Month: January 2021

The proposed Canada-wide foreign buyer tax could have implications for resort towns like Whistler, British Columbia, claims a Vancouver-based developer.

“I like using Whistler as an example—it wouldn’t exist without foreign investment, particularly U.S. dollars, which allowed the whole village to thrive,” Jason Turcotte, VP of development at Cressey Development Group, told CREW. “If we had tax measures in place then, it wouldn’t even exist, and now we bring blanket tax measures in nationwide and they will, no doubt, catch places like Whistler.”

Noting that B.C. has the Speculation and Vacancy Tax and Vancouver has the Empty Homes Tax, which overlap in the city, Turcotte says Vancouverites are taxed to the hilt. Moreover, he says developers have to pay the latter tax on unsold units in a condo development that’s reached occupancy, and that they invariably pass the cost on to consumers.

“You might finish a building in May and get an occupancy permit, but 40 units out of 300 aren’t sold. Chances are it will take you some time to sell the inventory,” he said. “If you sell them during the year, there’s no tax, but if it rolls into the next year and sits empty for six or more months, you pay the Empty Homes Tax, which is absolutely absurd. We’ll end up trying to pass that tax on to consumers, and it affects the cost of housing.”

He added that selling those unsold units is easier said than done, and noted that, rightly or wrongly, some developers like holding onto unsold inventory to ride the market.

“The pandemic has also made selling condos in real urban markets tougher.”

Eric Andreasen, senior VP of marketing and sales at Adera Development, another Vancouver-based firm, says that while the non-resident tax is intended to curtail foreign speculation, multiple taxes are piling on top of each other and dissuading Canadians from buying properties outside of the cities and provinces in which they primarily reside, and that can hurt renters in urban centres where vacancy rates have been low in recent years.

“Any one tax won’t have an extreme impact, but there’s a cumulative effect,” he said. “I think the [empty homes tax] will have a detrimental effect and make people think twice about making an investment with the intention of renting it out.”

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Canada’s short-term office leasing market fundamentals will remain weak through at least the first half of this year, says Morguard in a 2021 outlook report.

“In the short term, vacancy will continue to rise, as the national economy and employment levels recover from the pandemic-driven and unprecedented declines,” said the company’s report. “Rents will decline to some extent, particularly for Class B and C space. Landlords will prefer to negotiate shorter-term leases until the economic outlook improves. In short, leasing market conditions will soften over the near term, during a period of gradual economic recovery.”

The COVID-19 pandemic unsurprisingly weakened leasing fundamentals when it chipped away at private sector confidence and either scuttled or delayed businesses’ expansion plans.

However, the forecast for Canada’s industrial property sector is positive, according to the same report, because e-commerce-related activity, continued economic recovery, and low supply are creating fortuitous market conditions.

“Functional logistics and warehouse space will be absorbed at a relatively brisk pace, ensuring availability holds close to the cycle lows of the recent past in the next year,” stated the report. “On average, rents will continue to range near the cycle-high, especially for newly constructed space in major markets.”

Moreover, investors will continue pouring money into the sector because of the robust rental outlook, particularly in Canada’s major markets. Vacant space will also be vastly outstripped by demand and cause bidding wars for spaces that have long-term leases.

Headwinds in the retail sector won’t dissipate any time soon, though, says the report, as brick and mortar operations will trudge through a slow recovery. The industrial sector’s gains have largely come at the expense of the retail sector, with more businesses embracing e-commerce. The second wave of COVID-19 infections will also reverberate through this year.

“At the same time, retailers will be forced to reassess their business models and reduce store footprints, in order to prosper,” said the report. “In some cases, retailers will struggle to recover from pandemic-related losses and close on a permanent basis. Landlords will continue to face several challenges over the near term, including increased vacancy, downward pressure on rents, and the changing needs of tenants.”

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CBRE has Toronto anointed Toronto Canada’s top tech industry city, giving it a score of 87.6 in its Scoring Canadian Tech Talent report for 2020 to beat out Ottawa and Vancouver, which received 76.4 and 72.8, respectively.

Toronto boasts 250,000 tech workers—108,400 more than Montreal, which has Canada’s second-largest tech workforce—growing by 36.5% over the five previous years.

“Nationally, tech talent has increased a staggering 22.5% over the last five years. However, this growth has been uneven with most of the jobs being added in Toronto, Vancouver and Montreal,” stated the report. “While Toronto accounts for a quarter of Canadian tech talent, its tech job gains accounted for nearly half of the tech jobs added nationally over the period.

The report added that the 66,900 tech jobs added in the city between 2014 and 2019 could fill a 1 million sq ft office tower 10 times over.

“And, this doesn’t even include the administrative and managerial staff that would be needed to support them,” added the report.

Toronto is undoubtedly Canada’s tech sector epicentre, but other Canadian cities—namely Vancouver, Montreal and Edmonton—have also emerged as viable markets. Still, the technology sector comprises 8.8% of total employment in Toronto, and CBRE gave the city’s tech labour quality an A+.

“Today, Vancouver and Toronto continue to boast the lowest downtown vacancy rates in North America by wide margins,” said the report. “These conditions often forced growing tech companies to take space wherever and however available. Among major tech occupiers in downtown Vancouver, Toronto and Montreal, 49% have two or more locations in a given market. This is true for nearly 90% of occupiers with footprints greater than 100,000 sq ft.

Toronto does, however, rank fourth in cost, with talent costing around $38.2 million and rent coming in at $2.6 million. Yet, with tech employees earning an average annual salary of $84,989, they’re well-positioned to rent in a city where the mean condo rent is $2,307 and where purpose-built rentals average $1,459. With a benchmark home price of $890,400, mortgages are also affordable for workers in this sector of the economy.

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Vancouver’s office vacancy rate remains among North America’s lowest, and according to a CBRE report, the city’s thriving tech sector is a strong reason.

“On the office side of things, tech has definitely been one of our strongest growth segments over the past handful of years,” Vancouver-based Jason Kiselbach, Vice president and marketing director of CBRE Canada, told CREW. “We’ve seen big brand names move up the coast from the U.S. and set up satellite offices in Vancouver, which has led to a strong labour market on the tech side. If you have the talent, more tech companies show up and that breeds even better talent.”

According to CBRE’s Scoring Canadian Tech Talent report for 2020, Vancouver received an exceptional score of 72.8 because, among other reasons, the average annual expense of renting 75,000 sq ft for Vancouver’s tech sector is $3,484,500, which ranks third highest in Canada after Ottawa and Toronto, respectively. Moreover, the city has the lowest average wages for 211 employees in the field at $12,014,400, and accounting for 39 management-level workers, Vancouver has by far the lowest average wages at $3,772,080.

“In particular, Toronto, Vancouver, Montreal and Edmonton provide the best value in North America when it comes to cost and quality,” said the report. “All are within several percentage points of coming in at half the cost of operating in the San Francisco Bay Area.”

Kiselbach added that the city’s overall commercial real estate sector has also benefited from shutdowns in core American markets, some of which relocated film production to Vancouver and catalyzed spinoff activity in the industry like post-production editing.

“The office vacancy rate is mid-6%,” said Kiselbach. “Downtown is lower than that at 5.6%, and that increased throughout last year, but having said that, we’re still the lowest vacancy for downtown offices in Canada, and either the lowest or one of lowest in North America.”

Indeed, the COVID-19 pandemic has resulted in rising office vacancies and subleases throughout the world’s major downtown submarkets, but Kiselbach says it’s instructive to dig deeper.

“When we look at the data, subleased office space is occurring in smaller spaces, like sub-500 sq ft,” he said. “None of the medium or larger sized spaces are up for sublease, and to me that indicates that, when it’s appropriate, [companies] will encourage their employees to come back to work in the office.”

As an asset class, investor demand for offices is still robust, signifying that institutional investors and high-net-worth individuals believe in the sector’s market fundamentals. But make no mistake, the pandemic has certainly shaken those fundamentals, at least somewhat.

“Our mood at CBRE is still one that’s positive,” said Kiselbach. “I looked at that vacancy rate go up last year and now it’s an opportunity for smart money to be in the market during Q1 and Q2 of this year while the fundamentals are off a bit. Occupier decisions that were delayed through the year are coming up against their renewal dates.”

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Population growth in Canada’s urban centres decelerated between July 2019 and July 2020, according to Statistics Canada—a trend no doubt influenced by the sprawling search for affordable detached homes.

“The desire to live outside the largest urban centres was also reflected in the rapidly increasing housing costs in neighbouring real estate markets, a trend that has continued in spite of the pandemic,” said the recent StatCan report.

In Census metropolitan areas, population growth declined to 1.3% from 1.7% between July 2018 and July 2019. Toronto, Montreal and Vancouver, Canada’s three largest cities, saw positive population growth because of immigration, but they had more people moving to other regions of their provinces than moving in, with Toronto losing 50,375 people, followed by Montreal at 24,880.

“In Toronto, the net loss was mainly driven by people moving to surrounding CMAs,” said the report. “For example, the population growth in Oshawa (+2.1%)—which posted the fastest growth—was partly due to migration flows from the neighbouring CMA of Toronto.

“High population growth rates in municipalities close to the Montreal CMA, like Farnham (+5.2%) and Saint Hyppolyte (+4.1%), were also partly due to migratory flows coming from the Montreal CMA.”

However, the slowed population growth might not be as noticeable if it weren’t for the COVID-19 pandemic essentially stymieing demand from key demographical groups who comprise a substantial chunk of urban condominium apartment renters. In tandem with exorbitant housing prices in Canada’s major cities—the exodus to suburbs and exurbs began long before the coronavirus crisis, but historically low interest rates have helped homebuyers previously shafted by B-20 resume their pursuit of detached housing—the CMAs’ declining growth might look more dramatic than it really is.

“In the cities themselves, we’re seeing really soft rental markets. Rental vacancy rates are rising and rents are falling,” Phil Soper, president and CEO of Royal LePage, told CREW. “One of the mistakes people make is assuming everybody is abandoning the cities. In fact, a major contributor, perhaps the major contributor, is missing demand altogether. It’s missing demand that comes from foreign students, domestic students and new Canadians.”

Quoting StatCan and Public Safety Canada figures, Soper noted that there were 828,356 international students in Canada in 2019, and it isn’t a stretch to presume most of them study in major cities, each of which have multiple post-secondary institutions. Additionally, pandemic-induced shutdowns affect renters more than homeowners, and annual immigration quotas, which were increased late last year, have been shelved for the time being.

“Our universities are suffering because foreign students are major contributors to them, because they pay more than domestic students. Domestic students are also missing because a lot of them are taking classes online,” said Soper, adding the latter are simply moving back into their parents’ homes until they have to physically return to classes. “The federal government paved the way for students to return to Canada, and a lot of them came back in January, but most won’t be back until September when the school year starts.”

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Millennial-aged Canadians’ frenetic pursuit of ground-related housing played an outsized role in the country’s aggregate home price spiking by 9.7% last quarter over the corresponding period a year earlier, according to Royal LePage.

“Millennials are starting to have their first or even second child—they’re over 35—and our previous research showed they preferred city cores and condominiums, and now they’re looking for homes in the suburbs, like their parents did, with yards,” Phil Soper, president and CEO of Royal LePage, told CREW, adding that the trend began before the COVID-19 pandemic, but work-from-home policies and technology “super accelerated” the trend.

“Low financing costs, a healthy industry overall, and lower house prices definitely help when you move away from the city centre. Even though prices rise faster in places like Oshawa or Burlington, they’re much cheaper than legacy Toronto neighbourhoods.”

Sixty-four percent of the 62 regions in Royal LePage’s House Price Survey and Market Forecast reported annual median price gains of more than 10% for homes with at least two storeys. Canada-wide, the aggregate price of a home was $708,842 last quarter, with the price of two-storey homes increasing by 11.2% year-over-year to $840,628, and bungalows rising 10% to $592,899. Condo prices, meanwhile, only grew by 3.9% to $509,239.

In the GTA, Canada’s largest metropolitan region, the aggregate price of home jumped by 10.4% year-over-year in Q4-2020 to $936,510, with ground-related homes rising by 11.9% to $1,102,155, bungalows increasing 12.8% to $923,047, and condos increasing 3.6% to $593,811.

“Throughout the second half of 2020, buyers were looking for as much space as they could afford. While many buyers shifted their target neighbourhood away from the city centre, so few properties for sale meant that most detached listings saw multiple-offer scenarios,” Debra Harris, vice president of Royal LePage Real Estate Services Ltd, said in the report. “2020 did bring some balance to the region’s condominium market but larger units, often in the greater region, are still in high competition.”

In the Montreal metropolitan area, the aggregate price of homes rose by 12.4% year-over-year last quarter to $487,380, with two-storey homes increasing 13.6% to $619,099. Bungalows surged by 15.3% to $391,493, and condos shot up 8.1% to $367,113.

“We could have seen a price correction if buyers had left the market,” said Dominic St-Pierre, vice-president and general manager of Royal LePage for the Quebec region. “But low interest rates, combined with increased household savings from remote work and new buyer incentives, played a key role in a market that was already highly competitive before the pandemic. In the suburbs and on the Island of Montreal, activity in the single-family segment resulted in double-digit price increases in most neighbourhoods of the Greater Montreal Area.”

The aggregate home price in Greater Vancouver spiked 7.2% during the same period to $1,155,346. Two-storey homes in the region rose by 8.8% to $1,507,279, bungalows increased 6.8% to $1,265,285, and condos saw a 3.3% boost to $662,120.

“Multiple offers were common throughout the fourth quarter and almost every detached home was attracting competitive bids. Buyer confidence is strong and current low interest rates make purchasing even more attractive,” said Randy Ryalls, general manager of Royal LePage Sterling Realty. “Buyers are worried they will be priced out of the market and with our low inventory of homes for sale in the region, prices are expected to go up in the spring.”

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Ontario municipalities secured infrastructure project funding from the federal and provincial governments at the tail end of 2020, but there’s no guarantee they’ll be so lucky this year.

“Municipalities are facing the same fiscal pressures again in 2021, and we’re very much hopeful that the federal and provincial governments will come to the aid of municipalities and provide financial assistance through the Safe Restart Agreement 2.0, or any other mechanism they deem fit,” said Nadia Todorova, interim executive director of the Residential and Civil Construction Alliance of Ontario (RCCAO).

Canadian municipalities are prohibited from running budget deficits, and without fiscal aid from the two levels of government, planned infrastructure projects could get cancelled or postponed, asserts a new RCCAO report, Averting a Crisis: The Need to Protect Ontario’s Infrastructure Investments. In fact, the City of Toronto released its 2021 budget a couple of weeks ago and anticipates a $1.6 billion deficit, which it’s hoping to avoid with $856 million of additional funding—it’s already received $740 million—from the other two levels of government.

Not only will failure to financially buoy municipalities delay infrastructure projects in the MUSH (municipalities, universities and colleges, school boards and hospitals) sector, it will result in up to 117,671 job losses and imperil economic recovery from the COVID-19 pandemic.

“Investment in capital and repair construction by the public and not-for-profit sector supports approximately 91,566 direct jobs in the construction industry. Roughly 71% of these 91,566 construction jobs are supported by investments in the maintenance and expansion of infrastructure by the MUSH sector, along with cultural institutions. This represents approximately 65,012 jobs,” said the report.

“These 65,012 jobs in the construction industry support a further 29,255 jobs in the supply chain that is linked to the construction industry,” continued the report.

However, according to Todorova, the layoffs have already begun.

“We have indication from our members that they’ve laid off several hundred workers because tenders have been decreasing over the last few months,” she said.

And with construction season mere months away, the potential crisis looms large. But Todorova says there’s still enough time to make sure it doesn’t manifest.

“We’ve had great communication with both levels of government, and they understand the seriousness of the predicament,” she said. “They came together for the 2020 announcement and we hope they follow through in 2021 as well, because they understand what’s at stake and also what those jobs mean for the economy, economic competitiveness, and by extension, Canada.”

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