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Canada’s commercial real estate markets will see slowing but steady growth and “decent prospects for Canadian real estate investors as long as the U.S. economy does not drag them down,” says the Emerging Trends in Real Estate 2011 report by PwC and the Urban Land Institute (ULI). The report reflects interviews with and surveys of more than 875 real estate investors, developers, lenders, brokers and consultants in Canada and the U.S.
The report says that in Canada, employment is recovering and banks have sound balance sheets, boosting confidence that the local market can escape issues faced in the U.S. However respondents say a weak U.S. dollar and sputtering U.S. economy dampen cross-border commerce, especially hurting Ontario industrial markets, which serve Midwestern U.S. manufacturing centres.
“The big difference for Canada has been the sound condition of its banks,” says Chris Potter, leader of the real estate tax practice for PwC Canada. “We have no distressed banks and few distressed owners and sales. Now, rising interest rates coupled with tight bank requirements and broader economic concerns (will) tamper down a recent home buying spurt, particularly in Ontario and B.C., where purchasers stepped up activity before HST went into effect.”
Canada has one of the world’s healthiest capital markets and few borrowers confront refinancing issues. Overall in 2011, survey respondents expect a reasonable balance in debt market capital availability and an oversupply of equity capital, the result of non-satiated buyers.
“In Canada, the real estate industry didn’t get overleveraged and the markets never suffered any interruption of credit availability,” says Holly Allen, leader of the real estate deals practice for PwC Canada. “Canadian banks benefit from a combination of institutional risk aversion and relatively stringent government regulation.”
The report says a dominant handful of large insurance companies and public pension funds will continue to command ownership of the nation’s trophy commercial assets – downtown office space and regional malls.
It says REIT prices levelled off after strong run-ups in 2009. For 2011, analysts do not see “much room for big gains,” and these stocks should stick close to valuations.
Respondents to the Emerging Trends survey cite the “best investor bets for 2011”, including:
. Remove portfolios of select low-yielding assets and reinvest opportunistically in a U.S. market recovery.
. Time investments to the market and buy down-but-not-out city-centre hotels and struggling industrial properties in the Greater Toronto area.
. Buy apartments if you can find anything available because they offer the best security.
. Look for underperforming infill retail or commercial space and position for redevelopment as condos.
. Reserve land sites inside the Toronto greenbelt for future residential development; demand and pricing should continue to increase.
The report says that major Canadian real estate markets “settle in a fair to good investment range, with only modest investment prospects and constrained development potential. Toronto bumps Vancouver from the top ranking city to invest and develop” in the survey, “while Calgary must hope to recuperate from cooled demand and a touch of development binging. Population continues to concentrate in and around a handful of major 24-hour cores scattered from coast to coast, leaving extremely limited investment opportunities in small cities and rural areas in between. Shut out of primary cores, some investors scrounge for product in select secondary and suburban markets.”
It says that property sector ratings will improve over last year’s tepid forecasts, especially for apartments and offices. Retail and industrial will hold up, but hotels suffer from reduced U.S. tourist travel. Commercial markets promise to deliver cash flow but not much appreciation, while “housing prices could ebb after an unsustainable surge”.
“Not only has the Canadian real estate industry been able to weather the downturn in the economy better than other markets, the environment in the U.S. has allowed Canadian investors to be opportunistic,” says Lori-Ann Beausoleil, national leader of the real estate practice for PwC Canada. “Canadian investors looking to expand into the U.S. market or who are already in the U.S. have been able to take advantage of some great growth opportunities and purchase assets at a distressed price.”
A copy of the report is available at www.pwc.com/ca/emergingtrends or www.uli.org/emergingtrends.
