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Emerging Trends in Real Estate ®

Canada and United States 2015

EmergTrends CANADA 2015_C1_4

Emerging Trends in Real Estate® 2015 A publication from:

EmergTrends CANADA 2015_C1_4

Emerging Trends in Real Estate® 2015 Contents 3 4 7 11 14 17 23 23 24

Chapter 1 Emerging Trends in Canada The Business Environment Emerging Trends in Canadian Real Estate Capital Markets Opportunities by Property Type Markets to Watch in 2015 Local Market Opinion Expected Best Bets in 2015 A Summary of Canadian Real Estate Trends

? 37 Housing Steps Off the Roller Coaster 38 Keeping an Eye on the Bubble—Emerging Concerns 40 Expected Best Bets 43 44 48 50

Chapter 3 Real Estate Capital Flows Looking across the Debt Sector Meanwhile,

The View from the Bridge

Chapter 4 Markets to Watch 2015 Market Rankings Capital Flow by Market Continuing Urbanization Trend Generational Impacts: The Potential for Change Technology and Energy Leading the Recovery Jobs Go Where It Costs Less The Top 20 Markets Perspective on Regions

Chapter 5 Property Type Outlook Industrial Hotels Apartments Retail Offices Housing

Interviewees Emerging Trends in Real Estate® 2015

Editorial Leadership Team Emerging Trends Chairs Mitchell M


PwC Kathleen B

Urban Land Institute Authors Hugh F

Kelly Andrew Warren,

PwC Principal Researchers and Advisers Stephen Blank,

Urban Land Institute Anita Kramer,

Urban Land Institute Senior Advisers Christopher J


Canada Miriam Gurza,

Canada Susan M

PwC ULI Editorial and Production Staff James A


Senior Editor David James Rose,

Managing Editor/Manuscript Editor Betsy VanBuskirk,

Creative Director Anne Morgan,

Cover Design Deanna Pineda,

Muse Advertising Design,

Designer Craig Chapman,

Senior Director of Publishing Operations Xiaoning Mao,

Project Intern PwC Canada Editorial and Production Staff Jill Lising Jorja Mathers Mel Fowle Naveli Thomas

Emerging Trends in Real Estate® is a trademark of PwC and is registered in the United States and other countries

All rights reserved

PwC firms help organizations and individuals create the value they’re looking for

We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance,

Tell us what matters to you and find out more by visiting us at www

Learn more about PwC by following us online: @PwC_LLP,




© 2014 PricewaterhouseCoopers LLP,

a Delaware limited liability partnership

All rights reserved

PwC refers to the U

and may sometimes refer to the PwC network

Each member firm is a separate legal entity

Please see www

com/structure for further details

© October 2014 by PwC and the Urban Land Institute

Printed in the United States of America

All rights reserved

No part of this book may be reproduced in any form or by any means,

including photocopying and recording,

or by any information storage and retrieval system,

without written permission of the publisher

Recommended bibliographic listing: PwC and the Urban Land Institute: Emerging Trends in Real Estate® 2015


: PwC and the Urban Land Institute,

Emerging Trends in Real Estate® 2015

PwC Advisers and Contributing Researchers Adam Boutros* Adam S

Feuerstein Adriane Bookwalter Aki Dellaportas Allen Baker* Allen Topaloglu* Alysha Brady Amanda Gruskos Amy E

Olson Amy Perron* Andrew Alperstein Andrew Popert* Andrew Stansfield Andrew Warren Brad Wood Brett Matzek Bud Thomas Carlo Bruno Chris Dietrick Chris Mill Chris Vangou* Christina Howton* Christine Hill Christine Lattanzio Christopher J

Potter* Cynthia Chandler Daniel Cadoret* Daniel D’Archivio* David Baldwin David Baranick David Glicksman* David Khan* David M

Voss David Ross David Seaman David Yee* Deborah Dumoulin* Dennis Goginsky Dillon Long Dominique Fortier* Doug Purdie* Douglas B

Struckman Emily Pillars Eric Andrew* Eric St-Amour* Ernie Hudson* Eugene Chan Frank Magliocco* Franklin Yanofsky Fred Cassano* Ian Gunn* Ian T

Nelson Jack Keating Jackie Yau* Jacqueline Kinneary James Oswald Jane Ma* Jasen Kwong* Jason Chessler

Jay Schwartz Jay Weinberg Jeff Kiley Jeffrey Nasser Jerry Kavanagh* Jim D’Amore John Amman Julia Powell Ken Griffin* Kent Goetjen Kevin Nishioka Kourosh HoorAzar Kristen Anderson Kristen Conner Laura Daniels* Lori-Ann Beausoleil* Louis DeFalco Matt Lopez Mel Fowle Mike Herman Miriam Gurza* Nadja Ibrahim* Nicholas Mitchell Philippe Thieren* Rachel Klein Rajveer Hundal* Raymond J

Beier Renee Sarria Rich Fournier Rick Barnay* Rob Sciaudone Ron Bidulka* Ron Walsh* Russell Sugar* Ryan Dumais Scott Tornberg Scott Williamson Sean Hiebert* Sergio Lozano Stacie Benes Stephan Gianoplus Stephen Cairns Steve Baker Steve Hollinger* Steve Tyler Steven Weisenburger Susan Smith Tim Conlon Tori H

Lambert Warren Marr William Hux William Keating


Notice to Readers Emerging Trends in Real Estate® is a trends and forecast publication now in its 36th edition,

and is one of the most highly regarded and widely read forecast reports in the real estate industry

Emerging Trends in Real Estate® 2015,

undertaken jointly by PwC and the Urban Land Institute,

provides an outlook on real estate investment and development trends,

real estate finance and capital markets,

and other real estate issues throughout the United States and Canada

Emerging Trends in Real Estate® 2015 reflects the views of more than 1,400 individuals who completed surveys or were interviewed as a part of the research process for this report

The views expressed herein,

including all comments appearing in quotes,

are obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI

Interviewees and survey participants represent a wide range of industry experts,

ULI and PwC researchers personally interviewed more than 391 individuals,

and survey responses were received from 1,055 individuals,

whose company affiliations are broken down below

Private property company investor,

Real estate service firm

Institutional/equity investor or investment manager

Commercial/institutional real estate developer

Publicly listed property company or equity REIT

Private REIT or nontraded property company

Homebuilder or residential land developer

Mortgage REIT or real estate debt investor

Other 1

the views of interviewees and/or survey respondents have been presented as direct quotations from the participant without attribution to any particular participant

A list of the interview participants in this year’s study who chose to be identified appears at the end of this report,

but it should be noted that all interviewees are given the option to remain anonymous regarding their participation

In several cases,

quotes contained herein were obtained from interviewees who are not listed

Readers are cautioned not to attempt to attribute any quote to a specific individual or company

PricewaterhouseCoopers has exercised reasonable care in the collecting,

and reporting of this information but has not independently verified,

or audited the data to verify the accuracy or completeness of the information

PricewaterhouseCoopers gives no express or implied warranties,

including but not limited to any warranties of merchantability or fitness for a particular purpose or use and shall not be liable to any entity or person using this document,

or have any liability with respect to this document

To all who helped,

the Urban Land Institute and PwC extend sincere thanks for sharing valuable time and expertise

Without the involvement of these many individuals,

this report would not have been possible

Emerging Trends in Real Estate® 2015

Emerging Trends in Real Estate® 2015

Chapter 1: Emerging Trends in Canada

Emerging Trends in Canada “Everyone wants prime properties,

but in the Canadian market the bidding on those can be quite competitive,

creative in finding ways to enhance value

No shocks and few surprises: As we look forward to 2015,

the Canadian real estate market appears poised for another steady year

Canada’s economy continues to deliver stable,

creating an ideal low-risk environment for real estate developers and investors

Urbanization has become one of the key forces shaping Canada’s real estate markets

Once viewed as an emerging trend,

urbanization today is simply the “new normal

” People are flooding into city cores to live close to both work and the lifestyle they crave

companies and retailers are following them,

and this is driving new office and commercial developments in the core

In turn,

urbanization is blurring industry lines,

as commercial and residential developers explore the opportunities that mixed-use properties bring

Fueling all of this development is abundant investment capital and funding

Domestic and foreign investors alike are eager to pour their capital into new projects

Loan amounts are rising as banks become increasingly active—but no less discerning—lenders to high-quality commercial and residential projects

Pension funds and other institutional investors are looking to increase their real estate holdings

There are concerns,

especially when eager but inexperienced lenders or investors team up with equally inexperienced developers to bring projects to market

From a regional perspective,

western Canada continues to be the country’s economic engine

Alberta markets are strong,

propelled by Calgary’s office boom and significant development—from offices to condos to museums and a National Hockey League (NHL) arena—in Edmonton’s core


on the cusp of an economic resurgence,

has several office developments coming onto the market,

while foreign investment continues to pour into its robust housing sector

Saskatoon is enjoying record housing sales and long-awaited growth in industrial space

Exhibit 1-1  Real Estate Business Prospects for 2015 Multifamily developers 3

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

In the east,

Toronto’s condo market remains strong and stable as people continue to flock downtown

And retailers are following,

eager to deliver the services and amenities that core-dwellers demand

In Montreal,

the office market will coast along while condo development slows as the market continues to absorb the new inventory—yet retail is expected to undergo significant development and change

Halifax’s office market is looking bright,

offsetting reduced confidence in the housing market

Emerging Trends in Real Estate® 2015

Table 1-1 2015 Forecast Economic Indicators

Real GDP growth (%)

Total employment growth (%)

Unemployment rate (%)




Personal income per capita growth (%)

Population growth (%)

Total housing starts

Retail sales growth (%)






Source: Conference Board of Canada

economic growth will benefit from ongoing immigration and the now-stronger U

Despite these positives,

concerns remain over the potential impact of fiscal constraints being implemented to deal with government deficits

Exhibit 1-2 Emerging Trends Barometer 2015


Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

Looking ahead,

what are the likely best bets in Canadian real estate

? Western Canada will remain the place to be,

buoyed by strong performance in Calgary and Edmonton

Commercial and office space on the edges of the urban core looks promising—as long as it’s the right price

Speculative industrial appears strong in Alberta and the western part of Greater Toronto

Those focused on Toronto opportunities would do well to explore retail opportunities as well as multiresidential opportunities along transit corridors

And in a country with an aging population,

seniors’ housing—well managed and in good locations—offers attractive potential

The Business Environment Canada is enjoying stable economic growth,

with a number of factors driving activity in the regions across the country

Future 4

Emerging Trends in Real Estate® 2015

The Canadian economy remains stable overall,

achieving modest growth and creating a low-risk business environment for developers and investors

The technology industry continues to contribute to growth in British Columbia’s Greater Vancouver region,

while oil and gas continue to be Alberta’s economic engine

The financial sector and government spending are responsible for a significant portion of economic activity in both Ontario and Quebec

shipbuilding and new oil and gas drilling are expected to provide a boost to the region’s economy

The broad manufacturing sector continues to shrink,

as manufacturers move more production to lower-cost labor markets in the United States and elsewhere

This ongoing economic shift has had a profound impact on central Canada,

Once the nation’s economic engine,

Ontario’s economy now supports and benefits from the new growth powerhouses in western Canada

Global economies also will likely have an impact in Canada

Canada as a whole and Ontario in particular are likely to get a boost from a stronger U

which appears to be finally reaching a point of sustainable economic growth

On the other hand,

there may be headwinds with Europe’s continuing economic struggles and concerns around China’s economy

Chapter 1: Emerging Trends in Canada

Table 1-2  Employment,

Job Vacancy,

and Average Weekly Earnings Growth,

Year over Year Total employment growth

Job vacancy growth

Average weekly earnings growth




British Columbia


New Brunswick

Prince Edward Island

Nova Scotia


Source: Statistics Canada,

May 2014

The energy sector will continue to play a large—and growing—role in the Canadian economy in the years to come

Asian markets,

will become more important to Canada’s energy sector as U

shale development makes the American market less reliant on Canada’s energy production


the issue of how to transport Canadian oil and gas to both U

markets still needs to be solved,

and this could have a significant impact on the sector’s fortunes

As well,

uncertainties around Middle East stability will be a major factor in whether Canadian energy developments are economically feasible

And as the hub of the country’s economic growth has shifted to western Canada,

have most of the employment opportunities

Interviewees noted that competition for scarce workers is already putting upward pressure on real estate construction costs,

as builders find themselves competing with energy and natural resources firms for scarce skilled workers

Project timelines also will be negatively affected by the scarcity of labor

“We’re seeing the pressures in terms of skilled labor supply and demand,” says an executive with an urban development organization

we’re seeing it as being manageable for this particular construction season

Exhibit 1-3  Net Migration,



Toronto Montreal Vancouver Winnipeg Ottawa/Gatineau Halifax Saskatoon Calgary Edmonton









Source: Canadian Conference Board

Emerging Trends in Real Estate® 2015


the labor market is an area of concern across Canada,

since there may be a mismatch in some areas with unemployment and others that have a labor shortage

The nation’s skilled tradespeople and others are heading west for lucrative opportunities

Yet many industries are finding it hard to find and keep the people they need

Developers and investors alike are also wary of rising government debt levels,

especially at the provincial and municipal levels,

and their impact on economic growth

Efforts to curb spending and reduce debt—while confronting a very real need for infrastructure investments—could have a significant effect on real estate markets

Transit investments,

open up attractive opportunities along new lines

rising development charges or other fees will continue to put pressure on pricing,

Changes in Canadian demographics will make themselves felt in various real estate sectors

Employers will soon need to deal with a four-generation workforce,

as generation Z joins the millennials,

and a baby boomer cohort that is not quite ready to retire

Meeting their diverse and sometimes competing needs—from location and amenities to work style and office space preferences—could prove challenging both for employers and building owners alike

The movement of workers is driving location decisions for many employers

The recent surge in office construction in a number of markets is being driven to facilitate companies’ ability to attract and retain qualified workers

Urbanization is creating greater demand for offices in downtown cores

This will result in increased vacancies in existing office space in the downtown cores,

as landlords seek to upgrade or reposition this space

It is also expected to put even more pressure on vacancies in suburban office spaces as more tenants move to the downtown core

While the move to the urban core is more visible,

choosing the proper location is also important in the suburbs

Interviewees commented that any new development or redevelopment in the suburbs will be aimed at making it convenient for workers to get to the office

An interviewee noted,

“People want to live mid-downtown

The subway/transit corridor is golden for developers

Exhibit 1-4  Housing Affordability

Exhibit 1-5  Average Home Size,



2015 2014


United States


Canada Denmark


France Germany




United Kingdom

Italy China


Vancouver 0%

Hong Kong 10%

Source: Quarterly Regional Housing Report,

July 3,

TD Economics

Note: Affordability is measured by the mortgage payment as a percentage of average household income

Mortgage payment is based on the average home price,

and five-year fixed posted rate

Younger workers in particular—though not exclusively—continue to flock to the urban core,

preferring to work where they live rather than take on long commutes

This continuing urbanization trend has fueled the condo boom in Toronto and other cities,

but some question what will happen as the lifestyles of today’s young urban singles and couples change

Will they move out of the city core in search of larger homes,

or will they—like their counterparts in other parts of the world— simply adapt to smaller living spaces

Emerging Trends in Real Estate® 2015

Square feet Sources: CommSec,

Reserve Bank of Australia,

United Nations,

Census Bureau

Chapter 1: Emerging Trends in Canada

A more pressing concern is whether young families will be able to afford single-family homes at all

If baby boomers opt to stay in their homes rather than sell them,

the market for detached singlefamily homes will only tighten

And as the supply of lots available for new detached single-family homes dwindles,

particularly in Ontario given the Greenbelt legislation put in place a decade ago,

prices will only continue to rise—beyond the reach of ever more Canadians

We may also see an increase in the number of multigenerational homes in the years to come as a result

begun to add retail and other services to their projects in a bid to attract buyers

At the same time,

many commercial developers are adding a residential component to their office and retail projects

A major retailer,

recently signed a deal to develop land near one of its shopping centers into a high-rise residential complex

Other commercial property owners,

including some real estate investment trusts (REITs),

are redeveloping or intensifying existing properties to reflect mixed uses—usually with a residential component

Emerging Trends in Canadian Real Estate

This convergence of commercial and residential development appears to be driven by a desire for developers to maximize upside by controlling more aspects of a project,

to add value to their property holdings,

Some developers may encounter challenges as they cross over into less familiar ground,

but we expect this trend to continue

Canada’s real estate market remains steady as the industry looks ahead to 2015

Economic growth in western Canada will continue to drive significant opportunity in Vancouver,



and Saskatoon in the residential,

Despite continuing and ongoing concerns about overvaluation,

Toronto’s housing market continues as a solid performer,

while office and industrial sectors remain strong

Montreal looks to revitalize its treasured retail district to boost an increasingly condo-driven core

In Atlantic Canada,

Halifax will build up commercial and office space while hoping for the residential market’s sluggishness to end

And everywhere,

industry players will search for opportunities in and around the city cores—capitalizing on the trends of urbanization and reversemigration that show little sign of abating

Looking ahead,

we can expect to see more and more retail and services along the streets of Canada’s city cores and along major transit arteries,

especially where new developments predominate

Major brands are likely to move into these new spaces,

too—though with new formats and smaller footprints

If done correctly,

and perhaps office space will create a positive synergy where each use provides customers or tenants for the other

Office Tenants Demand New Space

Commercial and Residential Development Converges Urbanization has become part of the new normal of Canadian real estate,

rather than an emerging trend itself

urbanization is sparking new trends that are blurring the lines between residential and commercial developers

An interviewee summed it up thusly: “Business overlap will increase and will drive behavioral changes—growth by intensification

” As many urban dwellers have discovered,

services and amenities haven’t kept up with the pace of downtown development—not only in terms of retail,

In response,

Office tenants are demanding new amenities from builders in order to deliver the workspace configurations and features needed to attract and retain today’s talent

New supply will be delivered in a number of markets as a result

Market demand for this space is obvious,

as a significant amount of this new space is preleased: Tenants appear quite willing to pay for the higher-quality space in many markets,

so the new developments make good,

long-term economic sense from the developers’ perspective

Part of the economic decision is related to using less space per worker

Tenants may be

Table 1-3  Downtown Class A Office Space: Q2 2014 Under construction Downtown

Market vacancy rate

Proposed development (sq ft)

Space (sq ft)

Percent preleased













Source: The Canadian Quartet: Look Forward,

Summer 2014,

Jones Lang LaSalle

Emerging Trends in Real Estate® 2015

paying more per foot for the new space,

but the impact on real estate costs is not a one-for-one exchange

The leasing of the new space is no longer simply a real estate decision

The human resource department also is now often involved,

as the quality and location of new space are seen as a very important tool to attract and retain talent

The Pursuit of Assets Remains Intense—and Increasingly Global

The real impact of this new supply on the office market involves the space left behind as tenants move into their new space

Some older buildings will likely be upgraded to better compete with the newer spaces,

while others will instead choose to compete on price,

positioning older buildings as a lower-cost alternative for tenants who want a desirable location but who don’t need all of the amenities offered by the new space

An interviewee put it well with the following quote: “Tout le monde veut aller au ciel,

everyone wants to go to heaven,

A number of office tenants want new office space,

but may not be willing to pay the higher rents required

The result is that there is going to be a period of adjustment in these markets,

when more space competes for changing composition of tenants

Some real estate players are concerned that an influx of new foreign investors could drive Canada’s already lofty valuations even higher and give rise to an asset bubble


Canada has one of the lowest proportions of foreign real estate investment in the world,

and the domestic market is dominated by pension funds,

These domestic players have ample resources and a clear desire to increase their real estate holdings to secure strong returns in a secure environment

One interviewee put it this way: “Pension funds are pounding down the door to get into the pipeline for mixed-use projects

these players’ knowledge of local markets may continue to give them the edge in winning key Canadian assets

While the interest in leasing the new space indicates that the market will welcome the new office space,

there is no getting around the fact that it will cause some uncertainty in the affected office markets

Vacancy rates may increase and market rent is likely to become dynamic in a number of areas

One of our interviewees,

a top real estate service provider,

offered up his opinion on market rents: “There are really about four different market rents today

It all depends on the situation and the current status of the space

” Different lease rates are being quoted for first-generation space,

The Rise of the “Superprime” Asset Class So-called superprime assets continue to attract capital looking for safe returns

Superprime assets are defined as those whose location is considered irreplaceable

The use in these locations may change with market demand,

but the actual physical and perhaps historical position of the property is unique

Since this type of asset is in short supply,

the competition to purchase it can be intense

The level of competition leads to very aggressive pricing

An increasing number of investors are sitting on increasing levels of capital and are eager to put it to work in the perceived safety of these premium properties

In Canada,

the “flight to quality” has compelled investors to trade these irreplaceable assets at the lowest cap rates

The search for

high-quality assets is likely to continue

but with a limited supply and owners typically looking to hold for a longer term,

future activity will be limited

They just don’t trade very often

Emerging Trends in Real Estate® 2015

Competition for high-quality Canadian assets is poised to intensify over the next few years

While valuations on prime assets are being pushed up by this competition,

it’s not a trend that’s causing much concern in the market

Interviewees noted that the premium being paid for the best assets is not spreading to lower-quality assets in less desirable locations

The higher perceived risk is being appropriately reflected in cap rates

Scarcity of Multiresidential Rental Assets Gives Rise to Development/Redevelopment Trend Everyone,

wants to be in the multiresidential rental sector—and the desire to hold on to these precious properties has resulted in a distinct lack of product on the market

With few opportunities to buy,

companies are focusing instead on creating value from within their existing portfolios,

often through development or redevelopment

These projects may well include purchasing existing assets to hold for potential redevelopment at a future date

Developing multiresidential versus acquiring may also be an opportunity in this market

An interviewee mentioned that the combination of low interest rates and the potential for a reduced construction premium might make development returns more attractive than those that can be earned by acquiring highpriced assets

These opportunities may be limited,

but could be worth exploring in 2015

Due to the age of the existing rental stock,

the end result could be a portfolio of newer assets than what could be acquired in the market

Chapter 1: Emerging Trends in Canada

Table 1-4  Prime Multiresidential Rental Market,

Before 1960









British Columbia






Nova Scotia


New Brunswick

Prince Edward Island







Canada total Source: CMHC Rental Market Survey

Matching Lenders with Borrowers

Rising Construction Costs: Hindrance or Benefit

The continuing flood of new capital into the Canadian real estate market,

has also brought with it new and,

There is a lot of competition to place capital,

and this is being reflected in narrowing spreads and more favorable terms being reported by some of our interviewees

On the positive side,

builders who are having trouble getting financed by traditional lenders may very well have alternative sources to consider


this may well put some of these new lenders in situations where they may find themselves involved with inexperienced developers

One interviewee remarked,

“If a builder can’t get bank financing,

there is still capital available,

but it does make you wonder about the potential viability of the project when you have two inexperienced parties involved

” The resulting new product may not in fact be good for the local market,

particularly in the condo sector

The ongoing battle for talent between the real estate construction sector and Canada’s booming natural resources industry continues to drive up labor costs

At the same time,

continued Asian demand for construction materials is boosting real estate input costs

Many industry watchers fear this could slow down the pace of development—or even stop projects from getting off the ground

Yet others see rising costs as a means to avoid overbuilding

The Continuation of Office Compression Workplace location and quality are key tools that companies have used to attract and retain high-quality talent,

and in recent years many companies have embraced open,

collaborative work environments in order to engage younger workers

The result is more collaborative and flexible space along with examples of no offices,

But as the millennials get older and a new generation enters the workplace,

will their tastes change—and will today’s open,

densely populated offices be what the market demands

? The rise in workspace flexibility could help deal with any change in space demand per worker

Today’s new flexible workspace could be adjusted to meet new worker configurations

Exhibit 1-6  Inflation and Interest Rate Changes Increase substantially

Increase moderately

Next five years

Remain stable at current levels


Short-term Long-term Commercial rates (1-year rates (10-year mortgage Treasuries) Treasuries) rates

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

Emerging Trends in Real Estate® 2015

Exhibit 1-7  Real Estate Capital Market Balance Forecast

Exhibit 1-8  Real Estate Capital Market Balance Forecast

Debt capital for acquisitions

Equity capital for investing

2015 14


In balance


2014 22


In balance


Source: Emerging Trends in Real Estate surveys

Debt capital for refinancing

Note: Based on Canadian investors only

Municipal Issues 16

2013 40


In balance


Debt capital for development 2015 30

2014 40


In balance


Source: Emerging Trends in Real Estate surveys

Note: Based on Canadian investors only

Emerging Trends in Real Estate® 2015

Municipal government policy plays an influential—and,

frustrating—role in real estate development across Canada

Interviewees noted that limited land being made available as well as increasingly lengthy and costly approval processes are areas of concern with municipal governments

As residents and businesses alike strive to make their voices heard at the municipal level,

it may well be time for the real estate industry to do the same,

especially around urban issues

Interviewees commented that a great opportunity exists for real estate industry associations to play an important advocacy role on many urban issues,

A prime example would be encouraging more multiuse zoning,

to allow developers to combine residential,

medical clinics) and create the vibrant urban cores people demand

Is Consolidation in the Cards for Canadian Real Estate Owners

? With Canada’s limited stock of investable properties—and the market flooded with capital and low-cost debt—is some industry consolidation in the cards

? It could become increasingly difficult for all market participants to continue to grow

Will smaller players be able to access the capital and find investment opportunities to support continued growth

? Or could we see firms opt for growth through a merger with or acquisition of

Chapter 1: Emerging Trends in Canada

? Consolidation may be a way for real estate companies to expand their opportunities for growth by expanding into new areas of expertise or getting access to new development projects

Capital Markets The consensus view among real estate players is that interest rates will rise at some point,

but any move is unlikely to occur until the second half of 2015 at the earliest

Interviewees expressed confidence that increased capacity worldwide is limiting any upward pressure on interest rates

The improvement in the U

economy indicates that higher rates could be coming,

but the economic stability in Canada and the United States will continue to attract foreign capital

In addition,

retiring baby boomers are likely to flood the market with private capital as they

look to turn stock options and retirement packages into stable,

Investors operating on shorter time horizons will be less concerned with the direction of rates,

but longer-term players will want to factor the impact of higher rates into pricing and net operating income

We can expect to see larger players continue to prune and refocus their portfolios in the years ahead,

and sell some secondary market properties or those that don’t currently align with their portfolio strategy

Shorter-term investors and those looking to grow their portfolios will be keen to snap up these properties

A lot of debt will be coming due over the next couple of years

Many companies face an elevated debt maturity schedule because it was very difficult to secure longer-term debt in the aftermath of the financial crisis

With rates remaining low,

Exhibit 1-9  Global Capital Flows $106

Global Capital Inflows by Country (US$ millions) $3,699

United States

United Kingdom


Hong Kong

Saudi Arabia

Global Capital Inflows by Destination City (US$ millions) $365

3 $2,860







Source: Real Capital Analytics

Emerging Trends in Real Estate® 2015

Exhibit 1-10  Equity Underwriting Standards Forecast for Canada

Exhibit 1-11  Debt Underwriting Standards Forecast for Canada

Less rigorous Remain the same More rigorous

2015 24

Less rigorous Remain the same More rigorous 20

2015 25

2014 11

Source: Emerging Trends in Real Estate 2015 survey

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

Note: Based on Canadian investors only

can expect to see companies continuing to focus on refinancing their existing debt before rates start to rise in the future

Those market players looking for capital may have attractive options

A number of interviewees commented that debt capital is abundant and typically available in Canada at 65 to 70 percent of the value on income property

Canadian financing of up to 85 percent on developments is available,

though syndication is often required once deals reach a certain size

Construction financing for condo projects remains available,

but the primary lenders continue to focus their lending on established builders with healthy balance sheets

Others will have to look to the many alternative lenders in or entering the market

“There are a number of organizations,

that are identifying their targets,

they’re doing their homework,

and they’re preparing should the REIT market continue to weaken

” There have also been a large number of new entrants over the last two years,

and there will be pressure for them to grow their portfolios or take some actions to grow unit-holder value

One REIT executive feels that “some new REITs may need to merge to get to critical mass,

but being externally managed they are not really incentivized to do so

” The market may see increased investor/unit-holder activism to force consolidation


most market participants feel that debt capital will continue to be readily available in 2015

This increase in capital availability should be able to absorb the amount of debt maturing

Debt capital will be available,

but lenders will remain diligent in their underwriting criteria

REITs Stable cap rates allowed the majority of REITs to avoid a significant decrease in property values

Further cap-rate compression is likely to be limited in 2015,

and this will make it difficult to find investments that meet the current yield requirements

Delivering growth and value will have to be earned the old-fashioned way,

through growth in net operating income and improved quality of cash flows instead of relying on continued cap-rate compression

A number of REITs have already identified this market reality and have begun actively increasing development and redevelopment activity to enhance the value of existing properties and have identified development pipelines that will take place over the next several years

Some REITs continue to trade below their net asset values,

prompting some interviewees to speculate that we could see some takeovers or mergers if the unit prices soften further

Emerging Trends in Real Estate® 2015

The larger,

established Canadian REITs appear to be evolving to more of a U

REIT model with lower debt-to-equity ratios and lower payout ratios focused more on total return rather than just returning a certain yield target

Initial public offering (IPO) activity is expected to be down in 2015 as any new entrant needs to have a significant story to be successful

making it more difficult to attract new equity capital

Investors are choosing alternative investments that offer a more intriguing growth story

In response,

some REITs and real estate operating companies (REOCs) have been looking to intensification and redevelopment of their existing properties in order to drive value in their portfolios

Consolidation may also be driven by pension funds and others looking to increase their real estate allocations

A limited amount of private market investments could make acquiring a REIT and its portfolio an attractive alternative

are likely to sell off some of their noncore assets as they increasingly focus on improving their current real estate portfolios and developing new properties

One real estate analyst expressed the opinion that “real estate companies with a focus on development and redevelopment growth strategies—as opposed to REITs that strictly buy existing properties—are more likely to outperform going forward

Chapter 1: Emerging Trends in Canada

Mezzanine and Equity Financing

Canadian banks remain active but discerning real estate lenders

Banks continue to aggressively pursue high-quality commercial real estate projects,

and continue to provide capital to low-rise residential development

They continue to be cautious regarding high-rise residential development,

opting only to fund projects with established borrowers

Foreign banks and alternative lenders,

also are aggressively looking for opportunities,

but are finding it hard to identify places to make loans

The flow of mezzanine and equity dollars into Canadian real estate will increase in 2015

One interviewee noted,

“Pension funds have increased their real estate asset allocation in recent years,

and now look to have larger percentages of their portfolios in real estate

” The abundance of funds available means that investors are putting money into the market at very low returns

Underwriting remains strict and disciplined,

with a focus on blue-chip opportunities

there is no sign that underwriting standards are shifting in response to banks’ desire to get more money working in the sector

Banks remain insistent on seeing real estate players put more equity into any deal and taking a careful look at project budgets before approving loans

This desire to put money to work in the market prompted one interviewee to comment: “Loan sizes are on the rise

Larger loans are now possible without requiring syndication—at least on good deals that have developer equity,

and a good project plan in place

Construction loans are being made available at 80 percent to 85 percent of project value

Large pension and investment funds remain a major source of these funds


interest from investors in the United States,


and Saudi Arabia also is bringing more money into the market

Many of these international investors are willing to accept modest returns in exchange for Canada’s political and economic stability

Canadian investors aren’t confining themselves to the domestic market,

Canadian funds will continue to flow outward,

into high-quality real estate properties around the world and in jurisdictions such as London,

New York,


Canada continues to be the leading nondomestic investor in U

real estate by a substantial margin

This trend is likely to continue,

but Canadian investors will also keep looking for investments in Mexico and Latin America

Exhibit 1-12  Prospects for Commercial/Multifamily Subsectors in 2015 Development prospects

Investment prospects Warehouse industrial Institutional for-rent single family Full-service hotels Neighborhood/community shopping centers Limited-service hotels

Warehouse industrial Institutional for-rent single family Full-service hotels Neighborhood/community shopping centers Limited-service hotels

Central city office

Central city office

Student housing Apartment rental— high income R&D industrial Apartment rental— moderate income Medical office

Student housing Apartment rental— high income R&D industrial Apartment rental— moderate income Medical office

Power centers

Power centers

Suburban office

Suburban office

Regional malls

Regional malls

1 Abysmal

1 Abysmal

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

Emerging Trends in Real Estate® 2015

Exhibit 1-13  Prospects for Major Commercial Property Types,

Neighborhood/community centers

Investment prospects Industrial

2015 2014


1 Abysmal


Fair Fair

Hold 37

Sell 21

Power centers 2015 Investment Development 2015 2014



Fair Poor

Hold 25

Sell 56

Expected capitalization rate,

December 2015:

Regional malls 2015 Investment Development 2 Poor

Source: Emerging Trends in Real Estate surveys

Note: Based on Canadian investors only

Opportunities by Property Type The 2015 survey respondents matched the views of this year’s interviewees

The outlook for the office and retail sectors declined from 2014

Survey respondents have recognized the challenges that both market sectors will be facing

The apartment and industrial sectors,

were viewed more favorably than in 2014

The opportunity spotted by survey participants echoes the comments of interviewees who like the potential for investment and development in these property types

Retail The retail market remains bifurcated at a number of levels

There is a distinct difference in performance by location,

Interviewees feel good about the outlook for the urban core in Greater Toronto and Calgary,

prompting one interviewee to summarize these markets as “a tale of two cities

” Established malls and new urban formats seem attractive,

Investment Development


Expected capitalization rate,

December 2015:

Development prospects Industrial

Exhibit 1-14  Retail Investment Prospects

Emerging Trends in Real Estate® 2015



Fair Poor

Hold 28

Expected capitalization rate,

December 2015:

Sell 46

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

tive strip malls and power centers struggle as consumer tastes take them in a different direction


retailers at the luxury level and those that meet convenience needs are doing well,

while the commodity retailers struggle with new competition

Despite the challenges,

one interviewee noted that shopping centers are still the cheapest form of distribution

Shopping malls also have a social aspect to them: “The demise of shopping centers and malls is fiction

” Shopping centers remain the most hands-on way to get products to customers


and changing consumer behaviors and expectations continue to transform the retail sector,

and this is having a knock-on effect in real estate

As consumers embrace showrooming and online purchases,

retailers are reconsidering the role of the store and exploring new formats and footprints as a result

With physical stores playing a less central role in the shopping experience,

Chapter 1: Emerging Trends in Canada

markets are losing pricing power and can’t dictate the number and location of storefronts as they did in the past

With few good locations for new retail,

developers are instead focusing on existing assets

Some are adding more space for retail and services in residential or commercial properties,

while others are considering adding a residential or office component to retail properties

Urban retail is set to see strong growth,

as the influx of residents to city cores drives up demand for amenities

Mixed-use properties will become increasingly common

Power centers have been especially hard hit by competition from online retailers,

and this market is flat or declining across the country—though centers anchored by grocery stores or pharmacies are still proving viable for the moment

Demand remains strong for fashion-focused centers,

Retail outlet developments appear to be here to stay—and grow

“Off-price is the ‘in thing,’ ” remarked one interviewee

“It’s scary to see how much stuff is sold,

and how much people like outlets

” Outlet centers continue to lure busloads of shoppers each day—and these shoppers come determined to buy something to justify the trip

Purpose-Built Multiresidential Rental Properties With home prices rising and people keen to be close to the urban core,

some developers are discovering opportunities in purpose-built multiresidential development or redevelopment

Increasing location density,

or adding a retail component to the mix,

could prove key to making the economics work

Investors also are taking interest in multiresidential properties,

seeing them as a way to lock in income and potentially realize significant upside at the end of the term

Patience will be key: rent controls and other factors may put some limits on the returns that investors can expect,

and “making the numbers work” is still project-specific

Rental projects may also require significant amounts of ongoing investment to keep the product quality at a level where it can compete with rental stock represented by newer condos

Single-Family Homes

Exhibit 1-15  Apartment Investment Prospects

Apartments—high income 2015 Investment Development Buy 30



Fair Fair

Hold 35

Sell 35

Expected capitalization rate,

December 2015:

Apartments—moderate income 2015 Investment Development



Fair Fair

Hold 32

Expected capitalization rate,

December 2015:

Sell 27

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

and within cities will have an impact on labor markets and could contribute to upward pressure on home prices

Housing affordability continues to be a topic of concern and conversation

Many industry watchers worry about the impact of rising rates on the market for single-family homes—and as we’ve seen,

most expect rates to rise at least somewhat in the near term

Others believe that the inflow of foreign money and a scarcity of appropriate sites for new development will keep prices rising

In addition to helping with affordability,

municipalities welcome midrise development as it assists them in meeting their intensification quotas


this may be at odds with consumer demand and developer wishes in some areas

Looking ahead,

our interviewees indicate that it’s likely that we will see at least some drop-off in large tower residential


it’s anticipated that mid-rise developments—which are subject to lower development charges—will become more popular,

particularly in the suburbs and in core infill projects

Canada’s housing market remains largely buoyant and housing prices remain high

Land prices,

and labor costs are contributing factors,

as are a number of other trends

Buyers are using existing home equity to move up into pricier homes

Parents are helping their children get into the property market

Family members abroad are helping Canadian relatives by shifting money into the country

Immigration continues to have an impact on the Canadian economy

Immigration Emerging Trends in Real Estate® 2015

Exhibit 1-16  Industrial Investment Prospects

Exhibit 1-17  Office Investment Prospects

Warehouse industrial

Central city office



Good Good

Expected capitalization rate,

December 2015:

Investment Development Buy 24

Investment Development



Fair Fair

Hold 27

Expected capitalization rate,

December 2015:

Sell 22

Suburban office

R&D industrial 2015



Fair Fair

Hold 44

Expected capitalization rate,

December 2015:

Sell 31

Source: Emerging Trends in Real Estate 2015 survey

Note: Based on Canadian investors only

Seniors’ Housing Canada’s aging population means that seniors’ housing offers some attractive opportunities in the years ahead,

and serves as an alternative multiresidential investment

Vacancy rates are low and returns can be quite strong in some instances

Some investors may choose to partner with firms specializing in facility management,

rather than take on operational matters themselves

And companies should take into account the important differences between independent-living facilities and long-term care or convalescence properties,

as the returns can be quite different

Industrial The industrial market is performing well,

fueled by a rise in single-tenant big-box developments designed for distribution

An industrial investor summarized the trend in the market thusly: “Industrial is transformational

The days of the small-bay,

multitenant building are waning

We are now seeing new 200,000- to 500,000-square-foot buildings with larger bays

” Despite this transformation,

smaller industrial space is being helped as companies look to augment their local distribution capabilities at lower costs

Redevelopment opportunities will emerge in the industrial market as developers look to upgrade sites for industrial companies or “retool” for other uses

With land scarce and expensive,

we may eventually see the rise of multilevel industrial properties



Fair Fair

Hold 15

Sell 61

Expected capitalization rat