Customer-driven Demand Shaping Canadian Real Estate
Companies are adapting their developments and spaces to offer the top-quality amenities and services that users demand.
The challenges facing Canada’s real estate industry continue to grow. Despite Canada’s low unemployment rate and signs of strength in areas spanning multifamily, industrial, and office real estate, we are finding a heightened feeling of unease among many in the industry. With high asset prices and rising costs for land and labour, our survey reveals declining business prospects overall. As increases in foreign direct investment and the large amount of domestic capital crowd out smaller players, it is no surprise that our 2020 emerging trends barometer shows many in the industry are in a holding pattern.
The 2020 Emerging Trends in Real Estate report published by PwC Canada and the Urban Land Institute (ULI) takes an in-depth look at the causes of the unease and some of the solutions available, including: changing customer expectations, preferences, and behaviors; technological pressures; policy challenges and uncertainty; and rising business threats such as labour shortages, skills gaps, and cybersecurity vulnerabilities.
Many of these business challenges are not new, but we are seeing the pace of change and adoption pick up. And while the industry is clearly responding to these disruptions, the scale of the changes puts many organizations’ survival at stake. It is time for a new approach that puts customer needs at the heart of everything that companies do.
Companies are responding—particularly when it comes to developing deeper connections with customers, integrating technology across their businesses, addressing skills gaps, and rebalancing their portfolios to find new opportunities and optimize their assets—but there is a clear role for governments as well when it comes to broader challenges like housing affordability.
Governments and the real estate industry have an opportunity to do more to embrace mutually beneficial approaches to housing supply issues through transit-oriented development policies and collaborating on solutions to address affordability gaps in major cities. As with many of the challenges facing the industry, solving these issues requires all players to think differently.
Putting Customers at the Heart of Reimagined Spaces
A major part of the industry’s success in building for the future lies in its ability to reshape real estate in response to changes in customer habits and expectations and evolving uses of space.
Changes are playing out in large and small ways across property types. As online shopping continues to grow in Canada, the need for dedicated space for deliveries, including cold storage for food deliveries, is an emerging trend in the multifamily residential sector. Some developers are looking to cut the amount of space otherwise dedicated to kitchens or even eliminate standard appliances like ovens.
Co-living is another rising trend in Canada. Blending features of apartments, dorm rooms, and hotels, co-living accommodations offer residents the opportunity to have their own space within common living areas at a more affordable price. Some developers are developing multigenerational co-living projects, in which separate buildings accommodate the needs of a particular generation, but there also is common community space shared by all residents.
While some customers may be willing to give up space or certain features in the name of affordability or a preference for a more communal lifestyle, demand remains high for high-quality features and amenities that enrich residents’ experiences, including services like housekeeping, curated events, and easy access to basic household supplies.
The trend toward shared spaces in the office sector, which has been ongoing for several years, offers yet more evidence of rising tenant and customer expectations. Beyond good gyms, more tenants (and their employees) are looking for features like proximity to restaurants and less tangible elements, such as a communal vibe.
“The work environment is becoming more playful, more livable,” said one interviewee. “If you like going there, you’re going to enjoy working there and you’ll stay.” In response to those trends, many building designers are also designing offices in ways that make people feel more at home. For example, they are introducing wood finishes and kitchen designs more typical of a residential setting. As living and working spaces continue to decrease in size, expect the demands for more communal offerings to continue.
“The common theme in office, retail, and residential is that it is no longer about space. It’s about the services you offer.”
The Rise of Real Estate as a Service
These rising expectations are driving major shifts in an industry that has long been seen as reluctant to change. Much like the introduction of cloud computing revolutionized the software sector, the rise of real estate as a service (REaaS) is transforming all areas of real estate. Although co-working is the most common example of REaaS, the concept cuts across property types. As the gig economy becomes more prevalent in Canada, all space—whether residential, office, or retail—will increasingly be viewed as a service that is rentable.
Consider the decreasing desire to own property on the residential side, particularly among millennials and baby boomers. According to Statistics Canada’s latest census figures, homeownership rates in Canada remain very high, but the numbers have come down from their 2011 peak of 69 per cent to 67.8 per cent in 2016. And despite the continued desire of many people to own, much less stigma is attached to renting than in the past.
Reflecting on the growing movement toward temporary spaces, one interviewee spoke of the potential of subscription-based models for housing in which people would occupy different products at a particular stage of life. As another interviewee noted, many consumers are already focusing more on monthly costs than the total purchase price. While affordability is a factor, the REaaS trend also goes back to changing consumer behaviors as people look for more flexibility as their lifestyles and preferences evolve.
Blurring the Lines
Another important aspect of all these trends is the blurring of lines between property types and uses. In the past, for example, office space was designed and built to address traditional notions of office-based work. But the new environment, shaped by technology and customer preferences, is changing that approach significantly. With access to a good Wi-Fi connection, a traditional office is no longer necessary. Once again, flexibility is key as form follows function.
Some of the ways that traditional lines are blurring include:
- The evolution of retail spaces to become more of a distribution hub with smaller store footprints;
- The “surban” trend, in which suburbs are transitioning to include more urban elements with a live/work/play dynamic;
- Partnerships among co-working companies, hotels, and retail centres to provide access to underused space as well as services and amenities.
The real estate industry is clearly paying attention to these trends as companies make major investments in more flexible business models. But these shifts also represent a significant challenge for many industry players. When it comes to embracing co-working arrangements in offices, for example, short-term leases can affect property valuations and add to costs when tenants change more frequently. This makes it even more crucial for established industry players to embrace the technologies, services, and modernized spaces that can help them compete with newer entrants.
What Actions Can You Take to Position Yourself to Thrive?
Tap into a variety of information sources, including data-driven insights, to truly understand what your customers want. Embrace customer personalization to take your growth to new levels.
Also, think about your supply chain. Which parts do you want to own and serve directly, and which can you assign to someone else to undertake on your behalf? Try to minimize the number of layers between your company and the end consumer so that you do not lose control of an important asset.
In addition, explore the ways that joint ventures and partnerships can help you explore new market opportunities. As larger projects with more diverse uses become more common, partnerships can go a long way in accessing the necessary capital and skill sets while sharing risks.
“While cash flows, cap rates, and NPV calculations are always important in real estate, focusing on the customer experience has become a significant priority.”
Expected Best Bets in 2020
Multifamily housing and logistics facilities continue to be very strong asset classes. As phrased by some of our interviewees, the best bets for 2020 are mainly about “beds and sheds,” particularly in the top markets of Toronto, Vancouver, and Montréal.
In the sheds category, it’s all about warehousing and fulfillment, which tied as the top development opportunities in our survey. Customers’ rising expectations for same-day e-commerce deliveries continue to spark demand for large-scale facilities close to population centres and transportation routes.
Turning to beds, senior housing ranks next on our list of top development prospects. The industry is responding with a variety of options, especially those tailored to seniors looking for a blend of convenience, security, high-end amenities, and flexibility to suit their active lifestyles.
Despite the strong prospects, developers and operators face considerable costs, complexities, and regulations in creating and running facilities and services that cater to Canada’s aging population.
Also in the beds category are mid-priced apartments, which ranked third on our survey for development prospects. From co-living arrangements to traditional rental housing to moderately priced condos, the multifamily category still offers the affordable options that many Canadians are looking for.
Demand remains strong, even as condo and rental housing construction has risen consistently and significantly across Canada over the years. Rental housing under construction was just 13,947 units in 2008, a number that rose to 56,394 in 2018. For condos, units under construction hit 120,923 in 2018, up from 94,658 in 2008.
Rounding out our expected best bets for 2020 is transit-oriented development. In Montréal, projections suggest that the region’s Réseau express métropolitain project will spur about CAD$5 billion in real estate development along the route. And in Ontario, the regional transportation agency, Metrolinx, is moving to a market-driven approach to financing transit projects in which it will link new stations to development as it looks to capture land value in its rail network and real estate portfolio.