Urbanization is the new normal, according to PwC and the Urban Land Institute’s Emerging Trends in Real Estate 2015 report.

The publication, now in its 36th year, is an industry outlook for the next 12 to 18 months. The findings are based on the views of more than 1,400 industry experts, including commercial/institutional real estate developers, and do not reflect the authors’ opinions.

Canada isn’t alone in witnessing people moving into city cores in droves, says Chris Potter, leader, Canadian real estate tax practice, PwC, but the trend’s pace has increased here in recent years. The trend can partly be attributed to the desires of millennials, though he points out that other demographic groups may share in some of their attitudes.

“Some of it has to do, I think, with not wanting to have long commutes, wanting to have a lifestyle that allows them to live, work and play in the same community,” Potter says.

The trend can also partly be attributed to legislative changes, such as Ontario’s Greenbelt legislation, which is designed to prevent sprawl, adds Frank Magliocco, Canadian real estate leader, PwC.

“It’s pushing developers into the city to develop, and as they develop big condos and high-rise towers that are creating the workforce, we’re finding whether it’s the businesses or retailers that are following as well,” he says.

And as the flow of people downtown into new residential developments spurs complementary commercial development, industry lines are becoming blurred as builders increasingly pursue mixed-use opportunities.

The report predicts an adjustment period will occur as tenants move out of older buildings and into new developments. Suburban office properties are expected to be especially affected and continue to face challenges in 2015.

Vacancy rates may increase, while market rent appears poised to become dynamic. The report points to four different lease rates: those for first-generation space, turnkey sublet space, vacant sublet space and renewals.

Owners of older buildings may opt to upgrade their properties or re-position their properties as a low-cost alternative, the report says.

However, the report also found companies are willing to pay a premium for new space in their efforts to attract and retain talent. Desired features include location close to employees, amenities workers want, flexibility to implement new technology and efficient use of space. In many cases, when companies move into new space, they also reduce their real estate footprint.

New commercial development is a clear response to this demand, as evidenced by how much of these spaces is preleased, the report says.

The report identified potential opportunities for suburban office properties located along key transit lines. If congestion continues to worsen, it says, suburban office properties may benefit from companies that want to accommodate their workers outside of the core. As a strategy, some landlords of office properties located outside the immediate core are offering their tenants private bus service to shuttle employees from transit hubs.

The report flags Generation Z entering the workforce as a coming potential challenge, as it will force companies to accommodate the diverse needs of four generations in one space — including baby boomers, Gen X and Gen Y. The preferences of younger workers, the reports says, which have driven the trend of open and collaborative work environments, may shift. New flexible workspaces may be the answer to changing needs.

A broader question that looms is, what will millennials decide to do in the next seven years? The report highlights two decidedly different paths: millennials may move to the suburbs to attain more and affordable space, or they may follow the trend of their counterparts in other countries of remaining in the core and adjusting to smaller square footage.

If this year’s report is any indication, whichever route millennials predominantly take, it is likely to influence future trends in commercial real estate.

Regional breakdown

The outlook for the Canadian real estate market differs somewhat regionally. As Canada’s economic engine has shifted from central Canada — namely Ontario — to western Canada, so has the country’s real estate market, said Magliocco.

“Calgary, Edmonton, Saskatoon [are] strong real estate markets,” he said, “and the outlook for that is continued strength in those markets.”

Indeed, the City of Calgary tops the report’s ranking of the 10 Canadian markets to watch in the coming year. The city is experiencing an office construction boom. In the last five years, construction has delivered seven million square feet of office space, with another five million square feet in the pipeline.

Strong demand for new space means it is quickly absorbed by the market, with around two-thirds of future office space preleased. One concern in this market is that it’s susceptible to a downturn in the resource industry, which is driving most of the demand.

Toronto, number three on the list of markets to watch, is continuing to see an influx of tenants relocating to new properties in the core with the goal of shrinking their office footprint. Some worried that owners of vacated office properties may have difficulty re-leasing their spaces, but most believed suburban office properties would be the main casualty as migration to the core continues.

Vancouver is ranked fourth on the list of markets to watch. With a handful of new office towers on tap for the next year or so, some are concerned about oversupply of office space leading to downward pressure on prices, with some foreseeing the potential for AAA office space to lease at B rates.

In Montreal, number six on the list of markets to watch, the office segment is expected to coast.

Further east, Halifax comes in at number nine on the list of markets to watch. Halifax’s office market is described as “bright” thanks to the many head and regional offices located in the city. New offices under construction are expected to easily attract tenants, but like many other markets across the country, the impact of this on older offices is a concern.

Michelle Ervin is the editor of Canadian Facility Management & Design.