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The BMO report, though, questions the assumption that supply constraints are behind the rapid house price inflation in Canada.

The report points out that residential and non-residential real estate prices were moving in sync until 2015, when residential prices took off, reaching a 15-per-cent difference with non-residential real estate prices. If supply constraints were behind escalating housing prices, BMO argued, they should also have affected the non-residential real estate.

Supply-side constraints are acute for developable land in urban areas where most new residential developments occur in Canada. Non-residential construction, except for high-end office and retail development, often occurs in places where land supply is not scarce and where land prices constitute a smaller portion of development costs.

Hence, prices for residential real estate could have grown faster than non-residential real estate because of the former’s likely urban location.

Also, according to statistics by the Organisation for Economic Co-operation and Development, Canada is neither much more urban than the U.S., nor do Canadians live disproportionately in large populous cities.

It could be that the higher prices in Canada are essentially driven by the greater Toronto and Vancouver areas, where pockets of high-priced housing are numerous. A comparison of housing prices in Toronto and Vancouver with ones in Boston and San Francisco might suggest that the gap is much narrower than the one highlighted in the BMO report, Dunning opined.

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The most vulnerable are those with exposure to lockdown-sensitive businesses such as clothing retailers, gyms and movie theatres. “Certain types of retail have been impacted in a big way, and the move to online shopping has accelerated rapidly,” says Canaccord Genuity analyst Mark Rothschild.

Office-focused REITs have not been as intensely plagued by rent collection issues, but are seen as vulnerable to longer-term adjustments in work culture. A report from real estate consultancy CBRE Group Inc. pegs the national office vacancy rate, as of the end of 2020, at 13.4 per cent, the highest level since 2004.

“I think the office business has changed for a long time, if not forever,” Rothschild says. “Many people will not be back in the office five days a week any time soon. And that is something that is going to weigh on office REITs for many years.”

I think the office business has changed for a long time, if not forever

Mark Rothschild, analyst, Canaccord Genuity

At least 11 Canadian REITs have responded to pandemic-related cashflow issues by reducing distributions to unitholders, an unusual course of action in the normally placid REIT space. Among the companies who have recently chosen to cut payouts are two of the biggest names in Canadian real estate.

One of them is RioCan Real Estate Investment Trust, which announced on Dec. 3 that it would be cutting its monthly distribution by one third, from $0.12 per unit to $0.08 per unit — the first time in the company’s 26-year history that it has reduced its payouts. In a press release, the company said the distribution cut would bolster its balance sheet by $152 million per year.

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The same is true for the Montreal and Vancouver CMAs: about 24,880 persons left Montreal to settle elsewhere in Quebec, and 12,189 left Vancouver to settle elsewhere in B.C.

These three CMAs differ considerably in interprovincial migration. For instance, 3,175 more people left the Montreal CMA to settle outside Quebec than those who settled in Montreal from other provinces. By contrast, 4,381 more persons settled in the Vancouver CMA than those who left for other provinces. The net interprovincial flow into the Toronto CMA was just 284 persons.

The Calgary and Alberta CMAs had a net increase in population from intraprovincial and interprovincial migration, but, unlike other populous cities, the number of births was at least twice as large as the numbers of deaths. In the Montreal CMA, birth numbers were only 27 per cent higher than deaths.

A CMA is a constellation of Census Subdivisions (CSD) or municipalities, but the suburbanization of the population can also be observed at the individual municipal level.

The City of Toronto’s population growth rate during 2019 and 2020 was 0.84 per cent, compared to 3.42 per cent in the neighbouring municipality of Brampton, and 4.08 per cent in Milton, slightly further west. Surprisingly, the growth rate in Mississauga, home to Canada’s largest airport, was 0.61 per cent, lagging behind Toronto.

The lure for more space, cheaper rents and lower housing prices are cited as reasons for the outflow of people from populous and centrally located cities. These trends are likely to continue in 2021, given that the vaccine roll-out still faces logistical constraints.

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MNP Ltd.’s latest consumer-debt survey also found that 61 per cent of those polled “feel now is a good time to buy things they otherwise might not be able to afford,” the insolvency firm said.

“I’ve never seen the intent to buy as high as it is right now,” True North’s Eisner said. “There are a lot of Canadians who are looking to upgrade their house or just looking to buy a home for the first time.”

The debt that comes with such home purchases has been a source of concern for policymakers, but historically low interest rates brought on by COVID-19 have been keeping borrowing costs low for consumers. The household debt-service ratio, which is total debt payments as a share of disposable income, was 13.22 per cent in the third quarter, below pre-pandemic levels.

I’ve never seen the intent to buy as high as it is right now

Dan Eisner, chief executive, True North Mortgage Inc.

But if borrowing costs start ticking up, household budgets could start really getting squeezed. MNP found that 47 per cent of those surveyed were worried about landing in financial trouble if interest rates rise.

However, Renner said the Conference Board does not see interest rates rising again until 2023. In the meantime, Canada’s housing market is expected to stay strong, even in the midst of a second wave of COVID-19, which could continue to drive up prices and inflate the amount of mortgage debt being built up.

“We see little that will stop activity or prices from reaching new highs in 2021,” Royal Bank of Canada economist Robert Hogue wrote in a Jan. 15 report on the housing market. “Historically low interest rates, changing housing needs, high household savings and improving consumer confidence will keep demand supercharged. A dearth of supply will maintain the heat on prices.”

Financial Post

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CMHC said its changes were intended to protect homebuyers, reduce government and taxpayer risk and to help keep housing markets stable. It also gave a lift to CMHC’s publicly-traded competitor, Genworth MI Canada Inc. (now operating as Sagen MI Canada), as the company indicated in early November that CMHC’s changes had helped boost its share of the mortgage-default insurance market to somewhere in the high 30-per-cent range.

Canada Guaranty says its market share, like that of Sagen, is rising. However, the company says that was also the case before CMHC started fiddling with its underwriting criteria.

“Over the last several years Canada Guaranty has been steadily growing market share with the addition of new lenders and allocation increases over time with existing partners,” said Mary Putnam, vice president, sales and marketing, at Canada Guaranty, in an email. “Canada Guaranty’s market share was on the rise before CMHC’s changes and continued post CMHC restrictions. Canada Guaranty anticipates measured growth in 2021 and remains comfortable with its industry leading risk management.”

Mortgage-default insurance is crucial to the housing market. Banks must buy the insurance, which protects them in the event borrowers stop repaying their loans, when the amount of a mortgage is worth more than 80 per cent of a home’s value. The cost of premiums is typically passed on to the borrower, who is then able to get a loan without having to make a down payment of more than 20 per cent.

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It’s been very strong, and that strength can’t be sustained forever

Stephen Brown, Capital Economics

Yet those trends won’t last forever. Cities such as Halifax and Montreal have absorbed the effects of lower mortgage rates quickly, Brown said, and others such as Toronto and Vancouver are still dealing with weaker immigration levels, which weigh on rents and investor interest. 

“It’s been very strong, and that strength can’t be sustained forever,” Brown said. “So, the housing market will start to lose some momentum for that reason.” 

The economics unit at Bank of Montreal said it sees housing sales cooling nationally, but home prices being supported by the lack of supply and still-low interest rates.

BMO’s economists forecast the MLS Home Price Index would increase seven per cent this year, “with the first half of the year still characterized by outsized strength in single-detached homes, especially in smaller markets, partly offset by sluggish condo prices,” they wrote. 

A lot of demand is being pulled forward due to low rates and distorted buyer psychology

Shaun Hildebrand, Urbanation

“Whether or not that rotation persists after the vaccine is widely administered is probably a question for the 2022 outlook, but we suspect core urban markets will ultimately find a solid footing again after further underperformance in the meantime,” they added in their Dec. 23 outlook.

Downtown Toronto condo sales actually rose in December to their highest level since May 2019, increasing by 26 per cent month-over-month and 102 per cent year-over-year, according to Shaun Hildebrand, president of research firm Urbanation Inc.

Yet for the Greater Toronto Area housing market more broadly, Urbanation also sees a slowdown coming later this year.

“A lot of demand is being pulled forward due to low rates and distorted buyer psychology as many that weren’t planning on moving are now wanting a change and others think they need to get into the market now before it’s ‘too late,’” Hildebrand said in an email. “An eventual recovery in the economy and immigration will be important for the market as vaccines are introduced — but they will have a lagged effect and we could be dealing with a bit of a hangover later this year, specifically for (Toronto’s suburban) houses.”

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The market in the United States was no different. On a year-by-year comparison for the same period, occupancies were down 17.2 per cent, the average daily rate fell 21.5 per cent, and the revenue per available room decreased 35 per cent.

Miami, a popular tourist spot, reported the highest occupancy level of 69.2 per cent. Vancouver reported the highest occupancy level in Canada at 27.9 per cent. On the other hand, struggling regional economies reported the lowest hotel occupancy levels, with Calgary at the bottom at 13.4 per cent. Boston reported one of the lowest occupancy levels in the U.S. at 28.2 per cent.

A comparison reveals that U.S. hotels are a lot busier than those in Canada. The highest occupancy level in the U.S. is twice that in Canada, and the lowest occupancy level in Canada is more than twice that in the U.S. The signs of recovery are more obvious in the U.S. than in Canada.

Hotel and lodging statistics from the U.S. also indicate a shifting demand from urban to suburban and beyond. American Hotel and Lodging Association data for early August revealed that the occupancy levels in urban properties averaged 38 per cent, much lower than the 52 per cent observed for suburban hotels.

The hotel industry is clearly following similar trends found in the housing markets, where suburban and remote housing markets have experienced a higher demand since the pandemic.

But while the pandemic has aggressively disrupted the hotel and lodging industry’s traditional business models, it has apparently spared the disruptors. For example, Airbnb Inc. initially reported large declines in demand in March and April after many cancelled their reservations, but the surprise increase in demand for overnight stays within a short driving distance of large urban centres has allowed short-term rental platforms to flourish even during a pandemic.

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The demand to integrate technology into property maintenance has increased even more so during COVID-19. What a building must do to stay operational during the pandemic is what concerns landlords the most.

For instance, commercial building operators are aggressively searching for tools to improve and monitor airflow with advanced filtering technology. Proptech can enable merging sensor and other machine-generated data to deliver healthy and safer working environments.

New buildings are ready for automation. Managers are, if they haven’t already, transitioning to tech-driven building automation. Older buildings have little choice. Either their systems are upgraded and converted to digital from analog or demand and rents will decline as telework resets the spatial equilibrium in cities and beyond.

Rycom Corp., which specializes in bringing smart tech to the real estate sector by advising clients on technology, is already operating in buildings occupied by the federal government in Ottawa and leveraging data and analytics to reduce energy consumption and carbon emissions.

Building operations generate roughly28 per cent of the annual global GHG emissions. Improving efficiencies has a tremendous potential to improve the environment and address climate change.

“The new generation of property owners and managers must be trained on the use of smart technologies and operating models,” said Casey Witkowitz, Rycom’s chief executive.

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Immigration will be a key determining factor in whether condos remain an attractive investment in 2021 and beyond

Immigration will be a key determining factor in whether condos remain an attractive investment in 2021 and beyond. The federal government has announced that it intends to admit more than 400,000 new permanent residents in each of the next three years, which would be the highest annual figures in over a century. Flows of temporary residents, including international students, are also expected to increase.

“The resumption of immigration-based population growth will be important for two reasons,” says Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board. “Number one, the condominium apartment market is the starting point for a lot of immigrant households. Number two, immigration also drives demand for rentals.”

Carmin Di Fiore, executive vice president of the debt and structured finance group at CBRE Group Inc., likewise expects condo investment to rise in tandem with immigration after lockdown restrictions begin to ease. But he cautions that condo developers may need to hedge their bets by catering more to end users, who prefer larger units — as opposed to investors, who prefer smaller ones.

“The pandemic has altered people’s perspectives,” he says. “A 400-square-foot condo is actually quite a restrictive form when they’re working from home or locked down. That may cause a developer to go back to the drawing board and change the product mix to create a better sales pro forma.”

Luring end-users back to downtown condo buildings in future years could require more than simply making floor plans a little bigger. Jim Ritchie, executive vice president of sales and marketing at the housing developer Tridel Corp., says his company is already devising ways of making new condos more amenable to work-from-home lifestyles. “We recognize that more people will work from home,” he says. “We need to create space within the suite design that can accommodate that. And in addition to that we’re looking at virtual conferencing rooms that would make up part of the common areas.”

At this time of great uncertainty, at least this much is clear: COVID vaccines alone can’t return Canada’s condo markets to normalcy. But they probably won’t hurt.

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Bloomberg further reported that unlike many other investment markets that appreciated in 2020, “a global index of real estate shares has shed more than 10” per cent. In Canada, the S&P/TSX Capped REIT Index remains down 17.4 per cent year to date, compared to the broader S&P/TSX Capped Composite Index’s 2.9 per cent rebound during the same period.

While demand for office and retail real estate has been declining, the same is not true for warehouses and other commercial spaces associated with retail logistics. A gradual shift to online purchasing implies that warehouses and logistics hubs are handling more demand than ever before, necessitating the need to expand.

An Amazon warehouse in Brampton, Ont.
An Amazon warehouse in Brampton, Ont. Photo by Peter J. Thompson/National Post files

Whereas Amazon.com Inc.’s leasing of an additional 100,000 square feet of office space in Toronto recently made the news, a behind-the-scenes story reveals Amazon Canada is building two new fulfilment centres, one in Hamilton and another in Ajax, and five additional delivery stations in Kitchener, Stony Creek, Vaughan, Etobicoke, and Scarborough, bringing its logistics centres to 16 in Canada.

At the same time, the pandemic has accelerated technology adoption. Instead of years, new tech is being adopted in months, if not sooner. Does it mean tech companies might need more space because technology sales are on the rise?

The news from Silicon Valley suggests that large technology firms are not expanding their real estate empires, at least in the short run. Pinterest Inc., a U.S.-based social media company, recently paid US$90 million to withdraw from the 490,000 square feet lease in San Francisco.

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