DALL·E-2024-01-07-13.55.22-A-stunning-small-super-modern-apartment-with-an-innovative-electrical-bed-that-retracts-from-the-ceiling. - emerging trends in real estate 2024 and beyond

Summary of Emerging Real Estate Trends 2024 and Beyond

Summary of Emerging Real Estate Trends 2024 and Beyond

 

Summary of emerging real estate trends 2024 and beyond covers the comprehensive report created by PWC and the Urban Land Institute for 2024. Their detailed report is a roadmap of both sentiment and performance across the varying types of real estate. It includes the current data and projections for commercial, residential and industrial real estate, breaking them down by performance, outlook, and location within both Canada and the United States.

Since the report is quite extensive, consisting of more than 100 pages, I’ll be attempting to sum things up. All charts posted are sourced via the report “2024 Emerging Trends In Real Estate” by PWC and ULI Institute.

Overall Challenges

The main challenges in  real estate consist of:

-Higher for longer interest rates

-Hard to access money/capital for acquisitions and refinancing

-Shortage of  product supply

-Rising cost of  construction materials along with a shortage of skilled labor

On a year-over-year basis, residentialconstruction costs for 11 Canadian census metropolitan areas were up 7.5 percent in the second quarter of 2023. For non Residential construction, the increase was slightly lower, at 7 percent. The report identified concrete as one of the key materials increasing costs.

Some Overall Trends To Consider

-Harnessing Data, Digital Transformation, and Technology Including Generative AI

-ESG Strategy, Reporting, and Performance

-The Housing Market at a Breaking Point – The Challenge of Tightening Supply versus Growing Demand

-One of the more interesting trends this year has been the comeback story for retail property, similar to other asset classes, there’s bifurcation in the retail segment also. The largest regional shopping centers and grocery-anchored retail properties are doing particularly well. While suburban strip malls continue to struggle. Interviewees of the report believe it is important to invest in amenities and experiences, as well as ensure a variety of uses—including residential development—to create a greater sense of community and make the shopping center a destination for a diverse mix of consumers.

For some, this could mean using creative leasing strategies to ensure a strong tenant mix that includes lifestyle, wellness, and entertainment uses.

-There was a general sense among interviewees that it will be several years before the office sector starts to recover. Despite these challenges, many tenants in the best office locations are renewing their leases. Top-quality buildings with rich amenities and experiences in the best locations will remain in demand. Other buildings will suffer. This is reflected in CBRE’s data: downtown class A vacancy rates are lower than for class B properties (16.5 versus 23.3 percent).

Some office owners are looking to sell their properties, but those looking for a deal are finding relatively few distressed buying opportunities. Some contrarian investors are buying up office assets at higher capitalization rates as they are more confident in a long-term recovery for the sector, while others are looking to buy fully leased buildings at relatively attractiveprices and add value by refurbishing them.

Some say that office space is now what the retail challenge was with much discussion around repurposing.

Navigating rising vacancy rates and the current uncertainty is leading some owners to look at opportunities for adaptive use to incorporate, for example, health care, light industrial, and educational uses. More discussion is also occurring about repurposing offices to housing, although the overall sentiment among interviewees is that it’s still early, given that existing layouts tend to not be amenable to residential conversion. Even so, recent reports indicate that scores of buildings across Canada could be candidates for conversion. And experiences in Calgary, where conversions have been a factor in the recent decline in the local vacancy rate, prove it can be done successfully provided that there’s meaningful support from the government to make it work financially.

Similar to the trend toward experiences, activities, and entertainment in retail real estate, many office owners are focusing on amenities that attract tenants and their employees. This could include, for example, converting traditional work areas to bar and cafe spaces as well as reimagining building amenities, such as lobbies, to host events and offer activities that all tenants can access. Investing in ESG features could be another key differentiator to create value in an increasingly bifurcated market.

Purpose-Built Rental Housing has been a significant focus and asset class for both the real estate industry and governments recently. Among the most notable developments was the federal government’s September 2023 announcement of GST relief for new rental housing construction. The move has industry players watching for similar actions to remove provincial sales taxes, which, combined with the federal announcement, could lead many to take another look at development opportunities. The tax relief comes amid the growing recognition of the need for significant investment in and development of purpose-built rental housing, given current trends in the market.

According to the latest Canadian census data, the number of renter households grew by 21.5 percent from 2011–2021, which was significantly higher than the 8.4 percent growth on the ownership side. Rents are also rising quickly, especially for vacant units. According to CMHC’s 2023 annual report on the rental market, the average rent jumped 18.3 percent last year for a two-bedroom unit that turned over to new tenants.

Immigration is generally an important source of demand, but another key segment of international arrivals who need rental housing is the growing number of foreign students attending Canadian postsecondary institutions. Another factor is spillover demand from people unable to afford homes at higher interest rates.

Despite the current challenges, the long-term outlook for condos is generally positive given strong housing demand. Condos continue to offer a more affordable price point compared with single-family housing for those looking to buy property, especially for first-time homeowners.

Transit-oriented development centered around the large number of transportation projects underway across Canada represents another important opportunity to build condos as part of vibrant, mixed-use, and amenity-rich communities for Canadians looking to buy a home.

Affordability has deteriorated for single-family housing, creating an ongoing headwind for developers. According to RBC’sJune 2023 housing affordability measure, ownership costs as a percentage of median household income reached 65.9 percent in the first quarter of 2023. Although that was down slightly from a peak in October 2022, it was up from 57.2 percent at the start of last year. In the face of other challenges, such as labor shortages and rising costs and interest rates, single-family construction activity has been slowing. Developers are adapting by paying close attention to price points, given that many Canadians have reached the limit of what they can pay for a single-family home. Single-family housing construction continues to move further away fromCanada’s biggest cities, not only to suburbs but also further afield to secondary markets, given the growing appeal of smaller communities. These markets tend to be more affordable and are often an attractive option for Canadians who can work remotely and do not need to commute to major city downtown cores every day.

Looking at the low-rise category more broadly, affordability pressures are shifting the market toward smaller houses and townhouses rather than more expensive detached units. One trend that interviewees expect to see more of is stacked townhouses and mid-rise developments to increase density and affordability while appealing to suburban homebuyers.

One notable change in the affordability discussion this year is the increased focus on challenges in the rental market as potential homebuyers continue to rent after finding themselves unable to purchase homes. Canada’s rental vacancy rate was just 1.9 percent in 2022, according to the Canada Mortgage and Housing Corporation (CMHC), and the tight rental market has helped lead to rapid rent increases in many  Canadian cities.

According to the Toronto Regional Real Estate Board, the average rent for a one bedroom condominium apartment rental rose 11.6 percent in the second quarter of 2023 compared with the same period last year. The affordability squeeze has continued to spread to rental markets in cities other than traditional high-cost centers such as Toronto and Vancouver. In its latest annual report on Canada’s rental housing market, for example, CMHC found a record increase in average rents for Halifax in 2022.

Cities in Atlantic Canada such as Halifax are seeing strong population growth, in part due to the region’s rising share of immigrants coming to Canada. Coupled with the large number of Canadians moving to Halifax from other provinces in search of cheaper homes, the city’s housing market has tightened to thepoint that some residents are now leaving the Nova Scotia capital for more affordable communities,CMHC reported. Other communities seeing record rent growth include Kitchener-Waterloo-Cambridge, where CMHC noted increases were higher than for other Ontario cities such as Toronto.

Canadian Markets to Watch

Toronto’s economy is expected to regain momentum in 2024 with real gross domestic product (GDP)growth of 2.9 percent, according to the Conference Board of Canada (CBoC). The Greater Toronto Area remains a best bet among many of the interviewees, with one of them stating, “If I had $100, I’d spend it all in Toronto.” Toronto had the highest year-over-year increase in residential construction costs inCanada by a wide margin in the second quarter at 13 percent, according to Statistics Canada. This is compressing developers’ margins and adding new pressure to lock in project costs as early as possible.

Affordability

Overall, the CBoC forecasts housing starts to rise 5.4 percent in 2024 but predicts activity will remain below 2022 levels. Colliers reported that industrial rents climbed less than 1 percent in the second quarter to an average of $18.14 per square foot. That figure is down from the 8.6 percent increase recorded at the start of the year. The Toronto-area industrial vacancy rate is just 0.5 percent—the lowest among major Canadian markets.

As seen in other asset classes, divisions are widening among Toronto’s retail properties. Owners of high quality retail space, including grocery-anchored properties and enclosed Shopping centers with premium tenant mixes, are seeing higher returns. One of the city’s super-regional malls recently recorded its highest-ever sales per square foot in 2022.

The CBoC think tank says that after growing a mere 0.5 percent in 2023, Vancouver’s economy will expand by 2.8 percent in 2024. After housing starts decline by an estimated 15 percent in 2023. The CBoC forecasts activity will completely recover and return to 2021 levels next year.

CMHC says a record number of new purpose-built rental units are on track for completion by 2023, but the scale of development still falls short of what is necessary to house Vancouver’s growing population. Many developers are continuing to focus on mixed-use, transit-oriented developments, particularly on properties near current and planned SkyTrain stations. Vancouver’s office market is outperforming thoseof most other Canadian cities.

Investors also see opportunities for long-term appreciation in property values as land constraints, combined with a push for greater residential density, create opportunities to eventually replace industrial buildings with multifamily developments.

markets to watch

Calgary is a market that’s gaining more interest, bullish on Calgary’s residential segment—particularly its multi residential market—thanks in part to an increasing population and its affordability relative to other major Canadian cities. And with GDP expected to rise 2.8 percent in 2024, the city will trail only Edmonton and Toronto in economic growth next year.

The absence of rent control in Alberta gives investors greater confidence that they will be able to manage high interest rates. Some also believe single-family rental homes may emerge as a compelling opportunity in the coming years. A municipal incentive program that encourages owners of underused office buildings to convert their properties to other uses continues to attract attention across the country. The relative affordability of industrial space in Calgary continues to be a draw for tenants, especially among those looking to geographically diversify their Western Canadian operations.

Industrial rents in Calgary reached an average of $11.95 per square foot in the second quarter considerably lower than the$22.05 rate recorded in Vancouver.

2024 economic forcast by city

The CBoC forecasts Montreal’s economic growth will trail most other major Canadian cities in 2024, with real GDP expected to expand 2.2 percent. CMHC found that after reaching a 30-year high in 2021, housing starts in Montreal plunged 25 percent in 2022 and slipped further in 2023. The national housing agency expects starts to edge up modestly in 2024. Transit-oriented, multiresidential housing continues to be an area of particular interest for developers. The first phase of the new Réseau express métropolitain network opened in the summer of 2023, with additional sections scheduled to enter service in the coming years. Observers are watching to see whether proposals for a new eastern leg of the network will come to fruition and how calls for greater density around transit stations will fare against pockets of community opposition.

Downtown Montreal has regained some of its vibrancy with the return of festivals and major sporting events. But the increased foot traffic has not included a resurgence of office workers, with many employees continuing to work from home several days a week. CBRE reports Montreal’s citywide vacancy rate climbed to 17.4 percent in the second quarter, up from 16.8 percent at the start of the year. While the downtown market is outperforming the suburbs, vacancy in the central business district rose for the fourth consecutive quarter to 17 percent.

Industrial properties continue to be a favored asset class among investors. The market remains hot amid strong tenant demand. But after skyrocketing over the past two years, rental growth slowed considerably in mid-2023 to just 0.5 percent on a quarterly basis, reaching an average of $16.80 per square foot, according to Colliers.

Halifax has been one of Canada’s fastest-growing cities in recent years. The population increased by 4.5 percent in 2021–2022 alone—the second-highest growth rate in the country, behind only Moncton, according to Statistics Canada. This uptick has led to a limited inventory of available homes, even as construction activity remains above historic levels. Housing starts jumped 26.6 percent in 2023 and are expected to remain relatively constant in 2024, according to the CBoC. Overall, the think tank forecasts Halifax’s economy will grow 2.2 percent next year. The hot housing market is creating affordability challenges in Halifax as home prices appreciate and push more homebuyers to seek lower-priced properties farther outside the city.

With higher interest rates further decreasing affordability, a growing number of would-be homebuyers are staying in the rental market longer. Investors remain interested in acquiringindustrial park properties in Halifax and Dartmouth. But many feel current valuations are high. They seem particularly bullish on new grocery-anchored retail developments to support new residential developments.

In Ottawa there is a robust demand for all types of housing—from downtown rental apartments to suburban single-family homes—is helping to keep residential construction activity above historic levels in Ottawa. While elevated interest rates and labor constraints are causing some uncertainty, the interviewees were overwhelmingly positive about the city’s residential real estate outlook. They expressed confidence the market would absorb as many units as they could build. Indeed, after a slightly sluggish economic performance in 2023, the CBoC expects housing starts in Ottawa-Gatineau to jump 8.5 percent in 2024 and real GDP to grow 2 percent. Purpose-built rental housing stood out as a particularly noteworthy residential asset class. Many new projects are under construction and comingonline, with property owners typically achieving their desired rental rates. Rising home prices in central Ottawa are continuing to push both prospective homebuyers and builders toward townhouses and smaller single-family houses. In Ottawa’s surrounding communities, The federal government announced plans last fall to shed millions of square feet of office space but has since released few details about how it will consolidate its portfolio. This is creating uncertainty among landlords, especially with more than50 percent of the government’s leases expiring in the next fiveyears, according to CBRE. The federal government did release a list of 10 properties in Ottawa-Gatineau that it plans to sell, but many are older buildings. At least some are expected to be demolished. Outside the downtown core, the region is seeing some bright spots, notably in the city’s technology hub in the western suburb of Kanata, where several large multinational firms are increasing their presence.

Ottawa’s industrial market continues to attract interest among developers and investors. New distribution centers are under construction in Ottawa and other eastern Ontario communities as companies take advantage of the region’s transportation links and proximity to both Montreal and Toronto.

When it comes to ESG investments, there is growing interest in the use of solar panels. Solar power can provide a dependable supply of clean electricity to tenants, helping to address rising energy costs while reducing carbon footprints. This is one way for industrial players to make their properties stand out, which could, in turn, help them attract high-quality tenants.

Investment subsector predictions 2024

important issues in real estate 2024

major impacts for housing 2024

Emerging Trends and Projections for 2024 and the Next 5 Years

 

The next few charts show projected inflation, investor return, cap rates, and commercial mortgage rates

mortgage, cap and inflation projections for the next five years

Best Bets for 2024

-Industry players still see opportunities in industrial properties, particularly in the manufacturing and warehousing segments and niche areas such as data centers.

-Multifamily residential housing like industrial real estate boasts solid fundamentals that make it a best bet in the coming year. Amid strong population growth, the ongoing lack of supply, and the relative affordability of rental units and condos compared with single-family homes, the long-term outlook for multifamily housing remains positive. As one interviewee noted, it is a segment of real estate that has largely become resistant to a recession. Prospects are generally better in markets with fewer or no rent controls. Niche assets, such as student and senior housing have strong underlying demand drivers. The growth of the international student population as well as Canada’s aging demographics focusing on homes for Canadians aged 55 and up, as opposed to traditional senior housing for the oldest retiree age groups

-Retail property, especially when it comes to grocery-anchored developments that serve communities, are seeing strong population growth. Neighborhood/community shopping centers ranked particularly high for investment prospects in the survey this year.

-Besides these three best bets, an honorable mention this year goes to debt funds. While it is not an asset class in the survey, many interviewees cited this as a key opportunity at a time when there is a significant undersupply of debt and equity capital. By providing debt capital to those struggling with financing challenges, companies benefit from both higher yields as well as the security of the underlying real estate if the borrower cannot pay the lender back. Even so,one interviewee cautioned that companies will need to move quickly to take advantage of the opportunities they offer. They stressed that debt funds represent a “moment-in-time opportunity,”especially in a smaller market such as Canada.

“The Great Reset” – The Looming Liquidity Crisis

-After three years of holding out hope, industry leaders have accepted that there won’t be a return to the office nearly as often, and some not at all, the implications for our industry are profound, and not only for office owners, managers, and brokers. Collateral impacts will also be seen on downtowns and other property sectors that depend on a vibrant office market.

Owners facing major lease or debt expirations may be forced to sell, particularly if the higher debt costs render refinancing unfeasible or the asset cannot satisfy required loan terms or covenants. Many banks now require that borrowers put more equity into their projects to lower the project’s loan-to-value ratio; others require that borrowers keep deposits in their banks, which effectively accomplishes the same thing.

Some owners will conclude it is not worth throwing good money after bad and will hand the proverbial keys back to their lender. Distress levels are still relatively contained compared with other periods when there was pervasive market disruption.

-The Emerging Trends survey shows continued interest in several niche segments including data centers, student housing, and medical offices.

-Senior Housing: Capital Market Challenges in the Near Term, but Plenty of Opportunities Ahead

-The hotel sector continues to show strong performance amid recessionary concerns and macroeconomic headwinds, highlighted by year-over-year gains in average daily room (ADR) rates and revenue per available room (RevPAR). Higher inflation rates helped boost ADR throughout the past year, but signs of pricing fatigue are beginning to emerge. hotel performance is continuing to return to pre-pandemic levels. According to STR data, at the time of this publication, RevPAR in the United States has surpassed 2019 levels in each month since March 2022.

 

Eco-Anxiety Comes Home

 

After a record-breaking summer, 2023 is trending to be among the hottest years ever recorded. Preliminary data from the Copernicus Climate Change Service shows that the global average surface temperature for June through August was 1.17 degrees F above the 30-year average through 2020. For perspective, that was over half a degree warmer than the previous summer record, set in 2019. Numerous U.S. cities experienced all time heat records as the number of billion-dollar climate events rose sharply, posing increased costs and risks to owners and operating challenges for managers.

The United States has already endured 24 billion-dollar events this year through mid-September only part way through the hurricane season. By comparison, the annual average number of events for 1980–1999, adjusted for inflation, was just 4.5. Over the past five years, the yearly average has risen to 18, and now that figure has been reached in just nine months.

But why is this a concern, aside from our own personal comfortand safety? One answer was succinctly offered by ULI’s former chair, Owen Thomas, in a recent article in Urban Land magazine:

“The quality and financial performance of real estate assets is increasingly correlated with sustainability performance.”

Insurance historically has been only a minor concern for commercial property owners, but rising insurance costs and declining availability is forcing the industry to rethink the approach to insuring assets against growing climate risks. Even if they want to do the right thing, however, CRE investors and fund managers face complex and difficult choices in considering how exactly to move forward. On the agenda: decarbonization and energy efficiency, indoor environmental quality, climate resilience, soaring insurance costs and declining insurance availability, and uncertain access to resources like power and water.

 

 

U.S. Market Outlook

Markets to watch in the U.S.

All data and image resources are via the 2024 Emerging Trends Report by PWC & ULI Institute

 

Read the full 2024 Emerging Trends Report by PWC & ULI Institute

 

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Read the latest Montreal Market Reports

 

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Bonnie Meisels
buymontrealrealestate@gmail.com
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