Eight things real estate investors should watch for in 2018

1. Sustainable growth

The good news for 2018: Solid growth should continue in the commercial real-estate market, while the residential market is likely to simmer along gently – both signs of healthy and sustainable growth in GDP and employment.

Canada is expected to end 2017 having grown about 3 per cent, outpacing both the G-7 average and the U.S. economy, Perspective notes. But, while debt-laden households did most of the heavy lifting in 2017, this dependence on consumer-driven growth is anticipated to ease in 2018, the report says.

“While this strong showing over the past year signals that the Canadian economy is heading in the right direction, real GDP growth is likely to ease to a more sustainable pace of around 2.0 per cent in 2018,” it forecasts.

2. More jobs, newer jobs

Employment trends are being driven strongly by demographics, particularly the growing influence of millennials in the workplace, many of who are gravitating to new economy jobs in the urban cores. The Perspective report says employment growth momentum in Canada, particularly in the expanding tech sector, has enabled absorption to keep pace with the new supply of office space.

The continued strength of the financial services industries, combined with the emergence of an expanding tech sector in Canada’s major cities continues to drive vacancy lower and rents higher in most markets outside of Alberta. Toronto, Vancouver, and Montreal have been the primary recipients of this surge for space, but Waterloo and Ottawa have also benefitted from tech-driven office demand. 

3. Suburban opportunities

This new-economy jobs surge in downtown areas – and resulting upward pressure on prices – means more companies will look to suburban areas to house their operations.

However, not all suburban locations are created equal. Suburban areas that possess “urban-like” characteristics, such as access to public transit, restaurants and retail amenities within walking distance, and adequate parking are garnering the bulk of the demand. 

4. Signs of life in the oil patch

When it comes to the once-thriving energy-industry markets that were hammered by the oil-price plunge, there’s some cause for optimism.

The outlook for the energy sector is still tentative, but crude oil prices have stabilized and could see moderate gains in 2018 as global economic growth improves. Evidence of an economic recovery has emerged, helping to slow rising vacancy in the office market, but a recovery to [a] balanced market is still a long way off.

5. Watch those interest rates

The Bank of Canada’s next moves on interest rates is one of the variables likely to affect the real estate and broader markets.

“One of the questions for investors these days is how higher interest rates will impact cap rates and valuations,” Perspective says. “Elevated debt levels and rising interest rates are expected to slow discretionary spending as households focus on ‘normalizing’ their balance sheets.”

However, it adds: “Fortunately, the recent momentum in wage growth should help mitigate some of these headwinds and help sustain a more moderate pace [for] retail sales growth.” That’s good, if not stellar, news for the retail sector – a key factor to consider for investors in commercial real estate and the broader equities market.

6. Residential ripples

Canada’s housing market may also throw some curveballs during 2018. Perspective notes that new, more stringent federal mortgage rules came into effect at the start of 2018, after which applicants for an uninsured mortgage will need to qualify at higher interest rates. For an average priced Canadian home of roughly $500,000, this will require an additional $16,000 of annual income, an 18-per-cent increase.

The new rules, along with record prices in major cities, have sparked concern about first-time buyers, particularly millennials, being priced out of the market.

7. Dollar signs

The value of the Canadian dollar is also something to watch,  if the Canadian dollar were to remain below 70 cents, that would probably drive up housing prices quite a bit, because it would make the price of Canadian properties much cheaper for foreign buyers, which would be one source of demand.

Prof. Raiha expects 2018 will “probably end up being a fairly modest year in terms of an appreciation. I don’t anticipate a return to the kind of record-breaking years that we had in 2015, 2016, in terms of really sky high, double digit rates of appreciation on real estate in Canada,” he says. 

8. NAFTA: Will he or won’t he?

Trade tension in North America is growing, injecting risk factors that investors cannot ignore. Canada signaled its intention to play tough with the Trump administration in early January, submitting a wide-ranging complaint to the World Trade Organization about U.S. use of punitive tariffs; and the “will-he-or-wont-he” speculation on President Trump’s threat to throw out NAFTA continues to cast a shadow over 2018. The Perspective report warns that the trade pact’s renegotiation adds more uncertainty and an element of risk to the Canadian economy, which could impact real-estate investment