If change is the mark of a vibrant business climate, the Canadian real estate space can look back and celebrate a banner 2017.
From mortgage rate increases to interest rate hikes to corporate tax changes to political interference, last year challenged developers to think on their feet. This recent crop of changes came on the heels of a decade-long transformation of real estate in the Greater Toronto Area.
With 2018 now fully upon us, BDO's real estate team has come together to clarify key trends that may define the upcoming year. This look into the future is informed in part by two BDO initiatives from late last year: our Real Estate Developers Conference and a related survey conducted in the week following the conference. Thirty percent of conference attendees responded to the survey. Statistics cited are intended to provide a sense of attendees' key views on real estate development.
Barriers and Disruptors
Government policy and “red tape” were top of mind for our survey respondents, with 75 percent citing them as their biggest disruptor to development. This total easily outstripped the 17 percent of respondents who cited shortage of land as their greatest disruptor.
Many of the high-profile industry experts at the conference focused on the approval process, which they say needs to be streamlined and made more efficient, and Bill 139, which replaces the Ontario Municipal Board (OMB) with the Local Planning Appeal Tribunal. For some developers, the process has become lengthier and riskier.
“Reform is how the industry is going to change the way they deal with applications,” said Joe Vaccaro, CEO of the Ontario Home Builders' Association. “There has always been a view to apply based on what you think the best planning outcome will be, and if you don't get a fair hearing locally, you can get a fair hearing at the OMB. That is about to change, to trying to deal with it locally first and then if you don't get the desired response you can go to the tribunal.”
With this new tribunal wielding less power than did the OMB, though, developers are faced with the prospect of communities setting priorities and influencing the actions of local councils. The local application is growing in importance.
Further survey results show that 54 percent of respondents cited local government as the biggest barrier to development, followed by provincial government at 21 percent and regional government at 8 percent.
2018 has already brought a major policy change that will affect the real estate development industry. Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has announced changes to its mortgage underwriting standards — Guideline B-20 — that will further tighten lending standards. These standards came into effect on January 1, 2018, and include a “stress test” for borrowers making down payments of more than 20 percent of the home's value. Industry experts are predicting that this change will cause a contraction of the housing market, which will negatively affect home builders and land developers.
Land Scarcity and Urbanization
Over the last 10 to 15 years, developers have watched as Canadians migrated downtown. However, due to the scarcity of serviced land, this area is becoming far less attractive. In fact, only 13 percent of survey respondents indicated that they are looking to develop in the downtown core, while 54 percent hope to find success in other areas.
The Places to Grow Act, which was passed in 2006, has forced developers to look outside of the downtown core. David Charezenko, Senior Associate at Stantec noted at the conference that the government is making significant investments to improve mobility with transit hubs, and we can expect intensification to increase as markets shift around those corridors.
Nitty-gritty such as parking standards and municipal servicing agreements — especially in the transit corridors — are challenging developers in new ways. Demographics also affect developers' attempts to remain a step ahead of the market. The household unit is changing, with multi-family dwellings increasing due to the sandwich dynamic of elderly parents living with their children — and their own children staying at home longer.
Real estate dynamics in 2018 will challenge developers to come up with innovative solutions to meet the constantly changing demands of consumers.
“Change is good,” said Concert's Adrian Kozak. “We're developers — we react to change. But unpredictable change, that's extremely challenging. I believe we have a great thing going here, but we do have many challenges ahead of us, and hopefully we don't have too many changes too quickly.”
Now is the time to take a step back and fully understand your financing, valuations and forecasting. To prevail in 2018 developers must be adaptable and adjust to the changes. Finding clever solutions to offer multi-family dwellings, capitalizing on the future transit builds and benefiting from refitting abandoned builds in the city core are some of the ways our clients are modeling future builds.