Real Estate Valuations : The Driving Forces

Published June 22, 2023

Since the Global Financial Crisis in 2008-09, the real estate industry had operated within a favourable macro-economic environment characterized by easily accessible capital, low interest rates, and stable inflation. In that benign macro-environment, the valuation of property was given a gentle tailwind to allow owners to focus solely on growing their future cash flows. That environment, although a positive influence, took the backseat and real estate thereby experienced steady income growth and rising valuations.

Today, those dynamics are changing and reminding the industry that real estate values and performance are never solely determined by property particulars; no property is immune from the driving force that is the macro-economic environment.

This whitepaper sets out to describe the most critical and ever-changing forces influencing the value of real estate in Canada. The key drivers of value that will be highlighted are the under-rated significance of liquidity cycles (i.e., the availability of capital) and economic growth cycles that together characterize the macro-economic environment. This outside force provides the underpinning of any property’s ability to grow future cash flows as well as determine where cap rates may trend. The paper will also examine the importance of replacement costs to determine scenarios when this “old school” metric has a more significant influence on real estate valuations. Lastly, the analysis will culminate to provide food for thought about how best to consider these forces in navigating through the current market conditions.

We invite you to learn more about this subject by reading our latest white paper.

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