Creativity and innovation key to addressing deepening challenges in Toronto real estate
From industrial assets to housing, the Greater Toronto Area’s real estate market is a key source of strength as the region’s economy kicks into gear after multiple lockdowns.
Amid the increased need for warehousing and fulfillment space as part of the e-commerce boom, the rise of Toronto’s industrial market shows no signs of slowing down. Demand is so strong that it’s becoming more common to see multiple tenants competing for space, in some cases leading to bidding wars. One interviewee in this year’s Emerging Trends in Real Estate report told us they’re looking to sell Class B industrial assets in Toronto at Class A prices.
Even with significant new supply in the market, the region is seeing high absorption as the availability rate in the Greater Toronto Area dropped to an all-time low of 1% in the second quarter of 2021, according to Colliers.
Housing construction at all-time high
Another top performer is residential real estate. An all-time high of about 84,000 housing units are under construction in the Toronto census metropolitan area, according to the Canada Mortgage and Housing Corp.’s spring 2021 housing market outlook.
Housing prices have also continued to rise. According to the Toronto Regional Real Estate Board, the average selling price was up 18.3% on a year-to-year basis in September 2021, with low-rise homes seeing the strongest growth as high demand for more living space from people continuing to work remotely spurs the market for single-detached houses.
Affordability among key concerns for the GTA real estate industry
A particularly critical issue related to rising prices this year was housing affordability. Interviewees pointed to lack of supply as a significant contributor, with many highlighting the need to encourage more affordable medium-density housing options in Toronto. The current low interest rate environment has also added fuel to rising housing prices, further exacerbating the affordability issue.
And interviewees expect affordability will worsen as immigration increases in the coming years. According to net migration data from the Conference Board of Canada, international immigration to Toronto will rise from about 103,000 people in 2021 to more than 120,000 in 2025.
The issue of affordability is highlighted by RBC Economics’ housing affordability measure, which is based on the ratio of ownership costs to household income and reached an elevated 81.8% for a single-detached home in Toronto in the first quarter of 2021. This is a key factor in the large numbers of people looking at leaving the region in search of more affordable housing options. An Ontario Real Estate Association survey in July 2021 found that significant numbers of Ontarians have thought about moving to a smaller community outside of the GTA or to another province in the past year.
Embracing new approaches to the GTA’s real estate challenges
These trends show why, even as interviewees are optimistic about Toronto’s long-term growth prospects, it will be important to think differently about the real estate market and look for innovative solutions to the challenges facing the sector.
One example of this on the industrial side is vertical or multilevel spaces. While this has been more common in Vancouver, which is also grappling with a very tight industrial market, there’s increased talk of the need for more of this in places like Toronto as well.
Could single-family rentals offer an affordable alternative?
On the residential side, an interesting potential trend to watch is the rise of single-family rental housing. As trends like remote and hybrid working spark the need for more living space, single-family rental housing could offer an affordable alternative to purchasing a detached home.
While interviewees had diverging opinions on the feasibility of single-family rental housing in Toronto given the region’s high prices, it was one of the top investment and development prospects in our survey and we’ll be watching for signs of this trend taking root here.
A time to accelerate collaboration and innovation
Addressing the region’s challenges will also require all levels of government to work more collaboratively with the real estate industry. Real estate players in Toronto have significant concerns about the city’s proposed inclusionary zoning bylaw aimed at requiring new developments to include a certain percentage of affordable units. A recent report from the Building Industry and Land Development Association found the proposal would significantly raise the costs of market-rate units to subsidize the affordable components. Without offsets to compensate for the costs of the affordable units, the proposal could make some projects unviable, which would hinder much-needed housing supply.
Governments can also work more closely with the industry on innovative approaches to the housing market. For example, changing the rules to allow for more than one unit or kitchen in single-family rental homes or even permitting smaller lot sizes could further improve affordability. Another key focus of innovation should be finding ways to encourage better use of the many empty bedrooms in homes across Canada, which would also open up more affordable housing options.
While collaboration is key, governments can only do so much to address Toronto’s supply problems as rising labour shortages limit the real estate industry’s capacity and impact costs. Accelerating transformation efforts to streamline processes and invest in the workforce is one way Toronto real estate organizations can address these business pressures while improving their performance.
Realizing Toronto’s growth potential
Some of these challenges reflect the effects the COVID-19 pandemic has had on Toronto’s workforce, economy and property sectors. But real estate remains a favoured asset class and Toronto remains a top market to watch. This makes it critical for all players to think differently and more creatively about solutions to Toronto’s real estate challenges and accelerate innovation as they look to fully realize the opportunities for the industry and our region.
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Managing Director, Real Estate Consulting Leader, PwC Canada
Tel: +1 416 687 8143
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