Retailers Eye Summer Resurgence
Changemakers Say Now Is the Time: Some things will never be the same and that’s good
Hotels Ready for Domestic Travel Boom
ADVANTAGE
Spring 2021
Jab Jealously: Life Sciences Sector Gets a Big Boost From COVID-19
McMaster Innovation Park Rendering
www.cbre.ca
Magazine
A Note from Werner PRESIDENT & CEO
Our second issue of Advantage Magazine marks the start of spring and what is hopefully the final act of the pandemic. We look at what lies ahead with commercial real estate stories and reflections from CBRE advisors and businesses hoping for that coveted “return to normal.” Major brands are readying new stores on Canadian high streets in anticipation of a resurgence of in-person shopping. Hoteliers are expecting a boom in domestic travel over the summer and companies are rethinking office space to attract employees back and make better use of those spaces. The past year has also drawn attention to issues around race and inequality. For this, there is no going back to anything. It’s essential that all businesses and communities forge ahead with real and lasting change to equalize opportunities and experiences. We have two stories that show how underrepresented groups are helping change commercial real estate for the better. We hope that you, your families and businesses are staying safe, but also hope that you are feeling more optimistic about the future on many fronts. This collection of stories reminds us that there are better days just around the corner!
2
CBRE ADVANTAGE MAGAZINE
Contents SPRING 2020 Sign Leases with An Eye 04 Retailers Toward Summer Resurgence Ruth Fischer, CBRE’s New 06 Meet Leader in Quebec
08
CBRE Changemakers Say Now Is the Time
11 Events for Advantage Sciences Sector Gets a Big Boost 12 Life From COVID-19
04 06
Industrial: So Much Demand, 15 So Little Space Outlook: What’s Ahead for 16 Market Canadian Commercial Real Estate? in 2021: More Challenges 18 Hotels but Opportunities Too 5 Ways the New Workplace Will 20 Be Better Than Before Construction Is Taking 22 COVID-era Longer and Costing More
12 15 18
08 SPRING 2021
22
3
Retailers Sign Leases with An Eye Toward Summer Resurgence As Toronto persevered through much of the winter under lockdown, CBRE’s leading retail broker Arlin Markowitz says retailers were looking to better days ahead. That could come as soon as this summer, when, if all goes as planned, a vaccine allows the world to return to some semblance of normal. In the meantime shoppers are doing much of their purchasing online. It’s been a big blow for retailers, independent ones especially, who are being denied vital foot traffic. Despite current woes, Markowitz says that most of the new leases he’s been working on are being done with an eye toward the summer. “Louis Vuitton, Nike, Apple, Peloton — you’re not having a conversation with them in November where they’re going to take possession in December anyway,” he says. “We’re talking about possession for May or June. “They’re saying, You know what, we’re going to look toward a brighter future this summer when, God willing, the vaccine will be distributed and we’ll be out of lockdown, patios will be open, weather will be nice, and we’ll be happy to take possession then.”
4
CBRE ADVANTAGE MAGAZINE
PANDEMIC FINE PRINT
LENDERS SPLIT DECISION
What’s interesting about many of these new deals, Markowitz points out, is how they’ve evolved to reflect the uncertainty of the pandemic. Leases he’s putting together now often include what he calls “pandemic language,” with contingencies and allowances for another lockdown. One deal, for example, included a lease clause stating that in the event of a lockdown where the government makes it illegal for them to open their store, they won’t have to pay rent during that time. “It’s giving retailers the comfort and confidence to move forward.”
Not all retailers have fared the same in the pandemic, of course, and CBRE’s most recent Canadian Lenders’ Report reflected the concerns that lenders have with certain retail property types. This is less problematic for retailers and more of a consideration for buyers and sellers of retail properties.
For retailers in the enviable position to be looking for new space at the moment, rents have come down thanks to COVID and there are bargains to be had, depending on location and the property type. That COVID discount might amount to as much as 25% off what rent would have been paid a year ago, according to Markowitz. As added incentive, many landlords are offering percentage rents and increased tenant allowances to help retailers to build out their stores. “It’s getting to be a situation where it’s becoming much less risky for tenants.”
Regional malls in secondary markets inspire the least confidence; 74% of lenders surveyed by CBRE expressed concern about these properties. Almost as many lenders, 69%, were concerned about entertainment and food service retail. At the opposite end of the spectrum, grocery-anchored retail gave lenders the most confidence, with just 3% of them expressing concern, right up there with industrial properties and purpose-built rental apartments as the least risky property type from a lender’s perspective.
It’s the urban retail environment, in nodes like Queen West, Yorkville and Yonge and Eglinton, where landlords are giving the most flexibility on rents, primarily to high-end fashion retailers. These are the types of tenants who can normally afford high demand areas and landlords will want them to survive and return in better times. “Rents on Queen West and Yorkville were so much higher than everywhere else that they had room to adjust,” says Markowitz. “Whereas the power and strip centres, the everyday retail, the rents weren’t that high to begin with, so they haven’t had to change as much.”
That’s what Markowitz is seeing out there. Power centres with grocery stores, pharmacies, drive-thru banks and fast food restaurants are thriving, perhaps stronger now than they’ve ever been. “The suburban big box market hasn’t changed.”
“The whole ‘death of shopping’ thing has been totally sensationalized. Once there’s a vaccine people are going to flock back to malls.” - Arlin Markowitz, Senior Vice President, CBRE Toronto
SPRING 2021
5
Meet Ruth Fischer, CBRE’s New Leader in Quebec Quebec’s economic renaissance has captured global attention and CBRE has selected Ruth Fischer to lead the company’s efforts in the province. Fischer will help elevate real estate services and realize more opportunities for business in Quebec. “Ruth is the leader to help CBRE rise to the occasion,” said CBRE Canada President and CEO Werner Dietl. “She is the partner who can help our clients meet and exceed their real estate goals during this dynamic period.” Montreal’s commercial real estate market has been resurgent of late. There were 1,439 transactions valued at $6.12 billion in the city last year. Montreal’s industrial market is particularly strong, recording 1.5 million sq. ft. of net absorption in the final quarter of 2020, dropping the industrial real estate availability rate to an all-time low of 2.1%. The city is also a Tech Talent centre; its tech labour pool grew by 19.3% between 2014 and 2019, for a total Tech Talent pool of 141,600 workers – 7.4% of total employment in Montreal. “Even in the midst of a pandemic, Quebec has incredible momentum, says Fischer, Senior Vice President and Managing Director for CBRE in the province. “Real estate strategy is a key part of achieving business goals and identifying new opportunities. Global experience, best practices and connections can help ensure we are all capitalizing on this moment.”
6
Fischer forged a dynamic career over the past 20 years that spans the U.S., UK and Canada. Educated at Cornell University and the London School of Economics, she has worked in all facets of the real estate industry, from analyst to consultant to key founder of CBRE’s Client Solutions division in Canada. Fischer is known for driving positive change. She is a champion of the Canadian Chapter of CBRE’s Women’s Network, supports industry outreach and thought leadership as Co-Chair of the Urban Land Institute’s Sponsorship Committee, and is a member of the board of the Children’s Book Bank. With this appointment, Fischer becomes the first woman managing director of a CBRE regional market in Canada. “Having a strong leader who knows the team and platform well was key,” said Dietl. “Our occupier and investor clients have come to appreciate Ruth’s creative solutions and her appointment promises an unmatched level of service, fresh perspectives, and next-generation leadership.”
CBRE ADVANTAGE MAGAZINE
Q&A
with Ruth Fischer
One month in, what are your first impressions of running CBRE Quebec? We have a dynamic, well-oiled machine with successful brokers who know how to get clients results. I’m loving learning the marketplace, getting to know the clients better and helping build on our success.
How are you staying connected with your new team? We may have been working from home, but the bonds are strong with this team. Last week we held a virtual wine tasting event at the end of our office and industrial leasing meetings. Everyone had a bottle delivered to their homes and it was a lot of fun. Our connection with each other and with our clients is solid, but I can’t wait to get together face to face!
What are some of the most significant changes you’re seeing in the real estate industry?
“Even in the midst of the pandemic, Quebec has incredible momentum. Global experience, best practices and connections can help ensure we are all capitalizing on this moment.” - Ruth Fischer, Managing Director, CBRE Quebec
SPRING 2021
Real estate is increasingly a reflection of the world around us, which is a very good thing in terms of relevance, idea generation and dynamism. CBRE is also leading a shift from transactional work towards holistic strategies that shape processes, culture and a client’s bottom line. Service and real estate optimization throughout the business cycle is key.
What’s top of mind as you look ahead to the normalization of life and business? Excellence begets excellence. That’s true whether the pandemic is ongoing or not. I’m making sure that I’m ready to accelerate with our clients so that we’re all moving forward together. That dynamic, matching pace and pushing each other, both motivates and energizes.
7
CBRE Changemakers Say Now Is the Time CBRE’s Vancouver-based broker Tara Finnegan realized she was facing an uphill battle in seeking to enter the male-dominated world of commercial real estate back in 2002 when she approached a local brokerage to inquire about job prospects. The other firm was quite clear. We don’t hire women for brokerage, they bluntly informed her, as Finnegan recalls. She soon found a home at CBRE, which was more than receptive to hiring women. Systemic challenges in the broader industry remained, however, and Finnegan spent years feeling like a lone wolf. True to her gritty nature, she persisted and before long garnered attention for more than being a rare woman in CRE. She built a strong business based on providing clients with creative real estate solutions and completed a diverse range of lease and sale transactions. She also prioritized giving back to the community, including launching the Vancouver chapter of the 10x10 Philanthropy group, which raises money for local grassroots organizations. Two decades into Finnegan’s impressive career, CBRE launched its Diversity Council in response to anti-racism and equality movements across the globe last year. As she continued to advocate for ways to address the gender gap and barriers to opportunities for women, she knew she had much to contribute. “I’ve lived the experience of being a woman in commercial real estate, so it felt right up my alley,” says Finnegan, who was elected Vice Chair of the Council in the summer of 2020.
8
“The situations I was in, the client engagement, how I was perceived, whether I would pitch or not — I’ve experienced it all for a long time and it’s all been very eye-opening and has spurred me to be my best and make change to help those coming up behind me.” At CBRE she has championed hiring women and has been responsive to female brokers seeking her assistance in getting hired, even at rival firms. “I’m open to anything, because all I want to see is a critical mass of women in this industry.”
CHANGE ADVOCATES CBRE Canada strives to equalize opportunities, experiences and outcomes within the company, the industry and the broader community. We believe there is no place for racism or discrimination against any group in any form and our aim is to build a CBRE Family that reflects and supports our communities. But the company is not as diverse and inclusive as we need to be, and the launch of the Diversity Council represents our intention to be better. The Diversity Council consists of 11 members who are serving as advocates for change. The group operates at arm’s length in order to provide impartial insights and help drive necessary change, while having access to company leaders and informa-
CBRE ADVANTAGE MAGAZINE
“Change can be uncomfortable. But we’re at a point now where things need to change and CBRE can be a leader in DEI like it is in so many other areas.” - Leron Mitchell, Sales Representative, CBRE Toronto
tion. The goal of the Council is to create a more inclusive environment that values and supports underrepresented groups and creates a safe and equal opportunity workplace for all employees. The Council has been actively assessing CBRE Canada’s performance on a range of topics, including hiring, education, mentorship, sponsorship, vendor engagement, employee resource groups and data collection. The group has formed three subcommittees – talent, retention and culture – to help them focus their efforts and organize their thoughts. “The Diversity Council is but one plank in a broader global effort for CBRE to become a leader in Diversity, Equity and Inclusion,” says CBRE Canada President and CEO Werner Dietl. “I’m excited to see where the Council takes our organization.”
PAIN SPURS ACTION For CBRE’s Leron Mitchell, who is Chair of the Diversity Council, it was a devastating personal loss and the tumultuous events of last summer that put him on the path to becoming a change-maker. Mitchell’s parents had emigrated from Jamaica to Toronto, where he was born. After battling breast cancer three times over the course of 30 years, his mother succumbed to the disease in April 2020. “Her friends and family couldn’t be around her in her final days due to COVID,” Mitchell says. “Emotionally it was a difficult situation to experience during the pandemic, with so many friends and family, in the UK, Canada, USA and Jamaica who wanted to attend the funeral, but could only do so through a Zoom event that was set up by our family’s church.”
SPRING 2021
Then came the video of George Floyd’s killing, and Mitchell, like much of the world, was outraged. He reached a breaking point. “My entire life I’ve watched Black men and women in the news beaten up or killed by the hands of those who are supposed to serve and protect, with very little justice. And then to watch the cop who knelt on George Floyd’s neck with no fear or remorse in his eyes was an alarming display of what is tolerated in our society.” Mitchell’s parents raised him to treat all people with dignity and respect, but that’s not the reality for so many people of colour and other minority groups. “I felt compelled to take action based on what I was taught and my visceral response to the injustices we were seeing,” he says. “I don’t consider myself an activist per se, but the combination of my mother’s death and the social intolerance we’re seeing lit a fire inside of me to get involved.” Mitchell, an industrial property, and urban infill land broker in CBRE’s Toronto West office, now sits at the helm of CBRE’s Diversity Council. And though he’s clear on the group’s mission, he knows it won’t be a simple one. “We want to help bring positive change to the company and accelerate the diversity,
equity and inclusion agenda. It’s obviously a controversial topic and change can be uncomfortable, but we’re at a turning point in history where the world is rapidly changing and CBRE can be a leader in DEI like it is in so many other areas.”
A DIFFERENT WORLD Mitchell brings unique perspective to the Council, given his background as an ex-professional athlete. Sports was his passion growing up, track and field in particular and Mitchell was offered a scholarship to the University of Texas at Austin Texas. UT boasts a top tier NCAA athletic/academic program, along with world class coaching and athletic facilities and Mitchell was recruited by Dan Pfaff, the men’s track and field coach at the time, who was considered one top track coaches in the world. Arriving in Austin at 18 years old, Mitchell found himself in a completely different world from what he was accustomed to growing up in Southwestern Ontario. “In many instances my family and I were one of the few black families in the schools we attended and the neighbourhoods where we lived in Ontario. We felt accepted and racial issues were rarely a problem growing up.” During his time at UT in
“All I want to see is a critical mass of women in this industry.” - Tara Finnegan, Senior Vice President, CBRE Vancouver
9
Tara Finnegan at 10x10 Philanthropy Event Austin however, Michell felt the lingering effects of racial segregation. “When it came to life on and off campus, white and Black students often stuck to their own.” Mitchell recalled that when travelling with the men’s track team for meets out of state, the athletic program placed the black athletes on one flight and the white athletes on another. “I was never called a racial slur, but there were several times I was ‘checked’ by friends, teammates and coaches of things not to do socially.” He stayed at UT for a year before ultimately deciding to move back home. “I had the talent, I was living out a childhood dream, but my social life was a miserable experience while at Texas.” Having fallen in love with Texas Football, back home Mitchell enrolled at Western University, in London Ontario and walked onto the school’s football team despite not playing football in his previous experiences. He got on the radar of NFL and CFL scouts, and a year out of university, in 2006, was drafted by the Toronto Argonauts. Playing pro football was the thrill of a lifetime but sharing a locker room with players who came from racially charged parts of the U.S., Mitchell would hear his teammates’ tales of childhoods filled with gun violence and racism. “It was another eyeopener for me.”
CFL TO CRE Mitchell knew he’d be wise to prepare for life after football and always had an affinity for real estate. So, he took mortgage specialist programs and did part-time home renovation work through a friend’s family owned residential real estate brokerage in London Ontario to get exposure to the business and experience during the off-seasons. In 2012 he retired from the CFL and went back to school with the goal of landing a job in commercial real estate. When he told his family physician, a former Argos team doctor, of his plan, the doctor said, “You need to meet a family friend, Andy Wright.” Wright, a veteran CBRE broker, met with Mitchell and advised him to finish up with school and then get in touch. About a year later Mitchell called, they had lunch and Wright passed Mitchell’s resume on to Werner Dietl, then Managing Director of CBRE’s Toronto Downtown office. Mitchell and Dietl had a great
meeting and shortly afterward Dietl offered him his first job in commercial real estate. “I was thrilled,” says Mitchell. Now, as Chair of the CBRE Diversity Council, he is paying it forward by working to ensure more minorities get the same shot he did. And he’s encouraging colleagues and peers to join him. “We need everyone involved to make change, now is the time.”
‘NOW IS THE TIME’ Finnegan, like Mitchell, is feeling positive about the prospects for change, but she admits the task feels daunting. “We know it’s not going to happen overnight. And the waves of COVID are intersecting with this initiative and it’s been a bit of a rollercoaster, and that’s just the reality.” “But I feel like now is the time, if ever there was an opportunity for us to work toward this. The world is waking up to change, and perhaps that’s been the silver lining on the pandemic.”
Saskatchewan Roughriders defensive back Leron Mitchell (25) attempts to block Calgary Stampeders receiver Deon Murphy (24) during a game at McMahon Stadium in Calgary, Alberta. (Credit Image: © Irena Thompson/Southcreek Global/ZUMApress.com)
10
CBRE ADVANTAGE MAGAZINE
Events for
Advantage
APRIL 14-15
Vancouver Real Estate Forum
Loren Bergmann
Carter Kerzner
Managing Director, Workplace Strategies, CBRE Limited
Vice President, CBRE Limited
PANELIST: Covid-19 and the Office Market: To What Extent Will Remote Working Become a New Normal and Reduce Demand? What is the Future for the Corporate Workplace Environment?
APRIL 7 ULI: 2021 Global Emerging Trends in Real Estate Report APRIL 8 ICSC Connect Local Talk: Canadian Industry Spotlight APRIL 12 NAIOP: What’s Next for the Dynamic Industrial Market? APRIL 13 Informa: Western Canada Apartment Investment Conference
SPRING 2021
MODERATOR: Where are Valuations in the Major Property Classes in Vancouver and the Lower Mainland? Who Are Buyers? Who Are Sellers?
APRIL 21 SIOR: What Does the Post Pandemic World have in Store for Canadian Real Estate? APRIL 27 NAIOP: Embracing Adaptability as a Key Tenet for the Future Workplace
MAY 6 Informa: Saskatchewan Real Estate Update MAY 12-13 Informa: Montréal Real Estate Forum MAY 13 RCC: Retail Cannabis Forum
APRIL 28-29 SIOR: TransACT 360
MAY 25-26 ICSC: RECon Digital
MAY 5 ICSC: Retail’s Recovery: Where It Stands and How it Could Progress
MAY 26-27 Informa: Edmonton Real Estate Forum JUNE 8-9 Informa: Land & Development
11
Life Sciences Sector Gets a Big Boost From COVID-19 The world was plunged into the first pandemic of the modern age only to have a vaccine developed at record-setting speed. Help is on the way, and it can’t arrive soon enough. And there has arguably never been a greater appreciation for the life sciences sector, or more interest in enhancing Canada’s capabilities in this area. This has sent demand for related real estate into overdrive. But both the vaccine and future life sciences aspirations could be limited by a severe shortage of much-needed facilities and conservative real estate investment philosophies. Landlords and investors have been blowing up the phone of CBRE’s Montreal-based broker Jeremy Kenemy to ask him what opportunities exist for investing in lab space. Montreal has had an active life sciences sector for years. But pandemic-inspired investor interest in the industry have sent demand into overdrive. “COVID added to the frenzy in a big way,” says Kenemy, who heads CBRE’s Canadian Life Sciences Team in Montreal.
LIFE SCIENCES HUB Montreal is North America’s sixth-largest life science and health technologies hub, home to more than 650 related companies. Over 10,000 students graduate from health-related programs in the city’s 11 higher education institutions, including worldrenowned McGill University. And the city is one of the most affordable real estate markets on the continent in terms of operating costs. “There are amazing homegrown biotech companies that are doing cutting-edge science here,” Kenemy says, noting that the city has become a hub for biotech research and development. This has had a knock-on effect on the commercial real estate market. Kenemy recently closed a deal for a 20,000 sq. ft. new lab space, and a 40,000 sq. ft. lab deal he did in 2019 was one of the biggest ones of that year. He took on a listing for a 50,000 sq. ft. specula-
12
CBRE ADVANTAGE MAGAZINE
Jeremy Kenemy, Montreal
tive lab building, a purpose-built greenfield extension to an existing facility. And he and the landlord managed to fill most of the space within 18 months with a variety of lab tenancies that ranged from 3,000 sq. ft. to 17,000 sq. ft.
A major U.S. player, Maryland-based Alexandria Real Estate Equities, has taken office space in Laval, a Montreal suburb, and is converting it into a lab complex. It’s telling that a foreign company is taking the lead when Canadian talent and ideas are ready for homegrown real estate solutions. “There’s so little existing lab product that’s vacant,” says Kenemy. “So I’ve been doing lots of deals like this where landlords are converting buildings to accommodate lab users.” There’s also a brand-new lab building in the works in Montreal, a 400,000-sq.-ft.-plus facility. “It’s very ambitious,” Kenemy says, “but the developer understands that there’s demand for this kind of space in Montreal—build it and they will come.” Despite these new projects, the Montreal market remains severely under-supplied with life science lab space. Kenemy is working to change this. He’s been busy facilitating joint ventures, bringing together real estate owners – who aren’t familiar with lab operations and tend to balk at the considerable up-front costs of building or retrofitting lab space – with lab operators, who scale up quickly but don’t always understand real estate. “We have the potential to make this happen. You just need to get the stakeholders together,” says Kenemy. “Someone who has access to capital and experience with development and building management, plus a user-operator who understands how labs need to be laid out and what scientists need to be productive. Life science is state of the art, but that doesn’t mean always starting from scratch. Retrofitting existing buildings can add a ton of value and bring in quality covenant tenants.”
TORONTO WAKES UP TO NEW POSSIBILITIES While Toronto hasn’t seen nearly the same kind of life sciences real estate activity as Montreal, interest in the sector in the wake of COVID-19 has been just as fervent. “Suddenly everybody wants to connect with me and talk about opportunities,” says CBRE’s Daniel Lacey, Toronto lead for the Canadian Life Sciences Team. Nearby McMaster Innovation Park in Hamilton has been a boon for the industry. The campus hosts over 100 companies in the life sciences, engineering and advanced manufacturing and high-tech sectors, including Fusion Pharma, which started at McMaster University. But Toronto itself is lacking specialized space for life sciences in the downtown core, save for the perpetually 100%-occupied MaRS Discovery District. And there are no new developments on the horizon. Lacey attributes this in large part to the risk-averse nature of local landlords and investors. “From an ownership perspective, life sciences isn’t for everyone,” Lacey says. “It’s high cost and high risk, but then it’s also high reward. With all the news about vaccine innovation and production, plus new government supports for the industry, my hope is that there will be more focus on growth opportunities and less on the well-known risks.” This is the frank conversation he’s been having with landlords who’ve been calling him up wondering about prospects for life sciences. “I’m honest with them: ‘Let’s talk through the entire scenario, and at the end of this you’re not going to have certainty. Most say, ’Wow this sounds exciting and an opportunity but we’re going to have to adjust our threshold.’” What’s the new calculus? Setup costs for life science tenants often need to be amortized over a longer period than with conventional office tenants, and landlords might not get an immediate return on their investment with the first tenant. New market entrants break trail and face the biggest challenges but are also setting themselves up to reap the rewards. “Traditionally, it’s the next wave of tenants who come in behind them that are likely to be more successful extend their lease for the next 20 years,” says Lacey. There is great potential for the development of a life sciences hub in downtown Toronto. Lacey points to Bedpan
“From an ownership perspective, life sciences isn’t for everyone. It’s high cost and high risk, but then it’s also high reward.” - Daniel Lacey, Associate Vice President, CBRE Toronto
SPRING 2021
13
McMaster Innovation Park Rendering
Alley, the stretch of University Avenue dominated by leading hospitals and related health services. “We definitely have room for a downtown Toronto asset to come to market and absorb the pent-up demand for lab space.”
accommodate this growth, knowing once they do the tenants will certainly come. Nelson says that he, like Lacey and Kenemy, has had to help landlords understand that life sciences real estate doesn’t work like other property types.
Lacey has also been in talks with U.S.-based shared lab space providers – think WeWork for the life sciences industry – who are interested in coming to Toronto to operate a facility. “They’re ready to sign a 25,000 sq. ft. lease downtown. I just have to show them the asset that’s ready to do it,” Lacey says.
It costs a great deal to build out a lab space and the tenants don’t often have stellar covenants, meaning there’s likely to be some turnover. However, the eventual payoff can be substantial if owners are patient. “It’s such a landlords’ market right now,” says Nelson. “There’s a 50% premium on rents if it’s biotech space. While there’s a pandemic imperative at the moment, there’s also an economic benefit to those who contemplate and execute a specialized life sciences development.”
“Opportunity is knocking. Will Toronto answer the call?”
‘AT CAPACITY’ Vancouver-based AbCellera Biologics Inc. made headlines last December when it was announced that the biotech firm was working with U.S. drug titan Eli Lilly & Co. on the same type of medicine that was given to Former U.S. President Donald Trump to treat COVID-19, a monoclonal antibody treatment. CBRE’s Kevin Nelson, who leads the Life Sciences Team in Vancouver, says news like that has helped spur renewed interest in the biotech sector. But at the moment there’s little he can offer clients by way of available lab space. AbCellera will be building two buildings in Vancouver, between the new St. Paul’s Hospital development and Vancouver General Hospital, to fulfill its own requirements. Otherwise, Nelson says, the state of the Vancouver life sciences market is at-capacity. “There’s tons of demand and no supply.” The sector is one of B.C.’s fastest-growing, with employment increasing by 5.6% between 2017 and 2018, to 17,300 jobs. What’s needed is for a developer to step up and build facilities to
14
“But recognize the profile of your tenant,” he cautions. “You can’t look at it conventionally, like requiring a balance sheet showing $200 million in profit. It just doesn’t work that way with biotech. There are eight pharmaceutical companies in North America that are profitable, and that’s it. So the tolerance for risk has to be higher. “If you’re a landlord there are riches to be had here,” adds Nelson. “But life sciences is not for the faint of heart.” After all that we’ve been through over the past year, here’s hoping we’re all brave enough to lay the groundwork for a bustling life sciences sector that can help us improve health outcomes during and long after the pandemic.
Kevin Nelson, Vancouver
CBRE ADVANTAGE MAGAZINE
Industrial: So Much Demand, So Little Space With online spending by Canadians forecast to reach $92.7 billion by 2025, net-new warehouse requirements from ecommerce-related demand are expected to exceed 40.0 million sq. ft. over the next five years. But as Bloomberg News reported, citing CBRE’s Market Outlook report, Canada will not come anywhere close to being able to construct that much space. Canada’s three hottest industrial markets, Toronto, Montreal and Vancouver, are expected to have availability rates around 2.0% throughout 2021; in Montreal’s case, a record-low 1.8% could be reached. This despite having a total of nearly 20 million square feet of new industrial space slated for delivery by the end of the year in those three markets, 12.5 million square feet in Toronto alone. Annual online retail spending grew by a record 31.6% to $58.8 billion in 2020, forcing retailers, wholesalers, and third-party logistics companies to develop more complex logistics networks in order to reach consumers in increasingly shorter timeframes. CBRE Research has found that for every $1 billion in ecommerce sales, 1.25 million sq. ft. of additional warehouse space is needed. This is greater than all of the available space for lease in Canada’s three largest industrial markets combined.
“Canadian industrial markets are North American leaders and we think this is just the beginning of an incredible period of growth and demand.” - Werner Dietl, President & CEO, CBRE Canada
And with so little space suitable for logistics users, CBRE’s Outlook forecasts new construction and strong pre-leasing of speculative projects. Canada’s ecommerce-related market has significant runway for growth. Retailers are exploring the role that small shipping hubs located in suburban neighbourhoods could play in bringing goods closer to customers. And Canadian grocers have all made significant investments in their online offerings due to the unprecedented shift in shopping habits. With manufacturing, energy, and other services requiring industrial space, CBRE forecasts that the industrial sector will experience high rental rate growth and record low availability rates for the remainder of 2021.
Accommodating E-Commerce Online Sales 20%
15%
10%
= 42.4 MSF
5%
0% 2015
2020
2025
Source: Euromonitor, CBRE Research, 2021.
SPRING 2021
15
20 21
Market Outlook: What’s Ahead for Canadian Commercial Real Estate? THE HYBRID WORKFORCE NETWORK
1.1M SF New office space to be completed this year in Vancouver.
RISE OF ECOMMERCE TO ACCELERATE DEMAND FOR LOGISTICS SPACE Online Retail Spending ($B)
FORECAST
$92.7
$83.5
$58.8
$12.6 $15.8
$19.9
$24.5
$31.1
$37.3
$63.5
$69.1
$75.6
$44.7
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
FOR EVERY $1B IN E-COMMERCE SALES Source: CBRE Research, 2021.
MULTIFAMILY INVESTMENT VOLUMES FORECASTED TO REACH NEW RECORD HIGHS IN 2021
Source: Euromonitor, CBRE Research, January 2021.
GFC
35%
2019
COVID
30% 25%
$10.0
20%
$8.0
15%
$6.0
10%
$4.0
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2021F
5%
$2.0
Source: CBRE Research, Realnet Canada, RealTrack Limited, Collette Plante, JLR Land Title Solutions, Real Capital Analytics, Q4 2020.
16
ADDITIONAL INDUSTRIAL DEMAND OF 42.4 MSF (20202025)
INVESTOR PREFERENCES SHIFT
Investment Volume ($B) $12.0
$0.0
AN ADDITIONAL 1.25 MSF OF DISTRIBUTION SPACE =
0%
Office
Industrial
Retail
Multifamily
ICI Land
Hotels
Proportion of investment by property type during Global Financial Crisis (2009), 2019 and COVID-19 era (Q2-Q4 2020). Source: CBRE Research, Realnet Canada, RealTrack Limited, Collette Plante, JLR Land Title Solutions, Real Capital Analytics, Q4 2020.
CBRE ADVANTAGE MAGAZINE
1.8%
$2.5B
Montreal’s projected industrial availability rate – an all-time low.
Forecast investment total for Calgary CRE in 2021.
12.5M SF Total new industrial space to be delivered in Toronto in 2021.
“Nothing of any value was ever achieved by being pessimistic. We are optimistic.” - Paul Morassutti, Vice Chairman, CBRE Canada
SPRING 2021
1,758 Number of new multifamily units to be built in Halifax this year.
“More than uncertainty, it’s flexibility that permeates real estate and there are more opportunities than risks ahead.” - Werner Dietl, President & CEO, CBRE Canada
17
Hotels in 2021: More Challenges but Opportunities Too The Canadian hospitality industry was the first sector to feel the full impact of the pandemic, with border closures and lockdown orders causing occupancy to plunge from historic highs to less than 20%, virtually overnight. The industry is still ailing as it waits for vaccines to begin working their magic. But during a brief window in the second half of last year, after COVID’s first wave had subsided and the second wave had yet to hit, pent-up demand translated into a resurgence in leisure travel. Hotels in drive-to resort destinations, such as Banff, the Okanagan and Muskoka saw a strong increase in occupancy levels as locals sought refuge in the fresh air and mountain views, away from their home / home offices, over the summer and fall. It was all too brief, of course, as the second wave kept people at home heading into the holidays. Nevertheless, to Mark Sparrow, the new leader of CBRE Hotels in Canada, that boost in business offered hope that a similar spike in leisure travel will occur once the vaccine has flowed through the bulk
18
of the population. Corporate travel, however, could take some time before returning to previous levels. In Prince Edward County, a two-hour drive east of Toronto, an influx of private capital is anticipating another surge in domestic travel this summer; investors are purchasing houses, cabins and small resorts to rent out in some cases for over $500-700 per night, and reporting strong booking pace through the summer. “We saw a big uptick in local demand at the end of last year, and we anticipate a similar trend as soon as the current restrictions lift, with leisure business returning very quickly,” says Sparrow. “Everyone has been sitting at home just waiting to get out, do something and get a change of scenery. And it doesn’t look like they’ll be travelling internationally initially. So it’s going to be all about local support for the leisure travel industry in the near term.”
CBRE ADVANTAGE MAGAZINE
As the hospitality industry looks ahead to a recovery later in 2021, Sparrow and his team, which includes co-leader Luke Scheer and Vice President Ryan Tran, are spending extra time focusing on the needs of clients, offering innovative and straightforward solutions to see them through challenging times. Sparrow and Scheer have built a formidable operating asset practice which is anchored in the hotel space. They are industry leaders with an extensive global network of clients and have executed some of the largest hotel transactions in the world involving Canadian assets. They are bringing this experience to bear as they help clients endure current hardships. “There is no doubt, there are a lot of groups that are in a tough spot,” says Scheer. “There’s light at the end of the tunnel, but right now it can feel like a recovery is far off. We’ve had a glimpse of what it’s going to look like and can help our clients plan for the inevitable rebound.”
“We saw a big uptick in local demand at the end of last year, and we anticipate a similar trend as soon as the current restrictions lift, with leisure business returning very quickly.” - Mark Sparrow, Executive Vice President, CBRE Toronto Amid the challenges, there are opportunities. For instance, some hotel owners in major markets who might not have considered selling one of their assets before might be more willing to consider a deal now than ever before. “There’s significant capital interested in opportunities to get into a high-barrier-to-entry market,” says Scheer. “We’ve been pleasantly surprised by some of the deals we’re putting together,” Sparrow adds. “Groups are still stepping up at incredibly strong levels in the midst of the pandemic, and deals are beginning to percolate. For investors, now is the time to lean in, not step away.”
Exclusive news and analysis you won’t find anywhere else. www.cbre.ca/ AdvantageInsights
SPRING 2021
19
5 WAYS THE NEW WORKPLACE WILL BE BETTER THAN BEFORE
Who said the old office was all that great to begin with?” CBRE Canada Vice Chairman Paul Morassutti quipped in his Market Outlook presentation earlier this year. With vaccine distribution ramping up, a return to the office looms on the horizon. However, many employees are underwhelmed at the prospect of returning to the workplace full time. Surveys show that most employees do not want to go back to the way things were, but it might be less about the comforts of home and more a reflection of what offices were lacking. The war for talent was already pushing the workplace to evolve into a better version of itself, and the pandemic will likely accelerate this movement. Companies have the opportunity to keep the best part of office culture and processes while addressing inefficiencies, said Stewart Butterfield, CEO and co-founder of Slack. “We all know that work will never be the same, even if we don’t yet know all the ways in which it will be different,” he wrote. “What we can say with certainty is that the sudden shift to distributed work has provided a once-in-a-generation opportunity to reimagine everything about how we do our jobs and how we run our companies.”
1 Design Office space design is undergoing a transition. There will be more space needed between co-workers and a greater portion of the office floorplan will be dedicated to collaborative areas. “Densification will take a hiatus,” Janet Pogue-McLaurin, Gensler’s Global Workplace Practice Areas leader, told Vox. Workstations will be spaced further apart, conference rooms de-populated and space-dividing partitions erected to provide greater physical separation. Salesforce has already de-densified its office space in its operations across Asia, with office floors redesigned to accommodate only 40% to 50% of previous capacity. Julie Whelan, CBRE’s Head of Occupier Research for the Americas, predicts that the office of the future will have more common space than personal space. Traditional offices are about 80% cubicles and 20% common space; Whelan expects there will be a reversal of this ratio.
2 Democratization Frank Weishaupt, CEO of Owl Labs, writes in Fast Company that the virtual setting has democratized meetings. Managers have observed that the pandemic-induced need to meet virtually has resulted in a greater number of employees participating in the exchange of ideas. Shy or more junior employees are finding it easier to speak up in a virtual meeting, where glimpses into the domestic settings of their co-workers can be more equalizing than the formal setting of a conference room. This spirit of democracy is something that companies are taking note of and will want to make sure is replicated in the new workplace.
20
CBRE ADVANTAGE MAGAZINE
3 Technology Technology will be embraced to create a more connected and safer workplace. Companies are investing in digital collaboration technologies that will continue to be used post pandemic. This technology will be built into every room so that they can be transformed easily into dynamic collaborative spaces regardless of where the employee is located. Touchless technology is being applied in the workplace to reduce the transmission of viruses. Nestlé added a feature to its coffeemakers that lets employees select their choice by holding their hand over the menu options. Motion-activated faucets and soap dispensers, hands-free sanitizing and automated entrances are other areas where touchless technology is being enabled. According to a 2020 report by McKinsey, companies that adopt the highest degree of touchless technology gain a competitive edge, as the risk to their employees and to their overall operations is reduced.
4 Health & Wellness Companies will exercise more vigilance when it comes to the health and wellbeing of their employees. Buildings that are WELL-certified – like many of CBRE’s Canadian offices – and those that have superior HVAC systems will become more sought-after. The most recent Office Tenant Survey by Canadian Real Estate Conferences identified upgraded HVAC systems as one of the key improvements desired most by tenants. Biophilic design – aimed at increasing occupant connectivity to the natural environment -- will become a part of the office fabric to help clean the air, lower stress and boost cognitive function. Self-cleaning surfaces will be utilized to remove debris or bacteria. One company, NanoSeptic, uses skins and mats to turn dirty, high-traffic public touchpoints like elevator buttons and door handles into continuously self-cleaning surfaces. “COVID-19 has accelerated the healthy buildings movement,” said Joseph Allen, director of the Healthy Buildings Program at Harvard University. “Every sector is now talking about what they need to do for health in the building, for COVID-19, infectious disease transmission and beyond.”
5 Flexibility Jed Walentas, owner of U.S. investment company Two Trees Management, believes pre-COVID-19 office expectations were impractical. “If you’ve got two and a half million people in Brooklyn, why is it rational or efficient for all those people to schlep into Manhattan and work every day?” he asked in a New York Times interview. “That’s how we used to do it yesterday. It’s not rational now.” In 2019, workplace experience firm Leesman interviewed 700,000 employees from 4,800 companies and discovered that 40% of tenants felt that their workplace did not enable them to work productively. The office will continue to play an important role within a company as the place where onboarding, collaboration, training, mentoring and team building occurs. Work that requires focus is better performed in a quiet, solitary environment. “The physical office will absolutely continue to be part of future of work, but it will be designed to support flexibility and choice,” CBRE’s Paul Morassutti said in his recent Market Outlook presentation. “Some companies will be fully distributed, with their employees working from places around the globe, while others will be more traditional and required their employees to be in the office full time. The vast majority will fall somewhere in between these two models.”
SPRING 2021
21
COVID-era Construction Is Taking Longer and Costing More COVID has left much of the Canadian construction industry in turmoil. The severity of the situation differs by province. While some are forging ahead with few construction delays, the nation’s two largest provinces, Ontario and Quebec, have been hit hard, with non-essential construction grinding to a halt for much of the winter. Regardless of current construction activity levels, the pandemic has created major scheduling inefficiencies across the board, largely due to new site safety measures and COVID protocols that reduce worker densities on construction sites. Getting both labour and materials into commercial office towers through freight and construction elevators and into an active construction site has never been harder.
“This is more difficult than it sounds. We learned when the first shutdown ended last May that product manufacturers struggled for weeks to confirm new delivery dates. So a five-week mandatory shutdown doesn’t mean just a five-week schedule delay over and above. Depending on how close you were to substantial completion, the net delay could be quite a bit longer than that once the true impact is felt.”
The challenge is being compounded by an erratic global supply chain. “You’ve got products and materials being imported from around the world and the shipping and production times are all over the place,” says Ron Armstrong, CBRE’s new divisional leader for Advisory Project Management in Canada. “The bottom line is that construction is taking longer and costing more than it did before COVID.”
It’s never been more vital for occupier and investor clients to have a clear line of sight on construction costs and timelines, and Armstrong’s national team—90-plus project management specialists working from coast to coast in the different commercial real estate asset classes, overseeing upwards of $3 billion in managed client spend a year—boasts industry-leading insights and intelligence that gives CBRE clients a competitive advantage and peace of mind in uncertain times.
And when things begin to ramp back up in Ontario and Quebec, Armstrong says construction companies have no choice but to re-coordinate the remaining site work and validate all of their outstanding product and material orders to truly understand where their project sits within the supply chain.
22
“Our cost consultancy division is constantly tracking escalations and closely monitoring how the market is responding,” Armstrong says. “Our project directors are in regular communication with the
CBRE ADVANTAGE MAGAZINE
“You need someone tracking issues on a building by building basis to truly know what’s happening, be responsive and to mitigate schedule impacts.” -Ron Armstrong, Senior Managing Director, CBRE Canada construction industry to understand the scheduling impacts and the logistical challenges each building is having. You need someone tracking things on a building by building basis to truly know what’s happening, be responsive and mitigate schedule impacts.” By tracking costs so closely, Armstrong’s team gains better insights and can more accurately forecast costs for clients who may have signed a lease but haven’t started their build out yet, or who are mid-project and having difficulty getting across the finish line to achieve their budget. “We’ve definitely seen an increase in claims for additional costs from the sub-trades, some of which are legitimate while others that have no factual base. Our cost consultancy division has been busy helping our clients understand and negotiate these costs to a reasonable number.” These insights are enhanced further with real-time intelligence from CBRE Research on how much sublet space is hitting the market and the amount of new-build construction happening. “Combining all of that data gives us a comprehensive perception of exactly how the marketplace is responding and how our clients can best move forward,” says Armstrong.
2021CANADA R E A L E S TAT E M A R K E T O U T LO O K Watch CBRE’s Canadian Market Outlook presentation to find out what’s next for commercial real estate.
www.cbre.ca/marketoutlookwebinar SPRING 2021
23
TOP TALENT. INDUSTRY LEADERSHIP. MARKET INTELLIGENCE.
As the global leader in commercial real estate services, CBRE delivers world-class consulting and advisory services to all of our clients in Canada. Our unparalleled local market insight, integrated services and proven expertise continue to unlock the power and potential of real estate for everyone we proudly serve.
Learn more at cbre.ca