Altus Insights Podcast Series

It’s been a hot minute since the National State of the Market presentation we hosted in February, 2022, so this episode serves as a special conversation between Marlon and Ray on all the changes they’ve observed in the Canada real estate market since then. It’s a little bit of good news, a bit of bad news, some opinion, and probably 100% of your daily value in gruff from Marlon.

Show Notes

Date: May 18th, 2022

Name of podcast:  Altus Insights Podcast Series

Episode title and number: Canada real estate market news roundup

Episode summary: It’s been a hot minute since the National State of the Market presentation we hosted in February, 2022, so this episode serves as a special conversation between Marlon and Ray on all the changes they’ve observed in the Canada real estate market since then. It’s a little bit of good news, a bit of bad news, some opinion, and probably 100% of your daily value in gruff from Marlon.

Panelists in this episode:

  • Raymond Wong is the Vice President of Data Operations for Altus Group’s Data Solutions team.   Overseeing 60+ researchers across Canada, Ray’s primary responsibility is to ensure data collection is all encompassing, reliable and accurate and that it adheres to the Altus Group data governance guidelines.  Ray works closely with both internal and external clients to ensure the information meets their needs and that it is both accurate and timely.  He also regularly presents on key market trends to clients and at industry events.

  • Marlon Bray is the head of Altus Group's Ontario pre-construction and contract administration services as part of the Cost and Project Management team. With over 25 years of experience, specializing in budgeting, value optimization, and providing visibility on risk through the entire lifecycle from early due diligence through to completion. Marlon oversees a team that leads the way with cutting-edge estimating technology and data analytics, bringing a greater level of transparency, and added value to all projects he is involved with.
Key topics:

01:10 – Q4 2021 performance afterglow
02:33 – Expectation on returns
03:23 – Increased property activity – retail & office
04:36 – Leasing activity
05:27 – Homage to Avi
05:42 – Challenge snowball for construction
07:55 – Construction levels
08:42 – Government policies
09:36 – Housing supply
11:02 – Inflation and interest rates
14:30 – Uncertainty in the market driving cautiousness
20:39 – Silver linings in the market

Referenced in this episode

·         2022 National state of the market presentation
·         CMHC releases first series of reports on housing supply

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What is Altus Insights Podcast Series?

Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.

Welcome to Altus Insights podcast series with Ray and Marlon hosted by me, Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada. So today's podcast is being done a little on the fly outside of the typical schedule subjects, as everyone knows, we live in interesting times and an ever evolving period of uncertainty. So today we're going to discuss the National state of the market. Unfortunately, Avi is not well today. So you stuck with me and ray, who's in Houston. He just woke up. Unfortunately, national team don't actually do any work before 11:00 AM we've got one question today in me. We're going to chat about all that. Ready, go. First off, my opinion will go backwards and forwards a wee bit. So so what has happened so far this year since we did the last market discussion in February 22? I'm ready if you want to go first on the market side. The challenge. Thanks, Marlon. The challenge we're facing right now is that the real estate data itself, the statistics is a bit of a laggard, right? So we started off the year very strong with overall investment activity totals and capital markets, but that was a result. Fourth quarter the activity in fourth quarter 2021. So so far, what we've seen this year is that overall demand for investment product remains strong. But with what we've seen over the last number of weeks with inflation numbers continuing to move upwards and and with respect to interest rates, there's almost like I don't want to say a reset in expectations, but there's also a bit of a pause. But at the same time, everything seems to be moving forward. When I say that is, the numbers right is higher, is higher borrowing costs. It's some of the financial institutions that are taking a bit of a step back that they're not over that overzealous with certain mountain loans and are pulling back a little bit, but they're still lending by, perhaps not as aggressive compared to the fourth quarter of last year and the overall expectations on returns as well, especially with interest rates moving up. And what does that do to expectation on returns? So cap rates were beginning of the year. We're talking about flat. But what we're seeing is perhaps the expectation for buyers expecting a bit of a lift in cap rates, perhaps in the tertiary markets or in the B and C class buildings, definitely with the core buildings that there's still a lot of demand, especially with what's happening on the industrial and the multifamily side, where availability rates remain very tight and as well as continued increase in rental rates for both those sectors. But when you look at the retail side again, you're having a return, less restrictions and more people coming into retail and as well as when you're downtown, which I know you are today, Marlon, that the food courts are getting busier, pedestrian the sidewalks. Getting busy are not sure if that's the warmer weather, but people are slowly making this return back into the office. So one the retail is picking up and on office. Actually, what we're seeing is that there's still a demand for that or quite a bit of demand for that newer class building, especially with public transportation lines. And so there's a demand for that. So we're starting to see a little bit of the tenant inducements come off, especially on the core assets and the eight buildings where there's little bit concern. And there was concern a couple of months ago as well on the B and C buildings. Whether or not there, whether or not they can meet the certain standards with New safety protocols and people feel safe to come back in. So when you look out the office side with overall new supply, that at least activity remains strong in that area, there has been very limited of any lease cancellations and typical firms are still leasing space from top financial. So there's definitely a lot more lease activity or inquiries, but we have to wait in the next couple of quarters and see the actual results in the office front and see where that goes. And whether or not the return to office, return. So a bit of a slight turn from back in February, Marlon, but it's still heading in the direction where we see maybe a few corrections in the road, but nothing short of massive that we think that the market's going to turn negative or any particular U-turn or change in direction. So then I need to. Now I'm hanging out for Avi and I'm representing Avi today. I have to say that was interesting, right? So I'll jump through. I'll do my side of things, which I think is a little more doom and gloom for nice and positive about the market. And then we'll jump into what we see on the construction side of things. And I think is a good image. We've changed the front of our market deck now to a deer in the headlights. So that's kind of the imagery that we're representing right now on the construction side because it is becoming a challenge significantly in Montreal and Toronto with all and based. What's not happened since February, it's an evolving train wreck in the market where finally, we've got a government that recognizes the supply side challenge on their residential. I mean, it took them a decade to get there as we come out of a pandemic. But we've hit the highest sustained construction escalation in a generation this year started off. We've got rampant inflation timelines for approval to actually getting worse through the year, especially in Toronto, us, where good ideas go to die in red tape. There's this insatiable appetite for tax in Le'Veon and crushing the hopes of home buyers and developers who are just trying to build homes for people. And basically, it's just turned into this endless list of problems. So right now in Ontario, we have a strike on the residential in the Aca trades and specifically local 183 local 27. So formwork framing carpet, hardwood local 790 free zone, which is the Operating Engineers. So we've got about 40 45,000 workers out on strike right now, and that's going to obviously have an impact much larger than the duration of the strike. We've got supply chain chaos. I think really when we're having this conversation said he's going to go take a site visit to that in Houston today. So add on to the supply chain chaos we already had. Now we have China in COVID. Lockdowns exacerbate an already broken system, geopolitical issues that continue in Europe, and in essence, it's turned into a gong show from what was already terrible. Commodities are all over the place. Double digit increases have continued to be erratic. No anticipation for normality till next year. Inflation, which is in essence, chronically controlling the whole of North America that impacts us all gas prices. Well, the good news about gas prices are exactly in the range that the liberals would like to reduce our carbon footprint if only someone had this idea of building some pipelines for oil and gas before, as well as hindsight's always a solution to a problem. Labour again, once we come back to work, especially in Ontario, but across Canada, there's just not enough. And although those tweaks around the edges being done. Well, we've got a real problem coming as we now start to address the supply side and ramp up the supply side. Do we have the workers to cover it off? Look under in Ontario, for example, we've got 110,000 units under construction, double 2015 levels, Montreal's double 2015 levels. Vancouver's ramping up quickly. And basically we've probably had a 25 30% capacity to cope with this and doubled the market. Then we got the spring spending frenzy that's starting to show the signs of light. In February, we made jokes about the government starting to spend money that's spending frenzy, starting to see the light of day now from all levels of government. Basically, they can't print it fast enough, and again, they don't work in the same rules as the private sector does. We have a budget. We have an economical, rational response. Basically, it's politics 100% of the time going to housing supply. As we continue the good news, it's basically a mess. So Toronto's become an even worse place to do business. I always make the joke go to Houston, which is where Ray and Johannes is, but it's just a complete gong show with the endless policies. And again focusing back in Toronto. Since January, we've had the DC increases. The park increases proposed. And it just keeps coming out on Toronto green standards, inclusionary zoning now looking at in Ottawa and Toronto not versus the BC version tanking of basements. Basically, you start to look at all of this stuff. If I look at the average price of a condo in Toronto, it needs to go up 75,000 100 and $15,000 a year just to cover off what the government's doing on their side. That's before we get into construction escalation and get tired of hearing this comment. Well, developers can afford it. Look at the cranes. Well, here's a newsflash for everybody that says that the purchaser pays, not the developer. It's in either the end price or it's in the recovery. So the only person that gets screwed nine times out of 10 is the person in the street trying to buy a home. Now CMHC came out, I think it was last week or the week before, and they finally saying, oh, we have a housing supply issue, not just a bubble, which is kind of funny because we're actually going into a small bubble at the moment, they start moving onto housing supply. But basically, since 2003, housing starts across Canada, especially in Toronto, actually decreasing in Toronto's fairly chronic. It's gone from 85% 10,000 people, down to 60 during the same period. The average household size is shrinking, too. So we actually need more homes, so we're actually supplying less in effect for an increase in population. But on a positive note? At the current pace of increases on inflation, on interest rates, it's going to really deal with the supply side demand side problem i.e. a recession is going to fix the construction issue. So if you have a recession, construction prices will create themselves real quick. And it's just a shame people need places to live, but won't be able to afford them now. Right now, the inflation is in a place where it's probably balanced. The question is, where does I mean the interest rates? The question is whether interest rates go from here. So I think to Ray's point, we're starting to see deals slowing down a little bit. People are looking them. We'll figure it out. But it's becoming a real challenge. And if you look at construction escalation basically since January February, we've upped it about two 3% in Montreal and Toronto from earlier projections. Vancouver, we've tweaked at very slightly, but this seems to be coming a made in the East challenge with the number of homes that are under construction and the acceleration we have. I'm not sure if you're seeing the same. The interest rate seems to be the big talking point now and inflation. Well, that's a bit of a wildcard because when you look at the interest rates and you look at some of the cap rates that are being in the market right now and that gap between the interest rates and the returns is getting narrower and narrower. So whether or not sort of a medium long term hold in this, or hopefully the numbers sort of work out in the medium and long term, but the short term, that's where the challenge is and there's a lot more scrutiny of the actual numbers and the potential returns because it's sort of like a bet on the capital market side. There's a lot of discussions right now that there's a premium that being paid for industrial buildings with very short term leases left within the building. And then that way, the purchasers have an upside return on rents. But is that the same for office if we don't see this return back to the office and there's sort of a reconfiguration of space requirements again, and we see more space sort of being returned to the marketplace just because of downsizing or not being in space. So so do you go long or short on the office side, right? And there's no right or wrong at this point, and we just have to wait to see the next 12 to 18 months and Marlon with these calls now. I hate to say I think I'm turning a little bit more negative, but there are some, some concerns that we have on the office front. And again, there's not enough data yet, but again, the lease activity and the inquiries are there and same thing with industrial, we've seen rents going up have gone up by 20% or 30% the last three to five years. And now there's a push, well, southwestern Ontario benefits in Toronto and as well as the outskirts. You know, if you look at Western Canada, Calgary and Edmonton benefit from the tightness in Vancouver and Montreal has also benefit from that expansion into some of the secondary, tertiary marks on the industrial front. But for the warehouse or the users that need to be in the urban areas that need that, that location, whether or not they can bear the cost is not just the logistic cost. And we talked about in previous calls the shortage of labor in that area and also gas prices and material costs that whether or not that actually starts to slow down the economy. And I know your comment was and I've heard this a number of times as well, the recession might be actually a good thing to slow down the market and put everything back in check. But whether or not it goes too far or based on the interest rates, because the other discussion is that the interest rate increases that we've seen is a little bit too late, that it should have happened sooner to really pull down this whole thing with inflation. And this is what in the US and in Canada, so be interesting to watch. So those are a few additional economists on my side. Yeah and I think that's part of the thing where it's interesting because we're in a period of uncertainty and we probably likely have access to more data and more information than anyone else in the market when it comes to real estate. And if we find it uncertain to predict now that it's going to be a real interesting time for the client. And obviously the good news is the market is the fundamentals are strong. It seems to be it's going to be a short term pain, long term gain. And I think that's the challenge as you start to see on the housing front now where people are holding off a little bit, I think it's more fear. And someone said to me yesterday presentation has always been fear in the real estate market. And if you don't have fear, it's a good way to end up bankrupt at some point or out of business. So even in the good times, you've got to live by fear. I think it's the uncertainty. That's really starting to make people nervous. I know in the home buying front, we've already got a couple of colleagues that have stopped looking for a home now because they're waiting to see what will happen. The tired had been in bidding wars for homes, and they just want to wait and see what's happened. They're looking at interest rates, but you know, I'll just hold off six months, what will happen? And I think that's what we're in is a period, and I think you're going to see the same on the institutional side with some of the investments they do, there'll be a little bit more due diligence or holding until maybe pull the trigger than there would have been six months ago. Just with how unsettled the whole world really is. And that's key because this whole talk about recession and stagflation, a lot of that noise started sort of almost a month ago when people started searching the web with the possible recession or stagflation impacting the economy. So it's a psyche that based on, you know, the direction of the stock market. And this continued pressure on prices that whether or not everyone comes to a halt in spending or just spending on necessities. So be interesting with all the restrictions coming off and you know, the airlines are starting to have increased traffic. Whether or not people just stay at home just because the airfare prices and everything else have really gone up in the last couple of months. Yeah, and I think that's the question is it's a return to normalcy come out of the pandemic and how business returns, like we mentioned with hybrid. We've mentioned with house buying sentiments and whatnot. I think we're in that period now where I don't think anybody actually knows what's going to happen for the rest of this year, either the economy level or when you start getting into real estate. I think we can have very educated guesses. We can deal with risk because we have a lot of experience. We've dealt with this stuff, but I think I don't think anyone knows with 100% certainty what's going to happen for the rest of this year. I agree with you, this is a let's see how things go. But I think the challenge right now is everyone's dealing with so many of local challenges at the municipal level and dealing with how the municipalities are reacting to the situation. But obviously in Ontario, we have the provincial election go in and then God knows what the feds are going to do next. It's everything's uncertain. I don't know that the global issues and you're just in this place where who knows what's going to happen tomorrow. So planning for that is a lot different than maybe it was pre-pandemic. And Marlon, even with you and I, with the number of calls we're taking in, a number of presentations are just accelerating, especially in the last few weeks. So there's more sort of not just phone calls, but that they actually want to meet to discuss the potential risk in certain areas. And we're doing a meeting next week and its concerns about the industrial market. And you would think that should be one of the most stable assets. But there's those concerns with everything we just mentioned was with the supply constraints and the escalating rents and whether or not companies can compare these increases and how do we even get land or buy land that is suitable? And it's not just buying land, especially on the industrial front, but it's actually having the actual labor to be able to support it. And last week, when we're in Chicago, we're talking to an order down here and it was talking about 80 80 foot clear buildings. And basically, those buildings are warehousing logistics. There's 100% automated and it's blocked off because it's too dangerous to get people actually into that space based on 80 feet, right? So it's interesting how people are looking to maximize their space. And you look at multiple stories, but again, everyone is pivoting to change what the requirements are, as well as to balance all the costs and the other challenges with what you said with labor. It's not just on the construction side, but the unemployment rate on Friday in Canada dropped again and continue tightening. So it'll be interesting to see hopefully some positive impact with the increase in immigration that we're going to see this year. Yeah, if you build it, can you actually have people to run it? And then, mike, you touched on the land side. You mentioned underwriting the deal right now. How difficult is I'm going to buy the land today, especially on, say, a multi Res you're in. Toronto is going to take four years for approvals and you're probably going to have it built eight years out and you're trying to do a purpose built rental. And that's the challenge. I think it's don't see is going to go up again. I mean, 40% is at 100% If I go out to Montreal, you know, they get the 20, 20, 20. We've already seen the changes with the step code and whatnot. So again, I think right now it's much more difficult to underwrite a deal with any level of certainty. But as we know in development, development goes ahead with people who take risk. It's an entrepreneurial business. It keeps continuing like that. It's about balancing risk. I think I've made this joke before. If I put 20% contingency on every project, I'd never go over budget, but I probably never have another development deal ever again. So it's not that balance in the risk. And I know in the presentations we always have the known knowns, the known unknowns. And that Donald Rumsfeld quote. So it's that same idea, and I think in the end that we're all going to be OK. And again, the interest rates right now aren't terrible, that it's not great. But if you look in historic terms, there's still pretty good. It's still pretty good investment environment. Subject to the craziness that this inflation that we're just not experienced in a generation. Yeah and you know, the other thing is for almost every presentation, when I talk about industrial land prices, especially in the GTA and some of the meetings are a week apart. All I know is that somebody in the room says, you're wrong. This is the offer we've got last week or this is the asking price of this. So even with some of the things, with the interest rates and prices slowing of demand price prices are still moving. And especially based on scarcity of certain property types. So again, I'm almost every week I'm being corrected, especially with land prices. It's all about supply and demand. If there is not enough supply, the price is always going to go up. And that's why I think we're all in Canada. The fundamentals are there across the major cities in terms of supply demand driven by immigration, so we know eventually it all balances itself. The question is, how long is the pain. If we have some pain? If a recession comes, how bad is it? How long is it last and how quickly can inflation get back in order? And then we return back to normal again. And then I suspect we fast forward 10 years. We'll be here complaining that we don't have enough labor, we don't have enough supply and we don't have enough homes again. And we're in the exact same endless cycle we seem to have been in for the last 10, 15 years now, where we just don't seem to be able to catch up across Canada, albeit with those little pauses in certain areas for a couple of years here in the. So next week we're going to be doing the podcast of the next podcast will be Colin, and I made the joke earlier about his extremely good benefits package he has since he got promoted. So the next one, he's going to be talking about projects basically forbearance, liquidation, canceled projects and his experiences. He started off down in the Caribbean when things went horribly wrong. A number of years ago, I think that's probably close to 15 years ago. So he's earned his stripes in the Caribbean. He's seen some projects here, so he's going to talk about his experiences. Not so much in the negative side, but the positive side of if your project is struggling, how you can approach that to try and fix it, bring it back online and get it through to the end. So we're going to try and avoid the negativity a little bit with the thing, but that one will be interesting to talk to, though. Colin has a Scottish accent, is actually english, so you just need to remember that when he comes on, and Johannes has said he will put subtitles for Colin, so then myself and really understand what Colin saying. So Thanks, everyone. Thanks