PwC Canada partner and national real estate leader Frank Magliocco. (Courtesy PwC)

A general sense of optimism reigns in the North American commercial real estate industry, according to the just-released Emerging Trends in Real Estate report from PwC and Urban Land Institute.

The annual report was compiled from 930 face-to-face or virtual interviews with North American C-suite executives, 185 of them from Canada. There were representatives from large real estate organizations, including developers, institutional investors, real estate investment trusts and others, as well as tenants. The results of 1,200 surveys, including 375 from Canada, were also used.

PwC Canada partner and national real estate leader Frank Magliocco told RENX past reports touched on trends that were starting to take shape and COVID-19 accelerated them significantly.

While environmental, social and governance (ESG) is becoming a bigger part of long-term strategies and value creation within the real estate industry, it still plays a more important role with institutional investors than with private — many of whom are doing more talking than acting, according to Magliocco.

“They want to insure that there’s true return on investment before they invest in those costs. If you’re talking about homebuilding, there’s not that return. Until the consumer says they will buy ‘That house over this house’ or ‘That condo over this condo’ because of its ESG characteristics, and they’ll potentially pay a little more because of that, it’s not going to infiltrate down.”

Proptech has reached a level of acceptance, but there’s still a lot of growth potential for the sector and companies involved with it as both providers and users, according to Magliocco.

This increased openness to technology, data and analytics is, however, accompanied by growing concerns about cyber-security.

Industrial and retail

Due to the accelerated dependence on e-commerce during the pandemic, industrial facilities used for warehousing and fulfillment remain at the top of investor want lists. As a result, the sector is seeing increases in pricing, rents and new developments.

E-commerce will continue to grow, according to those interviewed for the report, which bodes well for industrial assets.

Lines also seem to be blurring among warehousing, fulfillment and retail uses for properties. Suburban malls and big box stores were among the hardest hit by pandemic lockdowns and could be at least partially transformed in order to house goods before last-mile delivery.

Reinvestments are being made by retailers to further support their e-commerce and digital capabilities.

Necessity-based retail, including grocery stores and pharmacies, remained open and continued to perform well even during the height of COVID-19 precautions.

High street and discount fashion stores have done OK, but categories in between have been and likely will continue to have problems, according to Magliocco.

As Canada reopens and the economy begins to rebound, foot traffic will likely increase. Rezoning or intensifying retail properties to add multiresidential housing or office space can help and is becoming more common.

Mall owners need to bring in a more robust mix of tenants to draw customers, and those owners and tenants also need to create experiences or services to keep them coming back.

“If you’re the No. 1 mall in a market, you’re going to do well,” said Magliocco. “If you’re the No. 3 or 4 mall, you’re going to suffer.”

Office

The report showed divergent views on the future of office space. Some people think usage will return to pre-pandemic levels, while others believe increased working from home will be a more permanent structural change.

Many workers remain hesitant about returning to offices and prefer a hybrid arrangement allowing them to work from home at least part of the time, as they’ve been doing full-time through the pandemic.

There was no definitive view from interviewees, however, that there will be a huge reduction in terms of office space needs.

Sublet office space came online early during the pandemic, but has disappeared as tenants took it off the market after weighing their future options.

Medical office space has been a hot commodity and suburban office properties have benefited from a downturn in downtown buildings.

Interest in office investment waned during the pandemic as people were being cautious about the asset class, but it has rebounded a bit this year, according to Magliocco. Those invested heavily in office may rotate out of that allocation somewhat and move into other asset classes.

“When retail wasn’t looking good, people were repositioning their portfolios if they thought they had too much exposure to retail,” said Magliocco.

“Any good real estate owner does that, regardless of what’s happened through COVID. They always look at their portfolios and re-imagine them to see how they can fix and adjust them.”

Housing

Some developers are cautious about starting new multiresidential housing projects, given cost uncertainties, but it’s still seen as a strong category where demand will remain steadfast as people struggle with home ownership affordability.

“People have been gradually moving away from the central core because of the affordability issue, but what we’ve seen now in some of these smaller markets is that affordability is becoming an issue there as prices start to ramp up,” said Magliocco.

High-rise towers are regaining popularity, as people who were hesitant about living in the towers when COVID-19 hit now feel more at ease.

Magliocco expects an increase in permanent renters due to housing affordability issues, and he expects the purpose-built rental apartment sector to grow.

There’s a growing interest in single-family rental housing as a means to offset ownership affordability challenges.

However, interviewees in the report were divided on whether it can be as successful in Canada as it has been in the United States, particularly in the Sun Belt.

Some interviewees said it would be difficult to make single-family rental housing work in Canada because of high land prices and harsh winters that will increase maintenance and operating costs.

Others felt a good operator could pull it off successfully and serve those who want to live in a single-family home but can’t afford to buy.