Emerging Trends in Real Estate 2012 - Urban Land Institute

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Exhibit 5-9 Prospects for Capitalization Rates Property Type Cap. Rate August 2011 (Percent) Source: Emerging Trends in Real Estate 2012 survey. Note: Based on Canadian respondents only. Expected Cap. Rate December 2012 (Percent) Expected Cap. Rate Shift (Basis Points) Apartment: High Income 5.40 5.43 3 Apartment: Moderate Income 5.75 5.69 (6) Regional Malls 5.92 5.94 3 Central City Office 6.14 6.15 2 Warehouse Industrial 6.65 6.60 (6) Power Centers 6.55 6.67 12 R&D Industrial 7.00 6.95 (5) Neighborhood/Community 6.98 6.95 (3) Shopping Centers Suburban Office 7.02 7.16 13 Full-Service Hotels 7.60 7.66 6 Limited-Service Hotels 7.81 7.88 8 dream of marrying and raising children in a house and yard. Toronto (1). Canada’s preeminent global gateway, Toronto dominates the country’s business landscape, concentrating financial services and industrial activity. “It’s where people want to be: the bulk of immigration heads there.” In a “close to bulletproof” office market, rents have firmed just as the important banking sector starts to cut back, “putting a cap on office development.” Institutions own 75 percent of downtown buildings: “They effectively work in concert to keep vacancies low and avoid shooting themselves in the foot.” “Spotty” suburban office space suffers from move-back-in trends favoring downtown locations. Commercial nodes situated near mass transit stations perform better. About half the nation’s industrial space is located in the Greater Toronto area (GTA); the manufacturing dip hits older warehouses harder, but new higher-ceiling space Exhibit 5-10 Canadian Markets to Watch: Prospects for Commercial/Multifamily Investment and Development Markets to Watch Toronto and Vancouver retain their top survey rankings, boosted by international gateway status and diversified economies. Calgary and Edmonton rebound with recent energy market gains, while Ottawa benefits from its large and sustaining government jobs base. Montreal holds steady, and Halifax shows new strength from ramped-up energy exploration activity off the East Coast. In general, major metropolitan areas actively encourage development of downtown residential space and try to discourage suburban sprawl, creating growth boundaries. They look to control costs on building and maintaining expensive transportation, sewage, and water infrastructure to outlying districts, and to relieve increasing traffic congestion. These moves should enhance already-attractive 24-hour environments in these cities and position them to deal with expanding populations over coming decades. Local planners may need to pay greater attention to providing parks and other recreational space in and around new condominium corridors located near center cities. Especially in Toronto, the proliferation of new apartment towers leaves residents without immediate access to playing fields or nearby green environs. The accommodations may work for young professionals more interested in the local bar and restaurant scene, but do not accommodate the needs of families with children. Limitations on single-family housing projects, meanwhile, increase values on highly coveted suburban homes located in inner rings. Some interviewees wonder whether prices will become unaffordable for many families, killing the Toronto Vancouver Calgary Edmonton Ottawa Saskatoon Montreal Halifax Winnipeg Toronto Vancouver Calgary Edmonton Ottawa Saskatoon Montreal Halifax Winnipeg Investment Prospects 6.70 6.61 6.33 6.24 6.00 5.47 5.28 5.02 5.00 Development Prospects 5.92 6.43 5.64 5.47 5.26 5.42 4.57 4.32 4.58 1 abysmal Source: Emerging Trends in Real Estate 2012 survey. Note: Based on Canadian respondents only. 5 fair 9 excellent 64 Emerging Trends in Real Estate ® 2012
Chapter 5: Emerging Trends in Canada leases up. High land costs will restrain new industrial building and help tighten vacancies. Most attention focuses on residential space. “We’re the hottest housing market in North America, and probably the hottest condo market in the world.” Despite more than a decade of seemingly nonstop high-rise construction concentrated in the city’s core, relentless renter demand from immigration and in-migration from other provinces and the countryside absorbs about 40,000 units annually and keeps inventories low. “Lender presale requirements, including hefty buyer downpayments, protect against unbridled speculative development,” and Asian investors keep purchasing units to rent out. Developers figure “let’s ride the wave as long as we can”— more than 70 projects head skyward—“but it can’t continue like it’s been going.” Government intensification mandates escalate land prices in suburban nodes like Mississauga, where developers cannot make money without going the high-rise route. Nosebleed land prices and development restrictions inside the greenbelt also hobble homebuilders’ entitlement efforts, so existing single-family home prices spike on average above $500,000. Outside the greenbelt, home prices are lower, but the trade-off is much longer commutes. Homebuilders fare poorly in these 905 suburbs, too, because sizable government development charges—up to $60,000 per house—cut into profits. Toronto rapidly transforms into a vertical world. Vancouver (2). Canada’s beautiful Pacific-facing gateway, Vancouver experiences ongoing real estate spikes precipitated by a surge of Asian flight capital flooding into residential Exhibit 5-11 Canadian Markets to Watch: Prospects for For-Sale Homebuilding Vancouver 6.50 Toronto Calgary Edmonton Ottawa Saskatoon Montreal Winnipeg Halifax 6.29 5.92 5.64 5.55 5.44 5.12 5.03 4.54 1 abysmal Source: Emerging Trends in Real Estate 2012 survey. Note: Based on Canadian respondents only. 5 fair 9 excellent Exhibit 5-12 Canadian Apartment Buy/Hold/Sell Recommendations by Metropolitan Area Apartment Buy Source: Emerging Trends in Real Estate 2012 survey. Note: Based on Canadian respondents only. Hold Sell Calgary 50.94% 35.85% 13.21% Montreal Toronto Vancouver 32.00% 46.00% 22.00% 50.00% 28.13% 21.88% 46.77% 33.87% 19.36% 0% 20% 40% 60% 80% 100% markets. Chinese and other Pacific Rim–nation buyers willingly pay multimillions of dollars for penthouses in new high-rise projects, which have taken over the city’s core, as well as suburban manses. Local players talk confidently about maintained demand but realize any change in China’s political environment would mean “slippage” or at least leveling off in what some interviewees term the “overpriced” condo market. Separately, a repeal of housing sales taxes and delayed imposition of new provincial tax policy could freeze transaction activity until pricing implications become more certain. Under any circumstances, geographic barriers-to-entry—mountains, ocean, and bays— restrict new development opportunities and help sustain real estate values. Commercial trade, regional commodity markets, energy companies, and financial services all expand, firming up occupancies and rents. Downtown is mostly built out. Enough pent-up demand exists to absorb space in two recently completed boutique office projects, keeping vacancies comfortably in the mid- to high single digits. Several other modest projects totaling about 600,000 square feet will not be completed until 2014 or 2015. Developers concentrate residential and commercial projects around stations near the city’s popular and expanding Skytrain mass transit network. The availability of reliable train service coupled with Vancouver’s carbon tax has changed commuting patterns and reduced driving into downtown. Interviewees complain about “extortionist” development fees and call for a long-term, regional strategy for planning residential areas, commercial districts, and green space to serve an expanding population and protect highly desirable, but increasingly crowded environs. Emerging Trends in Real Estate ® 2012 65
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Executive Summary F or 2012, U.S. r
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gateway cities at or near market bo
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occasional build-to-suits, the odd
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Emerging Trends in Real Estate 2012 - Urban Land Institute

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