Property type outlook

What do current real estate trends mean for commercial property and the housing market in 2024?

From a comeback for retail real estate to a more measured outlook for the industrial segment and continuing uncertainty around offices, there’s no shortage of important trends to pay attention to across the commercial property market. On the residential side, real estate players we interviewed for this year’s Emerging Trends in Real Estate report see strong long-term prospects for demand even if current business pressures are creating challenges for both investors and developers. Explore below to learn more about the outlook for key real estate asset classes in 2024.

Industrial real estate

Industrial real estate remains a favoured asset class and a best bet overall, with low vacancy rates helping push up rents for leased space. But as rent for industrial assets peaks and starts to stabilize, there’s general consensus that further increases will be hard to achieve, especially if the economy enters a significant downturn. Investors can no longer assume valuations will rise as quickly as in past years, which has led to lower transaction volumes.

“Industrial has run its course,” one interviewee told us, echoing the sentiment of a number of industry players we spoke to. But other interviewees say they’re moving ahead with development, believing that industrial real estate continues to be an attractive proposition. Companies that have built up strong land banks are more likely to move forward with development, while sites located reasonably close to major cities will have a greater ability to demand higher rents.

Retail property

One of the more interesting trends this year has been the comeback story for retail, with many interviewees more bullish about this asset class. “Retail is recovering,” one interviewee told us, reflecting much of what we heard this year. Other interviewees say they’re fully leased and ahead of budget on their retail assets as some tenants look for more space, whether for larger showrooms, last-mile fulfillment or brand development opportunities.

Similar to other asset classes, we’re seeing bifurcation in the retail segment. The largest regional shopping centres and grocery-anchored retail properties are doing particularly well and seeing healthy foot traffic while suburban strip malls continue to struggle. To create value, interviewees believe it’s important to invest in amenities and experiences, as well as ensure a variety of uses—including residential development—to build a greater sense of community and make the shopping centre a destination for a diverse mix of consumers.

Office

Many industry players are taking a wait-and-see approach to this asset class as construction activity declines, vacancy rates remain elevated and the downturn in the technology sector adds to the challenges for office properties. As a result, there’s a general sense among interviewees that it will be several years before the sector starts to recover. Office categories also tended to rank near the bottom of investment and development recommendations in our survey this year.

Some industry players compared the outlook for offices to the situation faced by the retail segment in recent years. “Office is the new retail,” said one interviewee, a comment that raises questions about the extent to which lessons learned from the repurposing of retail properties apply to office landlords navigating rising vacancy rates. Besides discussion about repurposing and adaptive reuse of offices to incorporate, for example, residential, health-care, light industrial and educational uses, office owners are looking at creating value by investing in amenities, experiences and activities, as well as sustainability features, that differentiate their properties and help attract and retain tenants and their employees.

Purpose-built rental housing

Among the most notable developments in this asset class was the federal government’s September 2023 announcement of Goods and Services Tax 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 in this asset class. Some provinces have already announced plans to follow suit, while a number of developers have said they’ll be moving ahead with development plans as a result of the tax changes.

As industry players assess the impact of recent tax announcements, they continue to face conditions, such as rising costs and interest rates, that have made it challenging in many markets to invest in the supply needed to meet the high demand for rental housing. If a developer already has a rental project under construction, they’ll likely continue building, but they may postpone moving forward with developments that have secured approvals or been planned for the future.

In some markets, interviewees are looking at buying older rental properties to modernize or add value to rather than develop new product. Having financing support from the Canada Mortgage and Housing Corp. and density bonuses for building purpose-built rental housing can often make the difference when deciding whether to proceed with a development. And some categories of the rental market, like student housing, are more attractive to interviewees than others in light of current growth trends in certain niche segments.

Condominium

Interviewees are taking a cautious approach towards condo developments, with many of those we spoke to saying they’re delaying new launches even as they maintain a strong conviction on the long-term prospects for this segment of the residential market. While rising costs, labour shortages and long timelines for municipalities to approve new developments have created challenges for the industry for some time, higher interest rates have increased the cost of debt to the point that it’s no longer feasible to proceed with many projects, particularly in Canada’s largest and most expensive markets.

An additional emerging trend is the decline of investor activity, with rising interest rates deterring investors from buying new units to rent out. This reduces demand from a key buyer segment: data published earlier this year from the Canadian Housing Statistics Program found that 39.4% of condo purchases in 2020 were being used as an investment in the five provinces (Nova Scotia, New Brunswick, Ontario, Manitoba and British Columbia) studied. To manage current market pressures, some interviewees are trying to lock in costs for labour and materials earlier.

Single-family housing

Affordability has deteriorated for single-family housing, creating an ongoing headwind for developers. In the face of other challenges, like labour 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.

Looking at the low-rise category more broadly, affordability pressures are shifting the market towards smaller houses and townhomes rather than more expensive detached units. One trend that interviewees expect to see more of is stacked townhomes and mid-rise developments to increase density and affordability while appealing to suburban homebuyers. But they also expect to incorporate fewer optional features upfront—such as appliances and finished basements—to make them more affordable.