"Beds and Sheds" hedging to be the front runners for investors in 2020

The catchphrase of the moment is proving to hold its weight as we analyze commercial real estate trends leading into the new year. Canada’s Multifamily market is the strongest it’s ever been with rental rates nearing 10-year highs, apartments near 100% occupancy, and volatility remaining low. On the industrial front, demand for fulfillment space continues to reign supreme to satisfy the multiplying growth metrics in e-commerce.

“Beds”

Seniors Housing

It is well known that seniors (those aged 65 and over) are the fastest growing demographic in Canada, currently representing 17% of the total Canadian population, and expected to grow to 24% in the next fifteen years. Obviously this growth is continuing to create new demands on the multifamily market to provide for basic housing needs, as well as physical and social services to improve the quality of life in later years. Modern technologies are also changing development guidelines to accommodate greater independence among senior tenants, such as electric wheelchairs and motorized scooters that require different dimensions through living quarters. The environmental design of senior communities continues to evolve and concurrently the average monthly rents continue to rise while the vacancy rates decline.

According to the National Seniors’ Housing Survey conducted in 2016 by Canada Mortgage and Housing Corporation (CMHC), across Canada, Quebec recorded the lowest average rents ($1,527), while Ontario posted the highest average rents ($2,978) for a bachelor unit where at least one meal is included. For heavy care facilities offering a higher level of services, Alberta saw cost increases at a staggering 24% from 2015 ($4,450) to 2016 ($5,478). In this same category, the average monthly rent was highest in British Columbia ($6,214), and lowest in Quebec ($3,004). These increasing costs directly correlate to declining vacancy in seniors facilities, increasing demands in a growing sector, and ultimately, new opportunities for investors in the senior housing sector.

Mid-Priced Apartments

In the late 1990’s and early 2000’s across North America, there was a consistent and steady push outwards with single family residential construction. At the peak of 2006, “construction in the top 10 markets totaled 394,000 single family homes. Today, those markets are building 54% fewer homes, on average” (John Burns). This has had the secondary effect of dampening traditional shopping centre growth which follows the development of new residential neighbourhoods. To address this shift, home builders are adapting and according to a John Burns survey, “55% of entry-level builders are building on smaller lots, 45% are building smaller homes, 39% are using less costly materials, and 33% are moving further from the job centers”. However, the larger movement we’re seeing is not single family to single family, but rather a diversion towards multifamily mixed-use development.

Canada faces additional challenges in the single family residential sector due to a variety of economic adjustments that have recently occurred, shifting the goals of homeowners and tenants. Changes in market conditions (from housing bubbles to provincial recessions), combined with changes in federal and provincial policy (from stress testing to increasing interest rates), have prompted more individuals and families to find affordability in multifamily condos and apartments, especially in higher demand cities like Toronto and Vancouver. Developers producing mid-priced multifamily dwellings are proving to be the winners in the sector as they provide the amenities and services desired, but are more attainable for a larger majority of Canadians.

“Sheds”

Warehousing and Fulfillment

Onwards and upwards, the golden child of the commercial real estate sector continues to be a key investment tool leading into 2020, particularly through fulfillment centres, warehousing, flex space and last-mile delivery facilities. The growth has been consistent, “from 2014 to 2018, the industrial real estate market experienced a net absorption of nearly 1.4 billion square feet” (Deloitte), but this is just the beginning. It is expected that an additional 2.3 billion square feet of warehouse space will be required by 2035 to service the double digit growth in e-commerce sales that we’ve witnessed. E-commerce currently accounts for roughly 10% of retail sales globally, but as nearly 2 billion millennials (heavy online shoppers) are now hitting their prime spending years, it is expected that this statistic will only continue to increase. The main focus areas for occupiers will be around improving delivery times to consumers through rapid technology evolution, capitalizing on high-growth centres and sourcing consistent labour pools. The main focus areas for landlords and developers will involve creative thinking to improve efficiencies in existing assets while simultaneously securing critical sites to provide supply chain solutions to occupiers.