Investor outlook for the year ahead is ‘cautiously optimistic,’ according to industry insiders.Adrien Veczan/The Canadian Press
The bumpy ride that commercial property investors and developers have been enduring for two years may give way to a smoother path in 2023, but it will probably take until mid-year, according to experts who analyze the real estate sector.
”There’s a lot of capital available, and those in the industry who have it are going to be looking for places to invest it,” says Emeka Mayes, head of Canadian capital markets, brokerage, at Colliers Canada.
Experts are calling the new year a time of “price discovery,” as buyers and sellers try to sniff out what the market will bear. Ms. Mayes says that there’s cautious optimism that the year will go well for commercial real estate even though the Bank of Canada raised interest rates seven times in 2022, with more possible rate hikes to come.
“People will be looking to relatively low-risk strategies for buying and trading, rather than rolling the dice,” she explains.
Many investors holding capital are now putting their money into secondary “bridge” or “mezzanine” lending for developers who need more funds than the banks will now provide, Ms. Mayes explains.
“Historically, a developer may have gotten a loan of between 75 and 85 per cent of the cost of a project. In the current economy, the banks are putting in maybe 65 to 70 per cent. That means a developer has to come up with another 10 to 20 per cent, and there are groups of lenders popping up to provide this,” she says.
“Depending on who you borrow from, developers are looking at 8 or 9 per cent rates for this bridge financing,” she adds.
“People will be looking to relatively low-risk strategies for buying and trading, rather than rolling the dice.
— Emeka Mayes, head of Canadian capital markets, brokerage, at Colliers Canada
Repricing and recovery
Despite these escalating loan costs, Colliers’s 2023 Global Investor Outlook, released in early December, predicts that the worldwide real estate market will become more stable by mid-year than it has been since the COVID-19 pandemic began in early 2020.
According to the report, “A recalibration of the global real estate market is under way, and we anticipate the stabilization to take hold [by] mid-2023. The velocity and timing of this stabilization, repricing and recovery will differ across markets and sectors.”
”You’re going to see a time lag between the projects that have been approved and when they actually start digging, because people are waiting to see what happens with the economy,” Ms. Mayes says.
A PwC assessment, Emerging Trends in Real Estate 2023, agrees that there’s both optimism and hesitation, reporting that while the changing environment in 2022 has been a shock for some, the long-term outlook for the Canadian real estate market is positive.
“Lenders … are making it harder for real estate companies to raise capital and move projects forward. This, in turn is leading to reduced competition for deals.”
It noted that many of the Canadian real estate companies interviewed for the report and surveyed in the summer of 2022 are predicting a pause in market activity as they watch how the current uncertainty plays out.
Even if the commercial real estate scene does smooth out buy the middle of 2023, the outlook won’t be equally smooth everywhere, the experts warn.
”Expect the unexpected. The factors influencing decision making are changing hourly and daily, not monthly or quarterly,” Colliers’s report says.
Industrial and office outlook
Nearly 20 per cent of the investors it surveyed said they simply “don’t know” where property values will land in 2023. For investors in retail, hospitality and rental housing, more than 30 per cent said they can’t predict yet whether their property values will be up or down.
In Canadian markets, “industrial real estate remains a best bet,” PwC says. Subcategories like warehousing, fulfilment, data centres and self-storage also rank high, among investment and development recommendations, it adds.
The market for life sciences buildings also looks promising and there may be a surge in multi-residential property, although in Ontario, the outlook for the latter might be hobbled amid a backlash against Premier Doug Ford’s controversial moves to allow building on the province’s greenbelt.
The office market remains a question mark too, as employers seek to encourage or compel home workers to come back, with mixed results. “Many office users are just sitting there and going ‘Let’s just see what the first half of 2023 looks like from a business perspective,” says Alan MacKenzie, chief executive officer of JLL Canada. “Let’s not over-force our work populations back to the office.”
ESG transparency
The other big trends expected in commercial real estate for 2023 are that environmental, social and governance (ESG) considerations will be taken more seriously than ever and that smart technology to monitor and control building functions is increasingly being deployed in commercial property.
”While some real estate companies are still figuring out their ESG and net-zero [carbon emission] strategies, the imperative to act quickly goes well beyond investor expectations,” PwC says. It notes that companies in Canada will soon face “climate disclosure” rules and regulations requiring public reporting of their buildings’ carbon footprints.
The trend toward smart tech is raising concerns too. New research released Dec. 6 from KPMG in Canada, which surveyed Canada’s 17 biggest real estate organizations, found that 80 per cent of these companies that use smart tech don’t monitor their networks or devices for cybersecurity threats.
“Smart building technology is commonplace and holds many benefits, but it also comes with risks,” says Tom Rothfischer, audit partner and national industry leader for KPMG in Canada’s building, construction, and real estate practice. “The reality is that most companies now find they are playing catch-up to seal the security gaps.”