Real estate: Building new foundations for growth
Following the past few years of significant disruptions, experts believe 2024 will be a foundational year for future growth in real estate. However, recovery will not be without its challenges and uncertainties.
While demand in segments such as industrial and multifamily residential is strong, the extent of that growth will be dependent on a number of factors, including inflation, declining revenues, a record year of interest rate hikes, labour shortages, and lack of supply.
Growth projections for the overall market remain positive. Mordor Intelligence estimates that the Canada Commercial Real Estate Market size will experience a compound annual growth rate of 7.59%, from US$77.09 billion in 2024 to US$111.12 billion in 2029.
The shifting landscape
Not surprisingly, the pandemic played a critical role in changing the real estate market environment. Widespread corporate closures, the shift to remote and hybrid working models, border restrictions, and reduced spending affected investors, landlords, and tenants. Many businesses have spent the better part of the pandemic realigning their investment and operational strategies several times over as the months dragged on.
The beginning of 2023 brought some positive signs to the forefront. A Royal LePage Commercial Real Estate Trends for Q1 in Canada noted that the first quarter of 2023 was marked by several key trends in the sector in terms of investment, demand, and technology adoption. These included an upsurge in demand for industrial real estate driven by the growth of e-commerce and logistics.
A second trend was a new focus on the diversification of alternative asset classes (i.e. data centres, self-storage facilities, and healthcare properties) to achieve better returns.
Environmental, social, and governance (ESG) factors were also identified as a top priority for investors in commercial real estate, driven by the rise of sustainable investing to provide long-term value.
The high and low points
Despite the challenges, the market is not without its opportunities, but they will not necessarily follow traditional paths. The growth numbers appear promising, but the investment landscape is expected to change considerably. Surveys show that digital economy properties (e.g. data centres) top the list of attractive opportunities, while suburban and downtown office sectors have dropped out of the top ranks as supply exceeds demand.
With the rise in e-commerce and third-party logistics providers, there is also intense competition for industrial locations, leading to record demand for warehousing, manufacturing, and data centre space. Construction however will be hampered by lack of available land, labour shortages, and energy infrastructure requirements.
On the residential front, affordability has become a major issue, particularly for first-time home buyers and renters, leading to intense interest in the multi-family residential asset class. Condominium projects have been delayed and are unable to keep up with demand for the foreseeable future, particularly in major urban centres such as Toronto.
This has led to increased activity in the rental segment as a more promising prospect due to escalating demand and the recent federal government’s announcement of GST relief for new construction projects. There is also growing interest in niche assets such as senior and student housing in the segment.
Experts also foresees a perpetual demand for senior living housing including active adult communities and ultra-luxury retirement facilities, as the share of global populations 60 years and older is expected to nearly double from 12% to 22% by 2030. With that, revenue opportunities for the sector are expected to (potentially) grow in the 6.5% range over the next five years.
Morguard predicts that multi-suite residential rental demand will continue to outpace the available supply of units in new and existing properties, resulting in a significant imbalance. Much of that is being driven by a substantial increase in immigration and stronger-than-expected job growth.
The retail sector for its part remains an active investment area, according to experts. Necessity-based retail property, particularly in the area of grocery-anchored developments serving areas of strong population growth, shows strong potential for growth.
On the downside, suburban and downtown office real estate continues to underperform, as the shift to hybrid work environments takes hold. The 2024 commercial real estate outlook: Finding terra firma global survey, shows that the downtown office sector dropped from first overall globally last year to 10th this year, while the suburban office dropped five spots to seventh. In the office space, investors are considering strategies, including adaptive reuse such as office-residential conversion where feasible.
Morguard states that Canada’s office leasing market downturn continued through to the midway mark of 2023, with easing demand falling short of supply, due largely to reductions in space utilization by businesses and government. That being said, demand continues to be high for high-quality space (AA and A assets) in the largest downtown cores and prime suburban nodes.
Trends to watch out for 2024
The JLL U.S. and Canada Construction Trends: 2024 Forecast, reports that a strong project pipeline will keep the industry busy into 2024 following the past year of stabilization. The key drivers will be the escalating housing needs, a return to office work environments, accelerated manufacturing projects, and a federally backed infrastructure. On the other hand, competition for skilled labour is fierce and is now accounting for most of the industry’s inflationary costs.
JLL Canada’s CEO, Alan MacKenzie, has stated that early 2024 is the bottom of the trough of the marketplace but expects to see an uptick in activity by 2025. Recovery will vary depending on geographical markets and the available quality of investment opportunities.
Experts agree that 2024 will be a pivotal year for repositioning the industry, bearing in mind that the economy will continue to be a primary factor in decision-making. Expectations are that the Bank of Canada will be cutting interest rates in the months to come, which will have a direct impact on the cost and availability of capital for buyers and investors if they happen.
With that, the 2024/early 2025 time frame promises to be an important repositioning period for real estate firms. However, it will require significant strategic changes in the way of driving efficiencies, leveraging technology capabilities to streamline operations and reduce risk, and build resilience into business models moving forward.
We have a wide knowledge of the real estate and construction industry, and considerable hands-on experience in advising general and niche contractors, property management companies, private developers, and landlords owning residential, industrial, and commercial properties. If you have any questions or need further information, please feel free to reach out to the Real Estate and Construction group at Fuller Landau.