No shortage of opportunities in Canadian real estate

Restrained investment capital is one of the biggest obstacles to solving Canada’s shortage of residential housing, says Steve Marino, executive vice-president of portfolio management with GWL Realty Advisors.

High interest rates have locked up capital, he said. That and other issues, such as a growing labour shortage and municipal red tape, have combined to crimp the supply of residential housing and create market dislocations.

“It’s a bit of a game of dominos, if you will, in terms of how they’re all kind of impacting one another,” he said.

He believes an unlocking of investment capital is in the cards as the market begins to anticipate interest rate cuts. That, he said, will open up greater opportunities in all real estate classes, and help resolve the chronic shortage of residential housing in Canada.

Marino said data from Canada Mortgage and Housing Corporation in 2022 showed a need for 5.8 million additional housing units by 2030 to return affordability to the housing market.

“There are about 2.3 million units currently planned for delivery by 2030,” he said. “So that leaves a delta of about 3.5 million units that our industry needs to deliver, in order to really help address what we would describe to be the affordability challenges that are in place.”

He said the recent removal of GST on new rental construction projects has been helpful, but other roadblocks need to be removed.

“Regrettably, increasing cost of capital, labour shortages [and] the municipal planning approval process continue to be real headwinds to helping to affect the volume of new delivery that we need,” he said.

“We really do need more of a collaborative approach across multiple layers of government to generate a more timely solution to the problem at hand,” he said. “As an industry we need to do more, and we need to do it at pace in order to really curb this issue.”

While a supply imbalance theoretically offers greater pricing power to landlords, it doesn’t contribute to making Canadian cities livable and a more attractive destination for immigrants.

“I’m somebody who thinks that, ultimately, the success of real estate really depends on the success of our cities, and having successful cities that are inclusive, that provide places to live, work and play for all of our inhabitants really help to create successful communities,” he said.

“If we can’t create successful communities, immigrants will go elsewhere, and some of our cities won’t be as successful or viable as they need to be.”

On most other fronts, Marino said the Canadian real estate industry is performing well, and investment opportunities abound.

“For the most part the Canadian fundamentals are very strong, especially in three of the four asset classes,” he said: industrial, residential and retail.

Industrial is “one of the stalwarts” with good market conditions, vacancy rates near historical lows, and significant new supply coming online in major metropolitan areas.

The current slowing of leasing activity offers a healthy pause to ensure market stabilization.

Purpose-built rental apartments is a popular alternative for prospective homeowners who are priced out of single-family dwellings. And the retail sector – especially neighbourhood grocery-anchored shopping centres – also continues to be exceptionally strong, he said.

“The ease and convenience of these neighbourhood shopping centres have really been well received by both tenants and by society at large,” he said. “We are seeing vacancy rates continuing to be very healthy in that regard.”

The office sector remains challenged by work-from-home trends, but that is lifting, he said.

“I think we are starting to finally see some more meaningful recovery in the office sector,” he said. “Certainly the number of people [working in offices, as opposed to at home] is approaching pre-Covid levels. It’s starting to feel like it’s getting back to where it was.”

Meanwhile, the increasing competition for tenants is leading to capital expenditures on building amenities and upgrades, he said.

Marino believes opportunities exist in the Canadian real estate market for investors willing to research the fundamentals in different regions and real-estate assets. The most relevant question is what they can do to improve and reposition a potential asset.

“What are the areas and buildings that have rents below market, where an investor can step in, invest capital, and create value through that equation,” he said. “You know, really seeing where the puck is going to be going.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.