Canadian developers navigate uncertainty

Canadian developers navigate uncertainty

Global survey finds more consistent attitudes than distinguishing differences
Monday, September 28, 2020

Canadian developers are generally less focused on interest rates and more concerned about tariffs than their peers elsewhere, a new survey of more than 400 global players with at least USD $200 million worth of projects in progress in 2020 reveals. While in sync with the global view that public investment in infrastructure and tenants’ expectations are the two most influential forces driving development decisions, Canadians assign even more weight to these considerations than respondents from most other global regions. They also stand out for a higher propensity to use private equity to fund projects.

The bulk of the findings in the newly released Altus Group Global Property Development Trends Report are tied to opinions collected in early 2020 before COVID-19’s full hit landed in the world’s commercial real estate markets. Accordingly, Altus analysts conducted in-depth interviews with seven prominent senior executives, including two Canadians, in July 2020 to explore how that sudden impact may have heightened existing pressures or undermined the optimism expressed earlier in the year — then concluded that the development sector has not dramatically altered course for now.

“It’s evident from the report that the global development sector is facing a complex set of challenges due to long-term market pressures, many of which are exacerbated by the pandemic and its evolving impacts,” says Scott Morey, executive director at Altus Group. “However, the industry is recognizing opportunities balanced with a cautious approach.”

Canada is in line to receive a large share of the investment represented in the report. Seventeen per cent of respondents have projects underway or in the pipeline in this country, making it the second most active global region after the United States, where 31 per cent are engaged. Respondents also have projects, in descending percentages, in Australia, the United Kingdom, Germany, France, the United Arab Emirates, Singapore, Thailand, Vietnam, Columbia, Brazil, Hong Kong and Mexico.

Looking at the entire global picture, escalating project costs, environmental regulations and labour shortages in the construction trades are ranked the top three challenges that the industry faces. More than two-thirds of respondents acknowledge that the risk of economic downturn is colouring their decisions about new construction investment. Many are also looking to snag some potential bargains if or when the pandemic fallout continues.

“Macro uncertainty due to the pandemic has resulted in ‘lots of dry powder,’ or cash reserves, waiting on the sidelines. Developers expressed surprise that significant distressed asset opportunities have not yet emerged,” the report states. “They are focusing on continuously evaluating conditions, being prepared and waiting attentively for more opportunities to emerge.”

Meanwhile, the already significant sway of infrastructure investment is expected to become even more dominant as governments attempt to stimulate a resurgence of jobs and spending. Public transit projects, in particular, are deemed critical determinants in the pattern of and demand for surrounding urban development. Seventy-four per cent of survey respondents ranked infrastructure as a major influence on development planning — a notably larger share than the 60 per cent who flagged the global economic outlook as a factor.

Survey respondents would likewise welcome reduced development charges, a more straightforward approvals process and public-private partnerships. These are identified as the top three actions governments could undertake to encourage private investment, with two of those measures also involved in addressing construction project costs. Government investment in training and national immigration policies are also expected to factor in expanding and maintaining a required construction labour force.

“Uncertainty related to government action and inaction has amplified views both positively and negatively,” Altus analysts surmise. “While government has been integral to establishing a floor for economies, there are concerns about the various stimulus measures in place and uncertainty regarding what may happen when these measures end.”

Outlier on weight assigned to interest rates, cross-border trade issues

Drilling down to regional perspectives, Canadian developers are largely in sync with many global trends, but are outliers in a few others. Interest rates are less likely to be unnerving in Canada, where only 39 per cent of respondents deemed them a significant influence on development planning decisions versus the global average of 51 per cent. However, cross-border trade issues, which nearly 51 per cent of Canadians called significant, raise major concerns for just 43 per cent of the overall survey base.

Canadian respondents were somewhat less likely to give significance credence to the global economic outlook — 57.4 per cent versus a global average of 60.2 per cent. They were also less likely to see climate change as an influential factor — 54.1 per cent compared to a global average of 56.2 per cent.

Canadians developers have more experience using private equity to fund new projects, with 34.4 per cent reporting they have done so on multiple occasions compared to the global average of 25.3 per cent. An equal number of Canadian respondents have relied on private equity or private debt to fund one project — 27.9 per cent — while 21.3 per cent report using private debt for more than one project. That, too, is higher than the global average of 17.6 per cent.

Meanwhile, the risk of an economic downturn is more likely to weigh in Canadian decision-making about new construction investment (73.8 per cent) versus some of their global peers. Notably, only 56.1 per cent of respondents from the U.K. voiced the same hesitation, while 68.1 per cent of respondents did across the entire survey base. In contrast, Canadian participants exhibited less consternation about choice of asset type, with only 39.3 per cent reporting that a downturn could affect the decision, compared to 68.3 per cent of respondents in the U.K. and 59.3 per cent in the U.S.

A somewhat higher percentage of Canadians deemed escalating project costs and environmental regulations to be key challenges. They were less concerned about labour shortages in the construction trades, with 57.4 deeming it a major challenge compared to the global average of 65.1 per cent. That stands out even more in contrast with Australia, where 66.7 per cent of respondents called trades shortages an impediment, and the U.K., where 70.7 per cent of respondents voiced concern.

When it comes to adopting strategies and practices to address business challenges, Canadians are among the most proactive adherents of sustainable development, staff training and upskilling, and digital transformation of back offices. They outdistance their U.S. neighbours in the uptake of advanced construction practices — at 42.6 per cent versus 31.9 per cent — but trail the pace set in Asia, Latin America, Australia and the United Kingdom.

COVID-19 refocusing the environmental lens

While ahead of most other global regions on the sustainable development front, the 49.2 per cent of surveyed Canadian developers who are delivering sustainable projects still lag Australia’s 57 per cent quotient. Nevertheless, Altus analysts speculate COVID-19 will push up that tally, everywhere, in the years to come.

“Interestingly, the lens on what ‘environmental’ means has shifted focus,” the report muses. “The top priority and focus is human health and customer well-being. Sustainable real estate development is now seen as an opportunity.”

Canadians developers surpass the global adoption rate for eight of 11 identified construction and project management technologies including: smart buildings; construction site robotics; building information modelling (BIM); process automation; virtual reality; drones; geospatial; and connected job sites. Thus far, though, all are a long way from the market standard with no more than 39 per cent of Canadian respondents having implemented any of them.

Canadian developers fall behind the global average in adopting the two least common technologies: 3D printing and 5G. Just 11.5 per cent of Canadian respondents have adopted 3D printing compared to the global average of 18.4 per cent; 3.4 per cent of Canadians have implemented 5G versus 5.1 per cent of total respondents.

Canadian take-up of prefabrication is slightly below the global average — reported at 28.3 per cent versus 31.2 per cent across all respondents — and well behind the U.S. adoption rate of 41.6 per cent.

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