market drivers

Developers weigh in on market drivers

Canadians more wary than global peers of trade policy and the approvals process
Friday, September 21, 2018

Canadian respondents to a global survey of real estate developers with at least USD $250 million (CAD $322 million) worth of projects in progress are generally in sync with their international peers in gauging positive and negative market influences. Recently released results from Altus Group indicate that, collectively, the 400+ C-suite and senior executives see more opportunity than threat in technological advancements, social change and a less economically stratified society.

Earlier this year, the international research firm, IDC, polled these leading real estate players on 11 forces that could potentially affect development demand, developers’ proficiency in supplying product and/or their return on investment. A largely optimistic outlook emerges, albeit with the qualification that respondents were asked to weigh in on market drivers like housing affordability and investment in public infrastructure that, in some cases, may be more theoretical than real.

In addition to its global makeup, the survey sample represents a diverse portfolio mix that offers a revealing snapshot of where global investment is going. Notably, mixed-use development is the most active sector, capturing 20 per cent of development underway.

Presuming that residential is a significant component of those mixed uses, that further underscores housing’s prominence. Stand-alone multifamily rental and ownership projects account for another 28 per cent of reported activity. The remaining breakdown is: 16 per cent office/commercial; 15 per cent industrial; 12 per cent retail; 7 per cent hotel; and 2 per cent government or institutional projects.

Positive, negative and neutral factors

A significant majority of the survey participants endorse housing affordability, immigration, environmental regulations, public infrastructure investment and the expectations of the millennial demographic as positive impacts. Only a minority view any of the 11 market drivers as an outright negative impact, while upwards of a quarter of respondents decree that six of the 11 forces wield no sway over the development pipeline.

More evidence of housing’s relative importance might be drawn from the fairly low level of threat attached to changing commercial occupancy patterns, such as the rise of co-working space. The greatest share of respondents — 46 per cent — categorize these trends as positive; 35 per cent call them negative; and 19 per cent say they have no impact.

Respondents are most blasé about transportation technology, such as electric vehicles, autonomous public transportation and the spectre self-driving vehicles. Fully half of them attribute little clout, good or bad, to these emerging trends.

Perhaps more surprisingly, 31 per cent of respondents are unfazed by taxes and 28 per cent identify the development approval process as a neutral factor. However, this seems to complement other findings of Altus Group’s trends report.

“Government regulation is a barrier to market entry, but if already developing in a market, it has a lesser impact on a firm’s decision to leave,” the report concludes. “Fifty-nine per cent say that government regulation has a high impact on their desire to enter a market, but only 26 per cent say that government regulation has a high impact on their desire to leave or avoid a market.”

Reflective of a dataset with interests in North America and Europe — 24 per cent of respondents are active in the United States; 17 per cent in Canada; 12 per cent in the United Kingdom; 11 per cent in Germany; and 10 per cent in France — cross-border trade policy triggers more concern than the 10 other market drivers addressed in the survey. More than a third of respondents suggest it has a negative impact on projects and decision-making.

“Rising trade tensions throughout a number of regions globally are adding to cost pressures in numerous markets, both real, via disputes and tariffs (e.g. steel, rebar and other commodities affected by recent tariff actions), and speculative, based on continued uncertainty about future implications of changes to economic, political and trade agreements,” the report observes.

Canadian sentiment diverges from the pack

A further breakdown of national perspectives reveals that Canadian respondents are the most pessimistic, with 40 per cent deeming cross-border trade policy to be a negative force and only 20 per cent calling it positive. In contrast, 40 per cent of American respondents see cross-border trade policy as positive and 31 per cent see it as negative.

Canadians also voice the strongest reservations about the development approval process — with both the highest percentage of respondents, at 38 per cent, categorizing it as negative and the lowest percentage, 30 per cent, calling it positive. Meanwhile, the majority of respondents from the U.S., the U.K. and Europe perceive the development approval process as positive. Michael Brooks, chief executive officer of REALPAC, is quoted in the report, offering further context for Canadian misgivings.

“In addition to continuous cost pressures on development generally, many cities are dealing with unaffordable housing. This disparity can often start at the development stage with unexpected taxes and charges that often get passed onto the end-occupier through increased cost or rent,” Brooks notes. “There is an increased imperative for policy makers to be upfront and clear about all fees and charges developers will be accountable for when embarking on a new project. This will help ensure they are developing appropriate project budgets and will move the entire process along with less delay.”

Although a majority of Canadian respondents identify environmental regulation as positive, they are somewhat less enthusiastic than their peers from other global regions — registering a 65 per cent approval rating versus 80 per cent of respondents from the U.S. and 83 per cent of participating Europeans.

Meanwhile, Canadians are most upbeat about immigration, even in a broadly supportive field, with 85 per cent of respondents calling it positive and only 5 per cent judging it negative. The largest proportion of detractors, deeming immigration negative, are Americans (13 per cent) and Australians (12 per cent). The smallest share of respondents viewing immigration positively are Europeans (73 per cent) and Asians (74 per cent).

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