The Canadian real estate market is in disruption thanks to rising interest rates and an uncertain economy. As the sector evolves in 2023, key trends can help inform investors as they consider opportunities in the space, says a new report from PwC Management Services LP.
The report, based on an annual survey of real estate companies, outlines three real estate trends for next year, starting with a period of price discovery.
“Lenders, according to interviewees, have been tightening borrowing requirements, which, along with higher financing costs, are making it harder for real estate companies to raise capital and move projects forward,” the report said. “This, in turn, is leading to reduced competition for deals during a period of price discovery in which sellers and buyers find themselves at odds over pricing expectations and valuations as some real estate assets come under pressure.”
Some companies are staying out of the market, taking a wait-and-see approach until the market settles, the report said. Supply chain delays and cost increases for labour and materials further inform that position.
A second trend in real estate is sustainability.
“At a time when financing is both less available and more expensive, companies with a strong ESG track record will have an advantage in attracting investment from institutional players and sourcing new forms of capital that continue to grow in Canada,” the report said.
It also noted that climate disclosures, such as the draft sustainability disclosure standards from the International Sustainability Standards Board, will increasingly affect real estate companies in Canada.
Third, the housing affordability crisis requires more supply.
“In Canada, the supply is insufficient to meet housing demand, for all types of homes,” a release accompanying the report said. “Demand will continue to rise, especially as the Canadian government commits to higher immigration targets in the coming years and the country welcomes large numbers of temporary residents.”
The real estate industry is attempting to address supply by incorporating technological innovation and improving processes so that housing development is faster and more economical, the report said. It suggested multi-family residential housing as a potential opportunity for investors.
Another best bet for investment, given the trends, is industrial real estate — warehousing, fulfillment, data centres and self-storage.
However, the pressures affecting real estate as a whole, such as rising interest rates, are also affecting industrial properties, so opportunities must be carefully assessed, the report said.