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Mixed use developments, greater intensification and infill projects will be continuing trends

A highly regarded annual real estate trends report released in early November predicts that Canada's real estate market will remain healthy in 2014 and continue to attract positive attention from domestic and international investors. It also predicts an increase in redevelopment, more intensification of urban cores, and more mixed-use projects that combine residential, commercial and office space.

Emerging Trends in Real Estate, an American publication by PwC (an advisory, accounting, audit and assurance services firm) and the Urban Land Institute, provides an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States, Canada, and Latin America.

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The report is based on survey results or interviews of participants who represent industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.

Canada's real estate market avoided the worst of the 2008 global financial crisis, and due to steady economic growth and a lack of oversupply, it remains in a good position, says the report. The current level of economic growth will support the expansion of the real estate market across all property types and Canada's real estate market could also get a boost from improvement in the U.S. economy.

The US Influence

While the strength of the Canadian real estate market has made it appealing to domestic investors, Canadians are also investing south of the border and are the largest non-domestic investors in U.S. real estate. According to Real Estate Analytics, Canadian investors purchased $10.7 billion worth of U.S. properties over the last 12 months, representing 28 percent of all nondomestic investment. This doesn't mean Canadians are dissatisfied with local Canadian markets, but are sophisticated investors seeking diversified investment opportunities.

As Canada's economy is tied to the U.S. economy, one interviewee notes that "we are waiting to see if the recovery in the U.S. is real. If it is, we will almost certainly benefit, and we will ride that tailwind."

Canadians would also benefit from a rise in U.S. property values. Canadian investors who regard prices as climbing too high at home will invest in the United States.

Strong Market Forecast

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The Emerging Trends participants expect Canada's real estate market to improve in 2014. The average "buy" rating is projected to slip from "modestly good" to "fair." Rather than reflecting falling confidence, this indicates that strength in the market has pushed up prices for the last two years to a level where investors are beginning to approach each transaction with a heightened level of caution.

Next year could be a good one for investors to put properties on the market, as the 2014 "sell" recommendation remains in the "modestly good" range.

Next year will be a "modestly good" time to hold properties. Many interviewees felt that 2014 would still see a good number of transactions, but volumes will likely be down from last year. Buyers could be more discerning, paying top dollar only for the best properties.

Top Trends

Redevelopment will play a major role in some Canadian markets.

Municipalities aiming to maintain the vitality of urban cores may favor redevelopment of existing projects. A Toronto developer said: "We are buying for future redevelopment sites. We don't see a large future in developing office space now or in near future. We are willing to buy existing office buildings, hold [them] for five to 10 years, then redevelop the site into mixed-use, high-rise residential/retail."

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In the Greater Toronto Area, all land available for lowrise development within the Greenbelt will be built out in 10 years, limiting opportunities to redevelopment only. Higher density and mixed use will be favoured.

With the increasing preference among downtown residents and office workers to live, work, and play within walking distance, if not near, mass transit hubs, there is an increasing trend toward urban core mixed-use development. Downtown Toronto and GTA projects are combining condominiums with offices and retail stores, and several downtown projects have combined hotels with condominiums and retail stores.

This mixed-use trend will continue, says the report.

Intensification and Urbanization

Intensification of downtown areas of cities is a continuing trend in Canada's major centers, coupled with reverse migration from the suburbs to downtown areas.

The Greenbelt restriction, combined with government intensification policies, is precipitating the development of office and residential property along subway lines and near mass transit hubs in Toronto, resulting in higher density. Residents of suburbs and employees of companies in suburban offices have grown tired of long commutes and are reacting by moving into downtown areas, which is stimulating new demand for office space and resulting in an increase in infill development.

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Residential development within city limits will be increasingly prevalent in 2014, according to Emerging Trends, with infill and in-town housing having the highest investment and development prospect scores for the year to come.

An issue is that single-family homes prices in major markets are rising faster than personal income. The average price of a home in Canada increased to $385,906, according to the Canadian Real Estate Association, an 8.8 percent year-over-year price gain.

This trend could push "more development outside of the greenbelt to address affordability," another interviewee predicts.

Development at more distant locations, however, comes with a different set of costs. The population has clearly shown a desire to move back to the urban core to eliminate commuting costs and to allow for access to a live/work/play environment. Suburban development will require more investment in infrastructure to attempt to efficiently move workers to and from employment centers.

Housing development outside the urban core also requires a lengthy and increasingly difficult and expensive process to obtain the proper approvals and install the required infrastructure.

The infrastructure issue may become an emerging trend in the GTA, Calgary, and Edmonton and perhaps in other markets. Municipalities seeking new and creative ways to finance infrastructure are increasingly pushing costs and risks down to developers.

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The growing attractiveness to investors of work/live/play developments leads the outlook for 2014. Survey respondents give niche and multiuse property "modestly good" to "good" ratings.

Toronto Market

Toronto's market ranks number two in the country for home building investment and development in 2014.

The best real estate bets for 2014, says an interviewee, will be downtown offices, condos in the right locations, and urban retail.

Demand for new homes in Toronto has benefited from foreign investment, an improved economy, low interest rates, and good population growth. With inventories rising, starts in 2013 are expected to slow but the decrease is expected to be a short-term, with growth in 2014 is projected to be 1.7 percent.

Commercial/multifamily developers are expected to have "slightly better" prospects than homebuilders in 2014. Multifamily developers may see more attractive opportunities in neighborhoods seeking to increase the density of development within the urban core.

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Mixed-use projects are soaking up investment dollars in one of the most rapidly emerging investment opportunities in Toronto's downtown areas, as condominiums are combined with offices and retail stores to take advantage of a growing preference to live, work, and play within walking distance of downtown areas.

CMHC’S LATEST FORECAST


Toronto’s housing market will remain stable next year, according to the latest forecast from Canada Mortgage and Housing Corp. New housing starts will ease, but existing home sales will increase modestly.


Here are the highlights:

•  Total housing starts will ease in 2014 with activity shifting to semi detached homes and townhouses, from single detached and condos

•  Gradually rising interest rates will keep home sale growth modest

•  Rising home values will keep more people renting, but additional condo rentals will keep rental supply in balance

•  Income growth will match broadly based employment growth

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