Month: November 2020

A surge in Canadians’ disposable incomes and a decline in their spending habits has resulted in approximately $170 billion of surplus of cash, $90 billion of which is tied up in households, according to a CIBC report.

The COVID-19 pandemic was the impetus for reduced consumer spending, but with the addition of the government’s pandemic emergency programs, which bolstered incomes, the amount of money Canadians saved skyrocketed. The report noted that the excess cash—the other $80 billion is held by businesses—which is about 4% of consumer spending, is a record.

“That spike in disposable incomes coincided with a notable decline in spending, which resulted in the savings rate surging from 3.6% to 28.2% as of June,” read the report. “Since then, government support has become increasingly more tailored to those who need it the most, while the re-openings have seen a nascent recovery in consumer spending. Using US data for the third quarter as a guidepost, the Canadian savings rate likely fell to 13% in Q3—still miles above the 3.6% level seen prior to the pandemic. With the second wave of infection upon us, that rate is likely to remain elevated during the winter.”

The report’s findings are all the more bizarre considering the economy is still reeling from pandemic-induced business shutdowns this past spring, and yet Canadians have never been more flush. But upon closer examination, low-income households accounted for the overwhelming majority of job losses in Canada, and their consumption habits didn’t much diminish as they continued buying essentials. However, the majority of the surplus money belongs to mid- and high-income households, which curtailed their non-essential outlays.

“We do not have current data on spending by level of income for Canadians, but utilizing high-frequency US data, we learn that spending amongst high-income households is currently 10% below its January level—notably weaker than the 3% drop seen amongst low-income households,” said the report. “With the happy days of summer over, it is reasonable to assume that mid- and high-income households will, in fact, reduce consumption of nonessentials again.”

The report also predicted that consumption growth will decelerate while incomes will stay elevated because of both the Canada Recovery Benefit program and Employment Insurance, which will cost $17.9 billion and $13.5 billion, respectively, through the next two years, and because of new job creation.

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Uncertainty is a dominant theme going into 2021, according to a new report from PwC, but there are some sure bets.

According to PwC’s Emerging Trends in Real Estate 2021 report, which studied residential and commercial property markets in the U.S. and Canada, the COVID-19 crisis has created a scenario in which so-called “alternative assets,” or niche sectors, have emerged as robust income-producing vehicles. Single-family rental housing, suggests the PwC report, is a safe asset class going into 2021 because, as more people work from home, they will desire more space.

That partially explains why condo markets in major Canadian cities are feeling the pandemic’s squeeze. Although single-family detached houses on the peripheries of Toronto and Vancouver are selling quickly, the laws of supply and demand dictate that most people who live in them will need to rent, as the PwC report believes they will.

Moreover, multifamily housing in Canada’s expensive cities will always be in demand, and PwC advises that it’s a safe asset in which to invest in 2021.

“Although some pandemic impacts—notably, reduced immigration, the desire for more size, and unemployment—may put a damper on demand for very dense housing types, interviewees emphasized that shelter remains a core need and noted the stability that the multifamily category can offer right now,” the report read. “But demand may shift, with renters and homebuyers looking to live in townhouses and mid-rise buildings rather than larger towers that have been the trend in urban centers in recent years. Interviewees also emphasized that the best prospects are for more affordable multifamily housing options, especially in light of uncertainty about jobs and the economy.”

Outside the residential market, investors would be wise putting their money into the industrial sector, particularly warehousing and fulfilment facilities, which can’t be built fast enough as e-commerce continues supplanting brick and mortar retail. Although the trend began before the pandemic, it has certainly become exacerbated by it.

“This category topped the list of both investment and development prospects in our survey this year,” read the report. “The growth of e-commerce is a significant factor, but interviewees also cite supply chain disruptions during the pandemic as a key contributor, since some companies respond to these challenges by holding more inventory.”

Facilities that offer last-mile delivery in urban areas, the report cited interviewees as extoling, offer value because they’re rapid delivery solutions.

“The interest in warehousing and fulfillment is consistent with interviewees across the country, although certain centers—notably, Calgary, Ottawa, and port cities in Atlantic Canada like Halifax—have particularly strong sentiment. The biggest challenge is finding available space, although some interviewees mentioned opportunities in adapting mixed-use properties to incorporate fulfilment.”

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The projection for rental housing demand in Ontario has doubled in a few short years to create a supply gap north of 40,000 units, driven by a propitious economy, falling homeownership rates and mass immigration, according to a report from Urbanation and the Federation of Rental-housing Providers of Ontario (FRPO).

Net migration to the province has surpassed 200,000 people in each of the past couple of years and, in the process, doubled the five-year average. Moreover, the number of projects in the development pipeline has risen, and while the COVID-19 pandemic has, in the interim, stifled the delivery of both condo and purpose-built rental units to market, the supply chasm is, and will remain, wide.

“Ultimately,” read the report, entitled 2019 Ontario Rental Market Study: Revisiting the Supply Gap & Opportunities for Development (Summer 2020), “it has become evident that the current pace of purpose-built rental development and the amount of supply derived from condominium investors is grossly insufficient to bridge the gap and satisfy rental demand over the longer-term in the province.

“Under the updated outlook for rental demand and the improved trajectory for supply, it is estimated that Ontario will be underbuilding new rental housing by a magnitude of over 20,000 units per year during the period to 2031, which will occur even under an optimistic scenario for rental housing construction.”

The aforesaid “optimistic scenario” pertains to recent housing policies that would see rentals—again, condo and purpose-built units—double to 27,500, which would cut the deficit by a third from 2027-2031.

Perhaps unsurprisingly, the Urbanation and FRPO report stated that, short term, the majority of these rental units will be built in the Greater Toronto and Hamilton Area, and specifically in and around Toronto, where monthly rents have averaged at least $3,000.

“In the medium-term, new purpose-built rental supply based on current development applications will remain mostly centred in the City of Toronto, although projects will be more evenly dispersed across the city,” continued the report. “The 905 Region, however, will continue to represent a marginal share of overall rental development based on the current pipeline of planned projects. Furthermore, only 19% of total proposed purpose-built rentals were approved for development.”

Urbanation, for its part, identified 950 sites, which presently hold purpose-built rental buildings, that could, through infill development, add 176,074 units.

“Most identified City of Toronto sites were located outside of the downtown core in more affordable areas, and 35% of total potential infill units in the GTHA were located within 800 metres of a current or future rapid transit station,” added the report.

Urbanation determined that only 8% of such sites are affixed with development applications, meaning that 161,266 units could still be built elsewhere.

Unfortunately, such a promising opportunity comes with a caveat: the economics, even if there were zero land costs, wouldn’t justify redevelopment, claims the report, because achievable rents outside Toronto’s core wouldn’t offset development and operating costs.

Still, the idea has merit.

“However, the sheer size of this identified inventory creates an important source of potential supply that should not be overlooked,” said the report. “Although the assumptions used in identifying candidate sites and development capacity can be considered conservative, even cutting the calculated additional supply by one-third leaves roughly 100,000 potential units to be targeted for rental development, noting that these figures did not account for additional infill sites located outside the GTHA.”

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