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WINTER 2016 / ISSUE 73


Environment protectionism pose risks Canada, U.S. to outperform

Brexit has an upside


Excess debt holding back recovery

Demographics strong suit in sluggish economy Safe haven status to sustain liquidity Investing in tech a “double-edged sword”


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THE WORLD IS CHANGING, AND WITH IT, THE LANDSCAPE The Real Estate Forum and Global Property Market Conference in Toronto will offer just such an opportunity, as insider experts converge and converse on the anticipated outcomes and effects of recent events. George Przybylowski Vice President Real Estate and Construction Informa Canada

Political upsets at home and abroad have created uncertainty like none before, and the marketplace is in floating limbo as a result. In Europe, Great Britain has drifted away from the European Union to create its own governing trade and commerce body and in America, Republican and President-elect Donald Trump prepares to launch the first non-politician-led government where every promise of partnership and trade is up for cancellation. Together, these major pieces of the global economy puzzle have jumbled the jigsaw so the landscape is no longer clear. As others follow suit, it is even more pertinent that the global marketplace unite in brainstorming, information gathering and networking to gauge where the new opportunities will lie. www.realestateforums.com

Presidents, CEOs and managing partners will join more than 40 leaders in pension funds, lifecos, REITs, private equity funds and privately owned entities at this annual double feature. Needless to say, the information presented will be timely and thought provoking. What better way to engage and enlighten than with more than 90 well-known experts and practitioners from across Canada, as well as senior executives from the United States, Asia and Europe. The Forum, celebrating its 25th year, is an excellent place to start, as domestic and international stakeholders review the good, the bad and the anticipated challenges in real estate marketplace. The quarter-decade devoted to this annual exchange of ideas and ideals have created the perfect venue to enlist the aid of world-renowned experts on their take on what the future holds, and where the pieces will fit once the dust settles. When combined with the global conference, this duo will deliver three jam-packed days dealing with trends, key issues, challenges, risks and opportunities in all property classes – office, industrial, retail, multi-unit, residential and land. They will deliver an overview of the global property market, and its trends; development and joint-venture opportunities in the United States, Western and Eastern Europe, Asia Pacific, Mexico, Latin America; and pinpoint other growing and emerging markets. Canada’s low dollar is also enticing interests from outside its

borders, so experts will key in on the regions attracting most global investments. Understandably, top of the agenda will be the aftermath of the Brexit vote and the anticipated fallout from the Trump Presidency, especially as they fit within the real estate and foreign investment portfolio. As with any piece of a global puzzle, each affects the other, as well as impacting on those around it. So, attending experts will also weigh in on how Great Britain’s vote to exit the EU and the promises from the Trump administration to exit trade deals will shift where other economies lie, particularly Canada’s, and the spinoffs onto other sectors, be these financial or industry. Add to those uncertainties, the current economic downturns being experienced by much of Canada, and attendees will have a front-row seat to much-needed insider information about where their pieces of the puzzle might fit. Other areas will include risk assessment and finding the best potential opportunities, tackling the impact of technological transformation in the industry by creating synergies between e-commerce and physical storefronts to capitalize on the advantages of both in consumer purchasing, the aftermath of the U.S. presidential election and how it relates to the sector’s growth and prosperity and, finally, the changing face of the office environment and how the sector can meet the challenges of tenants and owners head on. All one needs to foresee trends and downturns, upheavals and uncertainties and reshape their piece of the global puzzle to remaining competitive and grow is the right tools packed into three days. ■ 3


The world is changing, and with it, the landscape


Much more complex than a game of chess 12 Working with Unknowns

12 Debt, single-family, define defensive strategy

18 Defensive posture key to safe investing in 2017

18 Major markets moderating pricing

20 Uncertainty brings economic shifts in Europe

20 A tumultuous year ahead – Prudent investment a challenge in the face of global dissatisfaction

22 Threats and opportunities of technology: Automation of jobs a real threat

22 Political volatility continues in 2017 – Global growth expectations set on mute

24 Real estate remains attractive anchor in roiling markets

24 The silver lining of Brexit: Public sector tapping into new funds to buy assets

26 Downtown and data centres offer growth potential

26 Continued caution in 2017 among investors

28 Brazil ripe with opportunity

28 Brexit has an upside

30 Environment, protectionism pose risks

32 Anglosphere poised to outperform world economy

33 Occupational catching up with capital

34 Fasten your seatbelts: 2017 shaping up to be a turbulent ride


36 The Altus report: Are Retail Real Estate Owners Evolving as Quickly as Retailers and Shoppers? 67 Latest Commercial Market Statistics Across Canada

80 State of the Canadian Commercial Real Estate Market 86 A Defence of the Ontario Municipal Board 88 Revenue Tools: The Toronto Parking Levy


Canadian Real Estate Forum / WINTER 2016

48 50 Intensification of our cities & our relationships will be the road to growth 52 Upswing Continues with Pent-Up Demand

52 More years of weak markets ahead: Bank restructuring, job losses are key factors 56 Long-Expected Rate Rise is Imminent

56 2017 forecast better than previous years: Rental growth to stem from urban redevelopment 58 Demographics strong suit in sluggish economy 60 Investing in Tech a ‘Double-Edged Sword’

60 Safe haven status to sustain liquidity 62 Assessing Real Estate Options for 2017

64 2017 to be a strong year in real estate: Brexit creating opportunities in the U.K.

66 CETA Would be Great for Canadian Real Estate 66 From new technology to concepts and demographics: Exciting times lie ahead in food retail

70 Excess debt holding back recovery

71 Canada to remain foreign fund favourite

72 It’s the journey, not the destination: Gazit-Globe focuses on service end of retail 73 Retail continues to be strong in a fickle market 74 Minimal Growth In Sight

75 ULI Toronto Electric Cities Symposium: acknowledging the global zeitgeist…

76 Tough times to test Calgary 76 Insights in brief...

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©2016 Informa Exhibitions Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

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

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GAME OF CHESS Rita-Rose Gagné Executive Vice President Growth Markets Ivanhoé Cambridge

As the year 2016 draws to a close, the results of the recent U.S. election are clearly front and centre on investors’ minds. What is happening not only in the U.S. but in the U.K. and Europe, where forces of similar magnitude are at play, is that people are investing and operating against a challenging backdrop. More than we have seen in a long time, it is a backdrop of increased nervousness around global economic outlook and of heightened political risk almost everywhere, whether that’s Brexit in the U.K., Trump in the U.S., upcoming elections across continental Europe, the rise of populism, or other concerns. Central bank policy and monetary policy have clearly been very favourable for real estate investors over the last several years, but investors are now questioning how effective these will be in future. Are we at an inflection point in terms of the direction of interest rates and the nature of monetary policy? It isn’t just an American and European phenomenon. There are continued geopolitical and macro risks in China and other emerging markets. Real estate investors today share a recognition that we’re in a low growth, low returns environment, with potential for a more www.realestateforums.com

David Matheson Senior Vice President & Managing Director Investments – Europe Oxford Properties Group challenging financial outlook or at least continued volatility in financial markets. As a player in this industry you need to plan how to define your strategy against such a backdrop. If you’re running a pension plan, sovereign wealth fund or insurance money, what is the appropriate allocation to real estate? How does real estate play into some of those risks that you’re trying to address? Where are the appropriate regions to be targeting? Where on the risk spectrum should you be playing? Are you better off at the core end or should you be taking increased risk in order to try and get greater returns at this point in the cycle? By understanding how your real estate strategy can best react to the heightened risks out there, you will be able to determine where the most attractive returns and opportunities will be. There is no better place than the Global Property Management Conference to obtain help in defining and understanding the risks. The sector’s foremost experts are here to offer insight that will help you position your real estate portfolio so that it continues to generate return over the next 12 months and beyond. ■ Michelle Morra-Carlisle



Guy Metcalfe Managing Director & Chairman Global Real Estate Investment Banking, Morgan Stanley


Tom Shapiro President and CEO GTIS Partners With interest rates posed to rise, a glut of condo and signs of oversupply starting to appear on the office front, Tom Shapiro sees the end of a cycle and questions the merits of sinking capital into an equity stake at this point. “Is this really the right time to be investing in this market?” mused GTIS Partners President and CEO. 12

Asked for his forecast of Canadian real industrial warehouse space for anything estate in 2017, Guy Metcalfe, Managing relating to e-commerce, because Director & Chairman, Global Real Estate e-commerce trends will continue somewhat Investment Banking at Morgan Stanley says, unabated. And then, conversely, asset “I think valuations will classes that would be flat from where be negatively “The best opportunities for they are currently, as impacted by growth will be in the industrial will be income growth e-commerce, such for most asset warehouse space for anything as shopping malls, classes. Meanwhile, will be more capital from Asia and relating to e-commerce, because challenging.” e-commerce trends will continue selected sovereign Net lease space will funds around the somewhat unabated.” depend on what’s globe will still be next for the pretty robust for the Canadian economy. “In all asset classes I highest quality assets in the best markets.” think that the net lease space will continue to Like many in this business, Metcalfe is not outperform, but it’s going to be very immune to worries about US politics, sensitive to interest rates,” Metcalfe says. “If geopolitical risks in the Middle East, rates go back up, then net lease will get hit terrorism, and any unknowns down the road. pretty hard. As rates stay flat, then net lease Focusing on Canada he says, “The best is going to continue to hold up.” opportunities for growth will be in the ■ Michelle Morra-Carlisle

“Should you be a net seller, given all that overhang?” With returns on equity simply no longer justifying the risks they entail; Shapiro has shifted to debt capital.

“You will probably see a payoff for being patient and keeping a close watch on your margins.” “We like debt more than equity. You’re better off being in the safer part of the capital stack,” he advised. “In this part of the cycle, you want to play safe. You will probably see a payoff for being patient and keeping a close watch on your margins, given the backdrop of an economy that might not be as robust as it once was.” Shapiro nonetheless highlighted the American single-family residential sub-market as an area where returns could remain interesting. “That’s the one area that isn’t oversupplied,” he said. The 86.5 million millennials who are hitting their 30s are driving demand. While millennials are more indifferent to home

ownership – which has fallen from 69 per cent to 63 per cent – they overwhelmingly prefer to raise their families in houses, even if that means renting. The United States is currently building only a little over one million new homes per year, but needs to produce 1.4 million per year to keep up with demand. “That’s why we like single-family,” Shapiro declared. “We’re backing new homes for sale either by developing single-family lots for homebuilders, by providing capital for homebuilders and by buying single-family homes and renting those homes out.” GTIS channels its investments to markets with strong job prospects, from New York south to the sun belt, then westward to California, thence up the Pacific coast to Seattle, eschewing the Midwest rust belt. “We follow the jobs,” Shapiro said. “Phoenix is promising, as is California, though we’re more cautious there. If technology get beat up, a lot of the growth that has been driven by very heavy tech spending will dry up, and employment along with it.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2016









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International real estate – adding core alongside opportunistic By Chris Andrews, Head of Client Relationships and Marketing

Unlike with bonds or equities, investors often demand higher returns from international real estate to compensate for the perceived added risk when venturing abroad. But they may be missing a trick. Virtually every pension fund has a globally diversified portfolio of investments, albeit with a strong home market bias, reflecting the need to circumnavigate the world in search of the best risk-adjusted returns. Investing outside the home market in most asset classes is executed pari passu with domestic markets and hence is predominantly an exercise in diversification of income and capital returns. Real estate, however, remains an enigma: unlike with other asset classes, investors in international real estate generally demand a return premium over assumed domestic returns, seeking incremental, absolute returns via higher-risk, capital-oriented strategies. Hence, whilst the domestic allocation is oriented to open-ended core, the international allocation is oriented to closed-end opportunistic.

blend of core and opportunistic. For us international core is, by definition, the strategic allocation, just as it is in the home market. So core forms the bedrock of our investments, with a focus on long-term market participation across the cycle via open-ended funds, recurrent income, low leverage, low capital rotation, and modest fees. Closed-end opportunistic strategies are added for tactical investments within the cycle. That means higher capital rotation and higher reinvestment risk as a result of shorter hold periods, together with a focus on capital over income, more narrowly targeted exposures, and higher targeted returns from, say, developments or special situations arising during the pre-determined life of the fund. So the investment approach we advocate is an evolution beyond the norm, which is often to take only higher risk when investing in overseas real estate markets.

At M&G we advocate that an international allocation to real estate should be a

Instead, in broad terms, we prefer to take more risk at home in more familiar markets and then take less risk overseas in less familiar markets, focusing on recurrent income and diversification. The use of core in international strategies may go against received wisdom but is nonetheless supported by anecdotal evidence: I frequently hear investors who observe that, if they rank the outcomes of their real estate strategies, core all too frequently generates better results than their opportunistic strategies. That’s backed up by research from Property Funds Research, commissioned by M&G in 2015, which shows that on many occasions core outperforms higherrisk real estate strategies, both at the absolute level and on a risk-adjusted basis. The results from the longest, and hence most robust sample, is from the US market and are shown in the table below.

US risk-adjusted returns (2001-2014) Mean return % per annum

Standard deviation %

Sharpe ratio

ODCE Fund index




Value added Fund Index




Opportunity Fund Index¹




¹80 funds Source: Property Funds Research.

The sample sizes used for other markets, such as Asia, were much smaller and shorter (2010-2014), but nonetheless indicated that opportunity funds delivered marginally higher absolute returns than core funds but at disproportionately higher levels of risk.

Time and (foreign) money

risk strategies in foreign markets, then you can be sure that some of these projects (let’s say a residential development in China) will not work out well and demand a disproportionate amount of trustees’ time and energy. In contrast, a lower risk international strategy has a much lower risk of failure.

Another consideration is that invaluable investment commodity time – your time. We are a strong believer in the 80/20 rule – in this case, that 20% of investment problems will absorb 80% of your time. And if the pursuit of higher returns in international strategies leads to higher-

Taking on more risk to overcome currency fluctuations also sets up an interesting paradox because FX volatility only affects the periodic valuations of an asset translated into the base currency, but not the intrinsic value of the real estate. So a higher-risk investment strategy taken

to mitigate that translation volatility introduces entirely new, uncorrelated risks that could, ultimately, lead to a permanent loss of capital. Layering risk upon risk is a slightly perverse approach and is unlikely to always lead to a happy outcome. At the wider portfolio level, meanwhile, FX volatility should be a source of diversification over time. In open-ended funds, a longterm investment will have a much lower potential impact on performance compared with closed-end funds, whose net outcome is end-period dominant i.e. highly sensitive to the time at which capital is invested, realized, and returned.

Further, we often find in investor discussions that currency risk is actually just a mismatch with the benchmark, i.e. the measuring of a multi-country, multi-currency strategy against a single currency, single market benchmark such as the NFI-ODCE. This mismatch is even more accentuated if it is the basis of annual performance reviews. Investors do not measure global equities and global bonds against domestic benchmarks, so why is this the common practice in real estate?

Domestic Allocation

Build up core So how could investors forge a real estate policy that combines elements of both domestic and international investment? One approach would be to create a portfolio with both core and opportunistic elements that aims to generate a target return of 9.4% with an aggregate leverage of 41%. The emphasis here is on diversification rather than over-reaching for that extra, incremental return. In this way, the international allocation is about


Target return % p.a.

increasing the probability of achieving the desired outcome through diversification and not about optimistically pumping up returns with higher-risk, higherleverage strategies. The components and the resulting diversified portfolio are as shown in the tables below, with more risk at the domestic level and less risk for the international allocation.




Target return % p.a.









Value add



















Blended allocation


Return contribution % p.a.





Value Add












In addition, a combination of domestic and international core may result in lower overall costs. A typical international core strategy is similar to domestic core – fees on NAV range between 60 and 100 basis points and the total expense ratios top out at 1.5% (the costs of a multi-country strategy are inevitably higher than a single country strategy). No other fees – whether commitment, transaction, performance, and so forth – are normally applied. That can give a core strategy a significant head start over a typical closed-end international strategy with a J-curve from commitment fees and a total gross-tonet-load of close to 5%.

So when next international real estate is next a topic of discussion, maybe consider that core real estate does not begin and end at home. Just ask a French investor how they class a grade-A central Paris office or a Japanese investor how they class Tokyo multi-family. Core in one international market will not automatically outperform core at home – it is about diversification.

The longer term investor may want to ride the long-term demographic and economic growth trends in Asia or Latin America in search of superior returns. However these long-term trends will not always be captured by short-term hold, opportunistic strategies. Instead they are more likely to come from long-term participation and reinvestment of income.

Equally, international opportunistic is not necessarily a better bet than domestic opportunistic. Why should it be? And yet, in terms of returns per unit of risk, domestic opportunistic may be the better bet, if for no other reason than greater transparency and lower legal risk (especially if investing in less developed markets).

So to us a strategic open-ended anchor allocation with a complementary tactical closed-end real estate investment just seems more intuitive than the wholly opportunistic direction that we otherwise observe.

For more information, please contact John Parsons, Managing Director, MacGregor Global Investments (312) 274-6800 jparsons@macgregorinvestments.com This article presents the authors’ present opinions reflecting current market conditions. It has been written for informational and educational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product. NOV 16 / 164825


“We’ve been monitoring capital flows so nobody knows which way it will go in terms of valuations. We’re a little different than some investors – we still invest all the way across the risk spectrum, from core to opportunistic, debt and equity – and within each of these spaces we try to do something that puts us in a defensive posture,” says Cheng, Managing Director of

hedging our bets so that we’re not trapped.” Geographically, as the cyclical energy markets in Houston have been less stable, Cheng’s team has been looking elsewhere for interesting opportunities. “We’re not a sovereign that will only invest in primary markets – we will do secondary and tertiary markets as well, depending on the

“We invest all the way across the risk spectrum, from core to opportunistic, debt and equity – and within each of these spaces we try to do something that puts us in a defensive posture.”

Gena Cheng Managing Director Global Investors Group USAA Real Estate Company

While Gena Cheng is cautiously optimistic for slow and steady growth in 2017, her team continues to stay on the defensive in all its investments.


the Global Investors Group at the USAA Real Estate Company. “What that could mean is we might focus on pricing as to whether there’s significant income that protects us, where we get our capital back more quickly. Or we look for a valuation pop, like what people traditionally call a core plus profile to an asset. “If it’s a riskier asset like a redevelopment, we might look for more equity subordination in front of us, meaning we’d take on a participating preferred equity position,

Transaction volumes ought to improve next year after seeing a sharp decline in top-tier cities during 2016. “Places like New York were down 50 per cent year over year,” reported GreenOak Real Estate founder & partner Sonny Kalsi.

“On the retail side, in terms of shopping centres, we’re starting to see interesting recap opportunities we are comfortable with on a single underwrite basis, whether in the mall sector or big box that is well located to highways, and well tenanted.” ■ Barbara Balfour

“The same is true of Tokyo and was clearly the case in London, though in part due to Brexit.”

Although Japan’s economy continues to stagnate, its financial markets continue to compensate real estate investors there.

Buyers backed off last year as prices soared, as rental market valuations failed to support valuations.

“With negative interest rates and a very accommodating fiscal régime, you don’t need a lot of growth to prosper from a cash-on-cash perspective,” he observed.

“Investors had become super cautious,” he recalled. “Now that sellers are moderating their pricing going into 2017, expect the bid-ask spread to narrow next year.” Kalsi sees significant opportunities in rebounding real estate markets on Europe’s periphery.

Sonny Kalsi Founder & Partner GreenOak Real Estate

opportunity,” says Cheng. “We look for projects of institutional quality that adhere to where we think general demographic trends are heading, like urban infill with transportation hubs.

“Given the prospect of being kicked out of the Eurozone in 2012, Spain and Ireland took drastic action to reform their economies,” he recalled. “As a result, they are now two of the best-performing economies in Europe. There continues to be above-trend growth in places like Spain and, to some extent, Italy.” Portugal has also undertaken some reform, while other countries continue to languish. “The Greeks were asleep and did practically nothing,” Kalsi said.

A rising tide of American-led protectionism remains a risk, Kalsi cautioned. “The best surprise of 2017 will the United States,” he predicted. “It will offer the risk-adjusted return in the world during the next 24 months on the strength of economic growth and real estate fundamentals.” The downside, Kalsi warned, is a potential Brexit-like situation there. With the world economy flagging, one or two strong economies won’t suffice. “Last time there was an economic shock, central banks had a huge margin to cut rates and shift monetary policy to address it,” he said. “Were something drastic to happen today, there’s no way to slow it down. In two years’ time, every developed country could have negative interest rates.” ■ Robert Frank


Canadian Real Estate Forum / WINTER 2016

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A TUMULTUOUS YEAR AHEAD – PRUDENT INVESTMENT A CHALLENGE IN THE FACE OF GLOBAL DISSATISFACTION Dissatisfaction with the status quo and economic imbalance on a global scale must be urgently addressed, says Jin Choi, Managing Director and Head of Asia for Genii Capital.

Jin Choi Managing Director, Head of Asia Genii Capital

Choi says he mostly looks for opportunities with Korean institutional investors in mind, as well as focusing on European markets where the differences in interest rates compared to North America lead to greater returns for the same yields.

“Within the last few months, we have Brexit and Donald Trump’s victory to consider. For “Hence, that is where most of our focus has those of us in Asia, both Xi been. Recently we had to “How we can invest Jinping, China’s leader, decide between bidding and Japan’s prime on a large office property prudently in the face of minister, Shinzo Abe, are in Montreal or a similar such uncertainties is a fairly hawkish and these value in a major challenge.” are the two most powerful European market and countries in Asia. Then after weighing the pros there is Mr. Putin,” says Choi. and cons, including interest and swap rates, the European deal won,” he says. “The economic uncertainties following Brexit are visible for all to see and how Mr. Trump Ongoing disparity of wealth and inequality plays out will have effects I can only continues to be of concern to Choi, who surmise. The year 2017 will be tumultuous believes this had led to the rise of and frankly I believe the answers are still to nationalism and populism world-wide. “This be written. Money needs to be managed but is truly and deeply worrying,” he says. “How the underwriting has become slightly we can invest prudently in the face of such hazardous.” uncertainties is a challenge.” ■ Barbara Balfour


Evan Lazar Co-Chairman, Global Real Estate Group, Dentons

“A number of our clients are seeing the uncertainty caused by a weak pound in the U.K. – a pound weakened due to the Brexit vote – as an opportunity.” Evan Lazar leads a large team of real estate lawyers who advise investors across Europe. The Co-Chairman of Dentons Global Real Estate Group works with some of the world’s largest, most important investment players. Asked to share what his concerns are today, he highlights those immense geopolitical uncertainties that keep many in this industry up at night. “The questions that are raised by the recent U.S. election results and Brexit vote, and other elections that will need to happen in Europe in the coming years,” he says, “I would say that those items represent the greatest risks – not really legal risks, but business risks – that our clients are facing in investing in real estate today.” Fortunately, and in good business form, his clients recognize that there are upsides to these challenges. “We’re hearing from a


number of our clients that are seeing the uncertainty caused by a weak pound in the U.K. – a pound weakened due to the Brexit vote – as an opportunity,” Lazar says. “Particularly for non pound investors (Canadian dollar investors, U.S. dollar investors, investors from China, etc.) it may present opportunities to invest in certain assets in the U.K.” Some of Lazar’s clients see the volatile state of post-Brexit U.K. as a boost for other markets. For example, a loss of office space occupants in London could mean another city’s gain. “Many of our clients believe it will result in certain cities in continental Europe, such as Frankfurt and Luxembourg, having increased demand for office space, growth of business, and growth of their economies,” he says. ■ Michelle Morra-Carlisle Canadian Real Estate Forum / WINTER 2016

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THREATS AND OPPORTUNITIES OF TECHNOLOGY: AUTOMATION OF JOBS A REAL THREAT we won’t need buildings and factories for people to work in, which could have a massive impact on real estate,” says Breheny.

Alice Breheny Global Head of Research TH Real Estate What keeps Alice Breheny awake at night? Technology, obsolescence and the automation of jobs – all things that all of us should be really worried about, says Breheny, the Global Head of Research at TH Real Estate. “Some estimates say about 50 per cent of jobs in developed economies are at risk of automation – which then means

“As an industry, we are in a pretty slow-moving asset class and some of the things that will have the biggest impact on our performance are very fast-moving.” For 2017, Breheny would characterize the outlook as moderately positive, but overall uncertain due to political instability and ongoing change across the globe. “On aggregate, there will be some real winners and losers,” she says. “The most exciting opportunities probably relate to technology and demographics – cities that have embraced and built strategies developed around technology, with a higher degree of attributable employment, and able to attract global talents and services, will do very well.

POLITICAL VOLATILITY CONTINUES IN 2017 – GLOBAL GROWTH EXPECTATIONS SET ON MUTE Head of Real Estate Investments at Standard Life Investments.

David Paine Head of Real Estate Investments Standard Life Investments

With elevated political uncertainty both confirmed and yet to come, expectations for growth in 2017 are muted across the globe. From Brexit and the new U.S. government to the upcoming European elections, volatility and unexpected change are more likely than ever, says David Paine, 22

“The best markets will offer high, single-digit unlevered returns, while the worst sectors will see negative total returns,” says Paine. “Against that backdrop and on a relative basis we favour Australia in Asia Pacific, and in Europe the focus is on the Netherlands and German offices as well as the recovery markets of Spain and Ireland, which offer good short-term prospects.” Overall returns will be lower in the U.K. than on mainland Europe, predicts Paine, who favours industrial and logistics industries over other sectors. In the U.S. favoured markets include Boston, LA, and the logistics sector in principal hubs. Recent events have led to significant

“On aggregate, there will be some real winners and losers in 2017.”

“There will be some Interesting opportunities in areas previously considered niche, as well as opportunities that relate to demographic trends that are less positive, such as an aging population, which you can turn to your advantage.” ■ Barbara Balfour

“There remains a significant volume of capital seeking a home, and investors will continue to find real estate relatively attractive against other assets.” currency fluctuations and may in the future lead to inflationary pressures in some markets as well as rising interest rates. However, perhaps the greatest risk from recent and ongoing political volatility is the pause in occupier decision-taking caused by this uncertainty, says Paine. “That is certainly true in London and is now likely to impact in US markets until there is a clear sense of direction. “In this environment risk off strategies will prevail that are consistent with a focus on yield and preservation. There remains a significant volume of capital seeking a home, and investors will continue to find real estate relatively attractive against other assets.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016

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The winds of uncertainty have blown into quite mature in Europe’s real estate rental world markets in the wake of the recent submarket, for example, where properties American election. They will gain strength are widely seen as priced out of a next year, as Europe continues to grapple reasonable prospect of profitability. with the lingering “In terms of overall Euro crisis, Brexit, “The urbanization of all asset demand, a lot of Middle East refugees classes is a real opportunity for people see rental as – issues that will really expensive and savvy investors.” influence upcoming not easy to manage, elections in countries from an investment management that generate more than half of Europe’s standpoint,” Hübener declared. gross domestic product. Pardoxically, those geopolitical risks could be a boon to the real estate industry, suggested BNP Paribas Real Estate Chief Investment Officer Nils Hübener.

Nils Hübener Chief Investment Officer BNP Paribas Real Estate

“It has created an environment which is challenging but to a certain degree supports the case for real estate investment,” he said. “Low interest rates persist in many parts of the world, which has made it relatively attractive to put your money in real estate. Some submarkets are overdue for correction, though. The business cycle is

One particular global megatrend will likely influence real estate markets for years to come, he added. “The urbanization of all assets is a real opportunity for savvy investors,” Hübener concluded. “We are local in most European core markets, which permits us to asset manage – that’s key in the current environment. It offers ample opportunity to scale up. With the right residential developments, you can be fairly certain that there will be demand for them.” ■ Robert Frank

THE SILVER LINING OF BREXIT: PUBLIC SECTOR TAPPING INTO NEW FUNDS TO BUY ASSETS in order to buy assets they feel are more suited to public ownership,” says Panambalana, Partner at Hogan Lovells International LLP.

Dion Panambalana Partner Hogan Lovells International LLP

While Brexit has created an environment of uncertainty that will continue for quite a while, some investment opportunities have emerged from it, says Dion Panambalana. “Partially as a result of that uncertainty, councils, local authorities, and public bodies have been given the ability to borrow at quite preferential rates 24

leave, we do comply? Will the European courts want to make an example of anyone who doesn’t? Many people will err on the side of caution.”

“The ongoing focus on housing is going to be something that stays with us for a long time.” “There have already been some big purchases of secondary shopping areas in their own town centres, and this gives investors an opportunity to sell what they aren’t so keen on keeping.” How the public sector procures and tenders projects going forwards remains to be seen, as they have been traditionally constrained by European Union laws, says Panambalana. “Going forwards, does the prospect of leaving Europe make it more likely they won’t have to comply with those rules, or does it make it more likely that until we

New rules that will set limits on how much can be deducted on commercial borrowings, linked to EBITDA, have yet to play out but are a potential concern on the tax side, says Panambalana, who notes continued opportunities for residential and mixed-use developers. “It’s a big challenge structurally for a lot of global economies – we can’t get enough houses built in the right places to keep workers. The ongoing focus on housing is going to be something that stays with us for a long time.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016

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DOWNTOWN AND DATA CENTRES OFFER GROWTH POTENTIAL Washington State and New York, and prospects of building sites in Washington and Virginia. “The data centre sector is one of the best opportunities for growth,” Kanne suggested. Jeffrey Kanne President and CEO National Real Estate Advisors The two best opportunities for private equity investors in real estate lie in building and new, high-rise mixed-use towers and in riding the cloud into high-technology data centres, declared National Real Estate Advisors President and CEO Jeffrey Kanne. Natadvisors leads by example. In 2010, it took a $100 million, 34 per cent stake in Sabey Data Centres Properties, which operates 1.7 million sq. ft. of facilities in


Robert White Founder & President Real Capital Analytics


He also sees ample room for growth by building and developing mixed-use towers in cities with substantial intellectual capital and 21st-century jobs.

market assets as overvalued and advises steering clear of them for the medium term. “The risk during the next 24-36 months simply does not justify the potential rewards to be gained from investing in those markets,” he said. Kanne sees strong potential in the United States’ main West Coast cities like Los Angeles, San Francisco and Seattle and in major centres like Chicago, Philadelphia, Washington and New York.

“It’s a lot harder to access that potential with other investments,” he said. “The best potential is in new products and not in simply acquiring existing products.”

“Portland is brimming with creative intellectual capital,” he observed, “as well as Houston, because of the tremendous amount of engineering skills there which have global application. Those are the American cities where we’re interested in investing.”

Projects in the suburbs and in secondary cities simply don’t have the same prospects, Kanne said.

In Canada, Kanne considers Vancouver and Toronto – but not Calgary – in the same category.

“People have really been stretching for returns there, as interest rates slowly climb upward,” he observed. “The opportunities are for a well-funded group to invest in data centres and new high-rise developments.”

“We expect that the existing jobs in those cities will continue to exert a powerful magnetic force to attract even more people, to the detriment of other parts of the United States,” he concluded.

At the moment, Kanne views secondary

■ Robert Frank

Amid ongoing geopolitical uncertainty, While much of the Eurozone remains in expect 2017 to look a lot like 2016 with very question, White is seeing capital moving to rich pricing, and investors moving areas where yields are not at historic lows. somewhat cautiously. That’s according to These include Singapore, Hong Kong, Robert White, Founder and President of Real Amsterdam, and markets considered stable Capital Analytics, in the U.S. and “Investors are very cautious who believes this Germany, as well as year’s Brexit vote emerging smaller about paying very low yields and U.S. elections markets like Brazil. when the growth prospects are Another area of didn’t resolve any also fairly low.” uncertainty but growth is China, probably caused where he says more. “Slow economic growth on an almost investment into existing cash flow buildings global basis has been very concerning,” he is becoming “very vibrant.” says. “Investors are very cautious about The big question today is whether interest paying very low yields when the growth rates will rise. “The feds certainly signalled prospects are also fairly low.” that we should expect a rate increase in “Institutional investors have a lot of money December as they did last December but allocated but not yet invested, so they rates surprised everybody and went the certainly have pressure to spend that other way,” White says. “It’s going to be money,” he continues. “The current situation interesting. The U.S. doesn’t live in a has made that more difficult. I’d also say that vacuum, so if the rest of the world doesn’t potential sellers are perfectly happy to keep raise rates, there’s only so much the U.S. their assets and refinance at low interest can do.” rates rather than accept lower pricing in the ■ Michelle Morra-Carlisle current market.” Canadian Real Estate Forum / WINTER 2016

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interesting from an investor standpoint, since there is still very little capital chasing opportunities in Brazil these days. There’s almost no IPO activity and very little fundraising.” “With the crisis you don’t necessarily see outsized returns compared to what you’d get in a bull market,” he conceded. “but you get deals that are essentially derisked.

Dietrich Heidtmann Head of International Capital Markets GTIS Partners

The political and economic turmoil in Latin America’s most populous country has for the most part played out, creating a great entry point into the Brazilian real estate market, according to Dietrich Heidtmann. “You shouldn’t expect more bad surprises,” reassured GTIS Partners Head of International Capital Markets. “That makes it


Martin Towns Head of Capital Solutions M&G Real Estate

Both the most significant risk and greatest opportunity facing real estate investors in the U.K. can be summed up by one word – Brexit – according to Martin Towns, Head of Capital Solutions, M&G Real Estate. 28

“You don’t necessarily see outsized returns but you get deals that are essentially derisked.” That’s because you can buy existing assets like office that you can remodel or apartments which a developer has repossessed through cancellations or never sold at all. You buy them at a discount to replacement cost without all the risks of development where you have to start with a hole in the ground.” GITS, one of the largest real estate private equity companies in Brazil with exposure to residential, industrial, office, hotel and mixed-use projects, also invests in the U.S. property markets.

As the U.K.’s intended withdrawal from the EU moves forward, heightened risk aversion will lead to greater market volatility – creating fresh opportunities for experienced investors,” Towns says. “Not all parts of the U.K. market will be impacted in the same way. Beyond the central London office market, the supply of good quality real estate is low, helped by the recent restrained pace of development. So the underlying supply/demand dynamics are strong in several key submarkets. Well-located modern logistics facilities, for example, still have robust rental growth prospects, helped also by growing demand for online retailing.” Towns believes that investors will typically be risk off in the coming period and that fundamentally good, well-located real estate with, say, shorter income profiles or a need for some short-term capex may look like particularly good value. “Worries about London’s future as a key global financial centre are also exaggerated,” Towns says. “Most

“There we’re very focused on the single family housing market right now, usually completely ignored by institutional investors, even though it makes up 36 per cent of the American rental market and generates a great deal of cash,” Heidtmann observed. “There’s very little institutional representation in that market niche. You probably get some 175-200 basis points higher unlevered yield out of this sector than the multi-family that everyone keeps pouring billions into without asking too many questions. It’s more stable and there’s significantly lower tenant turnover. You get families who go there for the schools. It’s a mix of drivers we really appreciate.” ■ Robert Frank

commentators recognize the substantial practical challenges facing other European cities if they are to truly challenge its dominance in Europe, even if certain functions do drift away from London. As such, London will remain a highly attractive place in which to do business and live. Conversely, Towns stresses that a protracted and hard Brexit could cause a more pronounced economic slowdown in the U.K. than is currently expected. “Further falls in the value of sterling could also cause inflation to accelerate beyond what is currently factored in by markets, weighing on consumer demand,” he says. “As a result, more businesses might defer significant occupational decisions for longer. Certain U.K. industries may also see some occupational demand hemorrhage elsewhere – such as in life sciences research and development, which has historically relied on both EU funding and staff from outside the U.K.” ■ Michelle Morra-Carlisle Canadian Real Estate Forum / WINTER 2016

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Jacques Gordon Global Strategist LaSalle Investment Management

Real estate performance is unlikely to repeat their pattern of the preceding seven years, observed Jacques Gordon, Global Strategist for LaSalle Investment Management.

A profound, tectonic shift is also arising on the political plane, in particular the trend toward protectionism. Gordon cited this month’s Canada-Europe free trade agreement, which narrowly escaped the kibosh by a rogue Belgian region. The surprising outcome of the U.S. presidential election is another recent signal of this change. Those “The big change is “The main macroeconomic sentiments could put pricing, which has drivers during the next seven the brakes on trade moved up dramatically liberalization that has years will be unlike what during the past seven for two decades years,” he explained. we’ve seen previously,” bolstered the world “We’re starting the next economy. seven with that higher pricing, which adds uncertainty and risk that we just didn’t have “Topics like trade, immigration and the rise of from 2010-2012.” nationalism and anti-globalization sentiments are arising in many different countries To be sure, cyclical considerations will around the world,” he observed. “I’m talking continue to influence world real estate about regulatory, political and geopolitical markets during the coming year and changes in governance and ways of beyond. So will longer-term changes that organizing the economy during the next five are driven by demographics, the years that will affect real estate in ways that implementation of emerging technology and we simply haven’t witnessed before.” the influx of population into urban centres. “The structural shift is the new wild card,” Gordon, though, sees a fourth, factor just Gordon concluded. “It’s very difficult to get a beyond the horizon. handle on. Private equity real estate investors need to keep watching for these “It’s environmental issues,” he declared. changes in the years ahead, take that risk “Issues such as climate change and the into account and get paid for it.” regulatory responses that they prompt affect “The main macroeconomic drivers during the next seven years will be unlike what we’ve seen previously,” he predicted. “The next seven will likely be quite different, even though the longtime drivers – interest rates, inflation, and GDP growth – will remain low in many countries.”

real estate. The time has come to pay much closer attention. These issues have long


been factors that real estate investors have accounted for, but they have reached critical mass in enough countries – to a point that you cannot afford to ignore.”

■ Robert Frank Canadian Real Estate Forum / WINTER 2016

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Europe’s sluggish economic prospects – with the exception of Germany – has led Martin Brühl to invest US$2.5 billion in American real estate. He expects the United States to outperform the global economy next year and well beyond. Likewise for Canada: The Hamburg-based Union Investment Real Estate (UIRE) managing director anticipates growth here. He’s eager to grow UIRE’s US$300 billion portfolio, hence actively looking to acquire quality Canadian real estate assets. “We’re very interested in getting our feet back on Canadian ground,” he said, “We’re partnering with Oxford Properties. It’s a win-win for Canadian players who need reliable buyers. In addition to diversifying in Canada, we’re interested in other Anglo-Saxon markets like Australia.”

Martin Brühl Managing Director Union Investment Real Estate (UIRE)

Brühl said that UIRE’s appetite for assets with growth potential has induced it to invest in secondary American markets as well as top-tier cities.

“It’s not just New York, Washington, San Francisco and Chicago,” he explained. “We’re also investing in Silicon Valley and Austin, Texas.” Apart from a few bright lights beyond Germany’s borders, Europe will remain weaker, Brühl predicted. “There are pockets of investment opportunities in Europe but problems persist in countries at its periphery,” he observed. “Central banks are advocating lower for longer. They can’t withstand an interest rate increase. It would be a disaster.” Brühl remains nonplussed by the recent election of Donald Trump to the Oval Office. “There are enough checks and balances in place in the United States in terms of the administrative and political machinery,” he reassured. ■ Robert Frank

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OCCUPATIONAL CATCHING UP WITH CAPITAL on income growth rather than continued capital growth.

David Green-Morgan Global Capital Markets Research Director International Capital Group

David Green-Morgan, Global Capital Markets Research Director at International Capital Group, foresees another year of solid returns for commercial real estate globally in 2017. He says that the level of that growth, however, is certainly diminishing and is reliant www.realestateforums.com

“In this environment, the behaviour of the occupier is all important and we see that this is quite different across occupational sectors,” Green-Morgan says. “Financial services remain in the midst of an ongoing restructuring and are, as such, generally reducing their occupational footprints. Conversely, technology companies, despite some initial concerns over their occupational needs and habits, have emerged as some of the biggest occupiers of space globally and remain focused on good quality, well located buildings.” The world will always know economic and political turbulence, which remains a key risk for 2017. Green-Morgan believes that most governments and central banks remain focused on raising inflation, which should generally be supportive of economic growth.

“Financial services remain in the midst of an ongoing restructuring and are, as such, generally reducing their occupational footprints.” “Of course,” he says, “the chances of a spike in inflation could well induce a rapid rise in interest rates, and real estate generally underperforms in this scenario.” Fortunately, real estate has had a good run on the capital side. Occupational markets took a long time to catch up with the capital markets but have now started to. “On the property side,” Green-Morgan says, “we’re in a period where the supply of good quality office space is quite low around the world. And if companies do want to expand quite rapidly, they’re going to find it hard to find the right space in most of the major cities of the world. That all bodes well for property returns and rental growth.” ■ Michelle Morra-Carlisle 33

FASTEN YOUR SEATBELTS: 2017 SHAPING UP TO BE A TURBULENT RIDE point in the cycle when we’ve got historically high prices or historically low yields in most sectors and markets in the U.S. and around the world, primarily as a result of this incredible supply of capital. Brad Olsen President, Atlantic Partners Ltd. Fasten your seatbelts as we head into 2017. It will be an exciting year, but it’s not going to be easy, says Brad Olsen, President of Atlantic Partners Ltd. Among the geopolitical risks making headlines, Olsen lists the election of Donald Trump and the emergence of nationalist parties in almost every major continental and Nordic European country as potential investment hazards. “It’s a strange world we’re living in,” says Olsen. “We’re at this 34

“Yet, investors are being called upon to create and implement investment strategies when we’re facing the greatest combination of geopolitical risks since the Cold War.”

“We are facing the greatest combination of geopolitical risks since the Cold War.” Next year’s elections in France and Germany, where the outcome could be a far-right, anti-EU government, and oil prices at historically low levels, are only adding to the volatility, says Olsen. “In the Middle East, we’re dealing with Syria and terrorism and turmoil in every state, while the Saudi government is raising money in the bond market and bringing Aramco to an IPO to raise capital. These are the

countries we thought had capital that would last forever. “All of these risks are now front and centre for most investors.” On the U.S. landscape, growth has been steady, and supply and demand are balanced in almost all property types and markets. However, development has been kept in check due to a fear of what happened during the great financial crisis, says Olsen. “The Federal Reserve survey of banks indicates a tightening of lending standards and requirements every quarter for the last year and I don’t think that’s going to change. Everybody I talk to says it’s so much harder today to get construction advances than even a year ago. Banks require more equity or they’re just not providing the debt, no matter how good the project is. “However, with the caveat that I have no idea what the Trump effect will be, I believe the U.S. real estate markets will continue to be reasonably attractive to investors from Asia, Europe and the Middle East, although some will hit the pause button at least briefly.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016

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ARE RETAIL REAL ESTATE OWNERS EVOLVING AS QUICKLY AS RETAILERS AND SHOPPERS? Looking Ahead, the Canadian Retail Landscape Will Have Even More Big Winners and Big Losers.

Many commercial real estate investors including investors in retail real estate have during the past decade enjoyed terrific investment returns largely driven by declining interest rates, declining cap rates and an increase in the appeal of commercial real estate investments. In many cases these excellent investment returns had little or nothing to do with the investors’ asset management, property management and leasing strategies, their teams and their behaviours. While interest rates may go lower and cap rates may compress a bit more, it will be the local performance fundamentals impacting the future of retailing in Canada. These local market fundamentals will be the key drivers of changes in the net operating income and value of retail real estate assets in Canada during the next decade. Compared to office, industrial, apartment and other commercial real estate asset classes, retail continues to most rapidly evolve with swift retailer launches, weeding out successes from the failures. Retail is directly impacted by both economics and


Canadian Real Estate Forum / WINTER 2016

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shopper and investor preferences. The economic drivers of retail sunshine or gloom include population growth, growth in GDP, growth in after tax disposable income, consumer confidence, business confidence, demographics and more. The impact of evolving shopper and shopping preferences on retailers and investors in retail real estate are like waves hitting an ocean beach - relentless yet prone to surges and storms as well as periods of calm with breezes that can be steady, gusty, shifty and/or dead still. Success will most likely require levels of flexibility, agility, and insight not seen in decades. The insights needed to develop successful strategies will involve a deeper and more specific understanding of each retail properties’ current and targeted shoppers. Online merchants, such as Amazon as well as the online presence, profile and shopping experiences offered by traditional retailers, warrant thoughtful attention by retail real estate investors. Online shopping is growing rapidly and impacting traditional shopping experiences. In each of the past 5 years Amazon has achieved annual sales growth in excess of 20%. Amazon’s annual revenues in Canada are understood to be in excess of $2 billion.

In an attempt to fully participate in some of the successes being achieved by online merchants, traditional retailers are investing billions of dollars and their very best and brightest people on their digital profile and online shopping experiences to accelerate their online shopping results and/or their firms overall performance. Canadian Tire’s Board of Directors recently replaced the CEO based upon their view that the firm’s digital and online shopping strategy and leadership team was not meeting their expectations for canadiantire.ca even though their bricks and mortar stores were performing very well. Walmart acquired Jet.com and their team leader for $3.3 billion to drive greater results from Walmart.com. Thousands of other retailers understand that a compelling digital presence and online shopping experience are pre-conditions to their future success.

From retailer to retailer the results of these digital investments in strategy and implementation will vary, but online shopping will continue to grow and impact the design, performance, site selection criteria and relevance of retail real estate. Some traditional retailers have already shifted their approach to the optimum number of stores in a specific city downward. Previously some retailers

invested in three stores in a market, but now feel with the shift to digital complementing and/or replacing their physical stores they only need one store in some markets. This shift is being felt by the second and third best regional shopping malls in their markets. The impact of online shopping on the fourth and fifth strongest shopping centres in each market will be even greater. Total retail sales through all channels across Canada grew by 1% during 2015. The regional variances are material. Powered in part by perceived increasing housing wealth, retail sales in Vancouver grew by 7%, while Calgary and Edmonton experienced retail sales declines in aggregate. Not all retail real estate investments have the same drivers or achieve the same performance. We segment the market into 16 retail property formats that include multiple formats of malls, centres, plazas, strips, concourses, urban retail districts and more. Even within the regional shopping centre and super regional shopping centre format there is a wide range of drivers and a wide range of retail sales productivity achieved. In parallel with the growth and success of online shopping, billions of dollars have also been invested by the owners of many regional shopping centres in expansions and upgrades in the past five years. Some of these have been huge commitments of $300 to $500 million in each regional

Sound Bites

Compelling Facts Shaping the Future of our Markets • As of July 2016 Canada’s population was 36,286,425 up 1.2% in the past year. The portion of the population over 65 years old is 16.5% with 21% being under 20 years old. • In 2015 the number of Millennials (born 1981 to 2000) in Canada exceeded the Boomer (born 1946 to 1964) population. • In 2013-2014 the number of students enrolled in Universities and Colleges in Canada reached a new high of 2,048,019 with 56% of them being female. • In 1960 the average American, British or Japanese 65 year old man was expected to live for another 12 years. Women could expect 15 more years. Today it is 19 more years for men and 22 more years for women. 38

• Canada’s annual population growth over the past 5 years has been stable roughly 1.0 million people. BC’s share has grown from 15% in 2011-12 to 17% in 2015-16. AB peaked at 18% in 2012-13 and is 14% currently. ON’s share is at a 5 year peak of 46% of Canada’s population growth. Quebec’s share is stable at 20%. •

The average disposable income of Canadians between the ages 50 and 54 is now 64% higher than that of 25 to 29-year-olds which is up from 47% in the mid 1980’s

Canadian Real Estate Forum / WINTER 2016

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shopping centre. Dozens more are in the $50 to $100 million range for each regional shopping centre. Some investors in retail real estate are now using both defensive and offensive strategies in order to protect and grow the performance of their current assets.

The 15 most productive regional shopping centres in Canada generated an average of $1,157 per square foot in 2015 with an average increase of 13.7% compared to 2014. In total sales terms the figures are even higher as some of the 15 most productive grew their footprint, too. Success is now being achieved not just as more sales per foot, but also with more feet producing sales.

The next 85 most productive regional shopping centres in Canada generated an average of $612 per square foot in 2015 and an average increase of 6.7% compared to 2014. In total the 100 most productive regional shopping centres in Canada contain 88 million square feet of retail space and they achieved sales increases well above the very modest market average.

Canada’s Best Regional Shopping Centres Accelerate in 2015 compared to 2014


$ Billion Invested in Expansion and Redevelopment

Yorkdale Mall, Toronto, ON $331 million Expansion

Rideau Centre, Ottawa, ON $360 million Redevelopment


Square One, Mississauga, ON $480 million Redevelopment/Expansion


Mayfair, Victoria, BC $72 million Expansion


Sherway Gardens, Etobicoke, ON $550 million Expansion



Masonville Place, London, ON $77 million Redevelopment


Guildford Town Centre, Surrey, BC $280 million Expansion

Halifax Shopping Centre, Halifax $70 million Redevelopment

• 13.7% increase in sales experienced at Canada’s 15 most productive malls (to an average of $1,157 per square foot) • 6.7% increase in sales experienced at the next 85 most productive malls (to an average of $612 per square foot) 88 million square feet in the 100 most productive malls Altus Data Solutions (Altus Group, August 2016) Canadian Real Estate Forum / WINTER 2016

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Retail Structure Shopping Centre

Retail Property Formats More than One Approach to Serving Retailers and their Customers Too many, too few or just right? How to defend or improve a current retail property? How to best adjust the retail mix in your property? How to choose the best new store location or new retail investment property location? To answer these and related questions often we need to dig deep into the entire retail landscape including all retail property formats. The keys to success vary by each retail property format with the trade areas of some formats becoming surprising large and overlapping other properties in your market.

• Super Regional Mall • Regional Mall • Power Centre • Factory Outlet • Lifestyle Centre • Enclosed Community Mall

• Open Format Community Centre • Large Single Tenant • Neighbourhood Plaza • Convenience Strip • Downtown Concourse


• Other Retail • High Street – Urban Retail District • Fashion – Urban Retail District • Entertainment – Urban Retail District • Street Retail

Canadian Real Estate Forum / WINTER 2016

The implications are compelling and for complacent retail real estate owners and managers, daunting. Accelerating online shopping twinned with surging sales and productivity at a small number of regional shopping centres in a slow to no growth retail sales environment places intense pressure on most all other retail real estate assets, their managers and owners, some of whom are experiencing multi-year double digit sales declines. The insights needed to develop successful strategies will involve a deeper and more specific understanding of each retail properties’ current and targeted shoppers, their drivers and preferences, and their perception of their options. One of the differentiators of retail and retail real estate, compared to other asset classes, that makes it so challenging and rewarding is that it can be very simple and very complex simultaneously.


The simple part is about convenience, distance, travel times, competition and so on. Is the neighbourhood, or however the trade area is defined, over or under retailed? Nothing stays static including the distances we are prepared to walk, bike, transit or drive to get to various retail destinations and different retail property formats. The changes in neighbourhood composition and dynamics are likely fluid and may seem complex. Also relatively straightforward, is identifying the right retailers to recruit. More than usual, retailers are bifurcating into very big winners and those barely surviving or failing. Identifying the optimum retail mix and the most appropriate retailers is even more critical. The US retail invasion is at best taking a time out or more likely is largely behind us. Working with independent retailers and regional chains requires more effort and skill, but will become increasing necessary for all but the very top performing locations. Canadian Real Estate Forum / WINTER 2016

Accelerating online shopping twinned with surging sales and productivity at a small number of regional shopping centres in a slow to no growth retail sales environment places intense pressure on most all other retail real estate assets, their managers and owners, some of whom are experiencing multi-year double digit sales declines.


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Lower for longer might apply to interest rates or inflation, but for retailers, retail real estate owners and their managers, lower for longer also applies to growth in GDP, Jobs, Wages, Retirement Income and Disposable Income. Population growth has a brighter outlook with Canada’s population consistently growing by 1 million per year through a combination of immigration and net births.

markets and chosen shopper segments what is currently and about to be ‘cool’. What is new, compelling, interesting, gotta-see, want-to-be-there? And how do we stay cool? That is, the need to create a repeatable process so your retail real estate and your chosen retailers to stay vital, vibrant, and up-to-date to their chosen shopper segments and relevant trade areas. Clearly success here requires a completely different skill set than riding a decade long wave of cap rate compression.

The complex element of retail and retail real estate is the ability to understand for your chosen target

Looking ahead, a deep understanding of your current and evolving market, the skill to identify your viable options and best


12:44 am

strategy, the people to implement and the leadership to inspire outperformance are some of the preconditions to sustaining or becoming a very successful member of the retail real estate community. Since only a minority of retail real estate owners will likely evolve as quickly as retailers and their shoppers this is an excellent path to outperformance. ■ Sandy McNair is the Data Curator at Altus Data Solutions a division of Altus Group. In January 2016 Altus InSite, RealNet and several other businesses and teams within Altus Group were integrated to form Altus Data Solutions.



With the support of our investors, partners, and real estate communities, 2016 was an active year: The Fiera Properties CORE Fund broke through $1 billion AUM and remains a top quartile performer The Fiera Properties GTA Opportunity Fund launched and continues to source JV partners and projects An additional $300 million of capital was invested in new properties Our total assets under management reached $1.9 billion

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ROAD TO GROWTH Blake Hutcheson President and CEO Oxford Properties

As our Real Estate Forum celebrates its 25th anniversary, we feel privileged to have been asked to chair this year’s event. We appreciate the depth of the speakers, panelists and other great Canadians that have given their time to make this program worthy of such a celebration. All of us here are fortunate to work in the real estate industry. It is our sincere wish that among all participants, the hope and optimism about our collective opportunities will be infectious. This can be a confusing time for investors, when the likes of Brexit affect not only the U.K. but the Eurozone. And with the political volatility in the Middle East, massive volatility in the Asian stock market, and South American emerging markets going through their own currency and political fluctuations, it becomes apparent that the U.S. and Canada, though imperfect, are relatively well positioned to continue to focus and invest. There is, however, growing political sentiment that real estate as an asset class is a “golden goose” where it is always possible to extract more. Perhaps the success of real estate has been too celebrated because of the political environment. Political decision-makers might even view our industry as a target for further taxation, assessment, www.realestateforums.com

Peter Menkes President Commercial/Industrial Division Menkes Developments Ltd.

fees, dues and levies. While we’ve all had a great run in real estate, we need to be responsible in our expectations in pricing our products. In light of the office and residential population growth in Canadian cities, we see very good potential for urban growth and intensification in all areas – apartments, condos, office buildings and retail. That said, every investment must be assessed against risks and mitigants. As our industry is a function of supply and demand, it’s hard to say with some homogeneous pen that everybody in Canada will be affected in the same way. We’re seeing low growth in Atlantic Canada, negative or flat effects in Ottawa and Montreal, while Toronto and Vancouver remain strong. Each of us should be focused on the asset class and the environment in which we’re investing. Canadians continue to enjoy a great economy, and this first-class asset base still has room to grow. Heading into 2017 there’s no question that we face a slow growth environment, but we remain optimistic. We are truly blessed to be part of this industry and remain confident that, as a community, our future remains bright. ■ Michelle Morra-Carlisle



Mark Kenney Chief Operating Officer CAPREIT

“We’ve hit a point in many Canadian markets where both the combined effect of low interest rates and high rents have made apartment construction work again.”

Mark Kenney expects 2017 to be another great year for the apartment industry. The Chief Operating Officer of CAPREIT believes that the wave of new apartment construction that started this year will continue – at a level not seen since the 1960s. “We’ve hit a point in many Canadian markets where both the combined effect of low interest rates and high rents have made apartment construction work again,” Kenney says. “And I hold the personal belief that the outlook for interest rates is not unfavourable. Despite concerns in the United States of rising rates, we’re not feeling that imminent pressure here.” Asked if he has any concerns, Kenney points out that although natural gas prices are at historic lows, “Electricity and water prices continue to grow at double digits, and that’s a concern. Where in Ontario there has been a historic risk of over-involvement of government – whether it be municipal

MORE YEARS OF WEAK MARKETS AHEAD: BANK RESTRUCTURING, JOB LOSSES ARE KEY FACTORS the country we’re seeing some softness in other markets due to banks restructuring,” says McGregor, Chairman and CEO at RBC Capital Markets. Doug McGregor Chairman and CEO RBC Capital Markets

Along with the potential of higher interest rates for real estate valuations, Doug McGregor is most concerned by ongoing job losses in Canada. “In Alberta those job losses are due to prolonged weakness in energy prices, and in the rest of 52

“We’ve seen significant downsizing by all Canadian banks except ours so far. The banking business is changing in the face of client use – they don’t use branches the way they used to, so banks are restructuring their offering and downsizing the retail branch footprint. They’re also now offering mobile client services that use less office space. “Outside of the government of Canada, we’re probably the biggest user of office space in the country.” McGregor believes several more years of weak markets are in store for those in

licensing in Toronto or government intervention elsewhere – that’s always a risk to the business.” In terms of growth he says that besides big cities as “obvious opportunities,” other interesting prospects are opening up in cities that haven’t seen quality rental for decades. “Places like Barrie, Ontario are seeing new rental construction and a high, pent-up demand for it,” Kenney says. ■ Michelle Morra-Carlisle

“Do I think oil prices will be higher than 50 per cent by the end of the year? I hope so, but they won’t be at the level of two years ago any time soon.” Alberta, due to significant layoffs and a vacancy rate hovering around 20 per cent in Calgary. “Do I think oil prices will be higher than 50 per cent by the end of the year? I hope so, but they won’t be at the level of two years ago any time soon. Energy companies will not be needing the space they used for several years – they’ve rolled back their Cap-X programs and laid people off, and it takes time to build that back up. On the flip side, McGregor believes the two best areas for opportunities for performance at the operating level include downtown hotels and residential rental properties. ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016


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Michael Emory President and CEO Allied Properties REIT

According to Michael Emory, President and CEO of Allied Properties REIT, the biggest change facing the real estate sector in 2017 will be to interest rates. Not that he expects a steep rise, “but I think that for the first time in a long time we’re going to see them begin to rise gradually,” Emory says. “It’s something we all expected for years.”

“While REITS had a very good year in 2016, there has been a bit of a cooling effect because of the expected rise in interest rates in December.” Emory isn’t too concerned about a rate increase having a significant impact on anyone in the market. “But it can and probably will exert some upward pressure in capitalization rates,” he says, “or bring the value of urban real estate potentially down a little bit. There’s so much demand for property that it might not matter.” Asked about growth in the coming year, Emory says the greatest opportunities will result from the intensification of the inner city, primarily in Montreal, Toronto, Calgary and Vancouver. “I think some of the trading you see in the REITs in recent weeks is anticipating that change,” he says. The REITs had a very good year in 2016, probably due to better-than-expected operating environments and a flow of funds back into the REITs from international investors. While that flow continues, Emory says there has been a bit of a cooling effect

because of the expected rise in interest rates in December. “After that, it’s possible the REITs could start to do quite well again. Only time will tell,” he says. “The market tends to anticipate change and react to it proactively and once the change occurs, it’s almost as if the market settles down and things stabilize again. I think we’re in that anticipatory phase.” ■ Michelle Morra-Carlisle

2017 FORECAST BETTER THAN PREVIOUS YEARS: RENTAL GROWTH TO STEM FROM URBAN REDEVELOPMENT “When Target left at the beginning of 2015, they dumped 20 million sq. ft. of retail space on the market; at the same time there was a pretty serious rash of bankruptcies among

Ed Sonshine Chief Executive Officer RioCan REIT Ed Sonshine’s 2017 forecast is calling for a slight rise in rental growth, more second-floor retail and continued government restrictions for real estate developers. “Otherwise I don’t think 2017 will be materially different than in previous years; I expect it should be a little better,” says the Chief Executive Officer of RioCan REIT. 56

“If it’s not affordable, it’s not good for anybody.” Canadian fashion retailers. The net result was pressure on rents going down. The bulk of that space has now been taken up – we may be going towards a bit of an undersupply because no one is building much of anything new.” New rental growth will stem from urban redevelopment, he says. More restaurants and increasingly supermarkets will take over the second and third floors of retail – “because you just can’t afford to do single-storey retail in the urban context,” says Sonshine, who notes the ongoing challenge

of vertical transportation when most customers prefer surface lots to underground parking, and pedestrian traffic is not as motivated to take stairs or an elevator. The ongoing threat of government interference in the industry will continue to make real estate out of reach for the middle class, says Sonshine. “You can blame foreign buyers and low interest rates, but an equal part if not the biggest part of the blame lies in the planning process, the charges governments put on new developments and the restrictions on the supply of new development land. Governments need money and the real estate industry is an easy target because there’s no direct impact on voters. I see them going even more so down that road. “If it’s not affordable, it’s not good for anybody.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016


With 60 properties valued at over $1 billion, Concert’s fully-subscribed CREC Commercial Fund has generated attractive returns for its investors since October 1, 2016 – the day it closed. The high-quality portfolio, composed of the Company’s existing and future office and industrial assets, is managed by Concert, which retains a 60% interest. Initiatives like this represent Concert’s ongoing development of innovative partnerships with valued investors.


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Population Growth, Actual Minus Plan (2011-2015) Annaul Average

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DEMOGRAPHICS STRONG SUIT IN SLUGGISH ECONOMY Though Canada’s economy will grow slowly and steadily in 2017, it is unlikely to sparkle, predicted CIBC World Markets Deputy Chief Economist Benjamin Tal.

Benjamin Tal Deputy Chief Economist CIBC World Markets

“Canada’s strong suit is that it has one of the fastest-growing populations in the developed world.”

“Compared with Japan and the Eurozone, we will do well but, in absolute terms, Canada won’t excel next year,” he said. Tal expects the Canadian economy, attenuated by depressed energy prices, to grow by less than two per cent. “To see investment activity we need higher oil prices and stable oil prices,” he explained. “We’re unlikely to see that in 2017: There’s a limit to how much oil can go up and that will limit how much the dollar will rise.” Meantime Canada’s manufacturing sector has proved slow to take up the slack. It had shed ten per cent of capacity and is oriented toward products that its main market no longer wants. “What we sell is aimed at clients in the American manufacturing sector, which is the only sector of the United States economy that is underperforming, due to the strong U.S. dollar,” Tal reported. “The mismatch between what they’re buying and what we’re selling will limit our potential to grow in 2017.”


With central banks’ ability to stimulate the economy through looser monetary policy hamstrung by historically low interest rates, the Tal found the federal government’s willingness to invest in infrastructure reassuring. “We will see a lot of activity in infrastructure, which will help the market,” he said. “Even if Bank of Canada cuts interest rates, it won’t help the economy significantly, especially in terms of credit generation. At best, it will lower the value of the Canadian dollar marginally.” Canada’s strong demographics will partly compensate for its weak industrial growth, Tal added. While Canada’s housing market will slacken slightly, population increases will help to offset the decline in demand. “Canada has one of the fastest-growing populations in the developed world,” he concluded. “We see significant economic contributions from non-permanent residents, immigrants and foreign workers. That’s one reason why the housing market remains strong. From a demographic perspective, Canada is in a relatively good position.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2016

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John Ruffolo Chief Executive Officer OMERS Ventures

“What we hope – and this is the massive challenge – is that the wealth created by the new opportunities will be used to help the individuals who have been disrupted and need time to retrain, if they can.” Owning technology companies means having assets that are both transformative and disruptive to the economy. John Ruffolo is Chief Executive Officer of Canadian pension fund OMERS Ventures, which invests in the Technology, Media, and Telecommunications sectors. On the example of manufacturing, Ruffolo says, “With the advances in technology you’re going to see the disruption to people that would otherwise have those jobs. All of it is unavoidable in that the technology transformation or disruption is happening on a global scale.” Granted, some of those ‘disrupted’ people can be retrained and repurposed into using their skill sets for other applications, but that’s often difficult, especially in the near term. Technology advances create new businesses and opportunities, but those tend to require very advanced training and capabilities. “What we hope – and this is the massive challenge – is that the wealth created by the new opportunities will be

used to help the individuals who have been disrupted and need time to retrain, if they can,” Ruffolo says. “That’s what society is going to have to figure out. The difficulty is that, with technology changing at such an increasingly rapid rate, society no longer has the luxury of time to adapt.” As an investor in technology, Ruffolo says that every time he makes an investment, “It’s a double edged sword, because you know you have to do it for future wealth creation but then you worry about what is it doing to other folks.” Even within his portfolio, one asset might negatively impact another. Companies often ask for his insight on what might threaten their business. “One of the advantages of our team is that we look at all these opportunities that impact all of our portfolio companies right across the board,” he says. “We have a great vantage point to see both sides.” ■ Michelle Morra-Carlisle

SAFE HAVEN STATUS TO SUSTAIN LIQUIDITY Ted Welter, Managing Director, Chief Investment Officer, Alternative Investments at Greystone Managed Investments. Inc., believes that demand will continue for quality Canadian real estate demand next year. Ted Welter Managing Director Chief Investment Officer Alternative Investments Greystone Managed Investments. Inc.

“We anticipate that liquidity in the Canadian commercial real estate market will remain high in 2017.” He added, “A market until recently dominated by Canadian institutional capital will witness an influx of private and public capital. In addition, foreign capital is clearly entering the market and creating even more competition, particularly for strategic assets.” “Even with a lower Canadian dollar, it’s not just about currency,” Welter explained. “Canada is quite compelling as a safe haven. The problem is that it’s very difficult to buy in Canada, particularly for large buyers.” The difference between the expected increase in demand for quality commercial


real estate and current supply will put pressure on prices or drive down capitalization rates even further for strategic assets, particularly in Vancouver and Toronto. Calgary, though, will take some time to adjust to the precipitous fall in energy prices. With Canadian institutional investors not yet fully allocated and poised to possibly increase their investment in real estate, liquidity will become more pertinent in 2017. “Will investors price through the appropriate risk-adjusted return?” he asked. “The tremendous amount of liquidity aimed at income-producing institutional real estate is going to be delicate, posing risks that might not be adequately reflected in pricing.” In 2017, deployment of capital towards quality real estate investments will be key for asset managers. ■ Robert Frank Canadian Real Estate Forum / WINTER 2016

Broccolini Construction is a leading single-source provider of construction, development and real-estate services, catering to the industrial, commercial, institutional and residential markets in Canada. Our organization provides a range of services, acting variously as a general contractor, construction manager, project manager and developer. montreal | toronto | ottawa WWW.broccolini.com


John Sullivan President and Chief Executive Officer Cadillac Fairview Corporation Ltd.,

It’s never a dull moment in Canadian real estate today, a situation that reflects a global climate of ongoing unknowns. The areas of greatest concern for John Sullivan, President and Chief Executive Officer of Cadillac Fairview Corporation Ltd., relate mainly to macroeconomic factors.

“It has become more important than ever to understand the implications of some of these geopolitical events in assessing investment options.”

Aside from the possibility of rising interest rates, Sullivan cites current geopolitical uncertainty (President Trump, Brexit, the Italian referendum and French election, just to name a few); uncertain growth in China, which could also be impacted by new political policy in the form of Trump’s proposed tariffs; as well as the current high cost of real estate and low capitalization rates. “It has become more important than ever to understand the implications of some of these geopolitical events in assessing investment options,” Sullivan says.

through development and investment where there is dislocation in markets,” Sullivan continues. “An example of this would be the U.K. Brexit vote where real estate stocks and funds, real estate liquidity and currency have been impacted significantly.”

The key is to know which areas of uncertainty to avoid and which ones might have a silver lining. “At the same time, I believe that opportunities will arise from these concerns, as there can be growth 62

Asked about future growth prospects for Cadillac Fairview – which has operated since 1953 and weathered many a geopolitical storm – Sullivan says that in addition to various investment strategies the company is pursuing, “we have deep development expertise in-house and a great pipeline, which will allow us to selectively pursue development as part of our overall growth strategy.” ■ Michelle Morra-Carlisle Canadian Real Estate Forum / WINTER 2016

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2017 TO BE A STRONG YEAR IN REAL ESTATE: BREXIT CREATING OPPORTUNITIES IN THE U.K. With low vacancies in key markets, advancing rents and decent transaction activity, 2017 is shaping up to be a good year for real estate.

Ric Clark Senior Managing Partner and Chairman Brookfield Property Group and Brookfield Property Partners


and Brazil, as well as in non-traditional real estate sectors, including student housing, manufactured housing and self-storage.

“We’re very high on Brazil as an opportunity “The fundamentals in our key markets for long-term investment,” says Clark. “As a remain strong,” says Ric company we’ve been “We’ve seen some Clark, Senior Managing active there for more than Partner and Chairman at unexpected things in the 100 years, with more than Brookfield Property Group 8,000 employees. The U.K. with Brexit, which and Brookfield Property country’s assets are can impact the markets, known to investors Partners. “That said, we’ve seen some unexpected so we’re keeping our eye worldwide. things in the U.K. with on that.” “Some of its current Brexit, which can impact challenges have gotten a the markets, so we’re keeping our eye lot of attention in the political arena but it has on that.” made great strides in working through these While it was initially feared that the issues and setting itself up for long term uncertainty would interfere with capital stability. market activity in London, for now, Clark has “There’s been enough uncertainty to scare seen exactly the opposite. “The currency away a lot of investors, which has created a has weakened and a lot of large liquidity gap and an opportunity for savvy international investors who were priced out investors to come in and do interesting of the U.K. are now rushing back in.” things.” In the meantime, Brookfield has been ■ Barbara Balfour investing in the developing markets of India Canadian Real Estate Forum / WINTER 2016

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“Protectionism doesn’t build value. It destroys value.” Agreement (CETA) will be implemented, and that Canada might also enjoy trade amongst its provinces that would be as free as it can be with Europe. “With Canada being a progressive trading nation, we can really build some economic value here,” he says.


Jon Love Chief Executive Officer KingSett Capital

Trade has a strong impact on real estate investors, who are in the business of housing “jobs, people with jobs, or retailers who are selling to people with jobs,” as Jon Love describes it. “Increased trade will increase jobs,” says the CEO of KingSett Capital. “And if there’s an increase in jobs, all classes of real estate benefit.” Love is hopeful that a Canada-European Union Comprehensive Economic and Trade

FROM NEW TECHNOLOGY TO CONCEPTS AND DEMOGRAPHICS: EXCITING TIMES LIE AHEAD IN FOOD RETAIL New technologies, new demographics and a rapid pace of change are creating some exciting times for the food industry, says Sylvie Lachance, Executive Vice President of Real Estate Development at Sobeys Inc. Sylvie Lachance Executive Vice President Real Estate Development Sobeys Inc.

“All these factors require fast adaptation and a rethinking of the ways we go about doing business,” says Lachance. “This is not unique to the food store industry but really the entirety of retail.” A larger share of the food retail pie in Ontario is being swallowed by discount retailers, as well as concept stores catering to certain ethnicities, such as the Chinese or South Asian communities, by offering products not usually found in full-service, conventional food stores.


A self-described pro free trader, Love says that what keeps him awake at night is growing protectionism, as well as growing isolationism, in the U.S. and abroad. “We have great strength in Canada in all sorts of industries to the extent that we have greater access to global customers,” he explains. “In those industries that are strong, it’s going to increase our national prosperity. Protectionism doesn’t build value. It destroys value.” Sure, free trade has its detractors. Love concedes that no trade scenario can please everyone. “Typically the media will speak to those that are unhappy because those that are happy don’t speak up,” he says. “But the reality is that globalization and trade, by definition, allow those countries that are good at something to build critical mass.” ■ Michelle Morra-Carlisle

“This is what you will see more and more. The market is segmenting and fragmenting into full service and discount concepts; that is the competition we are facing,” says Lachance. Lachance says the food service industry has delayed addressing online shopping needs, although they have already launched e-commerce platforms along with their competitors. Sobeys is currently working towards operational integration with Safeway, which they acquired three years ago. “When you are merging two major food store chains you have to address questions that are related to your operations – the way the stores will function, loyalty programs, merchandising, and pricing policies,” says Lachance. “We still have some work to do but we’re always trying to adapt our full service concept. We will continue to see the acceleration of growth, of new projects and stores opening in large cities.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2016

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remain so for several years. Rosenberg supports strong fiscal stimulus, but can’t see how that can bolster the American economy if the Federal Reserve Board cuts quantitative easing and hikes interest rates, as Trump has suggested. “You don’t do infrastructure to influence the contour of the business cycle,” Rosenberg explained. “You do it to upgrade your capital stock, which reduces costs.”

David Rosenberg Chief Economist Gluskin Sheff “The world has changed,” David Rosenberg declared in the wake of this month’s post-American election market bounce. “The words hope- and faith-based rally come to mind.”

He questioned Trump’s ability to simultaneously to cut taxes and boost spending, when it the United States is already so deeply in hock. China alone holds some $1.2 trillion in American treasury bills.

Pervasive over indebtedness is Gluskin Sheff’s Chief Economist’s greatest concern.

“When Franklin D. Roosevelt introduced the New Deal in 1933, during the Great Depression, America’s debt-to-GDP ratio was 30 per cent. When Ronald Reagan came to office in 1980, it was 30 per cent,” Rosenberg recalled. “Today it’s 75 per cent – it’s highest ever. It’s hard to see how taking that to 105 per cent in ten years will play out.”

The forces of debt, inflation and demographics will be hard even for President-Elect Donald Trump to offset, he insisted and predicted that interest rates, already at historic lows, will

The debt problem is pervasive throughout the world, he added. Elsewhere, China’s economic growth is marking time at seven per cent, despite massive domestic spending stimulus. It remains unclear whether a much mooted trade war will materialize.


“Trump said ‘it’s all totally hypothetical,” Rosenberg said, “which it is.” Meantime, Europe – already hamstrung by sovereign debt – faces further complication from Brexit. “We will see very anemic growth in Germany, Italy and France,” Rosenberg forecast. “France is still grappling with way too much debt and remains very weak.” India remains the one of the world’s only real growth stories, with inflation whipped, a sound central bank, a reform-minded prime minister and youthful, growing demographics. “They’re the real deal,” Rosenberg affirmed. “India is currently the seventh-largest economy in the world. In the next decade, they will become the world’s third-largest. While he welcomed Canada’s recent infrastructure initiatives he suggested that the best way out of ever-tightening capitalization rates is for the country to address its own indebtedness. “It’s the overriding impediment to growth,” Rosenberg concluded. “Excessive debt constrains the economy in a way that we haven’t yet resolved.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2016

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remain opportunity markets. They and possibly Montreal as well will see a lot of migration to the urban core, and corporations will continue to seek out higher-class buildings in the central business district. They need properties that better reflect their workplace requirements at higher densities, in order to attract the type of talent that they need.” The reversal of a half-century of sprawl has proved a setback to the suburbs, and requires a reexamination of real estate strategy there.

Chuck Scott Chief Executive Officer Cushman & Wakefield With uncertainty, the watchword for 2017, count on real estate markets to continue their current trajectory. “Next year is going to be a bit of an extension of 2016,” anticipated Cushman & Wakefield Chief Executive Officer Chuck Scott. “Toronto and Vancouver will www.realestateforums.com

“Suburbs will hopefully start to turn around, but they won’t see the same sizzle as downtown,” he predicted. Cities confronting the energy crunch will continue the real estate shakeout that they experienced in 2016, Scott anticipates. “Challenged markets like Calgary, Edmonton and St. John’s are unlikely to see remarkable improvements during the next few quarters that will make 2017 a turnaround year for them,” he said. Political turmoil elsewhere in the world and the sinking Canadian dollar has made

Canada a shining symbol of stability in a sea of global tumult. “With its strong banking system, economic fundamentals and a cheap dollar, there’s no lack of interest,” Scott reported. Despite Vancouver’s tax on foreign real estate investment, he considers the continued foreign capital influx the brightest prospect for the real estate market next year. “Canada has a wide range of attractive real estate opportunities,” he said, while acknowledging “that there’s been a bit of a lack of top quality institutional product which forces a lot of investors and pension funds to look to the United States for assets. Paralysis poses a significant downside risk, Scott suggested, given political uncertainty in the United States. “My biggest concern is the Canadian dollar’s continued slide, and weak commodity pricing,” he concluded. “We don’t want to see companies staying on the sidelines for several quarters, and avoiding investment decisions.” ■ Robert Frank 71



Dori Segal Executive Vice Chairman Gazit-Globe

In today’s volatile business environment, long-term planning is crucial to success, says Dori Segal, Executive Vice Chairman at Gazit-Globe. “Real estate is not a short-term business. Whether you’re looking at King Liberty, Yorkville Village or any number of properties we’ve done – these are all 10-year projects for us. “Generally speaking, we aim to own and develop good real estate and have been acquiring assets that are very strategic to our existing portfolio, from either a location or use perspective,”

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As one of the world’s largest developers, owners and operators of supermarket-anchored shopping centres, Gazit-Globe has been placing more emphasis on how people spend their time while shopping, rather than on what they can buy. “We’ve gone aggressively into the service business, as opposed to other kinds of retail – whether it’s the fitness centres, health food, coffee, or all kinds of fitness from yoga centre to gyms,” says Segal. “From a medical perspective, we provide a wide array of services from dentists and chiropractors to vets. We have a lot of places to sit down and access Wi-Fi or to enjoy a nice coffee on a rooftop patio.” Gazit-Globe is continuing to invest significant funds in capital expenditures to make existing assets more competitive, increase retail offerings and keep up with changing demographics, including continued growth in inner cities. “We are trying to dramatically improve the design and quality of buildings and provide amenities like smart parking for visitors who might only come for 20 minutes,” says Segal. “Many younger people don’t want to drive – they want to live in places where they can walk and take public transportation.” At the same time, they’re keeping an eye on the volatile economy – “It’s my greatest concern,” says Segal, - “more so than the interest rates.” ■ Barbara Balfour


Canadian Real Estate Forum / WINTER 2016



Peter Senst President of Canadian Capital Markets CBRE Limited

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More attention will be paid to the retail sector in 2017, says Peter Senst, president of Canadian capital markets at CBRE Limited. “Where retails looks so interesting to us right now is in the yield versus other asset classes,” says Senst. “You’re getting 100 to 200 basis points of return compared to equivalent assets and it’s hard not to want to take it.” At the same time, Senst says he doesn’t see much growth coming out of Canada in the upcoming year. “If there’s any growth right now, it will be something related to U.S. employment levels growing – which has led to revenue growth, and better occupancy of industrial.

“I think the ability to turn sentiment on or off is way greater than we’ve ever seen before.”

“Industrial has a significant part to play in the U.S. retail story – if you want to look at a hedge for retail you could consider that to be urban industrial, as a way of providing an e-commerce warehousing solution. Those kind of tie together.” While Senst is expecting another good year overall, he does see a significant element of unpredictability in the market. “Last year, in January, February and part of March, we were out of business as an industry, and it was very difficult to get any of the deals done,” he says. “By May it seemed like we had never seen stronger markets. “I think the ability to turn sentiment on or off is way greater than we’ve ever seen before. We’re expecting to see more capital to come to Canada but that can change so your plans have to be governed accordingly.”

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Forecasting next season’s biggest trends

What are the best bets for investment and development in 2017?


Frank Magliocco National Real Estate Leader 416 228 4228 frank.magliocco@ca.pwc.com

Š 2016 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. 255827-11-9-2016


Brady Welch Partner & Co-Founder Slate Asset Management LLP


increased from $10-$11 to $20-$25 today, Canadian real estate has headwinds in its though Welch does not see that trend forecast. “I don’t see a lot of growth,� says continuing. “We believe that core trophy Brady Welch, Partner and Co-Founder of assets today might be mispriced,� he says. Slate Asset Management LP, who believes “This whole ‘develop the core’ is, to us, a Canada’s low interest rate environment will risky proposition when remain in 2017. “I think there are some disparities “We believe that core you’re not underwriting a lot of growth. We choose regionally, and even trophy assets today not to play in that. You can Toronto and Vancouver pay $650 a foot downtown markets seem to be really might be mispriced. frothy and overheated to us, This whole ‘develop the and if it goes to $500 you’ve lost $150 a foot. But but I don’t see that core’ is, to us, a risky buy a building just a little changing,� he says. proposition when you’re bit outside and pay $150 I Anything akin to stability not underwriting a lot of don’t think it’s going to go could be disrupted by to zero.� global geopolitical issues. growth.� Welch sees the ongoing Welch cites the results of uncertainty with oil and gas the U.S. election; civil unrest commodities as “a low, slow slog and that in Turkey and Syria; Brexit and the next E.U. will trickle down into real estate and have an elections. “Those all could have ripple impact, which could create growth effects throughout the world economy that opportunities for guys like us.� could impact Canada,� he says. “Unfortunately,� he adds, “other people’s In Toronto, Slate has seen rental rates grow pain can create opportunities for others.� in its properties outside of downtown. Net ■Michelle Morra-Carlisle rent rates at Yonge and St. Clair have Canadian Real Estate Forum / WINTER 2016


Richard Joy Executive Director ULI Toronto

ULI Toronto is pleased to be working in partnership with Informa Canada on our second major city and region building symposium. Expanding on the hugely successful fall 2015 Symposium which drew 60 national and international speakers and 750 attendees, the spring 2017 Symposium will extend on our unique brand of city building that engages the full spectrum of our international, future focused, multi-sector leadership from within government and industry. Importantly, our next symposium will be set in the context of the global zeitgeist where many communities perceive themselves disconnected from the forces that are defining their futures. How can we better engage civil society in the challenges and opportunities of city building and urban transformation?

The Electric Cities Symposium will explore three subject clusters through the land use lenses of Placemaking, Mobility and Technology, including: regional economic competitiveness and urban affordability; systemic long-term disruptions and innovative short term solutions; and domestic and global best practices. Foremost, our symposium is a sophisticated public policy and industry forum. But it is also a forum that will also address the need to translate to a broader audience – outside of the professional realm. Never has community been such professional priority. In embracing this, the ULI Toronto Electric Cities Symposium seeks to be a thoroughly modern industry conference of global interest. ■

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Roseanne Hill Blaisdell Managing Director Harvard Developments

Energy prices have roiled real estate before, but the shakeout will continue for some time, since the fundamentals are different this time around, said Roseanne Hill Blaisdell.

“Opportunities in unfavoured office assets, distressed retail and new mixed-use residential.”

“We’re in for some very, very tough times,” Harvard Developments’ Managing Director acknowledged. “We still have some companies downsizing and there will be further deterioration.”

overexposed while trying to help keep these guys afloat.”

Calgary’s office market remains the most distressed and retailers are renegotiating rents, just to keep their head above water, she reported. “Alberta is particularly affected and, to some extent Saskatchewan,” Blaisdell said. “We’re working with our tenants to lock in financing to take advantage of low interest rates and ensure that we’ve got lots of debt cushion to provide sufficient margin in the event of a bad debt situation, which we anticipate we will have with some of these tenants. Ultimately, it’s about ensuring that we’re not


There’s no better ROI in commercial real estate.

Harvard remains open to acquiring unfavoured office assets, if the price is right. “I like neglected retail as well,” she said, “though we haven’t yet seen much of it. Turnaround is our strategy. It’s varied, takes more than mere paint and lipstick and suits our longer time horizon. That permits us to take on cumbersome assets that most institutions don’t have an appetite for.” “We are also looking at constructing a couple of multi-unit mixed use residential projects right now,” Blaisdell added. “In this environment, it tends to be both financeable and stable.” ■ Robert Frank



Ted Willcocks Global Head of Asset Management Real Estate Manulife “ In terms of growth for 2017, we continue to see increased demand from SMAs for core and core plus office strategies across gateway cities in the US.” “Our greatest concern at this point in the cycle is focused on the impact of the interest rate environment.” ■


Canadian Real Estate Forum / WINTER 2016

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2017 as likely being very similar to 2016 in terms of real estate risks and opportunities for growth in Canada.

Graeme Eadie Managing Director and Global Head of Real Assets CPPIB

“Capital here is in the same condition in most other markets,” he says. “I don’t really see anything that’s outstanding at this point. In terms of asset classes, I wouldn’t say any one in particular stands out in Canada, although globally there are probably greater tailwinds in the industrial sector.”

Some forecasts predict office vacancy to rise to 28 per cent in Alberta’s most-populous city, as Calgary is caught between new space coming online and tenants distressed by plummeting oil prices. Stephen Taylor Vice President Real Estate HOOPP

“The most damage is being done on the office side, lenders are more reluctant to renew, at least at the same level, because

Asked about the supply of office space in Toronto and Vancouver he says, “Vancouver has a good supply of office space coming, and I doubt that any more is really required. In terms of Toronto, we seem to be pretty much in balance, but I think it’s a delicate balance.” ■

they anticipate write-downs. While this is unquestionably bad news, it also presents an opportunity for firms that hope to make long-term investments in high-quality properties.” Many publicly traded companies are looking to reduce their Calgary holdings because they are being penalized on account of their risk exposure in Alberta. ■



WINTER 2016 / ISSUE 73

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By Michael Brooks Chief Executive Officer REALPAC


Although Canada is a small nation in economic terms relative to the U.S., Europe and Asia, it has a sophisticated and mature real estate market. By mature we mean that the dominant players in the Canadian commercial real estate market are not wealthy families as one might find in some developing nations, but publicly traded corporations, pension funds, life insurance companies, real estate investment trusts (REITs) and other pools of professionally managed capital. To be sure, there are still many wealthy individuals and families invested deeply in real estate throughout Canada, but many have also sold their assets to a public entity, or taken their company public so as to allow further growth through access to public capital markets.

Data on the size of the commercial real estate market (as opposed to the institutional grade market) in Canada, and therefore Canada as a per centage of the global commercial real estate market, sourced from within Canada, is annoyingly difficult to come by without using a top-down approach. Statistics Canada does not keep nor seek out particular data on the size or value of the commercial real estate market generally. The Canada Mortgage and Housing Corporation (CMHC) has reasonably good data on the apartment sector only. Aggregating broker market-area reports from major urban centers would be a start, but might not cover enough of the Canadian market to be useful. However, larger institutional investors tend to focus on larger markets such as the six or eight Canadian Real Estate Forum / WINTER 2016

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The Canadian commercial real estate market is large to Canadians but small in relation to the global market. With US$784 billion of institutional grade real estate, there is much to choose from in Canada. On the other hand, Apple Inc. had a market capitalization of US$735 billion as at June 2015. If Canada’s institutional grade real estate market is 1/10 the size of the U.S. institutional-grade real estate market, Canada’s market size should be US$2.6 trillion.

largest cities in Canada; others may focus regionally or have a suburban strategy. Knowing the size of the market based on reliable data would enable investors to better understand market share and more precisely manage over-investment and under-investment in a given market. Commercial real estate is a large part of the Canadian economy. REALPAC commissioned a report in 2012 that conservatively suggested the Canadian commercial real estate sector produces: • over $60 billion in annual economic activity • approximately 340,000 jobs • $7.2 billion in personal and corporate income tax revenue annually • $18.1 billion in earned income annually. Construction taken together with real estate is likely one of the two or three biggest industries in Canada. The Canadian commercial real estate market is large to Canadians but small in relation to the global market. With US$784 billion of institutional grade real estate, there is much to choose from in Canada. On the other hand, Apple Inc. had a market capitalization of US$735 billion as at June 2015. If Canada’s institutional grade real estate market is 1/10 the size of the U.S. institutional-grade real estate market, Canada’s market size should be US$2.6 trillion. The Canadian real estate market may be small by world standards but offers ample opportunity for investment. Those with capital seeking a return on investment can purchase income producing real estate and obtain a yield and perhaps capital appreciation as time goes by. Traditionally, well-maintained real estate is a good inflation hedge. In most cases, capital appreciation can be enhanced by appropriate additional capital investment, active and intelligent management, careful leasing and proper ongoing maintenance. On the other hand, capital appreciation is 82

not guaranteed. Most real estate markets are cyclical, reflecting the ups and downs of the economy at large or, in some situations, unique market ups and downs based on local overbuilding, poor management, regional economic events, a significant immediate drop in local demand, and the like. Prudent investors diversify their investments to avoid or minimize the effect of down cycles; declines in value in one area or asset class can be offset by stability in the other areas or asset classes and leave enough equity or cash on hand to enable the investor to ride out the down cycles. Canada is an excellent country in which to invest in real estate. The country is politically stable and federal, provincial and municipal laws encourage growth while systematically guiding rational development of residential areas, commerce and industry. As with all investments, there is both opportunity and risk in commercial real estate. There is opportunity because of the ability to add value through physical improvements to land. There is the ability to add value through regulatory approvals to land (such as by increasing permitted height and/or density, or changing permitted uses to a use more highly valued in the marketplace). There are opportunities to benefit from increasing rents to the extent there is scarcity of supply (or excess demand) in a given market for that particular use or location. There is the ability to achieve capital gains if inflation makes substitute properties more expensive or if the market demand for the rent generated by the building increases the value of the building. Although commercial real estate is made up of land and buildings, it is really a business about people, for people and by people: giving people a place to live; giving people a place to work and shop; giving people places to go; giving places life – places that are attractive to people draw renters and generate higher rents; those that do not, generally do not rent well, or rent at a lower price point. Those needs change over time, reflecting changing societal priorities, technological advancement, and economics. Canadian Real Estate Forum / WINTER 2016

Turn Around

Although commercial real estate is made up of land and buildings, it is really a business about people, for people and by people: giving people a place to live; giving people a place to work and shop; giving people places to go; giving places life – places that are attractive to people draw renters and generate higher rents; those that do not, generally do not rent well, or rent at a lower price point.

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Low-ceiling-height industrial was made obsolete by lift trucks that could lift pallets of goods higher. Newer industrial facilities now have ceiling heights approaching 40 feet. Strip retail and main-street retail were overtaken (at least for a time) by modern enclosed (and air conditioned) indoor shopping malls. Older brick office and other buildings with fixed interior concrete walls were made obsolete by steel and concrete office towers with clear longer spans between the elevator and the external windows, and movable partitions. Elevators and air conditioning made obsolete those buildings that did not have them. At 2,400 people, the annual Toronto Real Estate Forum, co-sponsored by REALPAC, is a who’s who of the commercial real estate sector, at least for Ontario: people get to know people, people talk, people do deals, and people invest across Canada. This brings us to the final point: reputation matters. Trust matters, professionalism matters. In the community of people involved in the real estate industry in Canada, trust and reputation fuel the transactions that occur every day. Big money is at stake. No one wants a partner, lender, borrower, supplier, purchaser, vendor, lawyer, accountant, appraiser, consultant or agent who cannot be trusted, has a bad reputation, is a poor (or non-) communicator or is unprofessional. Those who lack those qualities become less desirable participants in any deal. Those who have those qualities find people to do business with and are successful. ■ The above article was sourced from the first Canadian commercial real estate textbook titled “Canadian Commercial Real Estate: Theory, Practice, Strategy”, authored by Dr. Michael Brooks and published by REALPAC. This innovative new textbook is now available for purchase by visiting realpac.ca > Books & Surveys > Canadian Commercial Real Estate Textbook


Canadian Real Estate Forum / WINTER 2016

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By Brooks Barnett Manager, Government Relations & Policy REALPAC

The Province of Ontario has commenced a consultation process on potential amendments to the scope and powers of the Ontario Municipal Board (OMB). With submissions due December 19th, REALPAC has been gearing up for a defence of the OMB. While the existence of the OMB itself is not threatened, it is clear that certain municipalities are seeking to curtail its powers – reflected in the review goal of “giving municipalities a stronger voice and more independence in local land use decisions”. The Planning Act defines the Province’s approach to planning, the roles of key participants, and the requirements for creating land use documents such as official plans and zoning bylaws. It also provides a process for resolving land use disputes through the OMB. The 2016 review of the OMB marks the latest attempt to review the policies guiding the development appeals process. The review should concern all members of the commercial real estate industry who, to borrow from the government’s lexicon, are concerned with “building Ontario up”. The OMB provides considerable value to the land use planning system in Ontario by fulfilling a natural justice function. The OMB is the counterbalance to potentially harmful or unfair local planning decisions that may not reflect the best interests of the municipality, or “good planning principles”. City councils sometimes make bad planning decisions, which often stem from a NIMBY (not in my backyard) mentality. So, the OMB is necessary to protect the larger public interest and provide a useful forum to hear appeals, particularly when planning


applications may conflict with the provincial vision for development. Many municipalities argue that the OMB often sides with the development community, and therefore wholesale change to the scope, effectiveness or jurisdiction of the OMB is required. While the frequency with which decisions favouring development over municipalities fluctuates, it is important to note that the decisions made by the OMB are based on planning evidence, provided by expert witnesses under oath, which ensures that long-term public policy objectives rather than short term political calculations are upheld. Without the OMB, appeals could be heard by another authority such as the courts, which would add substantial costs to the development system. Rather than consider ways in which the OMB can be changed, policymakers should consider ways in which the development system should be changed. Much progress can be made by improving the municipal processes governing development – improving official plans, correctly zoning areas to begin with, and even considering other ways to build more mediation into the front end of the development process, and reduce NIMBYism by existing residents and their councillors. Recent amendments to the Planning Act could potentially decrease the overall impact of the OMB in Ontario. Policymakers should allow for enough time to pass before properly evaluating those changes and considering if further amendments are needed. Building a responsive, transparent and fair development system is in the best interest of the commercial development and real estate industry. Potential amendments to the jurisdiction or scope of the OMB is a step away from that objective rather than toward it. ■ Canadian Real Estate Forum / WINTER 2016

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By Brooks Barnett Manager, Government Relations & Policy REALPAC


As the City of Toronto continues to consider various revenue tools that can be used to close ever-growing operating and capital budget gaps, Toronto’s many real estate and development associations have banded together to oppose one such tool that could result in a property tax increase for some owners of up to 44%: the commercial parking levy. A parking levy is a tax on any parking space – occupied or not. It is paid by the owner, not the user parking in that spot. It is like another property tax. The parking levy, which has been modelled at anywhere between $.50 to $1.50 per day per available space on commercially owned parking spaces within the City, could raise up to $575 million annually, according to the City’s consultants. Toronto’s commercial real estate industry has not only challenged the premise of a parking levy based on basic taxation fairness principles, but also challenged the overall revenue projection by arguing that the administrative complexity, potential exemptions, and legal challenges will affect the overall revenue raise, and thus the

attractiveness of a parking levy as a revenue tool. In 2005 the City of Toronto began a regime of annual commercial tax decreases that would slowly bring commercial property tax burdens down in relation to residential rates in the city. This was the result of intense lobbying efforts by REALPAC in 2006, and a trend toward businesses relocating to Mississauga due to Toronto’s high commercial property rates. The proposed levy would be a clear break from the City of Toronto’s property tax reduction commitment. In addition, if all hypothetical revenues were raised at the highest increment ($575 million), this would mean an average increase in taxes paid by businesses across Toronto of roughly 44%. Hardly fair for commercial property owners. The proposed parking levy would impact all businesses with parking stalls, large and small. It would be passed on to retail, office and industrial tenants and would disproportionately be paid by small businesses, including small tenants in large Canadian Real Estate Forum / WINTER 2016

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The proposed parking levy would impact all businesses with parking stalls, large and small. It would be passed on to retail, office and industrial tenants and would disproportionately be paid by small businesses, including small tenants in large malls that probably need only a few spots, but would end up paying an unfair share. Increased taxation costs could mean that jobs and businesses will resume leaving Toronto. malls that probably need only a few spots, but would end up paying an unfair share. Increased taxation costs could mean that jobs and businesses will resume leaving Toronto. Studies conducted by the commercial real estate industry indicate that a levy could weigh on the number of firms choosing to operate in Toronto versus a neighbouring jurisdiction – which could cost the city jobs in the long-term. In 2016, the International Council of Shopping Centres (ICSC) found that the additional sales required by an average shopping mall tenant (roughly 2000 ft.²) to cover $10,000 in new costs due to a parking levy at a 6% profit margin, would have to be roughly $167,000. For many small businesses in the city, achieving something like this may be impossible. The parking levy is bad for the City of Toronto. The levy could have an impact on the city’s business competitiveness and economic development. The City’s goals in the short and medium term are to close a substantial budget gap in the hundreds of millions of dollars, while finding a sustainable source of revenue to fund capital expenditures. The parking levy does not provide the City with a viable solution in

support of those goals. Our industry has studied the potential revenue raise from a parking levy and found that the number of likely exemptions for property owners, which are politically likely, would drive down the overall revenue raise to a point where it would be more cost effective for the City’s administration not to levy a parking charge. Furthermore, a levy on parking does little to encourage behaviour away from driving – a major City Council policy priority to alleviate congestion. A parking levy on parking spaces, especially on free spots, is a hidden tax that is likely to be paid by the property owners and their tenants, rather than hit drivers. So, the levy therefore is incongruent with the Council-established policy. Our industry does believe that the City of Toronto’s revenue problems are real, but the City cannot and should not exempt its own residents from part of the burden. Long-term solutions to these problems ought to be fair, equitable, and enhance Toronto’s competitiveness and affordability while attracting jobs and investment to the city. Any revenue tool, tax, charge – or in this case, levy – must meet those objectives or be eliminated as a budgetary tool. ■

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