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The real estate market and interest rates have been very hot topics over the last year. We have seen house prices rise and fall and inflation is the highest it has been since the 1980’s. While interest rates are still high, we have now witnessed the Bank of Canada hold the overnight rate for two consecutive announcements, but there are still many hurdles in the real estate world. Curious what will be trending in Commercial real estate in 2023? Let’s take a look!
The 3 areas that will have the biggest focus for 2023 are:
- Sustainability and focus on Environmental, Social and Governance (ESG)
- Supply issues and inflation
- Housing affordability crisis
Focus on Sustainability and Environmental, Social and Governance (ESG) Concerns
Focus on climate change and sustainable development has been trending for a while now as companies hope to achieve net-zero emissions in the coming years. It is imperative that companies and developers have an ESG plan as achieving net-zero emissions is the new standard. Having an ESG strategy will not only help companies to assure investors and employees that they are forward-looking and see the value in sustainability. It is common now for investors to demand to see a net-zero strategy before moving forward, as expectations toward ESG best practices are emerging. With higher interest rates, it’s not as easy for companies to gain capital as it was in previous years, which is why having a strong ESG strategy will be beneficial. Companies need investors in order to further development projects and having a focus on climate change and sustainability will give some companies an edge against their competitors.
Supply Issues and Inflation
In a time of uncertainty and rising costs, it is difficult to know when to take risks and when to play it safe. With interest rates still high and potentially climbing, along with the rising cost of building supplies, commercial real estate is being impacted. With building and material costs being on the rise, labour costs have also been making development projects much more expensive than they were in the past. Not only do developers need to take price increases into account, but they will also need to consider climate change and sustainability when choosing building materials. In fact, according to Statistics Canada, in the first quarter of 2022, construction costs were 12.8% higher than they were in the first quarter of 2021. As a result, some investors and developers are choosing to take a pause to allow inflation and the supply chain to readjust.
Housing Affordability
Higher interest rates and lack of supply have created a housing affordability crisis in Canada, which has caused Canadians to look at renting rather than buying homes. Higher rates and inflation have made it more difficult for Canadians to buy property and increased the costs associated with new construction. Across Canada, the average minimum income required to purchase a home now requires an additional $5,000 to $21,000, the amount varying by city.
As a result, we are seeing buyers continue to wait on the sidelines, causing the rental market and prices to inflate.
An opportunity that has been discussed is office building conversions. With the shift to working from home, there are plenty of office buildings that are either empty or at very low capacity, making these buildings great candidates for rental conversions.
What’s Next?
Government involvement and assistance along with developers creating strong ESG strategies will offer some relief in the short term. As the real estate market resets and recovers, we are going to need to see government solutions to help with the affordability crisis in Canada and lack of housing supply and if developers want to see money from investors, they are going to need to have net-zero strategies in mind.
Information referenced from:
https://www.loopnet.com/learn/what-to-expect-in-canadian-commercial-real-estate-in-2023/1725921854/
https://www.pwc.com/ca/en/industries/real-estate/emerging-trends-in-real-estate.html
https://dailyhive.com/canada/home-prices-in-canada-income-march-2023
