Canadian Real Estate Forum Magazine - Fall Issue 2015

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FALL 2015 / ISSUE 69

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CENTRAL CANADA AWAKENS FROM ECONOMIC DOLDRUMS

Light at the end of the tunnel for Ottawa-Gatineau Derelict site becoming world-class community Ottawa’s long-lost tech sector continues to boom

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ONCE AGAIN THE CALGARIAN RESILIENCE IS PUT TO THE TEST

Market favours development over renewal Calgary market rewards staying power Market tilts toward buyers

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SAME PATH BUT DIFFERENT OUTCOME. THE DIFFERENCE? DIVERSIFICATION. Vancouver and Toronto – with high employment rates and the key driver of the country’s energy sector.

George Przybylowski Vice President Construction & Real Estate Informa Exhibitions

However, a much publicised and dramatic drop in oil prices over the past year has created flux in this province of affluence. It is an economic cycle that Calgary has seen and weathered before.

Although it’s wonderful to bask in the glory of being at the top – a great fall from this coveted position not only takes longer, the landing can be extremely painful and embarrassing – especially when in the public eye.

At October’s Calgary Real Estate Forum, we'll be crunching numbers to determine just how much of an impact the downward fall in oil prices has had on Alberta’s commercial real estate marketplace. We'll also focus on the challenges facing major players, from asset managers, brokers and corporate real estate executives to developers and investors.

For years, oil-rich Alberta has been enjoying the effects of an economic boom. It has long held the distinction of being the Canada’s hotbed for real estate sales and prices – behind

We will point to opportunities and pinpoint how to capitalize on these; whether it’s meeting the needs of an ever-increasing rental, condo and multi-family offering as potential buyers shy away from ownership or strategies of diversification into the industrial,

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technical and logistics sectors. This dip in the energy sector may be the incentive that Calgary, and Alberta, needs to draw away from the “economic eggs in the oil basket” approach and turn towards diversification and a more balanced and holistic approach to growth.

For inspiration, these cities could turn their gaze to Ottawa and Ontario. The National Capital Region, due in part to the surge in the technology and education sectors, will be one of the top two provinces for economic growth in 2016. Benefiting this market will be the continued population growth, solid retail sales, and increasing office demand especially in technology-rich Kanata and up-and-comer Gatineau.

Experts will look at the various real estate sectors in the National Capital Region – from office and retail to residential and development – and how they are responding.

Portfolio offerings, interest-rate and cap-rate projections will be high on both the Calgary and Ottawa Forum agendas, as we encourage high level dialogue around making a good stab at forecasting what next year will hold. ■ 3

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CONTENTS

3 Same path but different outcome.

The difference? Diversification.

6 Canada’s office markets are fragmenting with performance implications for all stakeholders and

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48 REALNET: Property Transactions by Asset Class

54 Dear, Prime Minister-(Elect?)

55 Bricks and Mortar Formation: Todays Dream 56 Emerging Trends: By the Numbers

About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-to-the-minute information and highly specialized skills and services. Our ability to deliver high quality knowledge and services through multiple channels, in dynamic and rapidly changing environments, makes our offer unique and extremely valuable to individuals and organizations. www.informacanada.com ©2015 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

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Canadian Real Estate Forum Magazine

Frank Scalisi Director of Sponsorship and Advertising Sales T: 416-512-3815 E: Frank.Scalisi@informa.com See our ad on page 46

The Canadian Real Estate Forum Magazine is published three times annually. Editions coincide with key Canadian Real Estate Forum and associated markets:

Conferences For more information on our Conferences visit www.realestateforums.com See our ad on page 53

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Spring: Montréal • Vancouver • Edmonton Fall: Ottawa • Calgary Winter: Canada-wide • Global E-magazines are available at www.realestateforums.com

Informa Exhibitions, Construction & Real Estate Rick McConnell, President, George Przybylowski, Vice President

Editor & Associate Editor Michel Rémy Jean Pickering

Design Informa Canada Design Studio

Canadian Real Estate Forum / FALL 2015

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OTTAWA

CALGARY

10 Thank you to our sponsors

28 Thank you to our sponsors

12 Strong outlook for Ottawa real estate

30 Calgary: weather the storm, continue to thrive

14 Central Canada awakens from economic doldrums

32 We’ve seen this before

16 Retail’s radical transformation

32 Calgary market rewards staying power

18 Major metropolis in the making

34 Results rely on values, relationships

20 Survival of the fittest in Ottawa market

34 Everybody drinks coffee: Calgary’s industrial market shows resilience in tough times

20 Retail and office development markets in Ottawa sizzling hot 22 Derelict site becoming world-class community 23 Ottawa’s long-lost tech sector continues to boom 24 Ottawa real estate markets on the upswing in 2015 24 New life for Ottawa’s old buildings?

26 Light at the end of the tunnel for Ottawa-Gatineau

36 Brighter skies ahead for 2016 in Calgary 36 What recession? Calgary’s retail sector continues to boom 38 New University District to become Calgary’s largest employment hub outside downtown 39 Market favours development over renewal 40 Despite the downturn, Calgary continues high record growth 42 Oil price puts pressure on producers 43 Resilience defies economic gravitas 44 Now gearing towards a balanced market 44 Market tilts toward buyers

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THE ALTUS REPORT

CANADA’S OFFICE MARKETS ARE FRAGMENTING WITH PERFORMANCE IMPLICATIONS FOR ALL STAKEHOLDERS

Sandy McNair President Altus InSite

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“This time, it is different” is one of few phrases that often will get a conversation going in an unhealthy direction, quickly.

Sometimes this phrase has been used to suggest that the laws of nature and the business cycle have been altered, at least for now, and some imbalance in demand and supply will have a unique and significantly more positive outcome than ever experienced before.

Each business cycle has its own personality, drivers and dynamics. For more than a decade, commercial real estate investments have benefited, relative to the stock markets, bond markets and many other investment options, from increasing investment appeal, transparency and performance. Strong inbound capital flows, compressing cap rates and excellent yields have been felt widely across the commercial real estate industry. If you wish, “high waters float all boats” has been the theme and the outcome for many investors.

Averages Are Dangerous Given the underlying drivers and current market dynamics in most of the major office markets across Canada, we see a widespread pivot towards highly divergent outcomes for each industry participant and stakeholder. Going forward, the theme will be “concurrent Big Winners and Big Losers”

where the averages are dangerous as they tend to conceal rather than reveal the very specific and localized patterns that will shape future performance.

To date, many in the commercial real estate industry have used a simple two dimensional matrix to segment the larger office markets into clusters with the desired homogenous characteristics that generate similar and predictive performance patterns: Geographic districts (downtown, midtown and suburbs) and nodes within each district, as well as building class (Class A, B, C). The expectation being, that if my subject property is a Class A building located in the Downtown Core, then I can expect my current status and future performance to match the average of all Class A buildings in the Downtown Core and furthermore, that the variance across the peer group will be small.

Relying on the averages is already dangerous. If we isolate a group of just 8 downtown core Class A buildings in Calgary, they have an average availability rate of 31.2% compared to the rest of the downtown core Class A buildings that have an average availability rate of 7.9%. – not very similar; not very predictive. As the chart below shows, this pattern is repeated in most of the major markets across Canada.

Canadian Real Estate Forum / FALL 2015

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The 8 Buildings with the Most Available Space Compared to the Rest of the Class A Downtown District Source: © Altus InSite, a division of Altus Group, data as at September 15, 2015.

Total Available Rates

Vancouver

Edmonton

Calgary

Toronto

Ottawa

Montreal

Availability Rate Within the 8 buildings

24.1%

28.1%

31.2%

26.9%

14.3%

32.0%

Rest of Class A Downtown District

7.9%

3.9%

7.9%

7.3%

2.7%

9.0%

All of Class A Downtown District

11.0%

10.1%

11.7%

10.6%

6.7%

13.3%

% of Total Available in the 8 Buildings with the Most

42.0%

71.4%

43.6%

43.1%

73.8%

44.9%

Searching For Predictive Attributes Perhaps what is needed is to dig deeper and look at more attributes to more accurately fragment the marketplace into similar and predictive tranches. But which attributes? How do we measure some of them and is the data collectible, accurate or current?

As a starting point, we have explored typical floor size and somewhat arbitrarily segmented the market into three tranches using 16,000 square feet and 29,000 square feet as break points for small, medium and large typical floor sizes. Using this typical floor plate size segmentation, we then looked at each of the major office markets through three lenses. Firstly, the entire office market including all districts,

nodes and classes. Secondly, the downtown district including Class A, B and C. Third and finally, the downtown district focusing only on Class A. Looking at the charts below a number of patterns and perhaps leading indicators of future performance are revealed.

Increased Pressure on Office Buildings with Smaller Floor Plates An Analysis of Office Buildings Based Upon Typical Floor Plate Sizes • Source: © Altus InSite, a division of Altus Group, data as September 15,

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“Relying on the averages is already dangerous. If we isolate a group of just 8 downtown core Class A buildings in Calgary, they have an average availability rate of 31.2% compared to the rest of the downtown core Class A buildings that have an average availability rate of 7.9%. – not very similar; not very predictive.”

With few exceptions, the buildings with smaller floor plates are overweight on available space.

Noteworthy examples include buildings with smaller floor plates in downtown Calgary, which contain 44% of the inventory but have 64% of the total available space in downtown Calgary.

Looking at just downtown Calgary Class A buildings, those buildings with smaller floor plates contain just 29% of the building inventory but have 47% of the total available space in the downtown Calgary Class A market.

Similar to Calgary, Ottawa’s office buildings with smaller floor plates have an uneven distribution of available space when looking city-wide. In Ottawa buildings with smaller floor plates have 30% of the inventory and 50% of the total available space. Downtown Ottawa follows the pattern since buildings with smaller floor plates have 44% of the inventory and 67% of the available space in downtown Ottawa. The twist in Ottawa occurs when we look at the downtown Ottawa Class A submarket and learn that it is the office buildings with larger floor plates (those greater than 29,000 square feet) that are overweight on available space with 19% of the inventory and 27% of the total downtown Ottawa Class A available space. In downtown Ottawa’s Class A submarket, the buildings with mid-sized floor plates are slightly underweight with 61% of the inventory and 53% of the total available downtown Ottawa Class A space. Buildings with smaller sized floor plates are on a more level playing field, with

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20% of the inventory and 20% of the total available downtown Ottawa Class A space.

Looking at buildings with large sized floor plates, we see the following patterns – under performance in Ottawa’s Downtown Class A submarket, even performance across Vancouver and Montreal’s downtown Class A submarket as well as outperformance in Calgary, Edmonton, Winnipeg, Toronto, Quebec City and the rest of Montreal.

Focused Actions Twinned with Operational Excellence In practical terms what can or should an owner, investor, manager, supplier, occupant or other stakeholder do with the knowledge that your building or portfolio is underperforming or outperforming the broader market or your peers based upon these and other building attributes? With a few exceptions, owners and managers of buildings with small floor plates will need to work smarter and harder than others to outperform their markets by thoughtfully highlighting and enhancing specific building attributes and manager attributes that align with their targeted occupant requirements and biases. In short, operational excellence twinned with a clear focus on your target occupant’s keys to success will be a precondition to the success of your investments.

The office leasing and investment markets are far more fragmented than ever before.

The substantial new supply of significantly different office buildings has altered the ‘commodity’ mindset of office spaces. Many office space occupiers now view space as increasingly distinctive and as an important element in their strategy to win the battle for talent. Office buildings and spaces are now being differentiated by: • Design (more daylight, personal control of temperature and air flow, higher occupant density, lower energy consumption, better environmental footprint);

• Property Manager and their brand (there are stark differences in awareness, use and satisfaction with communication channels established between occupiers and their property managers, responsiveness, issue resolution rates, intentions to stay, referral and recommendation rates for buildings and their property manager’s brand); • Positioning (relative to other buildings in that geographic node, building class, floor plate size, vintage, and other increasingly important attributes); as well as • Capital Investment (previous, current, and future upgrades in building and occupant performance, occupancy costs, image and appeal).

Many buildings and their submarkets are at a pivot point in terms of appeal and future performance. Some buildings will require repositioning and even repurposing. Some will require new owners and managers to achieve their potential. Others will drift downward into a place of increased pain before the key changes are made.

For those investors, owners and managers who have been investing in their buildings and people, in their processes and culture, in a service-centric mindset, they will more clearly see the premium performance that accrues to the ‘Big Winners’. Moving forward, strategy and execution matter. Now, they matter a lot.

■ Sandy McNair is the President of Altus InSite, a division of Altus Group. Since 1997 Altus InSite has conducted more than 1.9 million tenant satisfaction surveys for many of Canada’s leading commercial building owners and managers. sandy.mcnair@altusinsite.com www.altusinsite.com

Canadian Real Estate Forum / FALL 2015

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Canadian Real Estate Forum / FALL 2015

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STRONG OUTLOOK FOR

OTTAWA

REAL ESTATE

Aik Aliferis Chief Executive Officer / Founding Partner Primecorp Group of Companies

Our principal aim at this year’s Ottawa Real Estate Forum is to provide attendees with an understanding of the true current status of Ottawa’s real estate market, how and to what degree that market is being influenced by the federal government and how the major industry players see the market going forward.

Is Ottawa growing? Of course it is! Just as several major markets in Canada are growing.

The stability of Ottawa has always been one of its greatest attributes and an attractive feature for the real estate investment market as a whole. I am certain that that confidence, that consistency, is among the factors that have made Ottawa such a strong market. My hope is that the information given at this forum and the expert insight shared will instil that confidence in our attendees and reinforce the fact that the Ottawa market is strong and on the rise.

That stability is something we can count on for a long time. Real estate investors believe it – as they will impart in their presentations at the Ottawa Forum.

Of course every city has its real estate challenges. In the case of Canada’s capital, one such challenge is that

people aren’t sure how to define it. Ottawa has a reputation of being a major city, yet sometimes we are considered a “small town” because our population is a little less than that of other Canadian cities. We also, and without question, are painted with the government brush.

Ottawa’s federal government connection is very important and has a significant impact on the city’s real estate market. However, we should not forget that there many other industries driving the Ottawa market. Private industry – high-tech in particular – is strong throughout the Ottawa region and continuing to thrive. Private industry’s impact on Ottawa real estate is very positive.

There is one thing on which everyone agrees regarding Ottawa’s image – the city is clean, scenic, close to forests and waterways, and very high-ranking for resident lifestyle and happiness. If I could choose a take-home message for attendees of the Ottawa Forum it would that Ottawa’s real estate is strong in several unique ways and that investors that know only a little about this city should take the time to truly delve into its complexities, possibilities and realise its vast opportunities.

■ Michelle Morra-Carlisle

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CENTRAL CANADA AWAKENS FROM ECONOMIC DOLDRUMS

Derek Holt Vice President Scotia Economics

“We’re undergoing a quite significant rebalancing of regional growth prospects in Canada that will continue to have legs going forward.”

A strong American economy and a weak Canadian dollar will soften impact of oil’s price plunge and shift Canada’s growth engine eastward, predicted Scotia Economics Vice President Derek Holt.

“We’re undergoing a quite significant rebalancing of regional growth prospects in Canada that will continue to have legs going forward,” he said. “Lower commodity prices and borrowing costs will benefit the industrial heartland more than most other parts of the country.”

Commodities markets wrong-footed forecasters, who predicted earlier this year that crude prices would firm to $65 in 2016, after lower prices higher-cost drove American oil-shale producers out of the market. That didn’t happen.

“A lot has changed on the supply side during the last six months,” Holt acknowledged. “We’re looking at a longer, deeper glut in world oil markets.”

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Iran could add a half-million barrels a day to world markets by early next year and another half million barrels six months later.

Expect Ontario, Quebec and possibly New Brunswick and Manitoba to outperform longtime leader Alberta, as well as energy exporters Newfoundland and Nova Scotia.

Though the oil bust will hit Alberta hardest, it has historically bounced back from oil shocks faster than expected, and its economy today is more diversified.

“Having no debt is a very privileged starting point,” Holt smiled. “Don’t count Alberta out over the long term.”

British Columbia is a mixed picture. The Pacific province is not oil-dependent but does rely on demand from China.

“B.C. has a rather mature housing cycle and the commodity cycle also works against it, putting it in the middle of the pack,” Holt said.

Besides benefiting Canada’s industrial heartland, lower oil prices ought to stimulate flagging demand in China as well as the United States and Europe, firming prices to average in the mid-$50s in 2016.

While China won’t return to double-digit growth, it can easily sustain 7 per cent annual increases. The Eurozone ought to grow just under 2 per cent in 2016, with Germany leading the way.

Overall, Canada remains resilient. It is still spawning new jobs, despite the oil shock, and could see modest 1.5-2 per cent growth in 2016, outpaced by 2.5-3 per cent growth in the U.S. “A lot of these forces will extend into 2017 as well,” he added.

“Canadian employment and industrial output remain strong,” Hold observed. “Canadians still feel confident enough to buy a house or a car. I don’t see classic recessionary signals coming from the broad readings.”

With housing and consumer markets cruising record highs, Holt does see some softening ahead, but not a sudden drop.

“Canada’s regional mortgage market is very different from the United States,” he explained.

Even if U.S. interest rates spike in December, the Bank of Canada is under no immediate pressure.

“We forecast that Canadian interest rates are on hold for the rest of 2015 and all of 2016,” Holt predicted Even if Canada’s popular five-year mortgage rates hike next year, he concluded, lower commodity prices ought to leave more money in Canadians’ pockets, which will limit the impact of small interest increases on housing markets.

■ Robert Frank Canadian Real Estate Forum / FALL 2015

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MONTREAL QUEBEC OTTAWA TORONTO EDMONTON CALGARY VANCOUVER

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RETAIL’S RADICAL TRANSFORMATION

Lisa Hutcheson Senior Advisor J.C. Williams Group

Is online shopping a threat to brick-andmortar stores? Not if retailers are open to the latest creative approaches to buying and selling. Despite that Canadians are the second-largest Internet users in the world after the U.S. and retailers are determined to keep their shops relevant.

Walmart offers a locker service whereby the customer orders a product online and picks

“Bite Beauty Lip Lab in Soho, New York allows each customer to create her own lipstick colour, flavour and finish.”

it up at a designated “Grab & Go” locker.

This type of pickup option adds value for customers but does require extra consideration for retailers when planning their real estate needs.

Pop-ups: temporary retail spaces – are an increasingly popular way to gain exposure.

At a lower cost than leasing, a retailer can set up a mini boutique in a mall, city centre or market to promote their product and brand. Lisa Hutcheson, a Senior Advisor with J.C. Williams Group – Global Retail Advisors, encourages retailers to keep an open mind about the concept. “There is a possibility of them turning into some kind of real estate commitment,” she says.

Other trends which J.C. Williams is currently following: Curated Collections: Having the right assortment, the right product at the right time, by “curating” a collection to suit the customer’s tastes.

Customization: Tailoring the product to the customer rather than simply mass producing. For example, Bite Beauty Lip Lab in Soho, New York allows each customer to create her own lipstick colour, flavour and finish.

Experiential Retailing: Making sure a store is engaging for customers and gives them good reason to walk into that physical location.

Hyper Local: Taking “local” to a new level, this trend is about sourcing products close to home, with the promise of freshness, sustainability.

Retailvention: Busting the myths of the traditional retail model through technology and devices.

Technology Intervention: Creating experiences that can only happen at the store. Sport Chek in West Edmonton Mall offers a device that measures the customer’s golf swing, a treadmill that tests their gait, and a climbing wall that moves like a treadmill.

Granted, revamping a retail business via these new methods can be extra work and extra risk for landlords. Hutcheson still sees it as a plus. “It shows newness and freshness, and it shows that you are embracing innovation,” she says.

■ Michelle Morra-Carlisle

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Canadian Real Estate Forum / FALL 2015

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MAJOR METROPOLIS IN THE MAKING

development plan, tackling needlessly onerous development charges, reviewing its land use policy, pushing forward its second phase of mass transit extensions and developing transit-oriented hubs around existing lines.

At the same time, the city is moving swiftly to streamline its development process. The objective is to zero in on the precise proportion of public infrastructure required.

Jan Harder Ottawa City Councillor

“We need to start looking at suburban malls where we’re putting transit spines,” she suggested.

“Building atop of Walmart and Loblaw outlets could prove more financial feasible for developers.”

Jan Harder intends 21st century Ottawa to beat to the heart of business, more livable suburbs and a revitalized downtown core.

The city’s future rides on rail, renewal, riverfront and rural development, explained the head of the city’s urban planning committee.

The city councillor said that Ottawa is moving forward at full pace on five fronts at once; overhauling its urban 18

“Our standards need to give us the amount that we need,” Harder said. “Not more. Not less. Today’s standards likely contribute to delays and sometimes cost a lot more money than the regulated body insists on.”

She cited a recent decision to let developers build parks in line with their vision for new communities that they were constructing, rather than charge them to have the city do the work.

“The aim is for development charge appeals to fall by the wayside,” Harder added.

“Currently, when you build a large subdivision, less than half the land ends up being used to house the people who will ultimately live there. We’re looking at roads and storm water, for example, which ramp up development costs. ” Meanwhile, the city has revamped its urban development plan to encourage development along its multibillion-dollar light rail and bus corridors and reviewing its 1960s-era approach to parking.

“We need to start looking at suburban malls where we’re putting transit spines,” she suggested. “Building atop of Walmart and Loblaw outlets could prove more financial feasible for developers.”

The city is considering making the road network more amenable to pedestrians and cyclists, and might close some streets on weekends to make them more market like.

Likewise, the city is revisiting its old business parks and mixed-use neighbourhoods closer to the downtown core.

Underused Waterfront “We’ve done a lot of public consultation and have had a really good response from citizens,” Harder said. “We’re achieving more density in our suburbs than downtown. A much denser approach makes sense where people live, work and play. Ottawa also needs to take more advantage of riverfront development like the innovation centre at Bayview and the Windmill development at the Chaudière falls. More proposals on the short list for us to consider next year could forever transform the waterfront.”

Straddling a landmass larger than Vancouver, Edmonton, Calgary, Toronto and Montreal – combined – the city is also reviewing how it uses hundreds of hectares of rural land and plans to publish its findings in the first quarter of 2016.

Though the federal government has already begun to gravitate away from core areas, Ottawa currently lacks the outlying municipalities’ characteristic of large cities like the ones that dot the Toronto-Hamilton corridor.

“We might see investment in making our rural villages larger nodes,” Harder mused.

“Smaller towns will benefit by working aggressively to get more Ottawa related service. We could go as far as to connect the dots with the Seaway towns along Highway 401.”

■ Robert Frank Canadian Real Estate Forum / FALL 2015

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SURVIVAL OF THE FITTEST IN OTTAWA MARKET

Rob Kumer Partner, Investments KingSett Capital KingSett Capital considers Ottawa to be a stable real estate market, especially in retail and multi-residential investments.

That hasn’t changed for the company even as the federal government – the city’s largest employer – drastically cut costs

“As the government becomes selective and discriminating in terms of where they’re locating and where they’re pulling out of, those who have a real focus on the operating fundamentals will thrive. Those who don’t won’t.” and vacated office space in recent years.

“I think there’s a bit of a challenge in the office market, just given the stagnation of the federal government, but it does give an opportunity for the best operators to really prove themselves,” says Rob Kumer, Partner, Investments, KingSett Capital. “As the government becomes selective and discriminating in terms of where they’re locating and where they’re pulling out of, those who have a real focus on the operating fundamentals will thrive. Those who don’t won’t.”

He says that at KingSett Capital the focus is on ensuring that tenants, clients and customers in their buildings are happy and getting the value proposition they want.

On an investment basis, the company is selective and focused on buying good properties in good locations.

“Ottawa has always been and continues to be a core market for us and a big part of our program,” Kumer says. In terms of office buildings, KingSett focuses largely downtown, however it also owns a 50 per cent stake in Bayshore Shopping Centre, located in the suburb of Nepean. In addition the company owns multi-residential property in Kanata and two senior housing facilities also in the Ottawa area, one in the Glebe and the other in Nepean.

Given that federal government “stagnation,” will some operators be compelled to sell their properties in the coming year? “Generally – and this is probably a statement that applies for all of Canada – commercial landlords tend to be well capitalized and well-funded and don’t tend to sell when times get tough,” Kumer says, “but it’s always tough to predict what other guys are going to do.”

■ Michelle Morra-Carlisle

RETAIL AND OFFICE DEVELOPMENT MARKETS IN OTTAWA SIZZLING HOT

Julianne Wright Director and General Manager Altus Group Limited

20

More than $1 billion was spent in the last two years on redeveloping Ottawa’s regional malls and large format shopping centres – and that’s just on five projects, says Julianne Wright, director and general manager at Altus Group Limited.

This figure includes $220 million for Bayshore Shopping Centre; $300 million for the Rideau Centre; $291 million at Lansdowne Park; $120 million for Tanger Outlets; and $110 million for Les Promenades in Gatineau.

“One of the reasons why retail is doing so well in Ottawa is that we have one of the highest average household incomes across the country,” says Wright. “Another reason is that sales per square foot at the Rideau Centre are among the top 10 across the country, while Bayshore and St Laurent shopping centres are also above the Canadian Real Estate Forum / FALL 2015

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“One of the reasons for why retail is doing so well in Ottawa is that we have one of the highest average household incomes across the country.” national average. Our vacancy rates for retail in Ottawa are really low – the spaces are constantly being filled up with something.”

The office space market in Ottawa has also seen considerable growth, says Wright. The addition of six new buildings built for the federal government over the past five years – including three in Gatineau, one in Ottawa’s CBD and two outside the core – has created an extra 2.9 million sq. ft. feet of inventory, and this does not include the addition of the 2.2 million sq. ft. in the Carling Campus. It has also had a significant effect on the availability of space in the downtown core.

www.realestateforums.com

“The availability of Class A space was as high as 10.3% in 2012, but has fallen to about 6.5 per cent on some aggressive leasing,” says Wright. “The Class B market has been the clear loser, as we’ve seen Class B availability in the downtown core go from a low of 1.2 per cent in 2009 to as high as 12.2 per cent, as tenants take up Class A space or move into the new supply in both Ottawa and Gatineau.”

One of the myths Wright is adamant about dispelling is that downtown Ottawa is dead.

“We certainly don’t think so. There are four hotels being built in the downtown core, which will add an extra 770 hotel rooms.

While we are seeing the loss of over 1,000 units at the same time, it does show that these buildings are responding, being renovated or repositioned. The Le Breton

Flats major redevelopment project as well as Zibi, both just west of the downtown core, may both feature hotel components as well,” says Wright.

“Then there’s all of the new developments being spurred on by the LRT immediately to the west of the downtown core – we can easily identify about 20 projects that include 5,500 residential units, 8,000 sq. ft. of office space and 450,000 sq. ft. of retail which have filed for development applications.”

On the flip side, the condo market has gone soft, says Wright. “Three to four years ago, we would have seen cranes everywhere putting up condos, but they’re few and far between now.”

■ Barbara Balfour

21

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DERELICT SITE BECOMING WORLD-CLASS COMMUNITY Ottawa and Gatineau are waterfront cities, though the locals might not see it that way.

Domtar’s old “Chaudière lands” overlooking the Ottawa River and Chaudière Falls have been off-limits to the public for nearly 100 years, fenced off and obscured by lumber and paper mills.

Jeff Westeinde Founding Partner Windmill Developments

“You can build the world’s most sustainable building but if the owner of a building wants to show up in their Hummer, you’re not really doing much.”

In a deal signed off in December, 2013, Domtar agreed to sell the property to Windmill Developments, which plans to create the world’s most environmentally and socially sustainable community. Dream Unlimited Corp. is Windmill’s financial and operational partner on the project.

“One of the major issues we have as a region is there isn’t a lot of connectivity between the two sides of the river,” says Windmill Founding Partner Jeff Westeinde, adding that the site is historically significant: “This piece of property was the very first spot where a bridge stood, between what was then Upper and Lower Canada.”

Windmill’s environmental portfolio includes building the first LEED platinum building in Canada, as well as the first LEED platinum building in British Columbia, Alberta and Ontario, respectively. “But we’re going to up that game and bring in social sustainability,”

22

Westeinde says. That means fostering health, happiness, local content and community equity for all occupants. Windmill is using the framework of social sustainability pioneers One Planet Communities in the U.K. Westeinde explains the concept: “In a nutshell you can build the world’s most sustainable building but if the owner of a building wants to show up in their Hummer, you’re not really doing much. So we’re figuring out how to create the concept of a complete community that is durable and resilient on all aspects.”

Exploring sustainable communities in Europe and in Asia, his team noticed that each community had government support and was in fact created by some kind of government mandate. Their second observation was that Windmill could do an even better job.

“The fact that we have a private sector company setting the target to be the most sustainable community on the planet, we think, is a pretty good ingredient to see if we can achieve that,” Westeinde says.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2015

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OTTAWA’S LONG-LOST TECH SECTOR CONTINUES TO BOOM

Martin Vandewouw President, KRP Properties Not all markets in Ottawa revolve around the federal government.

The tech market in Ottawa is seeing a definite resurgence after falling off the radar for a bit, says Martin Vandewouw, President at KRP Properties.

“Despite what you’re reading out there, outside of the oil and gas www.realestateforums.com

industry, I think Canada’s economy is doing amazingly well,” says Vandewouw, whose company occupies a stronghold position in the Kanata market, and controls just over 2.8 million sq. ft. or nearly half of the overall office space in that market.

“About 90 per cent of our tenants are tech-related; the majority of them seem to be growing. There’s also some new faces showing up in the region – Qlik, a European company that takes up 45,000 sq. ft. of space; and ZTE, one of the largest telecommunications company in the world to name but a few.

“Make no mistake; there is still some volatility in the tech sector. For every company that doubles in size there’s one who needs to give back space. We might be doing a 40,000 sq. ft. deal one day and 20,000 sq. ft. comes back the next day.”

Despite occasional fluctuations, Vandewouw says they’ve seen a significant decline in vacancy over the past 12 to 18 months, into the single digits from the mid-double digits. In early 2000, KRP properties had 40 tenants; now they have 140. While the sizes of their

tenancies have changed, overall they’re occupying the same amount of space – leading to better diversity, and a greater mix of tenants.

“There’s a huge amount of talent in the region, left over from the Nortel, JDSU, and Newbridge days of the 1990s, and many tech companies are here to draw on that talent. As a result, Kanata is the largest private sector node outside of downtown,” says Vandewouw.

“On the service side, we’re also seeing tenants such as financial advisors and legal firms who provide assistance to tech companies. In the next few months, a hotel in the Marriott chain is scheduled to open in the area.

“When there’s a spending freeze, companies cut back on travel first – now we’re seeing it reversed. Tenants are getting back into letting their people travel again, so we’re seeing an influx of people using nearby hotels and restaurants.

“The private sector in Ottawa is alive and doing very well.”

■ Barbara Balfour 23

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OTTAWA REAL ESTATE MARKETS ON THE UPSWING IN 2015

“We’re at a time now where we can start to talk about stability. After the federal election, we can start to talk about growth, as all three party platforms have been about spending more money.” lack of government appetite, the Ottawa market has had its share of ups and downs along the way,” says Nathan Smith, Senior Vice President of the Capital Markets Group, Cushman & Wakefield.

“But we’re at a time now where we can start to talk about stability. After the federal election, we can start to talk about growth, as all three party platforms have been about spending more money.

Nathan Smith Senior Vice President Capital Markets Group Cushman & Wakefield With more government activity in 2015 than in the previous three years combined, it’s safe to say the market is on the upswing in Ottawa.

“From the growth of the technology sector and along with it the Kanata office space market, to the relative slowdown of the central business district due to

NEW LIFE FOR OTTAWA’S OLD BUILDINGS?

Gordon Wadley Leasing Director Dream Unlimited Ottawa’s downtown core has seen particularly high occupancy, low vacancy for a number of years.

Lately that has changed, with vacancy at its highest in three years. Ever since 2013 when the federal government announced its mandate to downsize its footprint, and its Workplace 2.0 initiative to create new, ‘smarter, greener, 24

“The government is looking at new space, putting in more requests for information and requests for proposals to lease. A growth in the public sector will have an immediate positive effect on commercial real estate, post-election.”

While the retail landscape experienced several challenges in 2015, including but not limited to the departure of Target earlier this year after years of anticipation, the general commercial market has been strong.

“The industrial market has had steady vacancy rates for the past three to four years, in outlying areas such as Sheffield Road, the Merivale sector, Kanata and

Colonnade Road. It’s been steady as she goes,” says Smith.

“We’ve seen significant strength in the Kanata market, starting in early 2014 and consistent with technology markets across the globe, which have improved steadily over the last eight quarters. It’s getting close to capacity and rents have noticeably increased.

“While we’re not truly at economic rent for speculative construction, we’re getting close to it each month.”

More good news for the real estate market in Ottawa includes the upcoming LRT, which presents developers opportunities to construct transit-oriented developments and residential projects that take advantage of the ability to move freely in and out of the downtown core.

“Overall, the market has weathered the downsizing by the city’s major employer particularly well; we’ve come out the other side with no long-term damage. We are now poised for growth as the government starts to re-engage,” says Smith.

■ Barbara Balfour

“Ottawa is a high-tech community. There’s a lot of smart human capital here and they’re growing these companies.” healthier’ workplaces, Ottawa’s largest tenant has vacated roughly a million sq. ft. of downtown office space. “It has been very dramatic for the market,” says Gordon Wadley, Leasing Director for Dream Unlimited. “And with that softening vacancy, we have also seen rents soften.”

This, he says, leaves landlords with little choice but to weather the storm together and invest in their buildings. He stresses the need more competitive offerings – buildings that make sense for the community – to attract tenants. As an example, Dream has been upgrading older buildings to LEED specifications.

“The reality is that here are a number of older obsolescent buildings in Ottawa's downtown core. They are going to stay in the inventory and landlords will have to put some capital in there to improve them,” he says.

Ottawa has rarely been considered an epicentre for commerce or business.

Rather than attract corporate headquarters, it is seen more as a location for regional offices. And yet while the city’s downtown has traditionally been occupied by federal government offices, high tech companies and other new-growth companies are now moving in. Until now these companies tended toward the suburb of Kanata, but as occupancy tightened there and rates climbed, downtown has become more attractive.

“Ottawa is a high-tech community,” Wadley says. “There’s a lot of smart human capital here and they’re growing these companies.”

Meanwhile, what happens next in terms of government tenancy in Ottawa, he says, will depend on the federal election results. His best guess is that the next 12 months will bring more “short term pain” but that, two years from now, the outlook could improve.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2015

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2005-14 Real GDP by CMA. Average Annual Growth Rate. • Source: The Conference Board of Canada

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4.0

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Saskatoon Edmonton Regina Calgary Vancouver Winnipeg Québec Toronto Halifax Ottawa-Gatineau Victoria

Mario Lefebvre President and CEO Quebec Urban Development Institute and Former Director Centre for Municipal Studies Conference Board of Canada The Capital region lags behind the national average in terms of economic growth. However, in the context of a temporary disruption to its prosperity – cost-cutting measures by the federal government, the area’s largest employer – there’s no serious cause for alarm according to Mario Lefebvre, President and CEO of the Québec Urban Development Institute and former Director of UDI Québec.

“Ottawa-Gatineau came in at 1.8 per cent [economic growth] over the last decade, which is not that bad a performance when you consider that the Canadian average was certainly boosted by the west,” Lefebvre says.

26

Montréal Hamilton

“Saskatoon grew by 4.5 per cent, Edmonton by 4.4 per cent, Regina by 4.2 per cent and Calgary closed the top four at 3.5 per cent. So these four cities certainly boosted the average.”

Housing markets have seen brighter days.

Lefebvre stresses, however, that although the market has slowed there is “no crashing in sight” because even having reached a plateau, we must keep in mind that the plateau follows amazing increases.

In the 1990s the prices of existing homes were stable at $135,000; these skyrocketed to an average of $370,000 – almost threefold – by 2013. Ditto for the new housing market, whose pricing index shows a slight decline but, again, after significant highs in recent years.

Population growth has also slowed in Ottawa-Gatineau, another side-effect of

federal government’s hiring freeze. But a surprising bit of good news is that consumers in the area are still shopping.

“Retail sales are averaging nearly 4.5 per cent over the past decade,” Lefebvre says.

“If you take inflation out of the question it’s still 2.5 per cent growth in real terms, and 2015 should also be positive for retail sales.

“Looking ahead to 2016, we’re going to see an end to the cuts in public sector employment. We’re going to have stabilization on the housing market front.

Population growth will resume a little bit.”

On the whole he believes the area’s economic growth in 2015 will likely be below 1 per cent for the 4th straight year but will rise to approximately 1.6 per cent next year. “I like to think that the worst is behind us,” he says.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 27

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Canadian Real Estate Forum / FALL 2015

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CALGARY

WEATHER THE STORM, CONTINUE TO THRIVE

Greg Guatto President and Chief Executive Officer Aspen Properties

The cycles we go through in Calgary are dramatic. The ups can be super high, the lows super low. What I find myself saying, however, is that it’s never as bad as it seems when you’re at the bottom, and it never looks as good as it appears to be when you’re at the top.

Our economic driver is the oil and gas industry, which is currently experiencing one of the most difficult times I have seen since starting a business in this town. The key for real estate investors is to have a longer-term, bigger picture view. Attendees at the Calgary forum will learn from individuals who have been through cycles like this before and who can bring perspective to people, particularly young people who may not have experienced such highs and lows.

Those of us working in Calgary real estate for the long haul know we must stick to our business and continue looking for ways to create value. We also need to understand where the opportunities are as you never know when they’re going to present themselves. You’ve got to be running your business and ready to act when new opportunities do arise – And come they will! We’ve had our share of them! www.realestateforums.com

From the experts presenting at the Calgary forum you will hear a consistent message; always take a long term view when investing in an asset.

Ask yourself; Can I make this a strong, long term asset by investing capital in the right places? Is it in the right location? Where is the opportunity to create value?

In true Calgarian form, my company loves that type of asset. The kind where we have to roll up our sleeves, work hard and do a great job managing, spend capital in the right places, attract new tenants – you know, that fundamental, good old-fashioned, hard work kind of job that ultimately creates value.

If I could share my own personal message to the Calgary Forum attendees, it is that – regardless of economic highs and lows, a real estate business can survive and thrive with the right people. One of the highlights of my career is watching our younger people develop and grow. I value that even more than doing big deals. So surround yourselves with the A team. Find the best in the industry to help you achieve your goals, develop strong relationships with them and believe me the possibilities will surprise you.

■ Michelle Morra-Carlisle

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! CREF FALL 2015 2015-10-01 8:25 PM Page 32

WE’VE SEEN THIS BEFORE

Greg Kwong Regional Managing Director CBRE Limited

The questions everyone asks Greg Kwong these days are, “How bad is it really out there? Are office tenants and landlords capitulating because they don’t see an end to the low oil price environment? And how low will rents go?”

CALGARY MARKET REWARDS STAYING POWER

“We have the tenant on one side saying, ‘I want the space for nothing,’ and the landlord on the other saying, ‘Things are going to get better so I won’t drastically drop my rental rates.”

Kwong, the Regional Managing Director of CBRE Limited, believes that lower oil prices are here to stay for a while. “Judging from what I am hearing from the Oil & Gas industry it won’t be until the summer of 2016 that we might start to see oil at over $60 a barrel and actually stay there for longer,” he says.

“Over the next 12 months most Oil & Gas analysts are stating that we’ll see drastic variability from $20 to $65 a barrel, but nothing sticking for too long.”

And for the downtown office market, that’s bad news, as 80 to 90 per cent of it carries a correlation to the oil and gas industry, says Kwong. In the suburbs, that direct correlation is significantly lower at closer to 50 per cent, he says.

Vacancy numbers for the third quarter were 14 per cent in the downtown core and 15 per cent in the suburbs, while the lowest

market a year ago. We will continue to own and engage in the market here.”

“Energy-industry-reliant office towers downtown will, undoubtedly, take a hit,” he acknowledged.

Eric Carlson has done business in Calgary for 25 years and has seen energy busts before. His bottom line: There’s money to be made in Alberta in the long term.

That’s why he’s in Calgary to stay.

“If you’re really good at market timing, you can come and go as you please,” said Anthem Properties’ President. “The time to sell was at the height of the 32

However, the lull in the market is a valuable opportunity for building owners to reflect on how to be competitive going forwards, and getting ready for the next cycle, says Kwong.

“It’s important for both landlords and tenants to understand where the market is and to be realistic with their expectations.

“We have the tenant on one side saying, ‘I want the space for nothing,’ and the landlord on the other saying, ‘Things are going to get better so I won’t drastically drop my rental rates.” In the sublease market rental rates will keep decreasing until Oil & Gas firms start feel some optimism and grow again.

“But with each scenario until both sides are realistic, not a lot of deals are going to get done.”

■ Barbara Balfour

“The City of Calgary was very slow to approve civic infrastructure during the past five years, so we had been expecting a three-year housing shortage to start in 2016.”

While oil prices have tanked, they haven’t dented Calgary’s economy the way they did in 1983.

Eric Carlson President Anthem Properties

rates Kwong has seen have been 0.5 per cent and 6 per cent respectively.

With fewer transient workers, apartment and investor-owned condo rentals will also suffer.

“There won’t be many condo launches during the next year or so,” Carlson predicted.

Decreased demand for high-end single-family residences has been offset by demand for smaller and townhomes, though, he said.

“New multi- and single-family homes ought to track the decrease in household formation,” he forecast. “They might plateau around 10,000 per year – a 30 per cent decline. That’s a slowdown, but nothing is falling off a cliff.”

Paradoxically, the Calgary cool-down will provide much-needed relief from a rapidly overheating residential market.

“The City of Calgary was very slow to approve civic infrastructure during the past five years, so we had been expecting a three-year housing shortage to start in 2016,” Carlson observed.

Retail rentals have plateaued but also remain strong, he added, and deep-pocketed institutions with the staying power to ride out the energy crunch hold most of Calgary’s industrial real estate.

It helps that Calgary has diversified and become much more urbane than a few decades ago, he said.

“It’s no longer just about energy,” Carlson concluded. “Today, Calgary is a city in its own right. That’s why we’re staying. We take the long view.”

■ Robert Frank

Canadian Real Estate Forum / FALL 2015

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RESULTS RELY ON VALUES, RELATIONSHIPS

“We eat what we cook. There’s no secret. We’ve always had a clear purpose: to create premium returns for our investors.”

KingSett Capital’s Managing Partner recounted his learning the ropes. “All of them were smarter than I was. They taught me what motivates customers.”

Jon Love Managing Partner KingSett Capital

“Make sure you can pass the phone test,” Jon Love advises newcomers to the real estate industry. “What does person at the other end of the line think when the phone rings and he or she sees that it’s you calling?”

“When I started out in retail leasing 35 years ago, I loved dealing with 300 sq.ft. tenants,”

He highlighted how personal connections that he nurtured the early 1980s continue to help him to this day.

“Values deliver results: Transparency.

Responsiveness. Integrity,” Love declared.

“Find a role, do your utmost and always build relationships – with brokers, tenants and all other stakeholders.”

Love recalled arriving in Calgary in 1984, just in time for a baptism of fire.

“Dome had just gone bankrupt, the office market was reeling and we couldn’t close condos,” he said. “It was all bad. It was also a great way to test your mettle. When you’re faced with adversity, you either quit or roll up your sleeves – which takes creativity, curiosity, persistence, and drive.

Despite the downturn, Love remains upbeat about Calgary’s prospects.

“We’re going through some wrenching adjustment now,” he granted, “but real estate is a long game. There will always be strong opportunity in Alberta, which makes it a great long-term place to invest. We’re going to be fine.”

Love credited his success at KingSett to the team of people whom he helped to assemble.

He added that KingSett’s single-minded readiness to invest in its own funds shoulder to shoulder with its co-investors’ has helped to earn its customers’ confidence.

“We eat what we cook,” Love concluded.

“There’s no secret. We’ve always had a clear purpose: to create premium returns for our investors.”

■ Robert Frank

EVERYBODY DRINKS COFFEE: CALGARY’S INDUSTRIAL MARKET SHOWS RESILIENCE IN TOUGH TIMES Trumble, Managing Director, Investments at Tribal Partners Inc. “You’d think that the layoffs and economic downsizing would make people spend less, but the example I always use is coffee,” says Trumble. “Everyone drinks coffee, whether you have a job or not”.

Lance Trumble Managing Director, Investments Tribal Partners Inc.

One of the greatest strengths of the industrial market in Calgary is its resiliency. And the major reason for why it can weather the storms so well is because it’s no longer directly connected to the oil and gas industry, says Lance 34

“It’s the same with milk and other everyday use items – that doesn’t change with the price of oil. The warehousing market is about consumables and consumer goods, not fluctuations in oil prices which have driven the Calgary industrial real estate market”.

An added strength of the industrial market in Calgary is that it now serves a much broader spectrum over a larger geographic area. “Before it was limited to just serving the immediate Calgary region, but now we serve as a hub for all of Western Canada. Our clients search for

industrial space solutions that can serve the entire market; that’s why the micro-market in Calgary has less of a direct impact than those of Vancouver, Winnipeg or Saskatoon, or all those combined with greater North American trends in logistics,” he says.

“What also helps is that all the major players in the industrial market are financially stable entities. You don’t see a lot of swashbuckling speculators here – these are large institutions with staying power who won’t bail if things get tough for 12 to 16 months.”

Providing even greater stability is the size of the market in Calgary, and it’s grown in size significantly.

In the early 1990s, the market size was only 75 million sq. ft. – now it’s at 130 million sq. ft.

■ Barbara Balfour Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 35

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! CREF FALL 2015 2015-10-01 8:25 PM Page 36

BRIGHTER SKIES AHEAD FOR 2016 IN CALGARY

Mary Moran President and CEO Calgary Economic Development Despite some tough times immediately ahead, President and CEO of Calgary Economic Development Mary Moran is confident that 2016 will be brighter.

“We know we’re heading into a stronger headwind for the last quarter of 2015. Continual

WHAT RECESSION? CALGARY’S RETAIL SECTOR CONTINUES TO BOOM

Darryl Schmidt Vice President, National Leasing Cadillac Fairview Despite sinking commodity prices and layoffs in the oil patch, retailers need not fear – Calgarians are spending more than ever.

“You’d think you’d see an immediate negative impact on sales, but right now we’re seeing 36

instability in oil prices and seeing layoffs have a ripple effect to other sectors - both leading to a significant rise in downtown office space vacancy,” says Moran.

“However, 2016 looks a bit brighter. The Conference Board's economic outlook for GDP growth calls for 1.8 per cent. Now, this can be hard to stomach when we had 5.1 per cent real GDP growth in 2014, but this is when we came off an overheated period of time where we saw accumulative GDP growth of 20 per cent in the last five years or so.”

The national GDP growth being forecast for 2016 is 2.1 per cent, says Moran, so it’s important to keep things in perspective. “I see this period as taking 20 steps forward, and then one step back in 2015.”

By mid-2016, Moran predicts that energy demand will be on the rise, and the oversupply will ease. While unemployment is currently at 6.6 per cent, it is still lower than during the 2010 economic downturn when it reached 7.5 per cent between 2008 and 2010.

“While the low price of oil is certainly impacting the downturn in the economy, so is

great resiliency in the market,” says Darryl Schmidt, Vice President of National Leasing at Cadillac Fairview.

“The decline in the oil patch and the fall of the Canadian dollar mean a lot fewer dollars are leaking into the United States, which in turn has propped up domestic sales in unprecedented ways.”

Calgary’s retail sector has remained a strong, highly sought-after asset class. In July, sales productivity, or sales per square foot, was $1,131 per sq. ft. at Chinook Centre and $960 per sq. ft. at Market Mall – both historical all-time highs for these shopping centres.

“Chinook is third in the country among assets this size, just behind Yorkdale and Toronto Eaton Centre,” says Schmidt.

“We’ve hit a critical mass in Calgary, in terms of population and household income.

We don’t see the dramatic swings correlated to oil that we used to. In spite of the bankruptcies we’ve seen in retail at the national level, we’re still seeing strong demand, and Calgary is now going head to head with Vancouver as the second point of entry in the Canadian marketplace.

“Calgary is definitely on the radar screen for

the uncertainty around the provincial government's climate change strategy, royalty review and market access stance – all of which carry a significant impact on investment and the timing of investment,” says Moran.

“We expect to hear the Government of Alberta’s stance on these topics over the next few months, which will certainly affect the flow of investment into the province.”

Other factors causing economic volatility across the country is a potential of change hovering around the federal government.

However, on a positive note, Moran urges the acknowledgement of growth in the transportation and logistics sector, which continues to create jobs and increase the GDP value.

“The low Canadian dollar is resulting in growth in other industries such as tourism, film and television, and manufacturing. The weaker dollar provides incentives for people to do business in and visit the city. We certainly saw this throughout the summer with an influx of tourists and increase in staycations,” says Moran.

■ Barbara Balfour any international retailer expanding across Canada – I would even say it’s a must-have market stop, whether brands are coming from the U.S. or Europe.”

The introduction of high-end and mass-consumer retail stores into the Calgary market in the past 12-24 months has been robust, and has included brands such as Microsoft, TUMI and Nordstrom.

While growth among U.S.-based retailers has decelerated, European brands are expanding on a much bigger scale in Canada – in the next 18 months, Calgarians can expect to see stores open by COS (H&M’s upscale label), Ted Baker, Marc Cain, and Massimo Dutti.

“Some of the national failures we’ve seen have created opportunities for local and regional retailers, too,” says Schmidt. “This is good news when you’re looking to have not as cookie cutter a mix, and want to include some independent boutiques to help differentiate from other enclosed malls.

“We’re continuing to do deals with other regional retailers for a more unique shopping experience that resonates with consumers.”

■ Barbara Balfour Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 37

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NEW UNIVERSITY DISTRICT TO BECOME CALGARY’S LARGEST EMPLOYMENT HUB OUTSIDE DOWNTOWN University of British Columbia and Simon Fraser University in Vancouver.

James Robertson President and CEO West Campus Development Trust

A vibrant new district to be set between two major hospitals and the University of Calgary is poised to become the city’s largest employment node outside of the downtown core.

Called the University District, the 200-acre, mixed-use community is being developed by West Campus Development Trust (WCDT), a non-profit subsidiary of the university that is modelled after similar land trusts set up by the 38

The development will include a total population of 15,000 people in 6,500 units of housing, as well as 1.5 million sq. ft. of office, serviced by approximately 200,000 sq. ft. of retail.

“It’s a great location with lots of amazing amenities around it,” says James Robertson, President and CEO of WCDT. “We have great single family-oriented residential communities around us; excellent medical facilities and the employment opportunities that go along with that; and a fantastic university of 35,000 students, along with all its faculty and staff.

“We have lots of employment for both the daytime and evening population, and we think we’re going to add something that brings the entire northwest into a tighter hub.”

Current employment in the area is in the range of 30,000 people, which is projected to rise to 60,000 over the next 20 to 30 years.

It’s the developer’s vision to bring together all the elements of the surrounding residential communities, as well as an existing employment centre, in an exciting, vibrant location, says Robertson.

“We have a very active population that has lived in the surrounding area for multiple generations, for 40 to 50 years; Alberta Health Services who runs the two hospitals, and the City of Calgary who has a significant vision for this area,” says Robertson.

“As a single-purpose entity, entirely focused on the University District as of today, we’re really looking for innovation. We have a large sustainability focus and also an element of social responsibility – so we’re looking for innovative projects that cover concepts ranging from who may live there, to innovation relative to sustainable or unique design.”

Phase One lots will be released to multi-family builders this fall.

■ Barbara Balfour Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 39

MARKET FAVOURS DEVELOPMENT OVER RENEWAL

Dallas Wingerak Vice President, Real Estate & Operations, Western Canada Choice Properties REIT

“There’s some uncertainty due to a new government regulations combined with a downturn in the commodities markets but the long term outlook for Calgary and Alberta remains strong.”

Low market capitalization rates – despite the downturn – have led Dallas Wingerak to intently focus on development and the development pipeline.

“That’s where the upside is,” declared the Choice Properties Vice President. “We manage our new development to bring down costs for our tenants by being as energy-efficient as possible.”

“Owners of distressed assets must incur great expense to reposition,” she contrasted. “In some cases, we might even see some demolition.”

Like most market players, Wingerak is prepared to weather the storm, banking on Calgary’s solid reputation for strong long-term growth.

“It you took a short-term view, there would be a lot more on the market than there is today,” she observed.

“In Calgary, you have to be prepared for more pronounced contractions than the rest of the country,” she said.

For Wingerak, whose firm is mainly in the retail real estate market, the primary challenge is to attract tenants who buy into Choice’s upbeat long-term outlook.

“Franchisees are somewhat more nervous than corporate-backed retailers, who are more prepared to make the leap in this market,” she reported.

Upcoming increases to the minimum wage will increasingly dent Alberta’s restaurant business, Wingerak added.

“Theirs is some uncertainty because the minimum wage has a huge impact, and that’s a big retail real estate sub-category,” she warned.

Paradoxically, inelastic capitalization rates have stiffened prices that otherwise ought to have fallen, given the current contraction.

“We’ve had a bit of relief on construction costs. Otherwise everything is sticking where it is”, Wingerak said.

■ Robert Frank www.realestateforums.com

39

! CREF FALL 2015 2015-10-01 8:25 PM Page 40

DESPITE THE DOWNTURN, CALGARY CONTINUES HIGH RECORD GROWTH

Jeff Fielding City Manager and Chief Administrative Officer City of Calgary

Planning for Growth City of Calgary

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While the perception of Calgary is that it’s undergoing a major downturn, the city has had held a fairly good record of growth in recent years.

Calgary grew by more than 35,000 people in the past year alone, a figure that has held steady over the past three years. The retail sector shows continued strength, and 93 per cent of Calgarians are gainfully employed – all factors that makes Jeff Fielding bullish about the city’s economic future.

“Even during the last major downturn in Calgary, in 2010, we still had a growth rate of 6,000 people for that year,” says Jeff Fielding, City Manager and Chief Administrative Officer at The City of Calgary.

“The only time we’ve seen net negative population growth in Calgary was in 1982/1983 during the National Energy Program.

“The long term trend for growth patterns has always been upwards in Calgary.

People are concerned about the economy but the attractiveness and quality of opportunities here remain significantly better than in many other places.

Comparatively, the city’s population numbers have tripled since 1971 and doubled since 1989.

About half of people moving to the city are new Canadians. This means the face of Calgary is changing dramatically – and so are its needs when it comes to infrastructure and housing choices, says Fielding.

“We’re seeing a shift in the upper end of the market, which is not as strong as what it’s been – the $1

“People are concerned about the economy but the attractiveness and quality of opportunities here remain significantly better than in many other places. Yes, oil and gas has taken a hit, but there’s lots of other options here.”

“New comers from Asian or African countries tend to have more people per household and support more family members. This affects the types of services the City needs to provide and the communities that need to be built for them to feel comfortable,” he says.

“Yes, oil and gas has taken a hit, but there’s lots of other options here.”

The fastest growing quadrant of the city, which also accommodates the most new Canadians, is the northeast, followed by the southeast and the southwest.

In the past four to five years, Calgary has grown by the size of Red Deer.

“One of the issues is – do we have the capacity to respond to that level of growth?

40

We’re becoming quite challenged to accommodate everyone,” says Fielding, who notes that the breaking price point in the housing market is at around $400,000.

million price point is changing quickly and we’re seeing a softening above $500,000.

“We’ve had a tight rental market in Calgary for a number of years. We know that there’s a pent-up demand for it, and more people will find home ownership attractive if the prices are affordable enough.

■ Barbara Balfour

Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 41

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! CREF FALL 2015 2015-10-01 8:25 PM Page 42

OIL PRICE PUTS PRESSURE ON PRODUCERS

OPEC Watch-List OPEC Watch-List Relative risk scale â&#x20AC;˘ RBC Capital Markets Oil production (mb/d) Country

Geopolitical risk Change over past year

2014

Last month

Saudi Arabia

9.67

10.50

3

Iraq

3.26

4.30

9

Risk for the next year

Comment

4 Plunging deeper into the red, even resorting to borrowing.

10 How long can oil remain immune from rising instability?

Kuwait

2.87

2.85

1

2 Small population, a lot of money, shock absorbers available.

Iran

2.79

2.90

6

3 Turn-around story of the year, has seen a reversal of fortune y/y.

UAE

2.77

2.95

1

2 Flush with cash and few citizens, UAE sits in the sweet spot.

Venezuela

2.46

2.49

7

9 Plenty of risk going into the December polls.

Nigeria

2.04

1.94

9

8 Elections bought time but December's amnesty decision is critical.

Angola

1.65

1.75

5

5 Once caught in a 27 year civil war, it's now a more stable member.

Algeria

1.12

1.11

5

7 A looming leadership transition looks to be a major risk.

Qatar

0.71

0.64

1

2 Reliant on LNG, Qatar's challenge will emerge later this decade.

Ecuador

0.56

0.54

5

Helima Croft Managing Director and Chief Commodities Strategist RBC Capital Markets

Libya

0.45

0.36

10

Something has to give. The oil glut has hammered energy prices, driving producer margins below the cost of capital.

â&#x20AC;&#x153;Key OPEC producers expected a recovery and increased production,â&#x20AC;? recalled RBC Capital Markets Managing Director and Chief Commodities Strategist Helima Croft. â&#x20AC;&#x153;Saudi production is up almost a million barrels, year over year, as is Iraqi production.â&#x20AC;?

Scale:

So far, American oil shale producers have deďŹ ed a shakeout that, six months ago, energy pundits thought certain.

High -> Low

6 Protests proliferating despite President's electoral track record.

10 Peace talks and efforts to restart exports have not borne fruit.

High -> Low

â&#x20AC;&#x153;The Saudis tried letting the market set the ďŹ&#x201A;oor â&#x20AC;&#x201C; when they thought the ďŹ&#x201A;oor was $75 a barrel,â&#x20AC;? she continued. â&#x20AC;&#x153;They were surprised by the resilience of U.S. production. If U.S. production ultimately proves unbreakable, then they really have a problem.â&#x20AC;?

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The lower-forlonger phenomenon that has emerged is literally a life-ordeath issue for some oil producing countries. â&#x20AC;&#x153;The wild card is whether rĂŠgimes will remain stable in this environment,â&#x20AC;?

Croft observed. â&#x20AC;&#x153;Cash enabled them to survive the Arab Spring.

High expectations remain for social services and, if they canâ&#x20AC;&#x2122;t pay for them, theyâ&#x20AC;&#x2122;re in real trouble.â&#x20AC;?

Countries like Iraq, Algeria, Libya, Nigeria and Venezuela are particularly at risk. â&#x20AC;&#x153;Some of those countries will really struggle to meet their ďŹ nancial obligations at current prices, putting them at risk of political instability,â&#x20AC;? she said. â&#x20AC;&#x153;If they canâ&#x20AC;&#x2122;t cover wages and experience massive shortages, they could face food riots.â&#x20AC;? â&#x20AC;&#x153;With four ongoing wars, the Middle East has never looked more unstable. Normally you have one, plus the Arab-Israeli conďŹ&#x201A;ict in the background,â&#x20AC;? Croft added. â&#x20AC;&#x153;The question is what has to give, and what will give ďŹ rst.â&#x20AC;?

Ironically, the ensuing supply disruptions could help to rescue the remainder of the energy sector from depressed oil prices.

In the meantime, donâ&#x20AC;&#x2122;t expect any signiďŹ cant price rises anytime soon. â&#x20AC;&#x153;We still have to work off very high inventories before the market reaches a balance in the second half of 2016, once they start to drop,â&#x20AC;? she forecast.

Croft predicted that crude prices will average about $63 a barrel next year for West Texas Intermediate; and around $68 for Brent crude.

She concluded by encouraging investors to take a closer look at longer-term issues that loom large, just over the horizon, like the United Nationsâ&#x20AC;&#x2122; upcoming climate change conference in Paris next month. â&#x20AC;&#x153;Ultimately it will be very important to see what Chinaâ&#x20AC;&#x2122;s commitment will be to the environmental policies that will be staked out,â&#x20AC;?

Croft urged. â&#x2013; Robert Frank Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 43

RESILIENCE DEFIES ECONOMIC GRAVITAS

Amy Erixon Managing Director Investments Avison Young

You wouldn’t know that Alberta’s energy economy had taken a hard hit by looking at the Calgary real estate market.

“Maybe we’ve been lucky, but we’re not seeing any significant dislocation in our portfolios,” reported Amy Erixon. “No defaults. No vacancy spikes. None of our tenants seem to be retrenching.”

The Managing Director of Avison Young’s investments sees a more nuanced shift in leverage strategy, as investors shift their allocation between different property types.

“It seems to be sector by sector,” she observed. “There is a little bit of ongoing diversification out of office overweights generally in Canada and specifically in Alberta.”

Paradoxically, despite the economic headwinds, prices haven’t budged much.

“It might be due to strong hands or that Alberta enjoys a more diverse economy than is widely recognized,” Erixon surmised. “There hasn’t been much price improvement nor have we witnessed many deal opportunities.”

Likewise for liquidity, she added.

“The nationals are more cautious, but the regionals have plenty of capital, so we haven’t seen a debt shortage or an equity crunch,” Erixon said.

Despite the trend for some national players to diversify outside Canada, they’re not shifting their strategies out of Alberta in the same way. Coupled with the cooling-off of Calgary’s once-overheated construction industry, www.realestateforums.com

that has boosted development at the expense of existing properties.

“With prices backing up, REITs can’t justify acquisitions,” she explained.

“Development is attractive. They’re interested in getting more exposure to Alberta because of the higher income that the province generates compared with other parts of Canada.”

Infrastructure investment talk by the newly elected New Democratic Party

government could also bolster Calgary in the short- and medium-term.

“It might make markets more ebullient across the more consumer-oriented spaces,” Erixon concluded. “It could be more attractive time to build than in other phases of the business cycle, if you have preleasing.”

■ Robert Frank 43

! CREF FALL 2015 2015-10-01 8:25 PM Page 44

NOW GEARING TOWARDS A BALANCED MARKET Boukall says new condo sales are down close to 50 per cent year-to-date, “but this is coming off one of the strongest markets we’ve seen in the last decade. So it is weaker, partially because there’s no real excitement in the market and, with the downturn in the energy sector, investors are sitting on the fence.”

Matthew Boukall Director, Residential Advisory Services Altus Group

Boukall says one problem is the lack of new options. Cranes still dot the downtown skyline, and condo developments in East Village and the Beltline have made splashy headlines, but, he says, “we’ve only seen three new High-Rise project launches in the inner city, where last year we saw twice as many. So there are fewer options, less excitement … fewer investors in the market

After years of strong growth, Calgary’s red-hot condo market has cooled off in 2015, says Matthew Boukall, Director of Residential Advisory Services for Altus Group.

Future High-Rise Residential Supply

results in a fairly substantial slowdown in the overall sales line.”

That said, the market is still fairly healthy, Boukall notes. After all, he says, people still need places to live.

“Residential is a bit different [than other asset classes] because you are dealing with actual consumer demand,” he says. “You are not necessarily influenced by corporate decisions … or financial stock pricing. You are more impacted by the fact that people need homes to live in. We’ve just come off the last four years of some of the strongest population growth the city has ever seen, and we are still recovering to a degree where we need to catch up to some of the pent-up demand from last year.” The three projects to launch this year have also seen fairly healthy levels of demand”

Altus Group 2000

1800

High Rise Residential

1600

High Rise Condominium

650

1400

663

1200

467

829

1000

800 150

600

1174

1068

1052 947

400

800 0

729

720

669 558

557

2013

2014

200 217 0 2008

2009

2010

2011

MARKET TILTS TOWARD BUYERS

2012

2015

2016

2017

2018

Oil prices are low and likely to stay low for a long time.

That will significantly soften Calgary’s real estate market in 2016, predicted ATB Financial’s Chief Economist Todd Hirsh.

Predictions this spring that American shale oil producers’ higher costs would drive them out of the market never materialized, so far failing to deliver expected relief to Alberta’s energy industry. A June oil-price bounce back to $60 proved ephemeral.

Todd Hirsh Chief Economist ATB Financial

“U.S. producers proved more nimble than anticipated and got their production costs down more quickly than expected,” Hirsh said.

“Oil prices will remain discouragingly low for

44

Inner-city Calgary also is starting to see more purpose-built rental come onto the market, Boukall says three new rental projects are nearing completion with more expected to start construction shortly. “Our housing market is still accessible from an ownership perspective, unlike in the US where tougher credit-score requirements make it more difficult for many to get a mortgage” he says.

“But we’re still seeing people deciding to rent, even when they could own, because of the lifestyle, the convenience, the mobility, the freedom. That’s going to support much of the rental properties being built.”

■ Alex Frazer-Harrison

Alberta producers for the next six months or longer,” he warned. “There are some signs that oil shale will start to curtail in 2016, though, stabilizing the energy markets.”

The energy industry has already retrenched with layoffs, with more coming.

Real estate sales are down 27%, year-over-year, with some inventory withdrawn from the market.

“Calgary will be hit the hardest of any Western Canadian city,” Hirsch declared.

“We’re talking about a slow sag in prices, rather than a bubble bursting. Residential prices are only down 2%, a year into the oil price downturn, and could reach 5%.

Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:25 PM Page 45

“Alberta resilience is just a normal cycle, unrelated to the newly elected NDP government. It happened under Prentice, Redford and Klein. Every time energy prices fall, we have a big budget hole to fill. Other helpful coincidences include the undervalued Canadian dollar, low interest rates and strong American growth that have buoyed Central Canada’s hitherto-sluggish economy.”

Commercial real estate will also take a hit, with vacancy rates remaining in the double-digit range, driving down rents.

“It happened under Prentice, Redford and Klein,” Hirsch said. “Every time energy prices fall, we have a big budget hole to fill.”

“A tidal wave of inventory will enter the Calgary market over the next year,” he observed.

“We’re seeing a lot of subleasing activity.”

Other helpful coincidences include the undervalued Canadian dollar, low interest rates and strong American growth that have buoyed Central Canada’s hitherto-sluggish economy.

Now for the good news Hirsch is no doomster. He forecasts Alberta’s economy will still end 2015 up 0.5-1.5%, and ought to remain in the black in 2016. With the best balance sheet of any province, Alberta has far more assets than debt, and is borrowing at far lower interest rates than it earns on its investments of $7 billion.

Calgary’s youth and brains also bolster confidence: The city has attracted the country’s youngest and best-educated demographic.

“Although some outmigration in 2016 is inevitable, the young, energetic entrepreneurs who remain will find opportunity,” Hirsch enthused, “even if energy prices don’t bounce back.”

Alberta resilience is just a normal cycle, he added, unrelated to the newly elected NDP government.

www.realestateforums.com

With Quebec and Ontario still facing some challenges, interest rates are unlikely to rise during the next six months.

“There’s still too much slack in the Canadian economy,” Hirsch reported. “Our dollar might move into the high 70¢ range, but don’t expect 80¢ anytime soon. Even if the Fed hikes its rates in December, it will probably be another year before the Bank of Canada follows suit.”

Why? Canada’s strong real estate sector.

“Residential real estate is one of the only remaining engines of the Canadian economy,” Hirsch concluded. “The Bank of Canada is reluctant to poke that bear with a rate increase.”

■ Robert Frank 45

! CREF FALL 2015 2015-10-01 8:25 PM Page 46

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! CREF FALL 2015 2015-10-01 8:25 PM Page 48

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! CREF FALL 2015 2015-10-01 8:26 PM Page 49

PROPERTY TRANSACTIONS BY ASSET CLASS GREATER TORONTO AREA H1 2015 vs. H1 2014 & H1 2013

Type

Volume (#)*

ICI Land

2014

2013

2015

2014

2013

127

132

114

$553

$784

$585

170

$1,665

16

$329

Percent Change

16%

Res Land

16%

255

Percent Change

212 20%

Res Lots Percent Change

30 -20%

Percent Change

-2%

8%

Apartment

37%

Hotel Total

$1,580

86

$799

$1,489 8%

$1,031 6%

-32% $500

60% $105

$984 -49%

$34 208%

$6,303

$411 -92%

$6,941 -9%

24

$1,512

127

$7,751 -10%

Recent Transaction

114

122

2014

100

2013

74 230

2015

235

2014

Land Sectors

191

2013

ICI Land

Sector:

Res. Lots Res. Land

220

2015

204

2014

Address:

220

2013

133, 135, 143 & 145 King Street East

93

Apartment 2015 68

2014

Municipality: Toronto

86

2013

Transaction date:

8

2015-07-24

2014 7 2013

$1,611 -2%

$1,607

132

16

1%

-31%

887

30

170

$1,090

11%

255

2015

2015

988

212

2013

220

16

9%

2015

$1,106

-56%

1,079

2014

Hotel

7 14%

Percent Change

191

-21%

8

Percent Change

Industrial

68

$224

-58%

-7%

93

Percent Change

Retail

204

26% $227

$656

23%

220

Percent Change

Office

74

235

$934

45%

35%

230

Industrial

Land

100 22%

34% $1,178

41%

88%

122 Percent Change

-29%

25%

24

Retail

Value ($M)

2015

Price:

16 $0.2B

$0.4B

$0.6B

$0.8B

$1.0B

$1.2B

$1.4B

$1.6B

$1.8B

$2.0B

$2.2B

$2.4B

$2.6B

$59,500,000

Price/sf: $752

Published on September 11, 2015

*Asset Sales $1M and Greater ®

www.realestateforums.com

®

®

www.realnet.ca ®

49

! CREF FALL 2015 2015-10-01 8:26 PM Page 50

PROPERTY TRANSACTIONS BY ASSET CLASS GREATER CALGARY AREA H1 2015 vs. H1 2014 & H1 2013

Type

Volume (#)*

ICI Land

2014

2013

2015

2014

2013

38

50

45

$145

$202

$238

35

$254

22

$160

Percent Change

-24%

Res. Land

34

Percent Change 11

Percent Change Retail

32

54

Percent Change

Percent Change

16%

Hotel Percent Change Total

194

2015

34

2014

38

24

$188

2

$73

$233 -2%

-21% $45

318%

$135 -67%

$26 184%

202

$295

$1,211

$13 98%

$1,538

-1%

-21%

$1,610 -4%

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11 15 22 32

2015

27

2014

Sector:

Land Sectors

23

2013

Industrial

ICI Land

2015

54

2014

46

Address:

Res. Land

4700 102nd Avenue S.E.

Municipality:

51

2013

Calgary - S.E.

22

Apartment 2015

Transaction date:

19

2014

2015-08-28 24

2013 2015 2014

$228

$83 121%

45

2013

Hotel

51

50

35

2015

$184

38

2014

Industrial

199

$654 -8%

-11%

100%

-3%

2013

Retail

4 -25%

Percent Change

$163

-21%

3

29% $602

-10% 19

$192

-73% 23

46

22

3%

17%

17%

Apartment

Office

27

-15% $247

-32%

19%

Industrial

-28%

9% 15

-27%

Percent Change

Land

11% 38

-11%

Office

Value ($M)

2015

Price: $22,000,000

3

Price/sf:

4

$746 (Adjusted)

2013 2 $0M

$100M

$200M

$300M

$400M

$500M

$600M

Published on September 11, 2015

*Asset Sales $1M and Greater ®

50

®

®

®

www.realnet.ca Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:26 PM Page 51

PROPERTY TRANSACTIONS BY ASSET CLASS GREATER VANCOUVER AREA H1 2015 vs. H1 2014 & H1 2013

Type

Volume (#)*

ICI Land

2014

2013

2015

2014

2013

205

205

208

$408

$368

$362

141

$787

32

$116

Percent Change

0%

Res. Land

217

Percent Change 66

Percent Change Retail

149

129

Percent Change

Percent Change

Total

806

2015 2014

65

2013

32

$10

79%

-22% $113

$106

52%

6% $43

-78% 645

$2,042

8%

$3 1,572%

$1,426 43%

205

$1,344 6%

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208

149

2015 105

Land Sectors

100

2015

129

2014

116

2013

136

Sector:

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Address: 8100 Granville Avenue

Municipality: Richmond

38

Apartment 2015 2014

25

2013

27

2015

1

$194

66

2013

Hotel

$171

205

141

2014

Industrial

27

217

2013

Retail

699

$191 -14%

$152

200%

180

2014

Office

$271

-7%

15%

2015

136

3 -33%

Percent Change

$164

-15%

2

Percent Change

$279

14%

70%

25 52%

Hotel

$95

7% 100

116

38

22% $109

5%

11%

Apartment

$392

65%

103% 105

2% $477

28%

42%

Industrial

11%

65 2%

Percent Change

Land

-1% 180

21%

Office

Value ($M)

2015

Transaction date: 2015-07-15

Price:

2

$30,255,000

2014 3

Price/unit: $320

2013 1 $0M

$200M

$400M

$600M

$800M

$1,000M

$1,200M

Published on September 11, 2015

*Asset Sales $1M and Greater ®

www.realestateforums.com

®

®

®

www.realnet.ca 51

! CREF FALL 2015 2015-10-01 8:26 PM Page 52

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! CREF FALL 2015 2015-10-01 8:26 PM Page 53

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! CREF FALL 2015 2015-10-01 8:26 PM Page 54

DEAR, PRIME MINISTER-(ELECT?)

Brooks Barnett Manager Government Relations and Policy REALpac

At the time of writing, it is not clear how Canada’s 2015 Election will end, and which party leader will form government. After the ballots are counted, and election night balloons have deflated, even after you are sworn in (perhaps for the fourth time) as Prime Minister, your focus will turn from campaigning to setting priorities.

Here is some good news: the leaders of Canada’s major industries have ideas that can help. In fact we see this as an integral aspect of policy development that will undoubtedly result in the betterment of the Canadian economy. REALpac considers our industry as a vital player in strengthening Canada’s economy, creating jobs, and promoting growth nation-wide. According to our research, our conservative estimate of the contribution of commercial real estate to the Canadian economy is substantial. Here are some examples: Industrial real estate: • Capital investment totaled $8.7 billion in 2013 • Supports 111,900 jobs each year • $21.7 billion in annual economic activity Office real estate: • Capital investment totaled $7.7 billion in 2013 • Supports 111,600 jobs each year • $20.8 billion in annual economic activity

54

Retail real estate: • Capital investment totaled $6.9 billion in 2013 • Supports 97,700 jobs each year • $18.3 billion in annual economic activity We believe that the government has an opportunity to help our sector grow. The following are ways by which the Canadian commercial real estate sector can be supported in its efforts to contribute to a more robust national economy.

Before setting any priorities, it is important to get a picture of the bigger industry trends.

We believe that Statistics Canada could compile, and make readily available, detailed data pertaining to the commercial real estate sector in Canada. Presently, Statistics Canada does not collect data through the Census, or any other survey. In our view, Finance Canada should support Statistics Canada in creating a commercial real estate data set which can track market information. This would greatly assist in identifying major economic issues and trends, as well as possible strategies which may strengthen the sector’s competitiveness and prosperity.

Continued on page 58

Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:26 PM Page 55

BRICKS AND MORTAR FORMATION: TODAYS DREAM

Michael Brooks Chief Executive Officer REALpac

Daniel Burnham was reported to have said “Make no little plans, for they have no magic to stir the blood of men”. Daniel Burnham was an architect and a planner involved in the plans for the City of Chicago and Washington DC in the early 1900s. All right, so what big plans should be have for our industry? Or for planners that regulate us?

Jim Collins in his book “Good to Great” would call these “big hairy audacious goals” or “BHAGs” for short. How about big goals for capital. Having just attended a crowdfunding seminar, it’s interesting how evolved and sophisticated capital formation is in the G7 countries. $65 Billion raised in crowdfunding in 2014 worldwide? Growth rate of over 400%? Greater than angel and venture capital funding combined? Indeed we often argue about how important a well-run stock exchange and securities regulation is to capital formation.

Recently REALpac has been involved with its REESA colleagues (global associations with acronyms REALpac, NAREIT, EPRA, APREA, BPF, PCA, ARES) in advocating for better REIT legislation in countries such as Singapore, China and India.

Those governments are prepared www.realestateforums.com

to develop REIT legislation recognizing that capital formation allows the creation of larger pools of capital, in turn necessary to build the office buildings, apartment buildings, shopping centres, and industrial plants that those countries need. It’s why Hernando de Soto trumpeted capital formation (and property rights!) in his book “The Mystery of Capital”.

Now let’s focus on the development side of our business. Why is it so easy and efficient (and perhaps soon with crowdfunding easier and more efficient) to raise money for economically-positive investment and development in our country and so hard to apply the money raised? Why does it take so long for development approvals and why is the cost of that process so high, and often so unclear in advance? If this was infrastructure money from the feds, municipalities would be falling all over themselves to make projects “shovel ready”.

But when its private money creating jobs and investment, municipalities are not falling all over themselves to make those “shovel ready”. Why not?

If we wanted the same efficiency in development, what I’m calling bricks and mortar formation [the contrast with capital formation], what would our wish list be?

Here’s REALpac’s; 1. A stable, consistent, predictable development process known in advance where the ground rules don’t change.

2. A service standard or Key Performance Indicator (KPI) applied to municipalities: applications at the staff level and decision making at the political level. We have it for passports and we have it for mail. Why can’t we have it for development applications? Why can’t a municipal government say it will approve or refuse a development application with reasons within 10 business days? Why does it have to be a legislated (slow) timeline?

What is a reasonable service standard for development applications and how do we

change the direction and attitude of municipalities to strive to shorten these timelines and reduce the cost?

3. Zoning in advance consistent with an official or comprehensive plan so developers know as of right building envelope. Why is it that developers have to up zone lands otherwise designated for medium or high density in an official plan?

Development capital will eventually follow tenants elsewhere if it’s just too hard to get a permit to build in our Canadian cities.

Planners and politicians need to understand that delay equals risk, and the quicker an approval is obtained, the easier it is for the development community to build to perceived demand before that demand supply equation changes.

4. Software to expedite the approval process. We still have circulation of development applications around various municipal departments and related authorities. Can we afford to keep this “every site is unique” perspective or can we deal with development applications by category, with commentary for each category set out in advance, with file sharing and timer software? Is a Development Permit System a solution?

5. [Add your issue here] REALpac’s recent “Canada-Wide Key Performance Indicators (KPI) Survey Report on Planning & Development” shows a significant disparity by land-use type, by processing time line, and disparities in cost that don’t seem to have any consistency, across Canada. You’d think the issues would be the same in any similar sized city. Could we have a national standard KPI and a national standard review process and have major cities adopt it?

Let’s start to move to a system where we have bricks and mortar formation encouraged just as readily as capital formation in this country. Then capital has a place to go. ■ 55

! CREF FALL 2015 2015-10-01 8:26 PM Page 56

EMERGING TRENDS: BY THE NUMBERS

Brooks Barnett Manager Government Relations and Policy REALpac National Property Tax Rates and Ratios Meaningful progress has been made with respect to the relative municipal property tax rates in Canada’s major cities. As shown

by REALpac’s 2015 Property Tax Rate Analysis, there are several key developments in the overall property tax standings: • The average commercial-to-residential tax ratio for all cities surveyed was 2.86 to 1.

• Vancouver, Toronto and Montreal continue to post the highest commercial-to-residential ratios of the ten cities in the report at 4.33, 4.01 and 3.67 to 1 respectively.

• Toronto’s ratio continues its downward trend for the eleventh consecutive year, demonstrating its commitment to reducing commercial property tax rates in order to improve the business climate and increase competitiveness over the long term.

We are encouraged to see provinces and municipalities proactively take on reviews of tax policies and programs, such as the Ontario Business Tax Capping Program and Vacancy Unit Rebate and Vacant & Excess Land Subclasses Program, and Alberta’s property tax discussions through reform of their Municipal Governance Act (MGA). The continued reduction of excessive property tax burdens on commercial and industrial properties will make cities more competitive, promote job growth and investment, result in increases to the property assessment base and subsequently generate more stable and sustainable revenue. These reviews are useful in identifying possible constructive program changes and various other ways in which the programs could better serve the real estate and development industries.

• For the third year in a row, the highest estimated commercial taxes per $1,000 of assessment exist in Montreal, Halifax and Ottawa.

Development processes: key performance indicators.

The high cost of development in Canada’s major cities continues to be a major issue facing the industry nation-wide. While it is encouraging to see certain municipalities making progress to refine development practices, more needs to be done.

REALpac’s Canada-wide Key Performance Indicator (KPI) Survey Report on Planning and Development, to be released this fall, offers the following lessons.

• Calgary, Vancouver and Saskatoon had the lowest commercial taxes per $1,000 of assessment for the third consecutive year.

• The comparative cost of development for stand-alone retail would likely be highest in Ottawa, primarily because infrastructure charges are exponentially higher than in any other city.

• On the lowest end of the spectrum, Saskatoon, Winnipeg, and Regina posted commercial-to-residential tax ratios of 1.99, 2.06 and 2.23 respectively.

56

• The comparative cost of development for stand-alone office would likely be highest in Toronto, due to higher application fees, infrastructure charges and cash-in-lieu of parking requirements. Ottawa and Vancouver would also be more costly than other cities due their comparatively higher infrastructures.

• The comparative cost of development for stand-alone industrial development would likely be highest in Ottawa, where infrastructure charges are substantially higher than elsewhere. Montreal and Edmonton are also comparatively more expensive than other cities due to higher requirements for both parkland dedication and parking.

• The comparative cost of development for higher density residential mixed use development would likely be highest in Toronto, where the city ranks poorly on nearly all KPIs, including application timelines and costs, infrastructure charges, parkland dedication and cash-in-lieu of parking requirements.

Selected cities were provided with key development metrics for a variety of development scenarios and asked to outline their City’s planning fees and requirements, including development application fees, development application processing timelines, development/infrastructure charges, parkland dedication requirements, automobile parking requirements, and, whether or not the development would be eligible for height/density bonusing in exchange for community benefits.

Recognizing the link between land use planning matters and economic competitiveness, municipalities interested in economic development should improve their respective development processes. ■

Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:26 PM Page 57

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! CREF FALL 2015 2015-10-01 8:26 PM Page 58

DEAR, PRIME MINISTER-(ELECT?)

Without a specific mechanism to track and sort data for the commercial real estate sector, market experts are left to speculate on the actual size of markets, as well as forecast emerging trends in the industry.

Furthermore, it is extremely difficult to record changes in the real estate market, when there is a lack of data which can be used of evidence. For example, as there is no present data detailing the number of commercial buildings in use across Canada, it would be hard to determine what percentage of buildings are lagging in their sustainability targets.

Continued from page 54

“The real property industry has an inherent interest in sustainable infrastructure across Canada. As Prime Minister, one consideration that could have meaningful impact is how the private sector (including corporations and pension funds) can become active partners in infrastructure replacement and enhancement.”

The Government of Canada could interface with the Provinces to determine which infrastructure investments would boost the economy, and how best to manage those projects. Enhanced funding support for provincial and municipal infrastructure is key: not just transit, but also sewers, water, waste facilities and other hard services through a well-funded and sustainable renewed infrastructure program. Great progress has been made by committing funding to the new Building Canada Fund, and Major Infrastructure Component (MIC), which addresses priorities including public transit, green energy and water.

The real property industry has an inherent interest in sustainable infrastructure across Canada. As Prime Minister, one consideration that could have meaningful impact is how the private sector (including corporations and pension funds) can become active partners in infrastructure replacement and enhancement.

Canada’s building sector can contribute to national greenhouse gas reduction goals

and a more efficient building stock. The last several years have marked significant achievements for the Canadian real estate market in regards to the environment and energy efficiency. We believe that this is also an economic challenge, as energy efficiency and sustainability is also a bottom-line motivator for businesses. Concerted efforts must be made to develop a strategy that helps Canada achieve its economic, social, and environmental goals in the short-term, while responsibly adapting to the reality of climate change in the medium-term and ultimately adding to the earth’s natural regenerative process over the longer-term.

The federal government can enable this by increasing support for Natural Resource Canada’s Portfolio Manager (Energy Star) service to Canadian building owners to enable energy self-benchmarking and improvement. Portfolio Manager can calculate a building’s greenhouse gas (GHG) emissions from energy use. We believe that if the Ministry of Natural Resources tied additional incentives to the program, more owners and operators of large commercial real estate would incorporate it into their management practices, resulting in greater energy efficiency gains, financial savings, and further reductions in GHG emissions.

Not surprisingly, the major theme of Election ’15 is, and will be remembered as, the economy. As you recall, the campaigns began with vigorous debate about how Canada could strengthen and solidify its precarious economic position amid constantly changing financial pressures. To this end, we wish you the best of luck with your new mandate. ■

THANK YOU TO ALL OUR ADVERTISERS AND SPONSORS Reach a Targeted National Audience. For more information on how you can advertise in Real Estate Forum Magazine, contact: Frank Scalisi at frank.scalisi@informa.com or 416-512-3815 realestateforums.com Romspen Investment Corporation

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TD Securities Real Estate Group

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Peoples Trust Company

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Yardi Systems Inc.

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BDO Canada LLP

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FCT

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KingSett Capital

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Miller Thomson LLP

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2

9 Canadian Real Estate Forum / FALL 2015

! CREF FALL 2015 2015-10-01 8:26 PM Page 59

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Damir Jesic Director, Commercial Financing

Simon Verdy Director, Commercial Financing

Recent Financings: $7 million equity take-out

Loan to facilitate purchase, renovations and improve cash flow

CMHC financing of a community retail centre

$18.5 million 193,426 sq.ft., office building Burlington, ON

$35.0 million 353 units, apartment building Edmonton, AB

$25.0 million 250,000 sq.ft., retail centre Montreal, QC

Conventional apartment construction financing

New construction loan

Conventional financing Equity take-out, non-recourse

$48.0 million 199 units, apartment building Toronto, ON

$10.5 million 80 units, apartment building Montreal, QC

$14.2 million 115,000 sq.ft., retail plaza/office Halifax, NS

firstnational.ca

VANCOUVER 604.681.5300 800.567.8711

CALGARY 403.509.0900 888.923.9194

TORONTO 416.593.1100 800.465.0039

MONTREAL 514.499.8900 888.499.1733

HALIFAX 902.452.0776

Ontario Mortgage Brokerage License No. 10514

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Bringing real estate investment advice to life.

Whether your group is entering into real estate for the first time or developing your existing portfolio, Canadian Urban delivers the experience and track record to bring your real estate investment objectives to life.

From nationally diverse, core pooled funds to opportunistic turn arounds, our team provides a passionate perspective to all that we do.

Consistently ranked in the first quartile our greatest satisfaction comes from helping our clients achieve their objectives.

Whether your group is considering adding to your real estate portfolio or entering the market for the first time call us at: Toronto: (416) 367.1300 Edmonton: (780) 424.7722 Toll Free: 1.877.612.7722

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