Affordability Tops Concerns as Real Estate Sector Focuses on Supply

Flex-space, PropTech and seniors housing on upward swing

• The proportion of household income to service the costs of a single-family home grew to 53.5% in the first quarter of 2018 as affordability concerns continue to rise.
• PropTech revs up with significant investment in funds dealing with the convergence of real estate and technology.
• Senior lifestyle housing is among the top development prospect for the next year as well as flex work and coworking spaces among the top new trends in commercial office space.

Toronto, October 10, 2018. The real estate sector is carefully monitoring recent tariff negotiations around steel and rising interest rates, which could further exacerbate affordability issues for Canadians. Developers, investors, lenders and other leading experts are cautiously optimistic about the sector according to the 2019 Emerging Trends in Real Estate report published today by PwC Canada and the Urban Land Institute (ULI). However, there is a bright future for flex spaces, PropTech, and seniors’ housing.  

Residential Real Estate

Land supply is the number one development concern heading into 2019 and the report highlights that all levels of government need to increase their focus on the supply side of the issue, not just demand. Markets like Edmonton and Montreal managed to bring new housing supply into balance with rising prices, but markets like Toronto and Vancouver have yet to do so.

“Dealing with the affordability issue is a shared responsibility between government and developers. While government addressed demand by introducing measures like tighter mortgage rules and foreign taxes, they neglected the supply side,” says Frank Magliocco, National Real Estate Leader, PwC Canada. “Reducing regulation and making more land available for development in a timely manner will help address the affordability issue.”  

“The real estate industry is at a crossroads where it needs to work with many other sectors in order to thrive in the future. We’re seeing more and more collaboration between architects, construction companies and the technology sector working to redefine how Canadians live,” says Richard Joy, Executive Director, ULI Toronto.

The proportion of household income needed to service the costs of a single-family home grew to 53.5% in the first quarter of 2018, with Vancouver leading the charge with 119.3%.  High housing costs are pushing Canadians, especially millennials, to abandon the dream of owning housing in the city for the suburbs or other markets for more affordable housing.

Rising interest rates and higher tariffs on foreign steel are top of mind for developers and owners.  For example, tariffs on steel could translate into more expensive input costs for residential and commercial builders, ultimately putting further pressure on affordability.

Commercial Real Estate

Coworking spaces or flex office space continue to see an upward trend and are forecasted to make up 30% of corporate real estate portfolios by 2030. “Creating a coworking space isn’t so much about cost as it is building a community and sharing experiences and knowledge between different people and industries,” adds Magliocco.

The multi-family apartment sector continues to be a strong performer but segments of the retail sector continuing to struggle and are forced to reinvent themselves. The industrial sector continues to perform well and with Canada’s legalization of recreational cannabis is set to  provide opportunities across the country as emerging companies look to find industrial space to grow the plant and retail space to sell product.

Senior lifestyle housing is among the top development prospects for the next year since Canadians over the age of 65 have surpassed those under the age of 15. In 2017, 31% of Canadians aged 85 and older lived in collective dwellings, which will only grow in upcoming years.

PropTech

The emergence of PropTech, which covers everything from new lending services to investment platforms and digital brokerages, is changing the way properties are bought, sold and managed. According to the report, PropTech is forecasted to add US$5.2 billion in new investment globally across 454 equity deals in 2018, after reaching a record US$3.4 billion in 2017 across 367 deals. However, only 10% of CEOs in global real estate are concerned about the speed of technological change.

“While the intersection of real estate and technology has been slow until now, we have seen a significant change in interest and focus in the PropTech industry here locally and globally,” adds Magliocco.

Drones were the top real estate disrupter identified in the report. There is potential in using drones to show job-site progress and others are looking to integrate docking stations into communities to accommodate last-mile delivery needs. Autonomous vehicles, cybersecurity and construction technology were also identified as top technology real estate disruptors.

The report also identified other  factors such as GDP growth and affordability issues impacting the different real estate markets across Canada.  The top five markets to watch in 2019 are: Toronto, Vancouver, Montreal, Ottawa and Quebec City.

Click here to access the full report.