Will we choose the city or the suburbs; will we ever ride the subway to work again? Those are among the pandemic-related questions prompting unprecedented levels of uncertainty among real estate investors, according to a new report called Emerging Trends in Real Estate 2021 by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI).
Based on 1,350 North American online surveys and 200 face-to-face interviews with Canadians in the investment and development fields, as well as some consumers, the report documents widespread differences in opinion about how dramatically the ground has shifted for those who build homes, workplaces and community facilities, said PwC’s Frank Magliocco, a senior adviser on the report.
It identified fulfilment centres and warehouses, followed by rental apartments, research and medical facilities as some of the top prospects for investment and development.
Shopping malls, entertainment centres, luxury hotels and student housing were at the bottom of the lists.
“It’s the consumer that’s driving what is being delivered,” said Magliocco.
He cited the trend to e-commerce from bricks and mortar retailing.
“That’s why industrial assets like warehouse and fulfilment centres have been hitting it out of the park in terms of returns. It’s all driven by the consumer and what they want,” said Magliocco.
Investors may be more prudent in their capital allocation. But they are “quickly pivoting to adjust,” re-examining their portfolios and following consumer trends, he said.
Where we will live
- Even people who move outside the core for more space or because they no longer need to commute will seek urban amenities in secondary centres known as “18-hour” cities, suggests the report. In Ontario, those are places like Ottawa and Kitchener. They offer services and have their own vibe but tend to be more affordable than “gateway” cities like Toronto.
Some will stay closer to Toronto in what are being called “15-minute” cities or neighbourhoods: urban areas with homes, stores and schools within a 15-minute walk or bike ride. In the GTA, they are being developed around transit in places like Brampton’s Uptown at Hurontario Street and Steeles Avenue East, or the Vaughan Metropolitan Centre.
The balance of opinion suggests that the fundamentals of how the GTA grows haven’t changed as much as some people think, said ULI executive director Richard Joy.
But there are “strong opinions from credible people” that suggest working from home has altered the urban dynamic for the long term.
Magliocco said those divergent opinions showed up in interviews about every type of real estate.
In terms of urban versus suburban or rural living, “maybe the sweet spot is these suburban-urban hubs with a strong transit, mixed-use orientation,” said Joy.
- Government policy to protect the environmentally sensitive Greenbelt should prevent “out-of-control sprawl,” said Magliocco.
But “what we’re seeing is some developments have jumped the Greenbelt to the other side. There’s still a strong demand for lowrise housing. People will want this and people will drive to where they can afford this and get it.”
- Single-family homes will be less open concept in favour of closed-door office space. Condos will incorporate Zoom rooms and parcel delivery depots.
- Supply and demand makes multi-family rentals a strong investment prospect that is attracting REITs and pension funds, said Magliocco. In Toronto, demand for rental will be tempered by a drop in immigration and university student tenants, but that will likely be temporary.
- Some of those interviewed for the report said they would avoid senior housing given the impacts of COVID. But “many interviewees felt that the demographic trends are positive for this subsector in the longer term, although some suggested that the operating model will need to change.”
Where we will work
- Whether we go back to the office remains one of the greatest uncertainties. Seventy-eight per cent of employers expect to return to the workplace, but employees were almost evenly split among those who prefer to continue working remotely, those who want to return to the office and those who prefer a hybrid arrangement.
Some companies are already reducing their office space. But PwC found developers and institutional investors were confident that the market will return because people are suffering from video-call fatigue and want face-to-face collaboration.
“In the future, the office is more going to be for collaboration … so you don’t need those designated spots,” said Magliocco.
- Companies want more flexible commercial space, including short-term leases and suburban locations closer to their workers’ homes.
- Workers will almost certainly get more square footage when they work at the office.
“The trend line for how much office per employee is bound to grow, which might mean the demand for office space doesn’t shrink quite as much as you might expect,” said Joy.
“How it plays out in terms of the commercial market as real estate may be less directly proportional,” he added.
- Mega-developments like The Well near Spadina and Front streets will remain viable, said Joy. They are the kind of projects that deliver social good such as environmental benefits.
- The surge in e-commerce means that more people will likely be working in fulfilment centres, which tend to be industrial spaces in more remote locations. That has an impact on transit demand, he said.
Where we will shop
- E-commerce was already changing the retail landscape, but that has accelerated with COVID-19. The report notes that online shopping has already penetrated the sale of clothing; books, movies and music; and consumer electronics by 46, 41 and 34 per cent, respectively.
- As retailers gobble up industrial space to get their goods to consumers, some stores and malls could be repurposed into fulfilment and distribution centres, and some mall owners are already planning to build residential properties on mall parking lots.
- Strip malls anchored by grocery stores are expected to be the retail winners in the pandemic.
- Among main street retailers there is “rightful panic” about the future, said Joy. “Even the malls are putting on a brave face.”
He suggested some strip malls and main street stores could find more midday opportunities given that there are people looking for lunch or light shopping closer to home.
“I think there’s something inherently more comfortable about entering into small establishments,” he said.
