need to be in the office or on-site “are very much looking for remote work or hybrid,” McLeod says.

Overall, the study found 82 per cent of employees want either fully remote or hybrid work. However, 32 per cent of employers are planning to increase the amount of time people are required to be in the office.

“That makes for a very interesting year moving into 2023,” he says, noting conflicts may arise between employers pushing to have people back in the office full-time or nearly full-time and employees who refuse – and look for remote or hybrid opportunities with other companies.

McLeod adds that for companies which require a full-time presence in office, “we are finding it tough now to find a really great pool of candidates.”

Vacation times can vary

The study also found increased vacation time is the top benefit candidates are seeking, followed by support for professional study, retirement contributions and mental, physical and well-being programs.

Three-week vacations have become the norm across the board in real estate, but junior staffers may only get two weeks. Four weeks of vacation time is a minimum for top-level executives, McLeod says.

The study shows salaries on the commercial real estate side are almost always higher than on the residential real estate side.

For example, for commercial real estate, high-end salaries for a director of property management increased to $180,000 in 2022, up 20 per cent from $150,000 in 2021. On the residential  side the same job paid an average $160,000 in 2022, up 14.29 per cent from $140,000 in 2021.

High-end salaries for senior property managers on the commercial real estate side were up 16.67 per cent from $120,000 in 2021 to $140,000 in 2022. By comparison, on the residential side salaries for the same position were up 15.79 per cent from $95,000 to $110,000.

Strangely enough, “commercial clients don’t like anyone from residential and residential clients don’t like anyone from commercial,” McLeod says, and there is not a big cross-over between the two asset classes. “It’s weird – they’re very similar jobs.”

Much of the hiring will be on the residential side for everything from maintenance to management roles, given the large amount of residential development in the GTA, he notes.

“So many new buildings and high-class luxury rentals will be on the market for 2023 that will want top people,” McLeod says. “If they’re paying top money, people will be interested in moving from where they are.”

Source Renx.ca. Click here to read a full story

New Toronto Development Points To A Shift In Land And Consumer Car Use

A proposed mixed-use development in Toronto, currently the site of a flourishing car dealership, may be a harbinger of the city’s postcar future.

The project at 1075 Leslie St., near Eglinton Avenue East, features five towers, ranging from 13 to 49 storeys, with 1,846 housing units and commercial and retail space wrapped around a green, pedestrian-oriented public courtyard.

It’s still early days for the 278,000-square-foot site; a community meeting is being held on Feb. 15 and the developers expect it will be years before city planning and zoning officials finish going through the details. But the ideas for the plan are significant – the development would alter the property’s past and present dependency on cars.

Flexible Office Spaces On The Rise With Canadian Companies Still Deciding How To Work

Some managers are trying to lure people back to the office with quality amenities

A New Report Says The Average Listed Rent For All Property Types In Canada Jumped By 10.7 Per Cent Year-over-year In January

The report from Rentals.ca and Urbanation calculated the average listed rent to be $1,996 in January, down 0.5 per cent from December.

When compared with the pre-pandemic average rent in January 2020 of $1,823, rents in Canada increased 9.5 per cent, which amounts to an average annual increase of 3.2 per cent during the three-year period.

Shaun Hildebrand, Urbanation’s president, says the numbers indicate that Canada’s rental market started 2023 in line with the end of 2022 but saw sharp annual rent growth, low supply and quickly rising demand.

Vancouver and Calgary had the highest increases in average rent for condos and apartments in January, with annual growth of 22.9 per cent and 22.7 per cent, respectively.

Meanwhile, Toronto condo and apartment rents increased 20.8 per cent annually in January.

This report by The Canadian Press was first published Feb. 15, 2023.

Source The Star. Click here to read a full story

The Commercial Real Estate Landscape Changed Significantly In 2022

The commercial real estate landscape changed significantly in 2022, so it’s not surprising executives have a whole new set of problems to worry about, according to the ULI/PwC Emerging Trends in Real Estate 2023 report.

“Unsurprisingly, if we look at our predictions for 2022, things have changed a lot,” David Neale, assurance partner for PwC Vancouver, told a gathering of the Urban Land Institute as the report was unveiled in the Western Canadian city. “We’ve had a year of political uncertainty, the highest inflation since the 1980s and an overall tougher climate to operate in.

“Interestingly, when we asked people what’s keeping them up at night, the answers were pretty much identical between Canada and the United States. Most of these interviews and the data contained took place in the summer and fall, and sentiment is likely more bearish now than it was even six months ago.”

Held at the venerable Terminal City Club, the Feb. 7 event was the first in-person gathering for the ULI’s Vancouver chapter since COVID restrictions were put in place in 2020.

The gathering coincided with the public release of the Emerging Trends report. Jointly produced by the ULI and PwC, the annual report provides an outlook on real estate investment and development trends throughout the United States and Canada.

Interviewees and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants.

ULI and PwC staff personally interviewed 617 individuals and survey responses were received from more than 1,450 individuals.

The highly regarded report is now in its 44th year.

The key concerns for CRE executives

In expanding on the findings, Neale noted: “Price discovery remains a key issue, with buyers, sellers and the lending markets hitting the pause button since the middle of last year.

“In 2022, there was an oversupply of capital. One year later, some respondents see an undersupply.”

The report also notes “sellers and buyers find themselves at odds over pricing expectations and valuations as some real estate assets come under pressure. Respondents identified interest rates and costs of capital as the top economic issue for real estate in 2023 and . . . both equity capital and debt capital are undersupplied.”

No. 2 on PwC’s list are impacts arising from ESG (Environmental, Social and Governance) factors which, Neale admits, “used to get huge eye rolls, but are now a concern since investors, lenders and private equity all need to report their own ESG numbers, and this results in a capital constraint.”

The report notes the Canadian real estate industry is a laggard when it comes to climate change strategy.

“In other areas of the world, investors are increasingly looking beyond whether a company has an ESG strategy to ask about plans to reach net-zero greenhouse gas emissions. And if a company does not have a net-zero strategy, they won’t invest.

“But while Canadian real estate players can expect to start seeing similar requirements from their own investors, our interviews showed that some companies have yet to fully embrace the net-zero imperative.

“According to PwC’s 2022 global CEO survey, just 19 per cent of real estate executives said that their organization had made a commitment to net-zero greenhouse gas emissions.”

ESG a key concern for millennial workers

One noteworthy aspect of the ESG conversation is its popularity with millennial workers.

“There’s still a war for talent and labour shortages in many professions,” Neale said. “Younger employees are communicating that they want to work with companies whose values line up with their own.”

Finally, conversations around housing affordability remain a key concern not just in the real estate industry, but throughout Canadian society generally.

“We’re told that we might get towards housing affordability if we build 5.8 million new homes by 2030. Well, right now we’re on track to build 2.3 million homes — roughly 300,000 housing starts per year — and that’s actually pretty good,” Neale said.

Add in high interest rates and the cost of owning a home gets even more prohibitive for many would-be homeowners, which in turn drives up apartment rental rates as well.

This is one reason why some people are exiting larger urban centres, but uncertainty over return-to-office requirements remains a factor for many.

“Canadians have been chasing affordability to smaller towns and cities, but we’re not quite sure how the work-from-home trend will end.”

Neale also offered a brief overview of the four main commercial and residential real estate sectors.

“The industrial category is a very safe sector, valuations are good, vacancies are low,” he observed.

“Office space and retail leasing will be unpredictable until we see how many workers return to the office.

“For instance, the Government of Canada controls 42 million square feet of office space and is facing resistance from workers, who want to continue to work from home.

“If even 20 per cent of this space was to hit the market, that would create a huge opportunity.”

Strong growth in 2023 for Vancouver

Specific to Vancouver, the report notes the city “continues to be (Canada’s) top market to watch for both its investment and development prospects,

The Conference Board of Canada is predicting healthy economic growth of 3.3 per cent in 2023.

“Rental demand is strong, while CMHC’s 2022 spring housing market outlook suggests that construction activity will not be enough to increase vacancy rates or reduce rents.

“And amid rising interest rates and slowing migration from other provinces, housing starts are declined by 15.8 per cent in 2022. The Conference Board predicts a further decline in housing starts of 6.4 per cent next year.

“The office market is seeing declining vacancy and climbing rents with new developments in the works; the majority of which are already pre-leased.

“The all-class downtown vacancy rate dropped to 7.2 per cent in the second quarter of 2022, down from 7.7 per cent at the start of the year, according to CBRE.

“Among the factors buoying the office market are a vibrant technology sector as well as a higher propensity for employees to return to the workplace in Vancouver and other cities in Western Canada.”

Vancouver’s industrial vacancy rate of 0.1 per cent is the lowest in Canada, while a Colliers report noted a 22.5 per cent year-over-year rise in the asking net rent.

The ULI/PwC report states while “some interviewees are watching for signs of a slowdown in Vancouver’s industrial market and the impacts of rising interest rates, others emphasize that land scarcity makes this asset class a best bet.”

Source Renx.ca. Click here to read a full story