SPRING 2017 / ISSUE 74
The Spirit of ’67 has Returned What’s Trending? Online Innovation, Offline Versatility All Aboard! Westbound Trains will Help Whole Island
Tsawwassen Lands: The Long View, a Boon for Future Generations Proactive Planning Process Needed Tech Takes Fresh Look at City Core
Edmonton: Feeling Energized by Mid-Year Time of Cautious Optimism could be an Opportunity to Invest Prospects for Edmonton? Easing into an Upswing
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Montréal, Vancouver and Edmonton are ripe to reap these upturns in economic gains forecasted by the Conference Board of Canada, and so, too, are investors and shareholders. Those at a loss to identify those gains need only turn to the Canadian Real Estate Forums and their tri-city conferences for insight and navigation; trends and emerging markets. Following a 1.6-per-cent growth in 2016, Montréal’s economy is forecasted to have an additional two-per-cent rise at the close of 2017. It is, therefore, timely that the Montréal REF will guide attendees through this emerging marketplace with talks of recovery, the role of the new United Kingdom and, of course, the tenuous pull of the U.S. engine. www.realestateforums.com
Other topics to be discussed include the multi-city $5.5-billion rapid rail system, infrastructure projects to modernize the urban centre and repositioning the city’s current assets so they remain competitive. Greater Montréal is experiencing one of the strongest periods of development in decades and the city’s attractiveness to residents, landlords, investors, builders and now just got the top ranking for cities around the world to study. That optimism is carried across the country to the West Coast, where the conference board recently noted British Columbia’s economy is “firing on all cylinders,” with a 3.4-per-cent hike in GDP in 2016 and a forecasted 2.4-per-cent increase this year. This year’s modest growth is due to a tax on foreign homebuyers and affordability issues, to a 13.3 per cent drop in housing starts and a 3.9 per cent drop in residential construction. So, it is no wonder the Vancouver REF has become the largest annual conference on real estate investment and management in the region. The forum will also touch on tighter mortgage insurance rules, possible trade restrictions with the U.S., provincial election fallout, potential growth restraints due to increased pressure to be sustainable while in a land squeeze and the rise in e-commerce and its effect on the logistics and retail sectors.
If the city is in need of inspiration to weather these woes, it just needs to turn its head East. Tackling challenges is what Alberta seems to do best, as it carries on the mantra: “what doesn’t kill you makes you stronger.” As oil prices stabilize after several years of record lows, so too has the market, leading to emerging — and more diverse — trends in the economy. In fact, according to the conference board, the province is poised to post the fastest economic growth this year —2.8 per cent in 2017 and 1.9 per cent in 2018. What all this means to Edmonton is a more investments, jobs and emerging markets. Finding those opportunities just takes a bit of intel, and there is no better way to get that insider info and trend lowdown than at the Edmonton REF. As with the similar forums hosted in Montréal and Vancouver, the Edmonton REF will focus on the challenges facing the real estate investors, developers, asset managers, brokers and other professionals active in every facet of commercial, residential and investment real estate. In fact, the only thing standing in the way of growth these days is not seeing the opportunities. ■ 3
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16 Blossoming Montréal
30 A Quality of Life Like No Other. Vancouver
44 In a Cycle, there is Always a Reset Period. Edmonton
32 Tsawwassen Lands: The Long View, a Boon for Future Generations
46 Time of Cautious Optimism Could Be An Opportunity to Invest
32 Low Supply Isn’t the Whole Story
46 Alberta Retail Markets Exceed National Average – Reports of Doom and Gloom Highly Exaggerated
18 Redevelop, Reposition and Reap Rch Rewards 18 Believe it: Montréal’s Future is In Sight 20 Why Industrial Can Be a Tough Sell 20 Réseau Sélection Finds Right Formula for Urban Seniors 21 The Spirit of ’67 has Returned 22 Top Tenants Want Workplace that will Optimize Employee Attraction & Retention 24 What’s Trending? Online Innovation, Offline Versatility 24 All Aboard! Westbound Trains will Help Whole Island 26 Economy Easily Outperforms Expectations 27 Champlain Corridor to Transform City
34 Vancouver at a Glance: Possible Clouds over Sunny Peaks 34 Foreign Real Estate Investment Continues to Flow 36 Proactive Planning Process Needed 36 Tech Takes Fresh Look at City Core 38 Economic Prospects Remain Strong, Steady 40 Retailing the Mall: Betting Bigger and Bigger, Better and Better 41 Middle-class Rental Market Continues to be Neglected: Opportunity for Builders, Developers to Step In
48 Edmonton: Feeling Energized by Mid-Year 52 Modest Rebound to Boost Residential Demand 53 Tenants Willing to Pay for Quality 53 How to Meet Consumer Demand in Edmonton 54 Competition for New Tenants Heating up: Concierges, Gyms among Coveted Amenities 54 Prospects for Edmonton? Easing into an Upswing
THE ALTUS REPORT CREATING ASSET VALUE Current and Emerging Opportunities and Threats
By Sandy McNair For owners and managers of income properties the primary objective almost always is to preserve and enhance the value of the assets. While current and future income impacts asset value, it is only one of several key drivers. The image, appeal, stability and outlook for the subject property and its peer group are leading indicators to growth in future property income. Another key driver of future property income and property value is the subject property’s strategy, progress and options to battle obsolescence. Failure to remain relevant and appealing to the evolving needs of tenants threatens future property incomes. The asset managers with the best relative performance metrics often are those who successfully anticipate the current and future needs of their tenants and targeted tenants, be it office employee attraction, retention, productivity and innovativeness; retail positioning, mix, traffic and sales productivity; distribution and manufacturing effectiveness and efficiency; or apartment occupants’ comfort, image and value.
Asset managers strive to outperform the market and their peers. The approach to performance metrics can vary widely and may include one or more of the following: • Industry Benchmarks – can be global, national, market or by specific node; can be by asset class and sub class specific; can be by asset size ranges; can be calculated with and without leverage (use of debt); and can be generated by internal, third party, actual investment transactions or a combination of approaches. • Peer Rankings – go beyond identifying performance relative to a benchmark by identifying the specific ranking of each manager, portfolio or property. • Peer Momentum – identify the magnitude of the gaps in performance between ranked (named or not) peers and the direction of change over time. For example, if you are number 3, how much out in front are number 1 and 2 and how quickly are you closing in on them? • Chosen Peers – some asset managers also choose only a handful of properties that they view as their immediate peers to track best practices and relative performance. • Other and All Investment Options – some choose to inform their allocation decisions by monitoring the short, medium and longer term performance of Public Stocks, Bonds, Infrastructure, Private Equity and other investments relative to all or selected Real Estate investments.
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For many investors, especially institutional investors, performance is often determined as the combination of income and changes in valuation. Many investors are long term holders as they wish to generate a stable and growing income to pay long term liabilities, be they pension or other long term obligations. Most organizations treat income and valuation equally and yet for many a stable and growing income has greater priority. Income and valuation are linked but not perfectly. Valuations can be volatile and even declining in assets with a stable and growing income and outlook due to shifting outlooks for interest rates, capitalization rates and other factors. For more than a decade most all income property markets and participants have experienced declining capitalization rates. The specifics vary by asset class and geographic market as shown in Chart 1 and Chart 2, but they are all dramatic, almost doubling the value of each dollar of net income over the past 15 years. As we look to the next decade many expect operational excellence will have a much greater impact on performance than further compression of capitalization rates. Said differently, focus on preserving and growing property income.
SHIFTING FROM CAP RATE COMPRESSION TO OPERATIONAL EXCELLENCE Office Downtown Class AA – Overall Cap Rate Benchmark Properties: Vancouver – Park Place, Toronto – Freehold Exchange Tower Altus Data Solutions, Altus InSite Investment Trends Survey (Altus Group, January 2017) 9.5
4 3 2 1 0
Toronto Q4 2001
SHIFTING FROM CAP RATE COMPRESSION TO OPERATIONAL EXCELLENCE Toronto – Overall Cap Rate 8 Altus Data Solutions, Altus InSite Investment Trends Survey (Altus Group, January 2017) 12 10
8 5.9 4.3
4 2 0
Downtown Class AA Office
Suburban Class A Office
Food Anchored Retail Strip
Tier I Regional Mall
Enclosed Community Mall
Single Tenant Industrial
Multi Tenant Industrial
Suburban Multiple Unit Residential
The Only Constant Is Change What are the current and emerging drivers of change that will impact asset managers? While each asset class and geographic market has variations, we can address the broad themes in this article. We will describe each theme individually initially, but it is the combination of them that is truly driving a material shift in the dynamics of our markets. For some asset managers this means the lessons learned from their historic successes may be less applicable and even unhelpful in this changing world. More Intense Use of Less But Better Space – across all four asset classes (office, retail, industrial and apartments) occupiers are prepared to pay more to get better space but will often choose to use less of it more intensely. In the office market this can mean paying more per square foot, but less per employee based upon increased density, hoteling and other strategies. Some retailers are striving to reduce their physical footprints (in some cases both the number of locations and the size of each location) while increasing their digital footprints and growing their total revenues and profits. Distributors and manufacturers are continuing to tighten their supply chains, effectiveness and efficiency in part by making their real estate work even harder. A segment of apartment dwellers are choosing less but better space driving more upgrades to existing buildings and construction of new apartment inventory. Pressure to Place Capital – The strong performance of real estate investments globally and in Canada twinned with demographics (the first boomers are now 70) has resulted in continued pressure to place capital in Canadian income properties through acquisition of existing properties, expansion, repositioning and repurposing of existing properties and development of new properties. New Supply Not Driven By Incremental Demand – Traditionally space has been viewed by many occupiers as largely homogenous with image, location and price as the key variables. During the past decade new designs, densities and technologies in office buildings have resulted in new being viewed very differently from older buildings including many former top of market buildings. An expanding segment of office occupiers are focused on
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the battle for talent and moving to new buildings to help them retain, recruit and inspire employees. New office supply is expected to continue in Toronto, Vancouver and selectively in other markets, without much regard to the availability of space in the existing office inventory. Arguably Canada has shifted from being under retailed to over retailed due to the accelerating impact of online shopping and the roughly $10 billion invested in Super Regional and Regional Shopping Centre expansions and upgrades over the past decade. We can expect the pattern of big winners concurrent with big losers within Canada’s retail real estate owners to accelerate as these pressures intensify. Increased Fragmentation Driven By Occupier Strategies – One strategy and one size no longer fits most all occupiers. In the office market we used to rely on segmenting markets into Downtown, Midtown and Suburbs and by Class A, B and C. Today, this approach is no longer helpful and can be misleading. As occupiers choose divergent strategies to retain, recruit and motivate talent a more nuanced
approach is desired. Geographic patterns and peers are best identified at the node and intersection level. Building classifications are more effective if their appeal to distinct targeted occupier segments is addressed, such as: • Brand New – more daylight, personal control, higher occupant density, lower operating costs, vibrancy but near ‘centre ice’ • Nearly New – built in the past 15 years with some of the above attributes • Traditional Class A – at ‘centre ice’, viewed by some as former top of market, recent and ongoing upgrades • Class A Made Funky – drop ceiling removed, polished concrete floors, distinct attitude • Class B – comfortable and appropriate image and attitude for a segment of employees and clients • Brick and Beam – conversions and new builds with B&M location, design and attitude Heightened Local and Global Competition – Shifting and uncertain local, provincial, national and global political, business and trade dynamics increase the pressure to continuously innovate and improve productivity. Those who guard the status quo likely do so at the peril of their performance.
Lower for Longer – Expectations of yields (investment returns), growth (GDP), inflation, interest rates (in Canada, but not the US), demand (overall incremental demand for office, retail and industrial space) and rents are all likely lower across the broad markets for longer and perhaps at new lower plateaus than previous cycles. However, there will be room for specific assets and their managers to outperform. To outperform the pack, these properties and their managers will need to behave differently than the pack. The Asset Manager’s Toolbox Imagine two asset managers – one with twenty plus years of experience, many successes and a clear view of which lever to pull to get the desired response from the market place and tenants; the other new to the industry, bright, curious and keen to learn. Put both of them into a rapidly changing market with unfamiliar and uncomfortable pressures and dynamics. The veteran is guided by conventional wisdom and his/her historic successes in more comfortable markets. The new entrant is left with common sense and perhaps fresh thinking to address this emerging and different marketplace. If the new entrant was able to earn the trust and respect of the veteran and vice versa, together they could benefit from both history and fresh thinking. Not easy, but likely better than solo thinking.
ASSET MANAGER’S TOOLBOX – PROPERTY SPECIFIC • Tenant Retention – Operational Excellence - Central Dispatch - Environmental and Other Programs - Employee and Key Supplier Training, Attitudes and Performance - Referral and Recommendation • Building Image and Amenities Leasing - Extend and Blend - Duration and Rollover - Tenant Mix – Size/Industry/Life Cycle • Invest/Cap Ex – Sustain, Upgrade, Reposition, Repurpose • Leverage – No Debt/Some Lots; Floating/Fixed/Mixed Rates • Build, Buy, Hold, Improve, Expand, Sell partial, Exit 10
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Looking ahead, what are the other key tools (beyond creative listening and teamwork) that successful asset managers will deploy with care and skill? As the two toolbox graphics illustrate we have one toolbox for Property Specific and another toolbox for Portfolio Strategies. Tenant Engagement and Retention – ideally asset managers would be able to identify those key actions (communication initiatives, service refinements, capital investments) that will have the optimum impact on tenant satisfaction, referral, recommendation and productivity such that the tenant is willing to pay a premium over market rents to stay in the building or move to another building owned / managed by their current landlord. Asset managers that achieve the highest levels of tenant retention are those who have succeeded in: • Systematically engaging their tenants through multiple 12
Competencies of Scale Economies of Scale Competencies of Localization Diversification Attributes – Industry, Asset Type, Asset Class, City Brand Attitudes/Value/Recommendation
communication channels to generate evolving insights that are credible, predictive and actionable, • Stepping across the lease line to better understand their tenants’ objectives and strategies, • Contribute to their tenants’ achieving superior levels of employee retention, attraction and productivity, • Building teams with a culture and commitment to being responsive, competent, flexible, courteous and accessible, Building Image and Positioning – High performance employees choose their employer based upon increasingly divergent criteria. Employers have increasingly divergent cultures and strategies to achieve success and to win their battle for talent. Asset managers who view their space and their tenants’ needs as homogeneous do so at their peril. The traditional view that ‘one size fits all’ may more accurately be that ‘one size fits almost no one’. Asset managers who outperform know that choices must be made in positioning each asset to specific segments of the business community. Communication initiative, service refinements and capital investments are most effective when they
are focused on a clear image and positioning. Merits of Scale – Competencies of focus and scale matter more than economies of scale. The ability to recruit, retain, grow and inspire key people generates advantages that far exceed the ability to buy things for less than smaller firms can. The ability to focus on a carefully chosen segment of the marketplace and create a brand with attributes that resonate with your tenants, targeted tenants, employees, suppliers and other stakeholders is the foundation to outperformance. Outperformance from the Intangible Income properties are very physical – glass, concrete, steel, tile, stone and more and include complex mechanical, electrical, HVAC, elevator and other systems. Success requires expertise with the physical; however outperformance requires success with the intangible - people, ideas, innovations, brands, teamwork, communication, strategy and focus. These are challenging times but it is also a great time to be an asset manager. ■ Sandy McNair is the Data Curator at Altus Data Solutions a division of Altus Group Limited. firstname.lastname@example.org Canadian Real Estate Forum / SPRING 2017
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Montréal’s economy is in a much better place than it has been in the last 15 years. Maybe it’s partly due to the 375th anniversary celebrations, but the city appears to be trend setting in a number of ways, and generating a level of excitement that hasn’t been felt in a very long time. Montréal has been cited as having much more job creation than anywhere else in the country and was recently awarded the best place to study in the world for international students, beating out London, Berlin, Boston, Tokyo and even Paris which has held the top spot five years running. We’re attracting a lot of talent here, which is a great way to build the future of our city and province. This is all great news. I believe that any pain we are going through right now will pay off in five or 10 years. By 2020 our city will have better infrastructure, with the major work most likely completed; streets will be in much better condition than they are today; and overall transit will be vastly improved, with—if all goes as planned—our electric train up will be and running and the extension of the subway lines nearly finished. Currently, a slightly weaker Canadian dollar than usual is attracting a lot of www.realestateforums.com
tourism, which is another plus. People wanting to come to Montréal and spending their dollars will certainly help to drive our city’s economy. In the context of real estate development, all of this business vibrancy will mean more towers. A few key developers have been waiting for the opportunity to develop some remaining pieces of land or redevelop already owned properties. While we did experience a downward curve for a little while, now the market is back to normal conditions. Developers will have to fill the need for brand new, environmentally friendly office space, an area in which Montréal has already demonstrated expertise and commitment. There is also demand for multi-use developments with a mix of residential, retail and office components, and potentially hotel or hospitality. Our market has shown very stable returns and really hasn’t suffered from the peaks and valleys of other parts of the country and worldwide. I encourage attendees of the Montréal Forum to enjoy the vibrancy and the buzz among our industry colleagues and take that feeling back home. I encourage you to spread the word that our unique, world-class city is a stellar place in which to live, work, study, play and, of course, invest in real estate. ■ Michelle Morra-Carlisle 17
REDEVELOP, REPOSITION AND REAP RICH REWARDS
Vincent Chiara President, Groupe Mach
Vancouver” noted Group Mach’s President, “so only a limited number of tenants will make the leap to a LEED platinum property. Developers will have to weigh how aggressive to become in order to create and protect value in their new properties.” With historic low capitalization rates squeezing returns, Chiara has invested heavily in upgrading Group Mach properties and imaginatively repurposing others to attract tenants. “There’s a big future in the redevelopment and repositioning of existing buildings” he forecast. “Below five per cent, existing buildings are trading for a fraction of their replacement value, increasing the incentive to repurpose a building: I keep the land. I keep the structure and I work with the shell. Every other system is replaced.”
Montréal’s limited inventory of new city core Class A properties will find it a challenge to continue to command 30 per cent plus premiums over existing buildings, anticipates Vincent Chiara.
“That lets us rent at much lower rates—less than half a new build downtown—a big incentive for tenants who want to be near but not necessarily in the city core,” Chiara continued, “in a brand-new space next to the Metro and close to services.”
“That gap doesn’t exist in other markets like Toronto and
“It’s a pretty compelling option. That’s why millions of square feet will migrate to these
BELIEVE IT: MONTRÉAL’S FUTURE IS IN SIGHT
such as the hospitals, the Ville-Marie, and the Pont Champlain, coupled with the importance of the city’s educational institutions, “Montréal is exceptionally well poised to take advantage of the investments that have been made and the dynamics that seem to be coming together at the same time,” says Daniel Peritz, Senior Vice President, Montréal & Ottawa, Canderel Management Inc.
Daniel Peritz Senior Vice President, Montréal & Ottawa Canderel Management Inc. The densification of downtown Montréal is firmly taking hold now. With major infrastructure projects either completed or underway, and other city-building projects 18
Peritz suspects that the real estate industry may be pleasantly surprised by absorption stats a year from now. While some companies are rationalizing their space, many small and medium sized companies are growing. “There are still a lot of tenants running around the city looking for 150,000 to 200,000 square feet and not finding a whole host of alternatives,” Peritz says. He believes that those larger tenants will help drive down some of the vacancies in the existing new buildings being delivered. Asked about specific asset classes Peritz says: “Purpose-built rental assets are being sought after by a lot of institutional players from outside of the city. Another interesting
sites during the next ten years,” he predicted. The repurposed industrial properties have added inventory which has flown under the radar. “That’s where the market gets wrong-footed” Chiara observed. “It doesn’t consider this space as potential office inventory, so you don’t get an accurate picture of where the market is going and where vacancy is located.” The situation has created a saw-off between firms seeking to add value and those looking for liquidity. “There’s a very strong market today for the stable properties that institutional buyers want” he said. “Pension funds, real estate investment trusts and insurance companies are looking for a steady revenue stream. They’re not going to develop and they’re not going to buy a property that has challenges.” “We buy properties that have challenges” Chiara contrasted. “We carry them, fill them up and reestablish their value.” ■ Robert Frank
asset class is centrally located warehouse distribution, which seems to be seeing some positive leasing velocity especially with the growth of ecommerce. And while retail—once the darling of our industry—faces challenges, from an investment perspective there are a lot of dollars looking for core, brand new, shiny office assets.” On a cautionary note, Peritz believes there is one thing that could hurt the Montréal market: municipal government seeing the growth as an opportunity to create a lot more taxation. “There’s talk of adding substantial taxation to residential development by adding a 10 per cent park tax to every subdivided condominium,” he says. “And I think that would be a horrendous mistake for a market that has waited 40 or 50 years to finally blossom. We’ve got to be careful. Governments are going to think this is a bonanza for revenue for them—and I think that will be the biggest threat.” ■ Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2017
WHY INDUSTRIAL CAN BE A TOUGH SELL
built with clear heights that are up to today’s standards—24 to 40 foot clear buildings that are still very functional and in demand. Buildings that are 16 to 18 foot clear are much harder to fill, unless they’re small base spaces of 1,500 to 5,000 square feet; there’s still high demand for small spaces among tenants who don’t require greater heights.” The toughest stock to rent are 16 to 18 foot clear buildings measuring 50,000 to 200,000 square feet. “You see that a lot in the West Island, in St-Laurent, which is why they have tremendous vacancy in those areas,” Quint says.
Ian Quint President, Groupe Quint The ease of renting or repositioning an old industrial property in Montréal depends largely on building dimensions. Ian Quint, President of Groupe Quint, divides the stock into two categories: “There’s older stock,
While there are creative uses for industrial buildings, anyone planning to redevelop one needs to be very cognizant of soil conditions. “If I can change to residential use but I have contamination from my industrial use, that has to be factored into the cost,” Quint says. There are, however, other ways to occupy industrial buildings without necessarily rezoning. Data centres and mini storage facilities, for example, don’t need great
RÉSEAU SÉLECTION FINDS RIGHT FORMULA FOR URBAN SENIORS Cormier eschews grey ghettoes that live in their own bubble. He prefers integrated solutions like mixed-use properties that blend commercial outlets at street level with a varied demographic in the residential accommodation above. Gaétan Cormier Executive Vice President Réseau Sélection
Halfway through its Réseau Sélection’s $2 billion bid three years ago to build housing for seniors, Executive Vice President Gaétan Cormier’s bet has been such a boon that he intends to take his winning recipe beyond Québec’s borders. “Our latest project, a 30-storey tower in Laval, will be the tallest seniors housing property in Canada. It’s an amazing prototype,” Cormier said. “That model has the potential to be exported to any urban centre in Canada or the United States.” 20
“We blend generations of different ages and take great care to ensure that our commercial mix closely corresponds to the neighbourhood’s needs,” he said. “We get the proper zoning, design a commercial façade for the building, give each business its own signage and doors to the street. That brings businesses supplementary revenue while providing indoor access, so our residents don’t have to go outside to visit the hairdresser, fill a prescription or buy some groceries.” Cormier added that another secret of his success entails solving seniors number one problem: Isolation. “We truly believe in creating environments where people can socialize,” he explained. “It changes their lives.” Cormier’s formula has proved profitable. With its properties full to the rafters, Réseau
heights, only a large surface area. Quint sees ecommerce as a positive for industrial real estate because online shoppers and retailers need warehouse space. Unfortunately, municipalities and residents don’t all look favourably upon distribution facilities because they don’t want trucks coming in and out of their cities. “Distribution facilities, for the most part, don’t create that much employment,” Quint says, “so the cost benefit for the cities is not so favourable.” He gives the example of a large retail chain, which wanted to move its head office and distribution facility from one municipality to another nearby. “One of the neighbouring cities said no to the project even though they would have hundreds if not thousands of new jobs in their city and a beautiful distribution centre that cost, by the way, $ 200 million—imagine what the taxes to the city would be. But they don’t want distribution in their city.” ■ Michelle Morra-Carlisle
Sélection has begun to invest its second $1 billion tranche and is again breaking ground in Quebec, mainly in the Montréal and Québec City regions. “Twenty years ago, six per cent of Québecers over 75 lived in senior housing facilities,” he recalled. “Today, that figure is 18 per cent. The rate for the rest of North America averages five per cent.” Cormier’s approach is to contain the two biggest risks facing developers marketing and construction fronts. “We have a very unique platform,” he said. “We’re the developers, the builders—we own a general contractor—and work with our own marketing, information technology and recruitment companies. That way we save on construction costs, gain great control over quality and consistently hit our deadlines on time.” The model has also attracted attention overseas. Cormier has already visited China, where authorities need to prepare for a population that’s aging on a scale which dwarfs North America’s. They want to explore how Réseau Sélection’s unique approach could be applied there. “They love to call it the Montréal Style,” he smiled. ■ Robert Frank Canadian Real Estate Forum / SPRING 2017
THE SPIRIT OF ’67 HAS RETURNED
Jacques Ménard Chief Executive Officer, BMO Financial – Québec The forces that thrust Montréal to the forefront fifty years ago during Expo ’67 have once again aligned, Jacques Ménard, BMO Financial’s Québec Chief Executive Officer, attested. The city, which continues to garner laurels for its universities and cultural vigour, is simultaneously booming on the economic front as well as witnessing a sea change on the political plane, Ménard observed. “More than 70,000 jobs were created in the Montréal region last year,” he said, “more than all other major Canadian cities—combined. The jobs were, in large part, quality positions in cutting-edge fields, including artificial intelligence, visual effects, video games and the life sciences.” Foreign direct investment here hit historic highs in 2016, Ménard said, with corresponding results for Montréal -based international organizations. Everything points to www.realestateforums.com
that trend accelerating once the new Canada-Europe trade pact soon kicks into force. Jitters south of the border have also made the city more attractive for firms seeking to set up a foothold in the Americas. “Foreign subsidiaries represent just one percent of Montréal region businesses but account for ten per cent of its jobs and twenty percent of GDP,” all of which augurs well for development, he observed. “The strength of Montréal’s real estate sector
could say it was a city in crisis. Today, it has bounced back.” Nonetheless, too many graduates from its top-notch university decamp after graduating, he said. “We need to entice them to stay and live in Montréal.” Likewise, the city needs to grapple with poverty, he added. “Montréal lags in terms of GDP growth and disposable income—plus the traffic here is terrible. It takes a week to recover from a heavy snowfall.”
“More than 70,000 jobs were created in the Montréal region last year, more than all other major Canadian cities—combined. The jobs were, in large part, quality positions in cutting-edge fields, including artificial intelligence, visual effects, video games and the life sciences.” points to the vitality of our city and the positive trend will continue for several more years,” Ménard predicted. He acknowledged that Montréal continues to grapple with some major challenges. “Montréal has the kind of steely determination that you see in people who have weathered a storm and are stronger for it,” Ménard declared. “Five years ago, you
Help is on the way, though, boosting productivity with more than $20 billion in investment for commuter train lines, highway infrastructure and bridges on the horizon. Four new hospitals and University of Montréal’s new science complex will soon also add to the mix. “There is a buzz around Montréal,” Ménard concluded. “The future will be written here.” ■ Robert Frank 21
TOP TENANTS WANT WORKPLACE THAT WILL OPTIMIZE EMPLOYEE ATTRACTION & RETENTION The formula has proved profitable for two buildings, totaling some 370,000 square feet, that TGTA is currently repurposing, Galarneau said.
Martin Galarneau Partner, TGTA Real Estate TGTA Real Estate partner Martin Galarneau has concocted a winning recipe for adding value to office redevelopment in midtown Montréal. First, find a suitably sized property, close to mass transit, trendy shops and services. Remove the shell and gut the interior, keeping only the solid structure. Add in all-new mechanical systems, elevators and leading-edge energy-saving environmental controls. Keep your needs flexible, to adapt to the tenants whom you attract. Finally, garnish with green space. 22
“It was a completely speculative initiative,” he recalled. “We had a vision: Employee well-being is top-of-mind for CEO’s. The workplace environment is a crucial determining factor for their ability to attract and retain top-notch staff.” “We’re not talking about initial startups,” Galarneau explained. “Our project, O Mile-Ex is more A-class. There, we offer the same level of comfort that would be expected of a downtown building.” From there, TGTA upped the ante with Mother Nature. “We gave up 40 parking spots behind the building to build a big park,” he said. “Folks asked me ‘Are you crazy?’” “We capitalized on our location,” Galarneau explained. “The park that we built contributes to connect University of Montréal’s Outremont campus with Little Italy. So we talked to the city and identified
how best to collaborate to optimize that corridor. It proved precisely the lifestyle option that quality tenants were looking for.” The tenant mix uncannily matched what TGTA had expected. “Of the tenants who have signed, about 50% develop internet video games; 10% are life sciences; 15% design firms; and the remaining 25%, are more traditional businesses,” he said. Buoyed by his success, Galarneau is in the process of acquiring another property elsewhere in the city akin to his O Mile-Ex project. “There are still midtown sites ripe for redevelopment. On the other hand, prices are making it increasingly difficult to buy,” he cautioned. “This sort of project has to be sensitive to cost for it to work.” Despite his accomplishments there, Galarneau insisted that ample opportunity remains in the city core as well. “Downtown Montréal is extraordinarily rich and vibrant—and is becoming more so with as residential development grows,” he concluded. “Midtown development opportunities don’t come at its expense.” ■ Robert Frank
Canadian Real Estate Forum / SPRING 2017
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WHAT’S TRENDING? ONLINE INNOVATION, OFFLINE VERSATILITY now,” declares Johanne Leclerc, Vice President of Operations for Cominar REIT’s shopping centres division. Retail sales are up and, according to data collected by the Retail Council of Quebec, “we’re seeing a mix of internet sales and in-store visits.” Johanne Leclerc Vice President, Operations Shopping Centres Cominar REIT
In this era of multiple retail opportunities, owners of shopping centres are studying the widespread shifting identity of their brick and mortar assets while reassessing the viability of their portfolios. “There’s a rationalization in the market right
ALL ABOARD! WESTBOUND TRAINS WILL HELP WHOLE ISLAND
Mario Monette Chief Executive Officer Technoparc Montréal Everyone will win by stemming urban sprawl, underscored Montréal Technoparc’s Chief Executive Officer Mario Monette, if the Québec pension fund’s commuter train network goes ahead as proposed. “It will have a very positive impact on the entire Island of Montréal,” 24
malls adapt to consumer evolving tastes and demands, “There’ll be a lot of innovation on the application side” of the retail marketplace, says Leclerc. In fact, Cominar “will be partnering with companies who are [equally] interested” in offering a mobile service delivery that enhances the shopping experience by, for example, allowing customers to pre-order food court items from their phones. And as food becomes the new fashion, renovations to food courts will become widespread to feature “flexible, community-oriented” spaces tailored for eating, gathering, studying and living.
The expansion of digital technology into the retail universe has seen an emergence of retailers focusing on online shopping. But “Retailers have to keep on top fortunately for The shopping of what customers want and shopping centres, experience today when they want it.” the reverse is also involves multiple true—internet channels—brick and retailers are looking mortar, internet, and phone—all of which to enter brick and mortar stores. While some need to offer a great experience for the retailers are closing, others are opening, customer. “If a retailer misses out on one of and “in 2018 there will be some movement those experiences, they’re missing the with retailers entering the market,” Leclerc target,” Leclerc says. “Retailers have to confirms, adding that other emerging trends keep on top of what customers want and will include pop-up and showroom retailers. when they want it.” As owners and developers of shopping
■ Michelle Morra-Carlisle
“As soon as the train arrives, we can double, perhaps even triple density, without having to alter any zoning.” he predicted. “Mont St. Hilaire and Beloeil are growing like gangbusters thanks to their new train service. To stem this exodus, we have to ensure that every Montréal district benefits from mass-transit.” Right now, West Island mass-transit use hovers just under ten per cent. While some claim that its low population density doesn’t justify investing in infrastructure there, Monette suggested that’s precisely why filling the void instead represents a historic opportunity. Grappling with gridlock Despite strong demand, the prospect of bottlenecks has so far stymied Technoparc, only half of whose 20 million square feet has been developed. Its current commuter infrastructure—bus and cars—lacks mass transit. Without it, achieving Technoparc’s full potential would produce gridlock. The existing road network capacity would be insufficient to handle the additional traffic. “As soon as the train arrives, we can double, perhaps even triple density, without having to alter any zoning,” he proposed. “Were the city to amend the usage to permit residential
accommodation, we could densify even more—erecting towers of a dozen storeys or more. We’re also looking at adding local services like conference centres into the mix. That would permit us to achieve the original intent of our project. We’re seriously looking at those possibilities right now and intend to continue to explore the opportunities in concert with borough officials.” Breaking out of the bubble Integration is the objective of Montréal’s biggest mass transit initiative since the advent of the Metro in 1966, Monette explained. By enabling seamless interconnection, the city will become greater than the sum of its individual parts. “Everyone has a stake in the growth potential inherent in the commuter train project,” Monette concluded. “Linking Montréal with Laval, Longueuil, St. Laurent, Brossard and the West Island will make them part of a bigger whole. It weaves their economies closer together to the advantage of all.” ■ Robert Frank Canadian Real Estate Forum / SPRING 2017
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expected—so the labour market here is bound to remain tight.”
Stéfane Marion shares a steady stream of superlatives when he talks about Montréal’s prospects.
Likewise for commercial real estate buoyed by Montréal’s percolating economy—to the extent that Canada can continue to maintain its huge flow of U.S. exports.
“Montréal will account for as much as 85 per cent of Quebec’s economic growth going forward,” predicted National Bank’s Chief Economist and Strategist. “For the first time, more people are working in the Montréal region than in all the rest of the province. That reflects the fact that Montréal gets 80 per cent of immigration flows coming to Quebec.”
“We are a nation of exporters,” he noted. “Not just goods: We are increasingly exporting services as well. Our government must work night and day to preserve our U.S. market access.” Marion remains optimistic that low unemployment in the United States will dampen recent protectionist rhetoric there. Rather, the biggest risk is that lower taxes and regulatory requirements south of the border could take investment flows south.
Demographics also plays a big pivotal role in the city’s success.
Stéfane Marion Chief Economist and Strategist, National Bank of Canada
“Eighty per cent of the growth in Québec’s working-age population going forward will be in the Montréal region,” Marion said. “The city already had a great year in 2016, creating almost 90,000 jobs.”
“Last year, investors bought about $14 billion a month of Canadian securities,” he reminded. “Were investors to second-guess Canada’s economic outlook and lessen their bids, the backlash could affect our currency and send interest rates higher.”
Indeed, Québec is witnessing its lowest unemployment rate in a generation and the proportion of its working age population who are employed has hit an all-time high.
“Ten-year U.S. treasury yields will likely converge toward three per cent or 50-80 basis points higher,” Marion anticipated. “If it doesn’t hit five per cent, it won’t destroy my capitalization rates altogether. American inflation will be the determining factor.”
“The tight labour market augurs well for housing for the foreseeable future,” he forecast, “as does the prospect that Montréal ’s aging population will spur densification. Québec is at full employment with unemployment numbers unseen since 1976. We anticipate GDP to grow by 1.5 per cent in 2017—about 50 per cent better than
■ Robert Frank
WORLD: GLOBAL COMPARISON OF PROPERTY PRICES FOR DOWNTOWN LIVING Price-to-income ratio (90 square meters apartment – 970 square feet) – 2016 Mid-Year NBF Economics and Strategy (data via Numbeo, http://www.numbeo.com/) 40 35.0
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Canadian Real Estate Forum / SPRING 2017
CHAMPLAIN CORRIDOR TO TRANSFORM CITY
Martin Landry Managing Partner, ARUP
“It’s not just a bridge,” he observed. “It’s also the A15 highway corridor through Montréal and on the South Shore —those who reside in the neighborhoods on either side of the road, have seen it as a divisive barrier which harms the urban fabric.”
Montréal’s new Champlain bridge will be more than a $20 billion international trade corridor for the region, insists Martin Landry. “It’s about much more than merely its economic value,” Arup Montréal Chief explained. “Yes, it’s important to efficiently move goods in and out of the Montréal region, which includes Laval as well as the North and South Shore. There’s a social value as well.” The 13,000-strong global design and planning firm earned its spurs developing icons like the Sydney Opera House and the bird’s nest stadium that became an emblem for the 2008 Beijing Olympics. While commissioned by the Government of Canada, Arup engaged all potential Champlain corridor stakeholders when it set about planning what is currently the biggest construction project in North America. “It’s not just a bridge,” he observed. “It’s also the A15 highway corridor through Montréal and on the South Shore —those who reside in the neighborhoods on either side of the road, have seen it as a divisive barrier which harms the urban fabric.” Arup grappled with planning how to sustain and enhance essentials like bus, cycle and pedestrian routes to connect the
neighborhoods on either side of the corridor; how to protect and improve key utilities such as water supply and sewerage, during as well as after construction is complete. “The consultations involved not just the City of Montréal, but the many subgroups affected,” Landry said. “We understand Cities, it’s an iterative process: You don’t just do it one time.” Based on Arup findings, the new span across the St. Lawrence will feature a dedicated mass-transit corridor, two three-lane highway decks, and a bike/pedestrian path over the bridge. Though bicycles seemed at first glance marginal to the project, they proved a strategic resource and asset. “Through our work in New York City, post Hurricane Sandy, which hit the city in 2012, we discovered that walking and biking were the only effective means of circulation,” he said. The new Champlain bridge is slated to open in 2018, with completion of the accompanying Highway 15 and Highway 10 corridor and bridge to Nun’s Island expected in 2019. ■ Robert Frank 27
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Hani Lammam Executive Vice President Cressey Development Group
A QUALITY OF LIFE LIKE NO OTHER VANCOUVER 30
Canadian Real Estate Forum / SPRING 2017
The Vancouver market has been so stable for such a long period of time that foreign capital envisions it as being secure. That’s because at the end of the day, notwithstanding what the economy is doing, Vancouver is a great place to live and, accordingly, a great place to own real estate. We do have an affordability challenge here across the whole spectrum of assets—condominiums, offices, retail, and industrial. This is very much driven by foreign capital coming into our marketplace and scooping up real estate. The challenge of affordability has, of late, reinvigorated the multifamily rental market throughout the city. The issue is also driving tenants to choose to own their space, as they tire of paying big rents to landlords; we’re also seeing this in retail, industrial and office. Activity in Vancouver is, of course, different according to region. The core is all about urbanization and mixed use developments. Growth in the outer areas, such as Mount Pleasant and along Clark Drive, is happening thanks to the tech sector, the film industry, the gaming industry. As for the Metro area, it is very well served now by rapid transit and will see growth concentrated around www.realestateforums.com
those transit nodes. And then there’s the Valley and outlying areas, where we have largely single families, townhouses, and some retail. That area goes back to a car-centric world, and an older way of doing things. Regardless of which specific market you call home, you will hear a loud, clear message at our Forum: Vancouver is a very healthy real estate market. Yet while we encourage participants to walk away with renewed enthusiasm, we also recommend prudent decision-making. This has been such a good market for such a long period of time, the exuberance is starting to become evident in some poor decisions. Because of the supply demand situation, many deals are overvalued, which does not make fiscal sense. Those deals should not be financeable. Anyone in Vancouver who is engaged in business should be concerned about the upcoming provincial election in May. If it goes the wrong way, we will all have to retrench. Beyond that, we will continue to grapple with the affordability issue. As we grow our asset base, portfolios or development projects, we are competing against the world to buy real estate. That will not change, and probably shouldn’t change. It’s simply the reality of a very competitive marketplace. ■ Michelle Morra-Carlisle 31
TSAWWASSEN LANDS: THE LONG VIEW, A BOON FOR FUTURE GENERATIONS
Chris Hartman Chief Executive Officer TFN Economic Development Corp. “When we’re built up here, we’ll have somewhere in the order of 10 million square feet of development which will represent significant construction employment but more importantly, close to 8,000 full-time equivalent jobs,” boasts Chris Hartman, Chief Executive Officer, TFN Economic Development Corp., and it’ll be “a major economic driver within the Lower Mainland,
LOW SUPPLY ISN’T THE WHOLE STORY
Beth Berry Director of Industrial Development Beedie Group Industrial land values in Vancouver have been on a significant rise as a result of two things: people’s expectations of value—given what everyone is seeing as a lack of supply—and the need to recycle land, since the only available industrial properties are brownfield developments that often need 32
seasoned investors, for instance pension funds, who have demonstrated shared values with the Tsawwassen First Nation and, importantly, seek to espouse the tenets of this provenly well-executed business model “that generates revenue both on a short-term and long-term basis, and builds capacity of Members and Member businesses,” explains Hartman, would indeed win the support, in part, of the executive council of the Board as next-phase residential and commercial opportunities present themselves for joint ventures.
and possibly within the province.” Implementation of a rigorous community plan serves as a framework to ensure a healthy development of the region of Tsawwassen for its TFN Members, who are shareholders, and their families, and “will position [them] where they have self-determination of how they The First Nations want their communities to develop and the associated “look long-term, economic, [financial] and their perspective social benefits that go [along] is a century.” with it.” Hartman, whose career in real estate development spans three decades, set-up his start-up in November 2009 and, with the B.C. government through treaty, “which took 14 years to negotiate,” has “leveraged the existing land base to secure many of the benefits that were negotiated” and in place over a 10-year phase. Conversations with
rezoning and environmental work. Current landowners expect high industrial land values but don’t always understand the costs involved in rezoning, nor the time involved in clearing, grubbing, servicing and subdividing the land, all of which makes industrial an expensive proposition. According to Beth Berry, Director of Industrial Development with Beedie Group, the common perception of a land crisis isn’t entirely accurate. “There is industrial supply left,” she says. “I wouldn’t say we’re at a complete crisis. It’s just that the time and the process to bring those industrial lands to market are the biggest challenges.” Acquiring an industrial property can take a long time. “More and more municipalities are pushing for 12 months, or even longer, particularly if you have to rezone, because there’s a lot of pushback from communities who, despite this land being designated as industrial, don’t want to see it used as industrial.” And yet industries create jobs. Over the last two years, Vancouver has seen the growth of not only ecommerce and retail, but also the long-awaited growth of manufacturing
In this seaside community, it’s a good time to lay down roots. The First Nations “look long-term, their perspective is a century” while generally speaking, “the thing about pension funds is that they like to own, operate and hold, therefore their perspective off the bat is generally longer [too].” This like-mindedness has developed “a very unique synergy between the pension fund” hands involved in TFN, TFN government and its culture. ■ Natasha Arora
“There is industrial supply left. I wouldn’t say we’re at a complete crisis. It’s just that the time and the process to bring those industrial lands to market are the biggest challenges.” companies. “We’ve had a really positive political environment for the last number of years, which has just continued economic growth within metro Vancouver,” Berry says. “As a result, we’re seeing groups starting to purchase their real estate.” What of the future of older properties? A study is underway on Vancouver’s False Creek Flats to explore potential uses for the area. “If [the city of Vancouver] got they got their way it would all be converted to tech space, which would push out the industrial users currently utilizing that space,” Berry says. “Redevelopment and the value of those lands could really push up the rates in that area.” ■ Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2017
INVESTOR CONFIDENCE IS WHAT KEEPS US GROWING STRONG
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VANCOUVER AT A GLANCE: POSSIBLE CLOUDS OVER SUNNY PEAKS
Brian McCauley President and COO Concert Properties Ltd.
maintain a position to accommodate growth but “there has to be some flexibility over and above current zoning restrictions that exist here today,” says Brian McCauley, President and COO at Concert, despite the “disproportionate amount of land that’s restricted from higher density than single-family homes.” There are clear signs that the industry, aided by the tiered governmental bodies, is moving toward favourable change: shaped in the form of investment in infrastructure and transit, critically important for the success of the future of British Columbia. While such investments, however, in tunnels and bridges are happening, “a much more important thing to be doing is investing in enhanced rapid transit systems throughout the region—and to get people out of cars.”
On Canada’s west coast, the real estate market continues to find fertile ground on which to lay lucrative development projects. Vancouver proper, Metro Vancouver on the south side of the Fraser River, and the newly formed First Nations development
Meanwhile, inhabitants in popular cities across the continent are choosing to live in urban centres. And this shifting positive attitude, in turn, is spurring the strong demand for new housing developments, despite Vancouver’s well-known affordability problem, created in large part by the issues and challenges posed by the laws of supply and demand. “We continue to see record-high sales prices because we have a
“...a much more important thing to be doing is investing in enhanced rapid transit systems throughout the region—and to get people out of cars.” lack of supply. Part of the challenge is zoning and the availability of land, but it’s also about municipal processing and the ability to get permits and licenses, faster, in order to accelerate development.” By the same token, construction and material costs are on the rise and the real estate industry is experiencing an unprecedented shortage of labour as a generation of qualified tradespeople is set to retire. Ultimately, what’s needed, is a brilliant Master Plan that’s devised, analyzed and executed to showcase and safeguard the region’s lush, natural heritage, and added transit links that would fuel new construction and create new communities. In this way, factors driving the market would also intensify the connections we feel as city dwellers. ■ Natasha Arora
FOREIGN REAL ESTATE INVESTMENT CONTINUES TO FLOW In the past three to five years, Hsieh has seen an increase in new clients from mainland China and Hong Kong, ranging from new families immigrating to Canada to large institutional and publicly traded entities.
Roque Hsieh Partner, KPMG Despite recent crackdowns in China on the amount of funds citizens can convert into foreign currency, the tide of foreign investment in Canada has continued to flow. “What will be the long-term sustainable impact of foreign investment in Vancouver, and what will that do to real estate prices? In theory, those prices should go down. But for now we’re as busy as we’ve ever been, working on in-bound transactions,” says Roque Hsieh, partner at KPMG. 34
market and gold. For foreigners, Canada is a safe haven, a place to weather the economic and political storm while raising a family and enjoying a superior standard of living.
“In my view, the affordable housing Hsieh attributes this to several push and pull conundrum isn’t going to be solved by factors. “Push factors demand side “Investors are concerned that include what’s measures or by happening in China China is not economically safe blaming foreign right now: the general anymore – it was the place where money – it’s a supply cool down in the issue, and that’s they made their wealth, and now where it needs to be Chinese economy, a crackdown on it’s time to move that nest egg.” tackled. Any foreign corruption, and money that makes its less-than-ideal living conditions including way to Canada and stays in Canada is crowded schools, pollution, and political and positive for the economy,” says Hsieh. economic uncertainty,” he says. “In Vancouver, where affordability is plagued “Investors are concerned that China is not by supply side challenges such as long economically safe anymore - it was the processing times for rezoning applications, lack place where they made their wealth, and of density and the scarcity of land, it seems that now it’s time to move that nest egg.” the public and the media are, nonetheless, more inclined to blame immigrants and foreign On the pull side, real estate has done very money than to direct attention to the root of the well in Vancouver, outperforming most other problem – housing supply.” common investments including the stock Balfour ■ Barbara Canadian Real Estate Forum / SPRING 2017
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build on,” warned the Reliance Properties CEO. His solution? Anticipate housing demand and identify land in time to develop homes that will be ready right when they’re needed. “Planners have stopped pre-zoning land,” he regretted. “They need to get ahead of the market. Otherwise supply will never catch up with demand.” That imbalance has driven stratospheric property prices in the province.
John Stovell Chief Executive Officer Reliance Properties Vancouver’s new urban planning leadership has made spectacular advances, John Stovell acknowledged, but still-stovepiped processes have become so slow and reactive that major development projects can take 15 years to complete. “Municipalities, particularly Vancouver, are not getting enough land out there ready to
TECH TAKES FRESH LOOK AT CITY CORE
Bryce Margetts Vice President, Western Canada Canderel
The downtown office market is a tale of three markets: The low and high ends remain very active and are almost full to capacity, while in the middle there’s a bit of a slowdown. “The 600-1500 square foot market is extremely active and space is 36
“We’re starting to see cities become more willing to rezone single-family areas,” Stovell observed. “Single-family is inefficient and unavailable to the vast majority of the population, hence a subsidy to the rich.” Taxing foreign purchases buys only temporary relief, since it fails to solve the underlying supply shortage. Spiking price points and stagnant interest rates have spurred a shift from strata market housing to rental development. “Developers see huge potential in rental as a hedge against undersupply,” Stovell added. “If municipalities don’t approve enough properties, they make rental more valuable.”
being filled up apace, driven primarily by the price point on C properties and, for the most part, in B as well as some A building, though there’s slower activity there,” reported Bryce Margetts, Canderel’s Vice President, Western Canada. “Where we’re seeing some glut is in other B buildings.” Overall, downtown office remains fairly balanced and is trending toward a landlord’s market. There is some lateral movement but the good news is that interest has perked up markedly from large American corporations. “There are several groups looking who are quite large—primarily in the tech sector,” he said. While tech typically remains interested in inhabiting they type of brick and bean properties found in Yaletown and Gastown, the new trend is seeing those companies venture beyond their traditional haunts, which is increasingly inducing them to set up shop in conventional office towers in the city core. Amazon, for example, has decided to set up in the new TELUS building.
Besides the red tape tie-ups, often-contradictory government intervention remains a topline risk. “Vancouver is bringing in a vacancy tax. The province, in turn, increased the property tax on homes worth more than $2 million from 2% to 3% and tacked on an additional 15% for foreigners, who now must pay 18%,” he said. “The federal government has restricted access to the market for first-time homebuyers by increasing stress testing for insured mortgages. Then the province turned around and raised the threshold for the property transfer tax for first-time homebuyers to $500,000 and offered them a second mortgage—which is exactly the opposite of what the federal government is doing.” A combination of uncertainty south of the border and the need to attract funds to finance government deficits in Canada also makes interest rates another wild card. “Interest rates have been so low for so long that we’ve all forgotten that they’re the single biggest factor driving demand in all real estate sectors,” Stovell concluded. ■ Robert Frank
“There’s a lot of tech circling the downtown core right now,” Margetts said. “They’re choosing location over building. Many want to locate on or adjacent to public transit. Since their culture tends to eschew traditional offices, and we are witnessing some tech firms who are willing to invest their money to customize the space to accommodate their employees’ needs.” Overall the downtown office market remains currently fairly balanced and is trending towards a landlord’s market, he added. “There continues to be a very healthy market in which we see space availability tightening,” Margetts concluded, “though in the medium term there is potential for that to change with more supply coming online. It will likely be four to five years before developers bring any new stock on line. Based on absorption and demand, that will likely entail at least two and possibly three new projects.” ■ Robert Frank
Canadian Real Estate Forum / SPRING 2017
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ECONOMIC PROSPECTS REMAIN STRONG, STEADY
foreign-buyers tax. Foreign buyers are not the main drivers of the Vancouver market.”
British Columbia ought to do well this year. Barring any unlikely black swan developments, the provinces economy fared well last year and ought to do likewise in 2017, predicted Helmut Pastrick . Helmut Pastrick Chief Economist Central 1 Credit Union
Unemployment is forecast to fall slightly this year to 5.8 per cent and 5.4 per cent in 2018. The upcoming provincial election is also unlikely to upset the applecart, anticipated Central 1 Credit Union’s Chief Economist. “Don’t expect the election to result in any disruptions,” he advised. Likewise, the province’s real estate market has absorbed Ottawa’s personal mortgage strictures without making much of a ripple in the housing market. “In general, the impact of the new rules appears to be a very mild and slight negative impact,” Pastrick reported, reminding that the federal tightening was somewhat offset by a provincial program to help first-time buyers enter the housing market. The market has also already absorbed the province’s clampdown on foreign real estate buyers, when it imposed a 15 per cent tax on purchases in August. “The downshift in certain market pricing has already occurred,” he said, “typically in high-end single-family homes in prime locations. in I don’t foresee any more downward movement as a result of the
The main challenge on the housing front is persistently high cost of land, which in turn drives housing prices through the stratosphere. Housing starts are projected to drop by ten percent this year, after spiking 32 per cent in 2016, though they are expected to rebound by eight per cent in 2018. Home sales are likewise forecast to slump five per cent this year, pushing down median prices buy two per cent. “Affordability is the biggest issue: It deters companies and prospective Vancouverites from locating in the region,” Pastrick acknowledged. That’s an ongoing challenge that will not be going away soon, since there’s no magic bullet.” Government, particularly local governments are best-positioned to redress the ongoing problem, he said, suggesting that they take proactive measures to enlarge the development potential for family oriented housing. “The tax structure in British Columbia is quite favourable, relative to other provinces and other countries,” he credited. “More could be done there, but it’s not as critical factor here as it is elsewhere.” Pastrick also highlighted the British Columbia’s government’s plan to increase capital spending, which will help to stimulate the province’s economy, though he cautioned to expect a lag before the benefits kick in. “Government infrastructure plans tend to evolve more slowly projected,” he observed. ■ Robert Frank
B.C. ECONOMIC AND HOUSING FORECASTS
Source: Statistics Canada, Landcor Data Corp., Central 1 Credit Union Dec. 2016.
Nominal GDP, % change
Real GDP, % change
Employment, % chg.
Unemployment rate, %
Population, % change
Housing sales, % change
Median price, % change
Housing starts, % change
Canadian Real Estate Forum / SPRING 2017
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For those sitting up and taking note: the savvy retailers, commercial realtors and brand specialists alike, the need to evolve in order to succeed is right now, in spite of looming socio-economic uncertainty. These said innovations are coming to market in the form of “the prevalence of technology, “The prevalence of and the fact that technologies are technology, and getting better and better is really impacting the way that we design the fact that spaces,” continues Kimes. technologies are “The mall of the future can no getting better and longer exist on stores alone; it’s better is really not just a retail experience but an impacting the way experiential, dynamic, ever-changing destination.” It can that we design also no longer be viewed as just a spaces.” bricks and mortar location. Mall anchor tenants want more because their consumers demand it. “Being part of the creation process is becoming bigger and bigger and that’s a way that stores are bringing people in to create something that cannot be replicated online or anywhere else” through “personalization and customization.” Expanding the mall concept as it’s traditionally known would require enhancements on its current footprint. “Mixed-use” says Kimes, will “continue to evolve more as a social, community, experiential destination.” For the industry outlook, it’s about peril and opportunity: “develop an omnichannel or an omnipresence strategy” or seize to exist. ■ Natasha Arora
Canadian Real Estate Forum / SPRING 2017
MIDDLE-CLASS RENTAL MARKET CONTINUES TO BE NEGLECTED: OPPORTUNITY FOR BUILDERS, DEVELOPERS TO STEP IN Todd Nishimura Director of Marketing and Leasing, Vertica Resident Services Despite a greater supply of rental inventory entering the market, it won’t do much to address growing concerns about accessibility for the middle class.
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“More supply should bring some stability to prices but the type of new product we’re seeing still targets the higher end of the market,” says Todd Nishimura, Director of Marketing and Leasing at Vertica Resident Services, a multi-residential property management company. “If I’m a renter in Toronto or Vancouver, both tight markets with low vacancy rates, my concern would be affordability and prices continuing to rise. And as interest rates remain low, buying into hot real estate markets will be difficult and competitive. There’s not a lot of relief in price for rental property and for those making an average income, it will continue to be challenging.” While Nishimura says another 10,000 purpose-built new rentals being scheduled for construction in Metro Vancouver won’t make much of a dent, he does see an opportunity for builders and developers to create product specifically for middle-income renters.
“Those 10,000 units will be phased in – they won’t hit the market at the same time and that’s another reason I think rents will remain at the higher end.
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“But in areas that sit a few blocks outside of the prime downtown core in Toronto and Vancouver, you can create a quality product at a price point that is more affordable. In contrast, if you are going to develop any type of real estate on prime land, the economics is that you need to command higher rents to pay for the investment in land that you’ve made.”
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While Nishimura says BC’s new tax on foreign investment in real estate has had an impact on cooling the market – and is even being considered in Toronto – he also doesn’t believe there will be a marked increase of American investors fleeing the Trump administration.
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“People made reactive statements because of the political climate but when push comes to shove, I don’t think that we have seen a marked increase of movement across the border. Moving is one of the most stressful things you can experience in life outside of debt, divorce and marriage – when that reality sets in, it takes a lot for people to uproot their lives.”
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■ Barbara Balfour www.realestateforums.com
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IN A CYCLE, THERE IS ALWAYS A RESET PERIOD EDMONTON 44
Canadian Real Estate Forum / SPRING 2017
In the Edmonton market we have a natural cycle, which we’ve lived through many times—it’s just degrees of activity—but we’ve also had some restructuring with changes in the market, particularly downtown office. The “reset” phase of the market is near completion. Optimism is starting to catch. So it’s time to focus on those mid to long term opportunities that will arise out of the upward trend in the cycle and from changes in the marketplace. Demand for real estate is a product of business activity in a sector. With a lot of current optimism in the resource sector, there is going to be a new normal, but the new normal isn’t viable. Many people who, six months ago, were thinking of selling their businesses in the resource sector, are turning into folders or buyers of businesses, which ends up manifesting itself into industrial real estate. As downtown office undergoes a large reset, with product coming on board and establishing new price levels for high quality office space, the big question is: what to do with the excess inventory? As for suburban office, while a little slow right now, it is a product of business activity. Once business activity comes, so will the demand for that space. www.realestateforums.com
Consumer demand for product will continue to evolve in future. For example, in 10 years we will likely have a fair number of driverless cars on our roads. Car sharing could become much more prevalent. What will be the implications in terms of office locations, or amenities? Real estate is a long game. We need to be thinking about what products will be in demand 10 to 15 years out, not three to five years out. Business in Edmonton has been very resilient. Going into the downturn, many people were projecting in terms of business failures, yet there really hasn’t been a tremendous amount of that happening. Edmonton businesses are diverse and have a strong foundation. Balance sheets were reasonably strong coming into this current downturn—and indicators say the downturn could be almost over. With every change in the economic cycle, or with every restructuring in the market, the problems tend to be shorter term and the opportunities tend to be mid-to longer-term in nature. It is very important that people in our industry start thinking about that. ■ Michelle Morra-Carlisle
TIME OF CAUTIOUS OPTIMISM COULD BE AN OPPORTUNITY TO INVEST
Grant Ranslam Principal, Avison Young
“I don’t expect that this is going to be an exceptionally busy year, but it will be a very tell-tale year. Now that we’ve got oil prices starting to stabilize, a different President down south, and pipeline announcements and approvals in the works, there are reasons to be a little bit more optimistic than in the last couple of years,” Ranslam says.
Compared to this time last year, Edmonton’s industrial market has seen increased activity. And though the results are hard to measure this early in the year, investors hope that healthy growth will continue throughout 2017. “In talking with landlords, developers, tenants and other clients out there, most are cautiously optimistic right now,” says Grant Ranslam, Principal, Avison Young.
The growth is across different market sectors. Edmonton’s consumables market continues to move forward, and population growth is ongoing. Meanwhile, drilling activity is increasing and service companies are a little busier. In this environment, while not everybody is buying or looking to do new long-term lease deals, Ranslam says the time could be right. “If you’re a tenant and you’re seeing that the economy is starting to pick up the pace a little bit, now is probably a good time to secure space,” he says. “Or if you’re a buyer, now is probably a really good time to take a hard look at the opportunities out there.”
“It will be a very tell-tale year. Now that we’ve got oil prices starting to stabilize, a different President down south, and pipeline announcements and approvals in the works, there are reasons to be a little bit more optimistic than in the last couple of years.” Just a few short years ago, Edmonton was more of a landlord-favoured marketplace, with a very low vacancy rate. Today the vacancy rate has risen by a few percentage points, which is a positive for tenants. As for the immediate future, Ranslam says, “Fast forward 12 months and the shoe might be on the other foot again; so the opportunity might be for tenants today. In the months ahead, the challenge will be what happens every time the market is in flux—a feeling-out process between businesses, tenants and landlords that might turn the tides a bit.” ■ Michelle Morra-Carlisle
ALBERTA RETAIL MARKETS EXCEED NATIONAL AVERAGE – REPORTS OF DOOM AND GLOOM HIGHLY EXAGGERATED demand. Bar tabs and restaurant sales exceed the national average. Sales per square foot in shopping malls are still doing incredibly well and consumer spending in Alberta is substantially better than any other province across the country. Eric Slatter Partner, Omada Commercial Despite newspaper headlines of doom and gloom, Alberta’s retail markets enjoy continued success well above the national average. “In the latter part of 2014, when the economy began its downward descent, the question became, who would want to come to Alberta? What will happen now?” says Eric Slatter, Partner at Omada Commercial. “The reality is, the performance is still there and so is the incredible 46
“We’re a market that is head and shoulders above the rest by a lot of retail metrics.”
business in Alberta, where else will you be?” In contrast to previous years, when everyone was talking about flashy new American entrants into the market, Slatter says we’ll be hearing more about incumbent players that are doubling down and reinvesting. “The area of fashion retail – whether American or Canadian – is a segment that has been hit incredibly hard. You have this juxtaposition of groups that are faltering and going into bankruptcy, with Canadian retailers like Lululemon and Simons which are expanding and thriving,” says Slatter.
“If you’re not doing business in Alberta, where else will you be?”
Retailers casting an eye to expanding across Canada, whether Canadian or American, often run into the tight, competitive real estate market in Vancouver. While Saskatchewan and Manitoba do very well, they lack the population base to make any significant impact, says Slatter. “Quebec is its own beast, Ontario isn’t as appealing, and Atlantic Canada hasn’t seen much movement. If you’re not doing
“All these groups have found ways to stay relevant and successful through aligning their brick and mortar stores with online operations.” ■ Barbara Balfour Canadian Real Estate Forum / SPRING 2017
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EDMONTON: FEELING ENERGIZED BY MID-YEAR
John Rose Chief Economist City of Edmonton
Bad news first. Changes of employment by region in the province have seen communities suffer “some very significant job losses” explains John Rose, Chief Economist for the City of Edmonton. Human capital was hit hard in the manufacturing and construction sectors in Edmonton, unemployment in Calgary is “record high by historical standards” and regions such as Red Deer, Fort McMurray, Grande Prairie, which are largely energy-dependent, “have taken the brunt of the downturn.” Some of these jobs are not coming back. “What people have to realize about Alberta, particularly about Edmonton” cites Rose, “is that there are dramatic differences in the structure, in the composition of local economies.” But stability is finding us again, and this is good news. According to data, encouraging signs show real economic growth potential both in the city of Edmonton and the province. “2017 is going to mark a return to
REAL GDP GROWTH % Source: City of Edmonton, C4SE
8 6 4 2
Edmonton CMA 48
City of Edmonton
20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22
“What people have to realize about Alberta, particularly about Edmonton, is that there are dramatic differences in the structure, in the composition of local economies.”
growth” says Rose. “We had not experienced recessionary conditions that existed elsewhere in the province prior to May 2016.” Though this upward turn will not begin to show its effect before “we get into the second half: we’ll see the unemployment rate come down, the numbers of jobs improve, and it’ll become much clearer that the economy for the region and the province is moving forward.” Market indicators for this optimism in the provincial economy emanate from “stable employment and stable activity in the energy sector.” Moving into the second half of 2017, “we’ll see a number of projects which had been shelved by the energy companies restarted, and that will gradually begin to improve employment in that area.” And, as a result, manufacturing, particularly in Edmonton, should rebound, also because of “improving export conditions and improving growth in the U.S.” continued Rose, whilst the real estate industry sits tight for a recovery in non-residential construction in 2018, when “infrastructure money from the provincial and federal governments finally hit the ground” in the region. ■ Natasha Arora Canadian Real Estate Forum / SPRING 2017
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MODEST REBOUND TO BOOST RESIDENTIAL DEMAND
Todd Hirsh Chief Economist, ATB Financial Alberta is set to kiss two years of contraction goodbye and grow 2.3 per cent in 2017, predicted ATB Financial chief economist Todd Hirsch. “Oil prices have roughly doubled and appear right now to be really stable,” he said. 52
The new government in the United States makes economic forecasting more challenging this year, Hirsch acknowledged, with competing dynamics at once pushing and pulling the energy sector in opposite directions. “There are some suggestions that President Trump will cut corporate taxes and ease energy sector regulation,” he observed. “That could stimulate investment in the United States and divert some investment capital from Canada south of the border. On the other hand, the Federal Reserve Board is talking about hiking American interest rates, which would have the opposite effect.” The market for commercial real estate in both Edmonton and Calgary will continue to face considerable challenges with surplus product, Hirsch forecast, though Edmonton continues to prove more stable, thanks to Alberta’s decision not to rationalize the provincial government bureaucracy. Residential property is poised to improve, though. “In 2015 and 2016, prospective homebuyers were reluctant to enter the market,” he said. “They wanted to see how long the recession would remain and were waiting for the
market to bottom out. Now, better economic prospects will encourage them to make a move, either to get into the market or to upgrade their home to a larger property.” Demographics will also play an important part in the residential rebound. Although Alberta has a net outmigration of about 8,000 people to other provinces, it nonetheless remains the Canada’s fastest-growing province. “The loss was modest, and a fraction of 130,000 that we gained in the 20 quarters prior to the recession,” Hirsch explained. “We’re still seeing strong natural growth in terms of births, plus international migration to Alberta remains positive.” Job growth tends to lag somewhat behind economic growth, he noted, so unemployment is unlikely to fall much during the first six months of 2017. “The job market might not show much recovery until the second half of the year,” he underscored. ■ Robert Frank
Canadian Real Estate Forum / SPRING 2017
TENANTS WILLING TO PAY FOR QUALITY
Cory Wosnack Principal, Avison Young
Over the last two years, Edmonton has been proving that the region is behaving differently than the judgment of the province. Cory Wosnack, Principal with Avison Young, says people who do business in Edmonton must often
HOW TO MEET CONSUMER DEMAND IN EDMONTON
Rohit Gupta President Rohit Group of Companies Do Edmontonians prefer to rent, or to own? Rohit Gupta, President of Rohit Group of Companies, says that depends on demographics. “There are new immigrants, and then there are people who have grown up here and are entering into the home ownership/home rental market”. www.realestateforums.com
defend the merits of Edmonton as a worthwhile investment. “The city has challenges, but not to the same degree as what we’re seeing in other parts of Alberta,” he says.
“We’re already seeing the early signs of optimism turn into investments and greater velocity on transactions.”
The year 2017, so far, has brought a new kind of optimism that has people behaving in a more strategic and optimistic fashion. And what will the second half of 2017 bring? “More deals,” Wosnack says. “We’re already seeing the early signs of optimism turn into investments and greater velocity on transactions. People who were on the sidelines will begin to come off, and there is no doubt we will see the ball move forward for economic progress.”
living up to predictions by creating an exciting social experience downtown. “We are only seeing the early beginnings of what the hospitality industry can do as a contributor to the downtown lifestyle because restaurants right now, on event nights, are packed,” Wosnack says. “And we don’t even have the new hotel yet [the J.W. Marriott, expected to be built by 2018].”
Wosnack expects to see an alignment of residential and commercial development in consideration of public transportation. And while LRT expansion and much-needed improvement of the Yellowhead Trail Freeway could take a decade, Wosnack stresses that the work will constitute economic stimulus, and that improved transit will make Edmonton a much more efficient city. Meanwhile, Edmonton is very visibly growing. The new Rogers Place arena is
“I would say the new immigrants definitely have a bias towards home ownership, because it’s viewed as a way of saving, whereas among the locals who grew up here we see a small trend starting to take place where people are saying, ‘I’m okay with rental, provided I get a lot of other amenities with the opportunity, where I can get into a location that would otherwise have significant barriers to entry.’ But where there are no barriers, all things equal, we see a preference to own more than rent. Edmonton has a few needs to address over the next 5 to 10 years. One need, Gupta says, is to offer product with cachet or exclusivity. “There’s a shortage of that type of product in Edmonton. Something like the island in Montréal, or the area near Concordia University—locations with some prestige attached to them. In Edmonton the older neighbourhoods were closer to the river, but a lot of the new neighbourhoods have moved away from the river. So we must take the opportunity to build neighbourhoods that are a little bit more exclusive or offer strong amenities, allowing residents to work, live and play.”
Stantec Tower, a mixed-use skyscraper under construction, is scheduled for completion in Q4 of 2018. “And it was already fully leased by last summer, a time when you would think there would be hesitancy for companies to not move into new buildings that command high rental rates to justify the quality of construction,” Wosnack says. “It shows you that this market was starving for quality, and that tenants are willing to pay for it.” ■ Michelle Morra-Carlisle
“Edmonton needs to offer product with some cachet or exclusivity—something like the island in Montréal, or the area near Concordia University, locations with some prestige attached to them.”
Another need to be met, Gupta says, is that of “good suburban neighbourhood living where the housing type is more cognizant of the specific needs of a consumer.” He compares this to older developments where, back in the day, a builder could put out five types of models in suburban space and let customers customize. Now, with increasing densities, he says, “People are looking for more specific needs for their housing selection.” ■ Michelle Morra-Carlisle 53
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COMPETITION FOR NEW TENANTS HEATING UP: CONCIERGES, GYMS AMONG COVETED AMENITIES of Maclab Development Group. “This flight to quality is true for all asset classes. People with better positioned properties and who have invested in older assets hold the advantage in attracting tenants to their rental product. Bill Blais President and CEO Maclab Development Group
“It is a competitive marketplace. Though the market is starting to flatten out a bit instead of continuing to slide the way it did in 2016, we’re not out of the woods yet.”
From concierges to full-service gyms, players in the multi-residential market are working harder than ever to keep and attract new tenants
To meet market demand, amenities and services are starting to emerge in Edmonton that were previously only seen in larger centres. “With Edmonton House, we were one of the first groups to have a full-service concierge in one of our buildings – that was very well received, and we’re starting to see other rental properties bring them on. We
It’s all about the quality of living arrangements these days, says Bill Blais, the President and CEO
also believe that a high-quality gym and other health related offerings are very attractive to tenants,” says Blais. “As people are shopping online more than ever, what’s critical is how you deal with receiving, storing and delivering people’s packages.” “A lot of our product is well-maintained and in really good locations; we’ve participated in significant investment programs over the years, and our units are well positioned and in good shape. “We are looking at building new rental products in some of the infill locations – there are opportunities on some of our existing sites to renew and build new product. As an asset class, the attractiveness of the multi-family market has been strong in Edmonton. However, we do need to see job creation to attract people to Alberta and Edmonton. We will remain an economy dependent on the oil and gas market and my expectation is volatility will continue. ■ Barbara Balfour
Canadian Real Estate Forum / SPRING 2017
PROSPECTS FOR EDMONTON? EASING INTO AN UPSWING
John Day President John Day Developments
“Being flexible, looking at alternative uses, looking for value, forgetting the best and the worst of conventional wisdom, and carrying on,” these are all the ways John Day, President of John
Day Developments, in Edmonton, has been riding the wave of uncertainty in his local and regional real estate world over the past few years. Pragmatic but hopeful, “the reality is things are still happening, deals are still happening,” says Day. “The world hasn’t collapsed, Edmonton hasn’t collapsed.”
“Being flexible, looking at alternative uses, looking for value, forgetting the best and the worst of conventional wisdom, and carrying on.”
The pace of development for infill housing, skinny houses and rentals of office-condos are holding steady in the Edmonton market. While on the retail side some “doors are getting closed and some good real estate is suffering vacancies and losses.” That said, however, notable investors in the Canadian economic landscape, including “pension funds and investments funds” are reconsidering Alberta and manufacturing opportunities. Conversations are taking place. There is money to be made. But it’s still early days.
human toll of unprecedented challenges with dire effects. “The psychological pressure of falling oil prices, change of temperament, uncertainty, increasing unemployment: the psychological impact of bad news,” overall, indeed tested the resilience of Albertans. Remarkably, it is little spoken about or addressed openly. “Nobody is impervious to a downward economy.”
Meanwhile, with the costs of building in this province markedly lowered from the heyday of the time when “things were so busy and so overheated”, there are established entrepreneurs who are seeing projects get started again, after a downturn that saw the
On a rosier note, although “the present state of the economy has been fairly negative for a year or two, it is starting to get a little bit better,” says Day, cautiously optimistic, but contrasting development with recent past years, “I don’t think we’ll see the millions of square feet being built.” ■ Natasha Arora
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Jay Hamilton Chief Financial Officer, Canadian Urban Ltd.
Jay brings over 17 years of experience in the financial and professional services industries, most recently with SCM Insurance Services. With a focus on people, technology and processes, Jay provides a wealth of strategic, operational and financial leadership to
Canadian Urban. Jay is the current Treasurer and Director of the University of Alberta Golden Bears Football Alumni Association. He is a Chartered Accountant and holds a Bachelor of Commerce degree from the University of Alberta. Canadian Urban is a highly regarded nationally focused boutique real estate investment advisor. Established in 1971, Canadian Urban has a track record of delivering consistent significant results for its institutional and high-net-worth investors.
Peter Dimakarakos joined Trez Capital in 2017 and heads up the origination team for Eastern Canada (Manitoba, Ontario, Quebec and The Maritimes) and the Northeast United States. Peter has more than 20 years of commercial real estate, capital markets and private equity experience. Over this period, he has originated, executed and Peter syndicated more than $25 billion of Dimakarakos financings for publicly traded, Senior Vice President, Head of Origination, sponsor-owned and privately owned real Toronto, Trez Capital estate companies including construction, acquisition, high-yield, mezzanine and mortgage financings. Prior to joining Trez, Mr. Dimakarakos held senior positions in Toronto and New York with a number of leading financial firms including CIBC Capital Markets and Banc of America Securities. He started his career at Scotia Capital in Toronto and later in New York. Peter holds an MBA from the Queen’s School of Business and a Specialized Honours BA in Economics from York University.
NAIOP: MOVING COMMERCIAL REAL ESTATE FORWARD NAIOP members span the industry – retail, office, mixed-use, industrial, multifamily, hotel and more – and our powerful chapter network unites members across North America. At NAIOP, you have unlimited opportunity to meet the dealmakers and visionaries who are shaping our industry. NAIOP: WHERE CAN WE TAKE YOU?
Canadian Real Estate Forum / SPRING 2017
ULI Toronto Symposium Metro Toronto Convention Centre, Toronto, ON April 24-25, 2017
Inspiring Better City Building, Community By Community
Information and Registration toronto.uli.org
The ULI Toronto Symposium will challenge Canadaâ€™s largest and fastest growing city region to become the global leader on how to make cities better places to live, work, learn, play and invest. Convening experts internationally and regionally to address the most current real estate topics at the intersection of
MOBILITY, PLACEMAKING AND TECHNOLOGY.
SPRING 2017 / ISSUE 74
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Bringing transparency and insight into every aspect of the real estate life cycle so you can make better decisions, faster. !;=;u|or-];v=ouŃ´|Â†vuoÂ†rÄ˝vŃ´-|;v|oll;u1b-Ń´-uh;|"|-|bv|b1v-1uovv-m-7-Äş
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GREAT RETURNS, POOR RETURNS: WHO DID THE BEST IN 2016?
By Michael Brooks Chief Executive Officer REALPAC
The 2016 REALPAC/IPD Canada Property Index results for 2016, published by MSCI, yielded some interesting national results that we are not hearing or seeing in the main street press. For the uninitiated, the REALPAC/IPD Canada Property Index is an valuation based index of real estate assets held by institutional investors across Canada. The index measures the investment performance of unlevered real estate. The index is published quarterly and data is submitted to MSCI for aggregation in confidence. At almost 90,000 assets in almost all asset classes, including almost 1800 portfolios of assets, the global coverage of MSCI Real Estate’s global data set, of which Canada is a part, is huge. In Canada, MSCI IPD has been running this index since 1985. The Canadian data set includes almost 2500 assets having a value of just under $150 billion CAD, which MSCI estimates represents almost half of the domestic professionally managed market. Why would a company submit their data for inclusion in the index? From the CIO’s perspective, it gives them a way to benchmark the performance of their real estate portfolios, by city and asset class, against other portfolios. It provides insights into risk and return. It provides an objective way of benchmarking staff skill in selecting and managing assets against others who have similar assets in similar markets. REALPAC is pleased to be the Canadian national partner with MSCI IPD. The index results for 2016 showed a total return of 5.7% nationally for standing assets, which is all cities, all asset classes. Of that, 4.9% was income return, and a measly 0.7% was capital growth. Still a better return than the bond market, but certainly the evidence over the long data set back to 1985, shows income returns slowing, particularly since 1997. Stellar Vancouver and Toronto Vancouver led the national performance numbers, with a 12% total return for 2016 comprised of 4.6% income return, and a massive 7.2% in capital appreciation. Second was Toronto, with a 4.7% income return and a 3.7% capital appreciation return.
Alberta Bottoming? It’s not clear whether Alberta has started to recover from the oil price shock of the past few years. Edmonton for example, while having a 5.8% income return, had a negative 6.1% hit on capital value. Similarly, Calgary, while earning a 5.3% income return, had a negative 7.7% hit on capital value. Edmonton and Calgary were the worst performing city’s in 2016, with Edmonton having a negative 0.6% return overall, and Calgary having a negative 2.8% return overall. Montréal Rebounding? Montréal was a bit of a surprise to many. With rebounding economic activity and numerous cranes in the city, many were anticipating a good year for Montréal. While income returns and Montréal were at 4.9% for 2016, capital returns were at negative 1.6%. Montréal’s overall total return for 2016 was 3.3%. The results on capital growth were actually quite surprising for many cities, as Winnipeg, Ottawa, Montréal, Halifax, Edmonton and Calgary all showed negative capital value growth for 2016. Apartments! On the sector side, residential and retail nationally showed good income returns of 4.3 and 4.5% respectively, while office, having a 5.4% income return, nationally had a negative .6% capital value growth in 2016. Nationally residential property had a strong return at a percent overall. The 2016 results for the REALPAC/IPD Canada Property Index are the lowest since the mid-1990’s. The importance of active management of real estate portfolio’s will be the key to outperformance. The top performing portfolio managers will have performance benchmarking tools which are based on valuation based indexes to help manage this new era of real estate returns. ■
Canadian Real Estate Forum / SPRING 2017
Real property. Real leadership.
â€œA first in Canada! Finally, we now have a
comprehensive and definitive text on Canadian commercial real estate that details the many legal structures, institutions, and practices
unique to Canada. It deserves a place on the bookshelf of students and practitioners alike.â€?
President & CEO Oxford Properties Group Board of Directors, REALPAC
Canadian Commercial Real Estate: Theory, Practice, Strategy authored by Dr. Michael Brooks and published by REALPAC.
Visit realpac.ca to purchase or view an excerpt from the
textbook, including the Table of Contents and sneak peek of Chapter 1.
Full Retail Price
A TALE OF THREE CITIES: MONTRÉAL, VANCOUVER, AND EDMONTON PROPERTY TAX TRENDS
By Brooks Barnett Manager, Government Relations & Policy REALPAC
Each year, REALPAC (the Real Property Association of Canada) studies the comparative commercial tax rates and ratios of Canada’s largest cities. The research supports a greater effort to encourage municipalities across Canada to achieve a measure of tax fairness that will promote a growing and economically viable commercial real estate sector. Montréal, Vancouver and Edmonton are three such markets where property tax fairness is a key challenge for industry advocates, and therefore tax ratios and rates are critical focus. REALPAC’s annual Canadian Property Tax Rate Analysis has yielded some key information about these markets in particular.
From a residential tax per $1,000 of assessment standpoint, Edmonton saw an increase in residential rates, while Vancouver saw a reduction of the same rate for the 13th consecutive year. Vancouver and Montréal continue to post two of the highest commercial-to-residential tax ratios of the 10 cities studied. Of the municipalities surveyed in 2016, Vancouver was the only city to post a tax ratio in excess of 4:1. Montréal is estimated at 3.82:1 and Edmonton, impressively, is roughly 2.39:1. On average, Canadian cities have extended the ongoing trend of decreasing commercial tax rates in an effort to promote business growth. While the findings for the above
Commercial Property Taxes Per $1,000 of Assessment Thousands. • Source: REALPAC
The 2016 survey reveals higher property tax rates for major cities in the Prairie provinces, including Edmonton. Rates have come down in Vancouver and Montréal, however property taxpayers may not see improvement on their bills, as steadily rising assessment values may counterbalance rate changes. For the fourth consecutive year, Montréal has one of the highest estimated commercial taxes per $1,000 of assessment, with a rate that is roughly 2.74%. Vancouver’s rate is also one of the lowest among those municipalities studied. Edmonton’s rate increased by roughly 1.45%. The chart shows these changes year over year since 2003.
noted cities indicate that more work may be needed to ensure tax competitiveness in those markets, REALPAC is encouraged that many municipal policymakers understand that the continued reduction of excessive property tax burdens on commercial and industrial properties will make cities generally more competitive, promote job growth and investment, and result in increases to the property assessment base and subsequently generate more stable and sustainable revenue. ■
Canadian Real Estate Forum / SPRING 2017
TAKE ADVANTAGE OF OUR UPCOMING EVENTS Canada’s Leading Real Estate Conferences Listen to Industry Leaders x Learn About the Latest Trends & Strategies x Build Your Network
VANCOUVER REAL ESTATE FORUM
Land & Development May 3, 2017 x Metro Toronto Convention Centre, North Building
April 11, 2017 x Vancouver Convention Centre West
SASK ATCHEWAN REAL ESTATE FORUM
Calgary Real Estate Strategy & Leasing Conference
April 20, 2017 x Queensbury Convention Centre, Regina
May 25, 2017 x Calgary TELUS Convention Centre
EDMONTON REAL ESTATE FORUM
Canadian Apartment Investment Conference
May 11, 2017 x Shaw Conference Centre
September 6, 2017 x Metro Toronto Convention Centre, North Building
ATLANTIC REAL ESTATE FORUM
June 1, 2017 x Halifax World Trade & Convention Centre
September 7, 2017 x Metro Toronto Convention Centre, North Building
OTTAWA REAL ESTATE FORUM
The Real Estate Strategy & Leasing Conference
October 17, 2017 x Ottawa Conference & Event Centre
CALGARY REAL ESTATE FORUM October 26, 2017 x Calgary TELUS Convention Centre
September 19, 2017 x Metro Toronto Convention Centre, North Building
Montréal Real Estate Strategy & Leasing Conference October 12, 2017 x Palais des congrès de Montréal
TORONTO REAL ESTATE FORUM November 29-30, 2017 Metro Toronto Convention Centre, South Building
Vancouver Real Estate Strategy & Leasing Conference November 2, 2017 x Vancouver Convention Centre East
QUÉBEC CITY REAL ESTATE FORUM
Global Property Market - Toronto
May 2, 2018 x Centre des congrès de Québec
November 28, 2017 x Metro Toronto Convention Centre, South Building
WINNIPEG REAL ESTATE FORUM
Québec Apartment Investment Conference
May 30, 2018 x RBC Convention Centre
February 13, 2018 x Palais des congrès de Montréal
MONTRÉAL REAL ESTATE FORUM
March 28, 2018 x Palais des congrès de Montréal
February 27, 2018 x Metro Toronto Convention Centre, North Building
For details on these conferences and to register online visit www.realestateforums.com Sponsorship and advertising opportunities available. Contact Frank Scalisi at firstname.lastname@example.org or 416-512-3815
A NEW UNDERSTANDING OF PRIVATE CLOSED-END REAL ESTATE FUNDS IN CANADA
By Sandra Dos Santos Director, Industry Affairs & Compliance REALPAC
REALPAC’s inaugural 2016 Closed-End Fund Survey Report has accomplished what it set out to do – to peel back the opaque veil that has shrouded the private closed-end real estate fund market. The first of its kind in Canada, the Report provides information on activities conducted by unlisted closed-end funds in 2015. The Report covers a wide range of data from total assets under management to information on the investment process, including fund strategy, geographic focus, fund leverage, gross target annual returns and investments realized. With 11 participants and over $18 billion (Canadian) in total assets under management, and with more funds in the market available to participate in the survey, the size of the sector is larger than initially anticipated. Half of the survey participants have more than $1 billion in total assets under management and the total equity raised by the participants exceeded $7 billion. The survey found that a value-added strategy was preferred by the majority of participants and almost 30% of funds chose a mixture of strategies with an opportunistic strategy being a very large component (86%) of their investments. Most funds had a multiple geographic investment focus and were evenly split between a single and multiple 64
property type focus. Fund leverage ranged between 0-55% and the majority of funds noted that they were not yet fully leveraged. The Report provides vital market information that has been missing in Canada. REALPAC’s objective is to conduct the survey annually to keep a pulse on the Canadian private closed-end real estate fund sector. REALPAC is hard at work on its 2017 Closed-End Fund Survey with the aim to expand its reach and scope of analysis. In growing the survey, the goal is to provide information for investors and participants to allow them to gauge how their investments are performing in comparison to the Canadian market. The Report also provides a comparison point against international markets. It is not meant to be a technical benchmark but rather to assist market participants in understanding the overall scope of the Canadian market. By having a better understanding of the closed-end fund market, we can now focus on establishing best practices to bring Canadian fund governance standards in line with emerging global standards; and increasing Canadian competitiveness globally. To purchase your copy of the REALPAC 2016 Closed-End Fund Survey Report go to realpac.ca > Supports > Books & Surveys > Surveys > Closed-End Fund Survey ■ Canadian Real Estate Forum / SPRING 2017
HOUSING AFFORDABILITY: THE UPSIDE OF ALBERTA AND QUEBEC By Michael Brooks Chief Executive Officer REALPAC
Question: would you move to another City if you knew that you could buy a house and pay it off in half the time? Would your young millennial employees consider doing that? There is a lot that is politically and environmentally correct around the Smart Growth movement. We’ve all heard and read the positives: more walk ability, less reliance on the car, less sprawl taking over valuable farmland, better use of existing infrastructure, more opportunities for mixed-use development, and better payback opportunities for mass transit expansion. It’s the current standard municipal planners playbook. It all sounds great as long as people can afford to live there. But are planners and politicians missing the big picture in constraining urban boundaries and spending big within those boundaries on mass transit? Are we being fed a cure for an illness that’s not our primary illness? I always enjoy reading the annual Demographia survey: www.demographia.com. It’s not that I don’t like RBCs Canadian Housing survey or the many that exist in the US. Rather it’s the fact www.realestateforums.com
that Demographia compares cities around the world using a very simple metric: the ratio of median household income to median price of a house. It appeals to me because it suggests that there is a limit to how much supply can be artificially constrained, and that there could be a reversion to mean (people move to find more affordable living) over a long period of time, like how the opening up of North America to immigration meant the end of feudalism in Europe. Obviously Vancouver is expensive. The Demographia ratio is 11.8 to 1 as of the third quarter of 2016. In other words the average house price of $830,000 is 11.8 times higher than the average Vancouver wage of $70,500. It’s the third-highest out of 406 cities in the Demographia survey, only cheaper than Sydney and Hong Kong. Vancouver is now becoming acutely aware of this issue particularly with their recent regulatory efforts to stem the flow of foreign investor money into housing, in effect crowding out local residents. Are they late to the game? Should they have done this five years ago? Or was it buried in the rhetoric of chest thumping – “we’re like London and Hong Kong now so aren’t we good!” Surprisingly, Toronto is now not far behind at 7.7. In other words the average house price according to Demographia in the third quarter of 2016 of $615,800 was 7.7 times higher than the average wage of $79,700. In
the recent Greater Toronto Area growth plan, there’s no policy for general affordability. It’s running the Smart growth playbook. We’ll have great walkability, with little affordability. And Toronto too now seems to be entering the chest thumping phase – “we’re on a par with New York and London”. But all of a sudden, Calgary and Edmonton are looking pretty good. Calgary’s ratio is 4.6; the average house price as of the third quarter of 2016 was $427,700, against an average income per household of $93,100. Edmonton is even better at 4.1, with the average house price being $356,000 and the average household income being $87,000. In Edmonton you can pay off your mortgage in almost half the time it would take in Toronto, or have way more disposable income. Similar in Calgary. Millennials: are you listening? Montréal is also looking pretty good with a ratio 4.8. Montréal has an average house price of $284,700, and an average household income of $59,500. Opposite Toronto, it’s an absolute bargain. Will we see a reverse drain up the 401 back to Montréal? If you have some job portability, for young family it’s a pretty compelling proposition. ■ 65
REAL ESTATE AND ENERGY POLICY: THE INCONVENIENT PROBLEM
As a national real estate leadership organization, REALPAC has followed, participated in, and often led the public discussion around energy policy relevant to buildings. We’ve been a key participant in the proposed mandatory building energy disclosure regimes in Ontario and Vancouver, discussions that we are sure are also underway in many other Canadian cities and provinces behind closed doors. Our normalized Energy Benchmarking Program, now representing time series energy data for hundreds of office buildings coast to coast, operated since 2009, was a national award winner in its category. We’ve participated in the carbon tax and cap and trade discussions, and been influential in electricity grid policy.
By Michael Brooks Chief Executive Officer REALPAC
In many ways, dealing with energy at the building level is fairly straightforward. The business case for being able to operate a comfortable building with reduced energy consumption and therefore reduced cost, is compelling. The invisible hand of the market has forced landlords to work on continuously making improvements to save energy in buildings, and they have been doing it for well over 30 years. However, once you go upstream to the source of that energy, the public policy choices become much more difficult. The sea change in energy policy, to reduce dependence on high carbon fuel sources such as coal, in many ways has to be a slow-moving vehicle. Ontario politicians have, hopefully, learned that lesson. When high -and locked in- 20 year ‘feed in tariff’ rates were permitted in Ontario from solar
and wind sources, it was inevitable that those higher rates would sooner or later flow through to consumer electricity bills. The backlash was swift, with one key by-election in the Toronto region being won by the opposition, apparently primarily on the basis of rampant increases and electricity prices. High electricity prices are still the fodder of daily debate in the Ontario Legislature. Once you’ve given out a 20-year contract for solar installation or a wind farm, there’s no way to cancel it. While British Columbia and Québec have the luxury of plentiful hydropower sources, Prairie and Atlantic provinces, without the luxury of hydroelectric resources, have been largely reliant on coal and natural gas. Whether to move off of those fuel sources, and if so how, within what timeframe, and to what alternate source, has become an inconvenient problem. In Ontario, a further growing opposition to nuclear sources and the high cost of nuclear plant refurbishment, may push that Province more into the arms of Québec for cheaper and cleaner electricity. The growing complication of Canada’s national and subnational energy systems is felt by all market consumers, including the commercial real estate entities that provide the offices, industrial facilities, and retail complexes that move Canada’s economy. REALPAC will continue to represent the owner’s point of view in national discussions, as our members continue to make economic choices in the current regulatory environment. ■
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