Markets to watch| PwC Canada

Where are the best places to invest in real estate in Canada? What’s ahead for the closely watched Vancouver housing market in 2024? And what are the key trends in the Toronto real estate market as we look ahead to next year?

As part of our annual Emerging Trends in Real Estate report, we spoke to real estate players across the country for their insights on what’s happening in key markets across Canada. Explore below to learn about the business issues in our 10 markets to watch, which appear according to their ranking in this year’s survey, as well as the top opportunities for the real estate industry across the country as we prepare for 2024.

Toronto

The Greater Toronto Area remains a best bet among many of our interviewees, with one of them telling us: “If I had $100, I’d spend it all in Toronto.” But the region’s real estate sector faces unique challenges. Toronto had the highest year-over-year increase in residential construction costs in Canada by a wide margin in the second quarter at 13%, according to Statistics Canada.

In the office market, several interviewees said tenants are increasingly seeking high-quality, amenity-rich properties in the core, with some large space occupiers consolidating their operations in downtown locations as their suburban leases expire. CBRE reported Toronto’s downtown vacancy rate was 15.8% in the second quarter of 2023, notably lower than the 20.5% figure for the surrounding suburbs. But the near-record amount of sublease space on the market has some building owners concerned that vacancy rates could increase further as head leases expire.

While many owners of Toronto-area industrial properties are feeling bullish, there are some concerns that rental growth may have plateaued. Colliers reported that industrial rents climbed less than 1% in the second quarter to an average of $18.14 per square foot. In the retail segment, the bifurcation trend continues to take hold as owners of certain types of space, notably grocery-anchored properties and enclosed shopping centres with premium tenant mixes, see higher returns.

Vancouver

Residential developers in Vancouver are acting with more caution than in previous years as higher interest rates increase financing costs, reduce homebuyers’ purchasing power and weigh on the city’s overall economic growth. But while some homebuilders are delaying the launch of new projects until next year, Vancouver isn’t seeing a significant slowdown in construction of projects already underway. After housing starts decline by an estimated 15% in 2023, the Conference Board of Canada (CBoC) forecasts activity will completely recover and return to 2021 levels next year.

Vancouver’s office market is outperforming most other Canadian cities, thanks in part to relatively successful return-to-office policies. But the amount of sublease space on the market is growing, raising questions about how much space tenants will require when their leases turn over. The city is seeing limited investment in offices, and developers in some cases are dropping office space from planned mixed-use developments.

Investors continue to show interest in the city’s industrial assets, with many attracted by recent growth in lease rates given asking rents that have increased at a compound annual growth rate of 15.7% over the past four years, according to Colliers. But rising land costs are hindering efforts to create more supply. Many of the builders launching new industrial projects are developing land acquired at lower prices years ago.

Calgary

Calgary is a “market that’s gaining more interest,” according to one interviewee. Several interviewees, including those from outside Alberta, said they were bullish on Calgary’s residential segment—particularly its multiresidential market—thanks in part to an increasing population and its affordability relative to other major Canadian cities. Investors are showing interest in all residential asset classes, including rental apartment buildings.

As a whole, Calgary’s office market still faces challenges, with the vacancy rate standing at 31.5% downtown in the second quarter of 2023, according to CBRE. 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. While some interviewees say they’re seeing some good conversion opportunities, other building owners are still waiting to see how well the repurposing projects underway will play out.

The relative affordability of industrial space compared to markets like Vancouver continues to be a draw for tenants in Calgary, where rents reached an average of $11.95 per square foot in the second quarter, according to Colliers. Still, the recent rise in interest rates has caused developers to put some new industrial developments on hold, although many planned projects are proceeding.

Montreal

In Montreal’s residential market, homebuilders face the same challenges seen elsewhere in the country, including higher financing costs. The Canada Mortgage and Housing Corp. (CMHC) expects that, after falling 25% in 2022, housing starts will slip further in 2023 before edging up modestly in 2024. Transit-oriented, multiresidential housing continues to be an area of particular interest for developers as the new Réseau express métropolitain network moves forward with the opening of the first phase in the summer of 2023 and additional sections scheduled to enter service in the coming years.

Downtown Montreal has regained some of its vibrancy with the return of festivals and major sporting events put on hold during the COVID-19 pandemic. But the increased foot traffic hasn’t included a resurgence of office workers, with many employees continuing to work from home several days a week. Even so, some owners and managers of newer, high-quality office buildings with move-in ready space say they’re facing fewer challenges filling their properties than headline vacancy rate figures suggest.

Industrial properties continue to be a favoured asset class among investors. But after skyrocketing over the last two years, rental growth slowed considerably in mid-2023 to just 0.5% on a quarterly basis, according to Colliers. In Montreal’s retail segment, interviewees told us they’re seeing modest improvements in the performance of their portfolios.

Halifax

Halifax has been one of Canada’s fastest-growing cities in recent years. The population increased by 4.5% in 2021–22 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.

The hot housing market is creating affordability challenges in Halifax as home prices appreciate and push more homebuyers to look for lower-priced properties further outside the city. And, with higher interest rates further decreasing affordability, a growing number of would-be homebuyers are staying in the rental market for longer. While the province’s rent control program has discouraged tenant turnover since it was first introduced in late 2020, interviewees told us it hasn’t hindered the construction of new purpose-built rental buildings as much as other challenges, like higher financing costs and long approval timelines.

Several interviewees said Halifax’s downtown office market is currently oversupplied. CBRE says the vacancy rate stood at 18.4% in the second quarter, with the amount of sublease space on the market doubling from last year. Elsewhere in the market, investors are interested in acquiring industrial park properties in Halifax and Dartmouth, although many feel current valuations are high as rent increases recorded in recent years—as well as those yet to come—are already priced in.

Ottawa

While elevated interest rates and labour constraints are causing some uncertainty, interviewees were overwhelmingly positive about Ottawa’s residential real estate outlook and expressed confidence the market would absorb as many units as they could build. There’s strong interest in pursuing development opportunities close to Ottawa’s current light-rail line and an under-construction expansion that’s scheduled to be completed in phases between late 2023 and 2026. Purpose-built rental housing stood out as a particularly noteworthy residential asset class among interviewees as many new projects under construction come online and property owners report being able to achieve their desired rental rates.

Ottawa’s office market has traditionally benefited from the public sector’s stabilizing presence, but the federal government’s return-to-office policies haven’t yet brought significant numbers of employees back downtown. 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 than 50% of the government’s leases expiring in the next five years, according to CBRE.

Ottawa’s industrial market continues to attract interest among developers and investors. New distribution centres 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. Within the city, demand for small-bay industrial space remains strong and is a favoured segment among some investors.

Edmonton

Despite positive migration trends and a strong economic growth forecast of 2.9% in 2024, housing starts are expected to remain flat next year after falling 15.6% in 2023, according to the CBoC. But population growth is increasing demand for rental accommodation and making existing multiresidential developments an attractive asset for investors. One interviewee said they’re seeing notable competition when investment opportunities arise.

Edmonton’s suburban office market is outperforming the downtown core and posted a slightly lower vacancy rate—20.9% versus 24.1%—in the second quarter, according to CBRE. While many large companies will continue to want a downtown presence, interviewees told us that high-quality suburban office space is proving popular as employees return to their workplaces.

Interviewees identified the industrial market as a best bet in Edmonton. But with Colliers reporting a 4.5% vacancy rate in the second quarter—the highest in the country—there were also signs that tenants may be cautious about taking on excess space in case the economy slows. Even so, interviewees remained confident in Edmonton’s underlying fundamentals, particularly its role as a gateway to large mining sites and oilsands activity further north.

Quebec City

The CBoC forecasts the Quebec capital’s real GDP will expand by 2% in 2024, trailing most other Canadian cities. And after hitting a record high in 2022, housing starts are expected to fall 13% this year and a further 9% in 2024. But several interviewees said they see opportunities in redeveloping portions of underused retail properties, as well as sites near transit corridors, to help meet healthy demand for housing.

In the office market, one of our interviewees predicted there will be relatively few transactions in the near future as investors remain in price-discovery mode. There’s still considerable uncertainty hanging over the city’s office segment, particularly as many public-sector employees continue to spend significant portions of their workweek at home. Quebec City’s office vacancy rate increased to 11.3% in the second quarter to hit its highest level in 10 years, according to CBRE.

In the industrial market, limited availability is continuing to drive up rents. On the retail front, owners of retail assets say they’re feeling more confident about their portfolios than in past years as they put more emphasis on managing their tenant mix to continue attracting consumer foot traffic.

Saskatoon

Saskatoon, like other Prairie cities, has been notable for its strong economic growth, driven in part by Saskatchewan’s agricultural and mining industries, according to the CBoC. But while GDP growth will moderate to 1.2% in 2023 from 4.8% last year, the CBoC expects healthier rises of 2.1% and 2.5% in 2024 and 2025, respectively.

Looking at purpose-built rental housing, CMHC expects international migration will bolster demand, helping push down the vacancy rate to 2% in 2024 from an estimated 2.5% in 2023. It projects vacancy will fall even with new supply being built and more units to start construction in the coming years.

Industrial property is another key area of strength for Saskatoon. The industrial vacancy rate was just 1.9% in the second quarter of 2023, according to Colliers, which expects to see upward pressure on rents.

Winnipeg

Winnipeg continues to distinguish itself for its relative affordability for homebuyers. And at a time of continued supply chain and inflationary pressures, Winnipeg also stands out for a recent decline in residential construction costs, which were down by 0.1% on a quarterly basis in the second quarter of 2023, according to Statistics Canada. On an annualized basis, costs were up 3.2%, compared to the average of 7.5% for all of the cities analyzed.

On the industrial front, Colliers reported a vacancy rate of just 2% in the second quarter of 2023, while net asking rents rose to an average of $9.75 per square foot from about $9 during the same period last year. Office trends reflect much of what we’re seeing nationally. According to CBRE, the downtown Class A vacancy rate was 14.8% in the second quarter of 2023.

Also noteworthy are Winnipeg’s efforts to pursue further downtown development through the city’s CentrePlan 2050. A key focus is on getting more people living and visiting downtown by designing attractive buildings, streets, parks and public spaces. The plan includes new urban design guidelines that will inform future changes to the zoning bylaw.

Markets to watch