Interest rates and inflationary pressures will make 2024 “tricky” for real estate: PwC

A report by PwC Canada has unveiled a complex landscape for Canada's real estate industry in 2024.

This year’s PwC Canada and ULI’s Emerging Trends in Real Estate (ETRE) report revealed an intricate landscape for Canada’s real estate industry in 2024.

According to the report, there was noticeable intensification of certain patterns, such as elevated interest rates and more expensive and scarce capital, which is causing a divergence in the real estate landscape. This is resulting in heightened challenges for numerous companies and contributing to a reset in the Canadian real estate sector.

The report, however, highlighted that companies are generally confident about overall demand for real estate and that Canadian real estate companies are focusing on value creation by optimizing assets, investing in digital transformation, and addressing generative AI, ESG performance, and housing affordability trends.

“This year it was all about capital. There is compelling data to show that scarcity of capital has impacted investment volumes. However, this creates opportunity as we saw many new private debt funds established to take advantage of this unique moment in time,” said Frank Magliocco, real estate Leader, PwC Canada.

The report also noted that there are many factors holding back industry activity which include interest rates which are predicted to remain high for longer periods of time and rising financing costs and less capital being made available for real estate.

While there is a housing affordability crisis, governments have introduced policies to streamline housing approvals as well as remove tax barriers.

“Market forces are challenging public policy objectives and corporate ESG goals. Industry leaders are keenly watching this space as they look for some respite from the economic headwinds, inflation, and volatile interest rates,” said Richard Joy, executive director, Urban Land Institute, Toronto.

The industry is witnessing ongoing developments in environmental, social, and governance (ESG) considerations. Although some are adopting a cautious stance, the significance of ESG performance remains substantial. Regulatory shifts and the potential for ESG to generate business value are contributing to increased industry involvement in addressing this issue. In a time where financing is both scarcer and more costly, companies with a robust ESG track record will have an advantage in attracting investment from institutional players and accessing new forms of capital that continue to grow in Canada.

An unexpected inclusion in this year’s best-bets list is the retail property sector. Sentiment surrounding the overall retail asset class has notably improved, particularly in the case of grocery-anchored developments catering to communities experiencing robust population growth. Community shopping centers have garnered exceptionally high rankings for investment potential in the survey this year.

For the second consecutive year, industrial and multifamily real estate options maintain their lead as a best bet, closely followed by grocery-anchored retail. Notably, debt funds receive an honorable mention in light of the current circumstances. On the other hand, office spaces are experiencing a continued decline as a favored asset class. This trend has been accentuated by the widespread adoption of hybrid work, significantly influencing the use of corporate real estate, including the increase in suburbanization.

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