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WINTER 2017 / ISSUE 76

THE NEW NORMAL

GLOBAL PROPERTY MARKET

Paying for Perfection Priced into Goldilocks Market JLL Defines ‘The Geography of Innovation’ Europe Adjusts to Low-interest Rates, Geopolitics, and Trump

TORONTO REAL ESTATE FORUM

NAFTA Remains Biggest Economic Wild Card Decade-long Expansion Nearing its End Aging, Tech and E-commerce Reshape Real Estate landscape

WWW.REALESTATEFORUMS.COM


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Dru McAuley Assistant Vice President, Commercial Financing Michele Cook Assistant Vice President, Commercial Financing Ed Kieser Assistant Vice President, Commercial Financing

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? Is ThE NEW NORMAL financing and leasing trends combined with opportunities for high quality networking. George Przybylowski Vice President Real Estate Informa Exhibitions

Of the eighteen real estate conferences that we produce annually across Canada, twelve were sold-out and nine of these achieved new record attendance. The 26th annual Real Estate Forum is one of these events having been sold-out now for the 12th consecutive year. Why? The real estate market across Canada – and frankly around the world – continues to attract significant investor interest with billions of dollars trying to finance or acquire a full range of assets. With the cost of capital remaining at relatively low levels along with interest rates, investors continue to look for opportunities for yield, growth and steady cash flows within the real estate market. Collocated with the Global Property Market conference, The Real Estate Forum offers very compelling insights on investment, development, www.realestateforums.com

The Forum is Canada’s largest annual commercial real estate conference, attracting over 2,500 senior real estate executives from across Canada, and around the world. As any real estate stakeholder will tell you, with change comes uncertainty. To identify the opportunities amid the changing landscapes, you need insider intel. That is what our real estate conference offers. Experts will examine key issues that shape investment decisions and portfolios, along with economic and political fundamentals. Therefore, panel discussions on developments as a growth strategy and using the evolution of a competitive landscape to one’s advantage this year will be front and centre. Office, retail, industrial and multi-unit residential projects are at record levels across the country. From redevelopment, intensification and mixed-use makeovers, construction activity is on the rise. Upgrading the assets in your portfolio isn’t enough in the minds of many investors; they believe in developing new properties to achieve sustainable growth. Many panelists will discuss the challenges and opportunities that new development represent. Out-of-the-box thinking has also found its way into investors’ strategies, as some conventional financial wells remain dried up.

Ramping up the Global Property Market, participants will also get the lowdown on the Brexit aftermath, and how the changing European economy has created trends and opportunities in emerging markets such as India, Latin America and Asia. All this global information needs to be grounded in Canadian strategies at home and abroad, which is why the Global Property Market conference is such a good complement to The Real Estate Forum. This double-hitter will give attendees access to more than 95 well-known experts and practitioners from across Canada, senior executives from the United states, Asia and Europe and key investors from more than 40 real estate organizations. The Real Estate Forum will offer up the Canadian connection, showcasing the risks and opportunities for stakeholders across the country. Aside from factoring political and social landscapes, technological disrupters will also be examined that affect the marketplace – including how artificial intelligence, cyber security, e-Commerce and techno-savvy smart cities change market growth. With panel discussions and networking opportunities to speak one-on-one with experts, both events offer attendees a seat at the most sought-after tables in the industry. All you need to do is pull up a chair. ■

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2017-11-09

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! CREF WINTER 2017.qxp 2017-11-22 8:48 PM Page 6 East Bay

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San Francisco CBD

CONTENTs

3

? is The New Normal

7

24

Toronto

Bay Area

San Francisco CBD

1

Beyond Global Gateway Cities: how Far does the search Need to Go?

28 H

23% 33% 4%

38%

The Altus Report: Building Up Core strength: The Resurgence of the Downtowns

77

Latest Commercial Market statistics across Canada

81

The Five Big Trends in Commercial Real Estate

84

Commercial Property Tax Ratios surveyed; still Much Work to be Done

About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-to-the-minute information and highly specialized skills and services. Our ability to deliver high quality knowledge and services through multiple channels, in dynamic and rapidly changing environments, makes our offer unique and extremely valuable to individuals and organizations. www.informacanada.com

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Rick McConnell, President George Przybylowski, Vice President

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

© 2017 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

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Canadian Real Estate Forum / WINTER 2017


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12 Thank you to our sponsors 12 Focus on Demographics & Market Fundamentals 13 Going south has its Rewards: GTIs Active Investor in Brazil

10

GLOBAL PROPERTY MARKET

14 Digital Transformation Presents Ongoing Opportunities for Investment

Plan, Adapt and Real Estate Will do Just Fine

14 Opportunities Abound in Europe

38 NAFTA Remains Biggest Economic Wild Card 40 Jobs Key to Growth 41 Decade-long Expansion Nearing its End

36

CANADIAN REAL EsTATE FORUM Let's Add Talent to the Dialog

42 shifting Tides Bring Losses and Gains 46 Change: If You Can’t Beat It, Meet It head-On 48 Aging, Tech and E-commerce Reshape Real Estate Landscape 50 Positive ‘secondary’ Market Opportunities 52 More Tech start-Ups in the Real Estate space: Convergence of Two Industries an Emerging Opportunity 54 Metropolitan Growth Outstripping Infrastructure 55 Canadian Retail scrambling to Keep Up With Pace of Technology

www.realestateforums.com

18 Europe Adjusts to Low Interest Rates, Geopolitics, and Trump 18 Invest smart, Think Long Term 20 JLL Defines ‘The Geography of Innovation’ 22 Paying for Perfection Priced into Goldilocks Market

56 Government Interference Not Getting in the Way of Positive Forecast for 2018 58 Retail: Desperately seeking seamlessness 60 shopping Redefined 61 Urban Office space the Best Opportunity of 2018 65 Real Estate Not Immune to Transformation from Tech 66 Intelligence Key to Better, Faster Decision-Making 66 From B2B to B2C: Customer is King in Today’s Retail space 68 From Rising Minimum Wage To New Rent Control Legislations: Government Rules Adding Uncertainty to Real Estate Landscape 69 Quest for Quality to Boost Rents 70 smart systems: As Needs Change, Connected Buildings Must Follow

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Canadian Real Estate Forum / WINTER 2017


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PLAN, ADAPT AND REAL EsTATE WILL DO JUsT FINE Mario Morroni Executive Vice President Investment Strategy & Capital Allocation, Ivanhoé Cambridge

While the global real estate context is not drastically different from a year ago with high valuations, an abundance of capital seeking yield and markets approaching later phases of the cycle, in many ways it has changed. The last few years were characterized by generally slow economic growth in a low interest rate environment. Global transaction volumes, although still strong, have come off their highs of 2015 as investors pause to assess their options. This year, global economic growth, while not necessarily that much stronger, is certainly more widespread. Growth in China and India continue to lead the emerging countries, while the economic context has also been brighter than anticipated in Mexico and Brazil. In key developed markets, moderate and sound economic growth in Canada, the Us and certain European countries has led central banks to start tightening, as they consider raising interest rates or tapering quantitative easing put in place following the global financial crisis. Although we are certainly headed for a higher interest rate environment, if this tightening is done in a measured way and is in response to sustained economic growth, real-estate will do fine. A bigger concern may lie on the geo-political front with rising confrontational issues both within and amongst countries as populism and protectionism gain momentum globally.

Allison Wolfe Senior Vice President Finance, Strategy & Risk, Oxford Properties Group

for greater public transit access and robust amenities is driving a push toward well-located new product, as well as supporting demand for repositioned older stock in up-and-coming, urbanized locations with a “cool” factor. The technology sector continues to perform well, while ecommerce continues to drive demand for logistics space at the expense of retail space. Lastly, a search for yield in a low-interest rate environment is continuing to push investors to look to alternative property types, including storage, senior housing, data centres, etc. This forum’s objective is to present a diverse group of individuals that will provide good insights into the global real estate market, the environment and key trends that will be influencing the performance of real estate going forward. The global real estate landscape is vast and continues to grow as new markets and sectors evolve and mature, offering many exciting investment opportunities to the wise, informed and well prepared. It is true that to enhance returns one must take on more risk, yet more risk doesn’t necessarily lead to greater returns. To be successful in the current real-estate investment environment, global investors must have clear mandates to abide by, understand the markets and strategies they chose to pursue, have well thought out views and convictions and be able to act and react quickly to opportunities as they arise. Thinking globally while acting locally alongside strong like-minded strategic partners will be key to delivering attractive risk-adjusted returns. ■ Michelle Morra

Trends of how people, goods and technology interact with spaces and places are creating new opportunities. A desire www.realestateforums.com

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Thank You to Our Sponsors

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FOCUs ON DEMOGRAPhICs & MARKET FUNDAMENTALs

Matthew Lawton Executive Managing Director, Investment Advisory Platform Leader HFF As the nation’s economic growth cycle enters its eighth calendar year, the commercial real estate industry has encountered several challenging considerations. Chief among them is the balance of investing capital with perceived risks associated with valuation, timing and growth outlook. Regardless of one’s economic outlook there are many accretive drivers of commercial real estate property fundamentals, most notably demographics. 12

Late-cycle investing should focus on innate contributors to GDP growth, especially growth in population and wages. In an environment of “tight” labour pools and moderating employment expansion, landlords will outperform benchmarks when they fully evaluate and leverage household formation and expansion of disposable income. While these two metrics are highly correlated with multi-housing assets, they also can support retail properties. Multi-housing equity and debt availability remains very abundant, providing owners and investors with ample liquidity to capitalize newly delivered and existing communities. While transaction volumes have not kept pace with prior years’ velocity, valuations remain resilient, even as effective rent growth expectations moderate. As the 24-44 years old age cohort with the highest propensity to rent continues to form households and experience wage growth investors can expect property fundamentals to see growth in net operating income and valuations.

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In addition, retail has suffered from a significant level of warranted scrutiny. The protracted entry of e-commerce and the subsequent impact to brick-and-mortar retailers has resulted in the closure of many companies who cannot swiftly adapt to the rapidly shifting playing field for consumer goods. shopping centres that focus on daily needs (grocery, fitness, health) and experiential environments (entertainment, dining, arts) provide landlords with the most defensive strategies. Meanwhile, “retailers who can leverage dynamic soft goods vendors utilizing multi-channel sales will outperform “mom and pops”. Many opportunities exist still within the retail property niche, especially given the tendency for capital to focus on headline risk as opposed to underlying operating fundamentals. Investors focusing on markets with growth in retail employment that outpaces that of the nation, especially when cap rates are expanding, may unearth valuable long-term value opportunities. Additionally, markets with proven population and wage growth dynamics will outperform given their underpinning retail sales. ■ Matthew Lawton Canadian Real Estate Forum / WINTER 2017


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GOING sOUTh hAs ITs REWARDs: GTIs ACTIVE INVEsTOR IN BRAzIL

invest today. We watch for markets that are getting oversupplied because capital is flowing freely and a lot of stuff is getting overbuilt right now,” says shapiro.

“We’re pretty focused on industrial, but cautious on office and condo markets. We still like B-class multi-family storey, which is what most Americans can afford. We also like single home building and land development as we’re underproducing in the U.s. in those “We watch for markets that are areas and most investors don’t getting oversupplied because allocate to that capital is flowing freely and sector.”

“Rents drop between 30 and 50 per cent, so when you can buy at an eight or nine cap rate, it’s a good day. We have a big portfolio so we can see the demand - more so in sao Paulo instead of Rio. We’ve been actively buying as much as we can.” Tom shapiro President and Founder GTIS Mobile As one of the largest real estate private equity companies in Brazil, GTIs Mobile sees incredible investment opportunities in south America’s most populous country. “In Brazil, office and industrial markets are down by 20 to 30 per cent. The way lease law works is you get inflation indexing annually but you go to market every three years,” says Tom shapiro, President and Founder of the global real estate investment firm.

Although GTIs is headquartered in New York, it holds offices throughout the U.s., France, a lot of stuff is getting overbuilt Generally, shapiro Germany and Brazil. right now.” says, they tend to The firm pursues invest in existing opportunistic real properties that are institutionally owned. estate investments through direct equity investment and non-traditional lending “We try to look for deals where we can get activities and has committed capital to 20 per cent return on investment, so if you residential, retail, industrial, office, hotel and put in a dollar, you get 20 cents per year mixed-use projects throughout the Brazil back. If a property trades for 50, that could and the U.s. be $10. Obviously, trading a dollar for $10 is a good trade.” “Nine years into the economic recovery, we have to be sensitive to areas that are ■ Barbara Balfour overheating and be selective in how we

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DIGITAL TRANsFORMATION PREsENTs ONGOING OPPORTUNITIEs FOR INVEsTMENT assuming we don’t have any significant international event… but it’s a big test,” says Kanne. “My biggest fear is inflation, but I think we could have three to four more years of pretty Jeff Kanne President and CEO National Real Estate Advisors With more inflation in today’s economy than what meets the eye and continued instability at the helm of the Us government, Jeff Kanne’s outlook for the year ahead is uncertain at best. Fortunately, the economy is doing exceptionally well after having healed from the crash of 2007-2008, says the President and CEO of National Real Estate Advisors. “The pillars of our democracy are strong enough to withstand the next few years and ultimately thrive,

OPPORTUNITIEs ABOUND IN EUROPE

Jane Gavan Chief Executive Officer Dream Global REIT The folks at Dream Global REIT are bullish about Europe these days. In particular, they intend to dig deeper into the Netherlands, Germany, Belgium and Austria, “exceptionally strong” markets according to Chief Executive Officer Jane Gavan. 14

“The institutional investment world is finally understanding that data centres are appropriate for an institutional portfolio. Capital is quickly flowing into the space, thanks to a combination of higher return on costs than on other property types, plus unbridled demand.” “Data centres are a good investment for people willing to spend the time, energy and effort to understand them, but I don’t think it can be done on an asset by asset basis. To have one data centre is not a prudent way to

“We will see a leap forward that will create a lot of dislocation – retail being an obvious example - but also a lot of opportunities for new products and projects.” good growth as technology continues to embed itself in everything we do. We will see a leap forward that will create a lot of dislocation – retail being an obvious example of that - but also creating a lot of opportunities for new products and projects.” From the advent of autonomous cars, to the Internet of things and the continued growth of content distribution networks, the demand for digital space of all kinds is skyrocketing. As the world continues its relentless transformation towards digitization, the growth in data centres is particularly notable, says Kanne.

Gavan describes Germany as a very strong place for investment. It’s a market where, remarkably, vacancy continues to decline. “The macro environment is strong, with little supply, so everything points to a good year for office,” Gavan says. “I think you’re going to start to see rent tracking up, which in the German market hasn’t really happened for a long time.” As the big 10 German markets become expensive, investors are digging deeper into the secondary and tertiary markets. Gavan explains that what Canadians would call “secondary and tertiary” markets are quite different in Germany. “heidelberg or Mannheim might not necessarily be names everyone in Canada knows, but they’re very strong office markets,” she says. “We’re calling them secondary or even tertiary, but they have very strong occupancy, strong economic drivers, and people are recognizing that these markets provide really stable returns.” Dream Global REIT is equally excited about the Netherlands, which Gavan says is at an

approach the space; you would need broader exposure and to be invested with an operator who understands how data centres work and what you’re delivering to the customer.” Kanne is also optimistic about urban core mixed-use developments, with a preference for office retail, hotels and apartments in projects. “We would not want retail to be the dominant property type for us. “We see it as a necessary amenity for our users that can bring life to the project, but it produces very little if any net income.” ■ Barbara Balfour

interesting point in its economic cycle. The Dutch market, which was plagued by oversupply for many years, is poised for growth in 2018. “GDP growth in the Netherlands is stronger than in Germany, so in fact the macroeconomics are starting to work for the Netherlands,” Gavan says. “It feels like Germany felt six or seven years ago. They’re starting to see yield compression, vacancy declining, and very modest supply in that market.” Asked what challenges might lie ahead, Gavan echoes a sentiment that’s pervasive: concern over the political uncertainty that is “unsettling the world,” including the unknown impact of the current political situation in the Us. On a more micro level for office real estate, Gavan says there might be concerns about oversupply, but she doesn’t see it on the horizon. “It’s something we consider, but I’m not worried about it,” she says. “I’m worried about the thing I just can’t anticipate – some big macropolitical event.” ■ Michelle Morra Canadian Real Estate Forum / WINTER 2017


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Rays of sunshine amidst the Brexit clouds By Paul Crosbie, Fund manager, M&G Real Estate

Making any long-term decision requires an element of certainty or at least reassurance about the future for sound planning. Politics is surrounded by perpetual uncertainty, with an array of different drivers and incentives often confusing things. This is epitomized in the U.K. where there is renewed concern around the outlook for the economy, as Britain gradually negotiates its exit from the EU, a process due to be completed by June 2019. The EU has so far resisted any talk of a ‘post Brexit’ trade agreement, not least until Britain agrees to the settlement payment the EU has requested – currently standing at £100m. With some 53 trade treaties created over a period of 42 years up for renegotiation, it is clear that this is an extremely complex process to complete in a limited time frame. Ultimately, no one can really know what post-Brexit U.K. will look like. The consequent risk aversion amongst real estate investors has caused them to value the ‘safety’ of core assets, which provide a defensive income or clear growth potential. Yields for core assets have also been driven downwards by overseas buyers, partly attracted by the relative weakness of sterling. As investors shy away from perceived risk, the pricing for non-core assets has fallen. This divergence in pricing has created opportunities for active asset managers, who are able to capitalize on the value emerging from this mispricing of risk. From an occupier perspective, it is difficult for firms in the U.K. to make long-term decisions about expansion, growth and investment amidst such uncertainty. Therefore, we anticipate occupier demand in some sectors to ease moderately over the next two years. This could further

deepen the core/non-core divergence and provide opportunity to investors who can look through the current market noise. Taking a longer-term view, there remains relative stability in demand across most occupational markets and significant supply restrictions compared to long term averages. With less than 2% Grade A supply in both logistics and offices in the big six cities outside of London, this supports prospects for rental growth and creates the opportunity for upgrading lower grade space to meet demand. It is important to look through the disruption to appreciate underlying megatrends that are major structural drivers of consumption, growth and demand. For example, around 83% of the U.K.’s population lives in cities1 and densification is only set to increase. It has one of the highest rates of population density, or people per sq ft, amongst the

developed economies. 2 The scarcity of available land on which to build means that asset managers must become inventive in their design solutions. Retail and office accommodation can be enhanced through intensification or the addition of floors. Building up or out can therefore offer a solution to the limited space on offer. In the industrial sector, this will lead to the advent of the multi-storey, mixed use and even subterranean warehousing. Making the best use of space will be essential in a market where available land is limited. Adopting a truly mixed use approach can enhance the returns from an asset by integrating a higher value alternative. For example, the creation of ‘beds and sheds’ assets which combine industrial with residential uses. Technology is another structural driver of change that is both a disruptive force and a creator of opportunity. The continued

UK markets represent good value on an international basis 6 5

3 2

Spread

Prime Office Yield

Glasgow

Edinburgh

Bristol

Leeds

Manchester

Birmingham

London: City

Chicago

Munich

Tokyo

Seoul

Paris: CBD

Sydney

Madrid

Milan

San Francisco

New York

0

Hong Kong

1

Singapore

Yield (%)

4

Govt Bond Yield

Source: Property Market Analysis, GBY as at Autumn 2017. 1 EBS 2 OECD World Bank 2016

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Active Management in Action: St John’s Hill, Clapham Junction, London This mixed-use development, situated in an affluent area of Greater London, was originally arranged as a terrace of four retail units with storage space and poor-quality offices above. We initiated a progressive £6 million redevelopment program to reconfigure the retail units and convert the upper areas into 11 luxury apartments. As a result of the redevelopment, we achieved record rents on new lettings to a high street bank and national retailer on the ground floor, while the apartments are currently being sold individually. Crucially, the value of the asset rose from £11.6 million in December 2015 to £25.4 million in December 2016, representing a profit on cost of 42%. Our collective established skills at M&G Real Estate of planning, development management, leasing and residential sales combine to execute reconfiguration and refurbishment to improve asset quality and unlock value.

growth of e-commerce and consumer demand for goods ‘anywhere, anytime’ is impacting both the logistics and retail sector. The dense population of the U.K. and relatively short distance between conurbations means the U.K. already has some of the highest level of e-commerce penetration globally. Retailers are being forced to evolve to attract customers to their physical showroom stores, while also embracing an online presence. The need for logistics space to deliver goods at consumers’ convenience is boosting demand for urban logistics and hub and spoke schemes. The use of bots (robot pickers) within warehouses to cut down walking times and reduce operating costs is one element of the supply chain. However, the use of technology will revolutionize the whole supply chain, including the delivery of goods. For example, Ocado has trialed the delivery of goods using driverless trucks around a small area of London. Advances in artificial intelligence, machine vision, sensors, motors, hydraulics and materials will change the way products and services are delivered. The ever increasing demand for last mile delivery hubs drives appetite for in-town or edge of conurbation industrial estates, where active property

St John’s Hill, Clapham Junction, London (after refurbishment)

managers can increase income through refurbishment or repositioning alongside capitalizing on the strong prospects for rental growth. The use of mezzanine floors, advanced robotics and increasing racking automation could eventually lead to improvements in occupier productivity, enabling higher rents to be more affordable and therefore offering the potential for more rental appreciation. This is where active asset management can prove its mettle in enhancing a property’s capital value and rental growth potential through capital expenditure. When compared to previous technological revolutions, it’s clear the speed, scale and the impact will be exponentially greater. A simple example of this is that a smart phone is some 250 times faster than the computer that guided the Apollo space craft to the moon! As real estate investors we must be able to respond to and understand such developments and what their impact may be on the built environment, as this helps to inform asset management decisions. Urbanization is a key structural trend that is unlikely to reverse as the economy grows and neither will the pace of technological

development. This is in contrast to the occupier and investment market where appetite changes upon sentiment. It is widely considered that the Central London office market is the most vulnerable to the impact of Brexit. However, recent Q3 figures from CBRE evidence take-up in Central London increased by 3% to 3.4m sq ft, 10% above the 10-year average. Turning to investment volumes, deals in the third quarter took the year to date total to £13bn, on par with the total for the whole of 2016. Such high transaction levels have been driven by international investors, representing 94% of investment volume. This demonstrates that London remains a global business hub and that investors still have faith in the U.K. It exemplifies a confidence that, we believe, will materialize over the longer term when risk perception returns to more ‘normal’ levels and the divergence of pricing between core and non-core assets tightens. As active asset managers, we are able to capitalize on where we can add value through redevelopment or repositioning, taking advantage of the clouds so that we can deliver returns for clients come rain or shine.

For more information, please contact Paul Crosbie, Fund Manager, M&G Real Estate +44 (0)20 7548 6614 – paul.crosbie@mandg.com This article presents the author’s 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.

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EUROPE ADJUsTs TO LOW INTEREsT RATEs, GEOPOLITICs, AND TRUMP capital, predominantly from German investors, into secondary markets as well as into the logistics sector.

Brad Olsen President Atlantic Partners, Ltd. Low interest rates are spurring renewed activity in European real estate in spite of geopolitical uncertainty. Brad Olsen, President, Atlantic Partners, Ltd. says, “The attitude in Europe right now relative to real estate is as positive as I’ve ever seen it.” Germany has seen a dramatic shift in yields. “Prime core yields across Germany in the major cities have dropped dramatically,” Olsen says. “My favourite example is Munich, where I think now prime office yields would be in the low 2s. That is down probably 100 basis points in the last 18 months.” Olsen says the drop is a reflection of the flow of

INVEsT sMART, ThINK LONG TERM

Lisa Lafave Senior Portfolio Manager Healthcare of Ontario Pension Plan In major cities across the globe there is a housing affordability issue as well as a housing shortage. That’s currently a focus for Lisa Lafave, senior Portfolio Manager, healthcare of Ontario Pension Plan. “so I think there’s opportunity in the residential 18

Yields in the Dutch market have been higher than in Germany, which has attracted investors in the residential sector. Olsen explains that unlike Germany, which tightened rent control after the grand coalition, the Netherlands essentially have a free market rental contract. “There’s no rent control as long as rent is above 700 euros,” he says – a more attractive prospect for investors. As for the UK, given the uncertainty relative to Brexit, Olsen says, “People talk about potentially 20 per cent corrections in central London, but I think everybody acknowledges that we don’t know yet what the impact of Brexit is… and that we won’t know the answer for probably years rather than months.” Olsen adds that the Nordic countries, meanwhile, continue to be very strong in general, thanks to both domestic capital and German institutional investors. spain, he says, “has become amazingly almost a core market again,” which surprises and even concerns him because the market is still volatile, especially since the Catalonia

referendum. Politics also contribute to uncertainty in Italy, a market that “remains a question mark for a lot of people,” Olsen says, despite the significant net family wealth in its cities. Geopolitics are on investors’ minds, not only in Europe but globally. The Us has seen a slower flow of capital from German investors, according to Olsen – and not only because they are leery of the Us President and what he might do next. “Multiple investors have talked to me about the pricing of currency, the fact that the dollar is expensive; and for those investors who have to hedge, the hedging costs of coming to the Us are quite high,” he says. “I think that maybe the hedging costs⁄currency issue is more relevant to keeping money out of the Us from Germany than Donald Trump… though the two may be related.” Asked what European investors are saying about interest rates, Olsen says some predict that with growth in the EU, rates will not stay low as long as previously thought. “But the flipside of that,” he says, “is a pretty consistent view among northern Europeans that the European Central Bank is not as likely to raise interest rates as early as the economy might dictate or suggest, simply because higher interest rates would essentially bankrupt southern European countries.” ■ Michelle Morra

space, particularly on rental properties,” she says. Asked about other opportunities on the horizon, she says, “Certainly in the logistics sector we’re seeing some structural changes with ecommerce growth, so I still see some continued growth in that sector, and rental growth, particularly in new builds.”

investors who say they’re pursuing secondary and tertiary markets rather than A-class markets which, particularly in Europe, are getting very expensive. “We don’t pursue core, because of the pricing. We’ll try to find a value-add strategy to end up with a core asset at the end of the day,” she says. “That’s how we approach it.”

Office, however, is an ongoing concern because “there are structural changes going on there,” Lafave says. “You have to be very careful of who you’re designing it for and where.” As for retail, uncertainty rules the day. In fact in many cases, Lafave believes the best route for a retail space today is a value-add strategy “were you get in and out – fix it and sell it.”

Lafave is as concerned as anyone about political uncertainty – what will happen next and how to adapt. But she says investors need to get past that uncertainty and think long term. “You’ve got to think about what you want to have in your portfolio long term and the markets you want to be in for diversification, or excess returns,” she says. “The impact really is mostly on the existing assets. Maybe because of political uncertainty you’re not able to lease them as quickly as you thought, but as a long term, patient investor, you should just be able to hold through the period.”

The markets of choice today for healthcare of Ontario Pension Plan are more international and less domestic. “Right now it’s primarily northern Europe, and we also have a push on in the U.s. as well,” Lafave says. she echoes the sentiment of other

■ Michelle Morra Canadian Real Estate Forum / WINTER 2017


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and shanghai, have become attractive locations for small to medium business interests with big ambitions. As many cities are already actively working to attract new business development, Feenan mentioned how they are beginning to work on assorted financial packages that could include tax credits along with a special consideration for available space, decent (read affordable) housing, and good local education for families with children. As the new economy indicates that the late Jane Jacobs was right when she predicted that cities would eventually become the (economic) locomotives of the new century, Feenan also believes that cities must provide a decent quality of life along with competitive and efficient services if they intend to attract any kind of serious commercial investment. Aside from offering potential investors affordable housing, safe streets, and a decent quality of life, Feenan also mentioned that cities must work on their ‘brand’ if they wish to set themselves apart, and possibly ahead of the rest of the world’s contenders for business investment. “Cities will be looking carefully at what their own innovation geography looks like in order to (attract) the right kind of company for the right kind of real estate,” she said. “ …and that real estate will be in a new place because the whole point of “Cities will be looking the innovation geography is that it’s usually located in carefully at what their new places that were own innovation never on the developer’s – geography looks like in or the investor’s – radar.”

JLL DEFINEs ‘ThE GEOGRAPhY OF INNOVATION’

Rosemary Feenan Head of Global Research Programs JLL

As the new century is already well into its second decade, JLL Director Rosemary Feenan said that a successful city must order to (attract) the right adapt itself to the needs Although confident that the kind of company for the ‘geography of innovation’ of its innovators if it plans to mount an effective right kind of real estate.” will soon provide potential campaign to attract the investors with multiple investment it needs to development opportunities survive and prosper over the next few in cities around the planet, Feenan also decades. mentioned that scarce assets such as affordable housing, reliable infrastructure “The new commercial geography of and decent public transport can have as opportunity, …is the geography of much a negative effect on a potential innovation.” said Feenan. business environment as could the live and local politics that can easily ruin a city’s While the ‘Big seven’ – including London, chance to attract the kind of investment it New York, hong Kong, Tokyo and needs to make it through the rest of this singapore – are bound to maintain their century. place for some time, Feenan believes that other cities, such as Amsterdam, Toronto

20

■ P.A.Sévigny Canadian Real Estate Forum / WINTER 2017


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PAYING FOR PERFECTION PRICED INTO GOLDILOCKs MARKET

Jacques Gordon Global Strategist LaSalle Investment Management.

The economic forecast for 2018 looks good. Very good, predicted Jacques Gordon, Global strategist, Lasalle Investment Management. “The G20 rich countries are doing very well,” he reported. “half are beating their forecast, with only one ledger, the United Kingdom.” The growth stems from two main inputs: Investor and consumer confidence levels that haven’t been seen since 2007, and continued credit expansion. “That’s also on the leger of concerns,” Gordon said of the latter, “but the expansion of low-cost credit has boosted the economies of most countries we cover. Germany, France, spain, Japan, Australia, the United 22

states and Canada are all ahead where economists through they would be in 2017, and their momentum heading into 2018 looks excellent.” The problem is that the market has already factored the predicted growth into prices. That leaves investors with a dilemma.

“In most markets, you’re paying for almost perfection, which is to say that the benign Goldilocks economic outlook is already included in the price.”

“In most markets, you’re paying for almost perfection, which is to say that that benign Goldilocks economic outlook is already included in the price,” he observed.

next three years there’s a good chance that geopolitics, monetary policy or a systemic financial crisis could upend capital markets.”

The coming year is not without risks for real estate investors, Gordon added, as geopolitical factors could come into play. Although those tend to be localized, in terms of their impact on property markets, tensions could escalate into a flight to safety, which would affect markets elsewhere.

The recent rise of shadow banking by unsupervised, unregulated lenders poses another, less-publicized risk.

"Besides North Korea, sophisticated weapons have fallen into the hands of lots of rogue groups,” he said, “and states as large as Iran, Russia and Turkey are under dictatorial control, which makes them unpredictable." Capital markets which are posting record highs across most asset classes also pose a risk. “some countries’ equity markets are 40% above a decade ago. Bond markets are up 30-40%. There’s a bull market in everything, as The Economist put it,” Gordon cautioned. “Debt levels re very high across several sectors. In the United states, it’s household debt. In China it’s state-owned enterprises and – like in Japan – government debt. The European Central Bank’s quantitative easing is still going in full force.” “Will that lead to tighter and costlier credit and hit property values in 2018?” he mused. “I don’t think so. But some time during the

“That’s a potential source of instability down the road,” Gordon warned. There’s another danger if the United states or China opt to overheat their economy with massive fiscal stimuli that drive grow up unsustainably, setting the stage for inflationary boom-and-bust that would force central banks to slam on their monetary brakes. “Trump administration talk about shooting for 4% growth is way above the United states economy’s natural growth rate,” he noted. “I’m not as worried that would happen in Europe or Canada.” NAFTA uncertainty also remains on the worry list. Were the United states to abrogate the treaty, Mexico, which relies on American trade for a bigger slice of its GDP, would be hardest hit by deep recession. “Canada can find other people who want its natural resources,” Gordon reassured. “It’s a very open economy with great trade relations and wouldn’t suffer much at all.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2017


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BEYOND GLOBAL GATEWAY CITIEs: hOW FAR DOEs ThE sEARCh NEED TO GO? By Amit R Nihalani, CFA Vice President, Research MSCI

It is increasingly common for institutional investors to think about cities rather than countries when formulating their real estate capital allocation strategies. Typically, their attention has focused on “Global Gateway Cities,” where stronger economic growth and demographic trends have been identified, even those locations where wider national market trends may be much weaker. Within these cities, investors tend to concentrate their search for attractive property investments on established Central Business Districts (CBDs), where they believe the most favorable supply/demand dynamics will generate superior investment returns and operating performance. however, more than eight years into the current real estate cycle, finding attractive opportunities

within such gateway CBDs has become challenging, as abundant capital flowing in from many competing sources has driven yields to record lows. so investors who have previously focused on class A offices in these CBDs are starting to question whether to expand their investment horizons to include more secondary markets, which often provide higher initial income returns. Often, such a move would mean examining unfamiliar secondary cities, either domestically or internationally, with all the extra research and operational costs entering new territory can involve. But can extra value be found closer to home? Global Gateways are often the largest cities. Their CBDs, which have been of such interest to global investors, often sit within extensive urban agglomerations that offer a broad range of real estate investment opportunities beyond the super-prime class A offices of the CBD. Understanding how the performance of such markets varies, not only between cities but also within cities, requires the ability to interrogate market data in a highly granular and flexible way. As an example of this kind of approach, this article takes a close look at the san Francisco Bay Area, examining market dynamics across this particular urban agglomeration and comparing them to other

cities. san Francisco is an interesting case as it has a relatively compact CBD that sits within a broad urban conurbation – the san Francisco Bay Area. This conurbation contains several large office submarkets including san Francisco CBD, san Mateo and santa Clara counties (silicon Valley), and the East Bay. Each of these office districts has historically been dominated by different industries and demographics, confined to their distinct geographic boundaries. To gain some perspective on today’s real estate investment landscape, we begin by taking a look at recent income returns (June 2017) for the Bay Area relative to a number of other global cities: New York, Toronto, London, hong Kong and sydney. Top tier global gateway markets such as New York, London and hong Kong have relatively low current income returns below 4%. san Francisco CBD is not far ahead, with an income return of just over 4%. While other global cities such as Toronto and sydney offer higher income returns, features of international markets including changing interest rate environments and currency fluctuations may explain some of these differences. segmenting the broader Bay Area office market in more detail illustrates the performance characteristics of each local submarket and allows us to make consistent comparisons with global market alternatives. Both East Bay and silicon Valley offer substantially higher income returns than the san Francisco CBD. however, it is obvious

CHART 1 Current Income Returns for Selected Markets as of June 2017 source: MsCI

6.3% 5.8 5.3 4.8 4.3 3.8 3.3

24

Bay Area

East Bay

Silicon Valley

CBD SF

Manhattan Toronto

London

Hong Kong

Sydney

Canadian Real Estate Forum / WINTER 2017

C


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to any investor that current income return does not tell the whole story of value. Variations in yields often reflect varying growth potential and/or risk, which feed into the level and volatility of total returns. how do these trends vary across the Bay Area? In the exhibit below, total returns are illustrated for each market from 2007 to 2017. The most striking aspect of the chart is the high level of correlation between the submarkets. While the level and volatility of the time series vary somewhat, they all exhibit similar cyclical turning points. Although silicon Valley recorded the most

volatile total returns, with the greatest variation between peak and trough, it also provided the highest average return over this period. In contrast, East Bay registered the lowest average return but also lower volatility. The san Francisco CBD lies in the middle of the range and is close to the Bay Area average; not surprisingly, given that this is where the bulk of the investments in the sample are located. On the face of it, this seems to show a typical trade-off between higher risk/ higher return in silicon Valley and lower risk/lower return in East Bay. But linking income return and total return gives us a better understanding of the nature of performance across the broad Bay Area market. The

chart below shows the tradeoff between total return and income return for each of the Bay Area office submarkets during our analysis period. While East Bay outperformed san Francisco CBD on income return by 120bps, this was not sufficient to compensate for a lack of capital growth, meaning that san Francisco CBD outperformed by a wide margin on total return. however, silicon Valley strongly outperformed the CBD on both an income return and total return basis. higher income returns did not come at the expense of lower growth.

Jun 2017

Jan 2017

Aug 2016

May 2016

Oct 2015

May 2015

Jul 2014

Dec 2014

Feb 2014

Sep 2013

Apr 2013

Nov 2012

Jun 2012

Jan 2010

Aug 2011

Mar 2011

Oct 2010

May 2010

Dec 2009

Jul 2009

Feb 2009

Sep 2008

Apr 2008

Nov 2007

2007-2017 INCOME Return

Jun 2007

It can often be worthwhile for investors to look beyond the CBD, as this may reveal markets that have so far attracted less interest and thus provide new investment opportunities. In our CHART 2 Bay Area Total Returns Since 2007 investigation of the Bay source: MsCI Area, we were able to 40 flexibly dissect the broader urban office 30 market and understand 20 the performance characteristics of 10 submarkets beyond the 0 traditional CBD. similar kinds of analysis can -10 be conducted across a -20 multitude of cities San Francisco CBD -30 globally, at multiple levels of segmentation, -40 even down to the granularity of postcode level. In an increasingly competitive investment Bay Area East Bay Silicon Valley San Francisco CBD landscape, the search for value is becoming CHART 3 Total Annualized Returns and Income Return for Bay Area Office Markets more difficult by the source: MsCI day. The ability to 7% interrogate market data flexibly and consistently Sydney can now allow apples-to-apples Silicon Valley comparisons across 6% East Bay global, national or even Toronto neighborhood markets, providing investors with the tools to uncover Bay Area value where few others 5% may be looking. â– San Francisco CBD

Manhattan

London Hong Kong

4% 5% 26

7%

9% 2007-2017 TOTAL Return

11%

13% Canadian Real Estate Forum / WINTER 2017


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ThE ALTUs REPORT BUILDING UP CORE sTRENGTh: ThE REsURGENCE OF ThE DOWNTOWNs

By Patricia Arsenault Executive Vice President Research Consulting Services Data Solutions Altus Analytics, Altus Group

Millennials Reviving the Downtown The recent 2016 Census of Canada results “officially” confirmed what many already knew to be the case – that the downtown area of the Greater Toronto Area has enjoyed a resurgence of population in recent years. The area within the former City of Toronto boundaries added 67,000 residents in the mid 2011 to mid 2016 period (Chart 1), up from the addition of 51,000 people in the 2006-2011 period and the 2001-2006 period when the population in the former City of Toronto was at a virtual standstill. Not only was the level of population growth up, but the former City of Toronto also accounted for a larger share of GTA-wide growth (18% in 2011-2016 vs. 10% in the preceding 5 years).

By Raymond Wong Vice President, Data Operations Data Solutions Altus Analytics, Altus Group

CHART 1 Population Growth Patterns Greater Toronto Area • source: Altus Group based on Census of Canada data

GTA Total Population Growth (000s) 600 474 453 500

400 300 200 100 0

23

Former City of Toronto

498 363

3

1996-2001

2001-2006

Growth in Population Aged 20-34 (000s) 125 100 75 44 43 50 4 25 0 -25 -5 -7 -50 1996-2001 2001-2006

67

51 2006-2011

2011-2016

103

96

33

28

2006-2011

2011-2016

CHART 2 Population Growth Patterns Vancouver Market Area • source: Altus Group based on Census of Canada data

Vancouver CMA

Total Population Growth (000s)

250 200 150 100 50 0

City of Vancouver

197

1 155

150

130 32

32 1996-2001

2001-2006

28

25 2006-2011

2011-2016

Growth in Population Aged 20-34 (000s)

100 75 50 25 0 -25 28

64 4 -2 -13 1996-2001 -

0

2001-2006

9

2006-2011

28

In this issue of the The Altus Report, we examine the performance of the downtown areas of Toronto and Vancouver within the broader market area.

The thrust of the recent growth came from population in the 20-34 age groups (what are commonly referred to as “millennials” are currently in this age group). Over the 10 year period from mid 1996 to mid 2006, the former City of Toronto saw a decline in population aged 20-34 – despite the fact that this age group had been growing GTA-wide. In the last 10 years, however, the 20-34 year age segment has been growing again, and the former City of Toronto is capturing “more than its fair share” of this growth. In the Vancouver area, the situation has been a bit different over the past 20 years. Total population growth in the City of Vancouver has been relatively steady, despite fluctuations at the broader market level (Chart 2). What has changed is that now more of the growth is coming from those aged 20-34. The City of Vancouver increased its share of Vancouver Census Metropolitan Area (CMA) population growth to 19% in 2011-2016 from 13% in 2006-2011 – with over 40% of the growth in 2011-2016 coming from population aged 20-34 years.

12

2011-2016 Canadian Real Estate Forum / WINTER 2017


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But Not All Millennials Want to Live Downtown Being deep in the downtown action certainly appears to have appeal for many millennials, which is a factor in the recent resurgence in population in the central areas. On our recent FIRM survey, Altus Group asked about preferences for smaller homes in a downtown location vs. larger homes in the suburbs (Chart 3). Many millennials in both the Toronto and Vancouver markets expressed the preference (“agreed completely or somewhat”) for a smaller home in a downtown location and in general were somewhat more so inclined than respondents in general. But not all millennials want to live downtown. In the GTA, for example, there were more respondents under 35 years that disagreed than agreed with preferring downtown living. This reinforces the often forgotten fact that millennials, like generations before them, are not “one size fits all” – they have a range of behaviours, attitudes and desires that need to be taken into account.

CHART 3 Assuming Similar Housing Costs, Preference Would Be to Live in Condo or Rental Apartment in Downtown Area Rather than Single-family Home in the Suburbs source: Altus Group

All Respondents

Greater Toronto Area

Respondents <35 Years

40% 30% 20% 10% 0%

Agree completely

Agree somewhat

Neither agree nor disagree

Disagree somewhat

Disagree completely

Agree somewhat

Neither agree nor disagree

Disagree somewhat

Disagree completely

More People=Need for More Housing Of course the additional population in the downtown area couldn’t have occurred without building more places to live. The relationship between population growth and new home development in the downtown area of Toronto has been a bit of a chicken and egg story. Increased availability of condominium apartment product in the downtown area – spurred in part by intensification policies – provided more housing options. At the same time, there was renewed interest by a segment of the population in living in more central locations. The downtown area of Toronto accounted for about one-fifth of total (single-family and apartment) new homes sales in the GTA in the past 10 years, double its share of the early 2000s (Chart 4). The majority of this activity has been condominium apartments, the better part of are investor owned units which are providing needed rental options for the growing younger population. Note that as the size of the downtown areas varies between the Greater Toronto Area and the Vancouver Market Area, comparisons should not be made between the two markets in the shares captured by the downtown areas.

Vancouver Market Area 40%

30% 20% 10% 0%

Agree completely

CHART 4 Total New Home Sales source: Altus Group • *Data not available prior to 2007

2002-2006

2007-2011

2012-2016

% of Greater Toronto Area

27%

30%

18%

20% 10% 0%

Former City of Toronto

Downtown Toronto

% of Vancouver Market Area*

30%

25%

20%

6%

10% 0%

30

City of Vancouver

Downtown Vancouver Canadian Real Estate Forum / WINTER 2017


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CHART 5 Downtown Toronto Office Space Downtown as % of Total Greater Toronto Area • source: Altus Group

47%

47%

Net New Space Added 2007-2011

Net New Space Added 2012-2016

50% 40% 30% 20%

13%

10% 0%

Net New Space Added 2002-2006

100%

83%

80% 60%

53%

42%

40% 20% 0%

Total Inventory Mid 2017

U/C Mid 2017

Pre-leasing Mid 2017

CHART 6 Downtown Vancouver Office Space

Downtown as % of Total Vancouver Market Area • source: Altus Group

45%

50%

37%

40% 30%

15%

20% 10% 0%

Net New Space Added 2002-2006 2

Net New Space Added 2007-2011

Net New Space Added 2012-2016

100%

81%

80% 60% 40%

45%

43%

Total Inventory Mid 2017

U/C Mid 2017

4

20% 0%

Pre-leasing Mid 2017

CHART 7 Office Vacancy Rates

Downtown Compared to Total Market • source: Altus Group

Mid 2006

Greater Toronto Area

Mid 2011

Mid 2016

Mid 2017

10%

7.2%

8% 6%

3.3%

4% 2% 0%

Downtown

Total Market

Vancouver Market Area

10% 8% 6% 4% 2% 0% 32

7.5%

The Downtown Population and Housing Spurt Has Gone Hand in Hand with More Office Space Development There has been a lot of synergy between population growth in the downtown areas and new office space development – linking more potential job opportunities to more residents. Almost half of the almost 20 million sq. ft. of net new office space added in the GTA in the past 10 years has been in the downtown office district (Chart 5) – this compares to a meagre 13% share in the early 2000s. Based on space currently under construction and pre-leasing, the downtown area will continue to capture more than its fair share (based on its current share of total inventory) of new space built. This signals the potential for more job opportunities in the downtown area in future – keeping the interaction between jobs, population and housing going strong. More recently, Vancouver has also seen an increased share of new office development occurring in the downtown district, although in its case it was still losing ground to the suburbs (Chart 6). Based on new office space currently under construction and in pre-leasing, however, the downtown share could still be on the rise. Office Leasing Market Performance Has Been Stronger in the Downtown Areas The significant office development in the downtown area of Toronto has not been an overbuilding situation – quite the opposite. strong demand for office space in the downtown area has triggered a dramatic decline in the office vacancy rate over the past 10 years. Currently, the downtown Toronto office vacancy rate is in the previously unheard of 3% range (Chart 7) – less than half that of the overall GTA office market. In Vancouver, the increase in office space in the downtown office market in recent years exceeded underlying demand for a time, causing a bump up in the vacancy rate. But with strong demand and less supply now being added, that is no longer the case and the vacancy rate is heading down again – to the 5% range, well below the overall Vancouver market area.

5.1%

Downtown

Total Market Canadian Real Estate Forum / WINTER 2017


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CHART 8 Property Investment Volumes

Investors Also Looking for Existing Assets in Downtown Areas The interest in the downtown is not just about development – the downtown areas are also capturing a larger share of investment in existing improved assets (Chart 8). The former City of Toronto accounted for one-third of the value of non-land assets traded in the GTA in the past 5 years – up from a one-quarter share in the early 2000s. The City of Vancouver has also regained some lost share of the overall Vancouver market in recent years.

• source: Altus Group

2002-2006 2007-2011 Former City of Toronto as % of Greater Toronto Area

2012-2016

50% 40%

33%

26%

30% 20% 10% 0%

Non-Land/Improved Assets

Land Assets

City of Vancouver as % of Vancouver Market Area

44% 4

50% 40%

Looking Ahead Altus Group now regularly tracks development applications within the City of Toronto and City of Vancouver. Based on applications from the 2016 to mid 2017 period, the attraction of the downtown areas for developers and investors continues. Within these two municipalities, the downtown areas in general account for the majority of planned development of new housing, retail space and office space.

30%

30% 20% 10% 0%

Non-Land/Improved Assets

Land Assets

CHART 9 Planned Space in Recent Development Applications source: Altus Group

Former City of Toronto as % of City of Toronto 100% 65% 75% 54% 5 50%

89% 63%

25% 0%

Condominium Apartments

Purpose-Built Rental Apartments

Office Space

Retail Space

Downtown Vancouver as % of City of Vancouver

100%

Much of the planned retail space in the former City of Toronto is podium space in condominiums and office buildings – putting it close to the everyday lives of the new residents and new office workers (Chart 10). In downtown Vancouver, the majority of planned retail space is in mixed use projects (primarily mixed office and retail uses). ■

80%

75% 50% 25% 0%

59%

51%

34% 3 Condominium Apartments

Purpose-Built Rental Apartments

Office Space

Retail Space

CHART 10 Retail Space in Recent Development Applications % by Type of Project • source: Altus Group

Former City of Toronto

Downtown Vancouver In Condo Apartments Buildings

1%

In Purpose-built Rental Buildings

23% 33%

5%

In Office Buildings

4%

38%

5%

In Mixed Use Projects Other

34

14%

76%

Canadian Real Estate Forum / WINTER 2017


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36

Canadian Real Estate Forum / WINTER 2017


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LET’s ADD TALENT TO ThE DIALOG

Toni Rossi President, Real Estate Infrastructure Ontario

Daniel Fournier Chairman & CEO Ivanhoé Cambridge

Our outlook for 2018 is that it will be strong. We are looking closely at growth opportunities across various sectors in emerging markets and in Europe. Globally, we foresee promising opportunities in logistics as well as in the residential sector. Product will still be limited, so it would be great to unlock some government lands, either through an infrastructure opportunity, such as transit or affordable housing, or through the sale of some pretty prime lands that can then be repurposed and unlocked for development. Real estate transactions today, let’s face it, largely consist of product just changing hands, so unlocking government lands could be a new way to get new product on the market. The best opportunities remain in urban locations, especially anything in and around infrastructure spend. We expect to see more and more foreign money coming in to build and to finance most of the developments that are occurring in Canada. The big five companies here will continue to be active, but there will likely also be strong interest globally in Canada’s large urban centres. This includes Calgary – a market that is depressed right now and therefore the best place for foreign money to be spending. This industry has enjoyed such a great few years. how do we continue to see sustained returns? Where will the growth www.realestateforums.com

come from, and in which asset class? We can expect yields to be lower in the years to come. In this context, working in real estate will not just be about chasing the next great investment opportunity. We must also be thoughtful about how we will be protecting the substantial values gained over the last seven years. We encourage participants at our Forum to see our future as bright, inclusive and diverse. And while much of this event will focus on the investment perspective – buying and selling – we encourage participants to ponder the issue of talent because, aside from technology and all of the other market forces in the economy, this industry is really made of people. so here’s to planting the seeds for future dialogue about how to keep on attracting and retaining the best talent to make our industry grow. Demographics will change in the next few years. Where will those great people come from? And speaking of people, we look forward to hearing industry leaders share what they experience, so that we all walk away from our Forum with concrete, real-world perspectives, not just textbook concepts. Above all, we trust that Forum participants will gain great insight into how industry leaders themselves see value creation in the next few years. We wish you a productive and enlightening experience. ■ Michelle Morra 37


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NAFTA REMAINs BIGGEsT ECONOMIC WILD CARD

Benjamin Tal Deputy Chief Economist CIBC World Markets Inc. While 2017 was good to Canada, the country generated most of its 3% GDP growth during the first half of the year. significant slowing since the second quarter will likely continue in 2018, forecast Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. “We’re talking about growth from 2-2.5%,” he predicted. The economic easing will likely lead the Bank of Canada to proceed cautiously before tightening monetary policy, despite a very mature economic expansion cycle.

“We still don’t see any significant wage inflation, the Canadian dollar remains a little pricey and many sectors of the economy remain sensitive to higher interest rates,” Tal noted. “Then you have tremendous uncertainty about the future of NAFTA. Clearly that’s the big story – one which the market has not really priced in.” Were NAFTA talks to fail, it would likely be over its dispute settlement mechanism, which President Donald Trump wants to remove. That would be a deal-breaker for Canada. It’s unlikely to happen overnight. If Congress demurs, the withdrawal could be tied up for years in the United states supreme Court. so, if NAFTA ends, what’s next? “Even were Congress to agree, there’s a six-month notice period before anything happens,” Tal explained. “If we revert to 2-3%, World Trade Organization (WTO) tariffs, Canada can still do well. however, under WTO, the countries can target tariffs at specific industries.” While a separate, bilateral trade pact, similar to the Canada-United states Free Trade

Agreement that the two countries signed in 1988, is another possibility, the uncertainty has already eroded investor confidence. “Two-thirds of Canadian small businesses telling us that NAFTA has already affected their decisions,” Tal reported. “That is not positive for the overall macroeconomic trajectory during the coming year. Manufacturing would hit Ontario and Quebec, though British Columbia might outperform because it relies much more on China than on the United states.” One bright light for the real estate industry is that long-term market fundamentals indicate that the housing look relatively strong. “Not only is immigration increasing to 300,000 from 250,000 a year,” Tal observed, “we’re also seeing an increase in another, typically understated source of housing demand: non-permanent residents.” “There’s also significant pent-up demand due to a dramatic increase in the number of people aged 20-35 who still live with their parents,” he concluded. “That puts a floor under housing prices because decreases will unleash that demand.” ■ Robert Frank

38

Canadian Real Estate Forum / WINTER 2017


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“Job growth is the fuel behind most real estate asset classes,” he said. Love chose to single out Quebec and highlight the tough choices that it has made recently in order to reorient its fiscal priorities. The provincial government braved considerable public backlash to undertake austerity measures which have ultimately enabled the province to achieve a balanced budget this year.

“The pace of change is accelerating,” Love observed. “Real estate industry leaders today are, by nature, creative and adaptive. That is true of the industry throughout the entire spectrum: They have already shown a tremendous ability to accommodate significant shifts with great imagination and leadership.”

Jon Love Chief Executive Officer KingSett Capital

“They’re now making thoughtful and tactical tax cuts as well as undertaking other measure to encourage job growth,” he commended. “That’s leadership.”

he said that he is confident that these qualities will enable the industry to rise to meet the challenges that are emerging over the horizon.

Putting people to work productively is the best way to for Canada to build a sustainable economy suggested Jon Love, the Chief Executive Officer of Kingsett Capital. he outlined how the prospects for the real estate industry are closely tied to how well governments apply public policy toward fostering employment.

Elsewhere in the country, both at the federal level and in other provinces, efforts to address fiscal imbalance and bolstering job growth are not prioritized to the same degree.

Love said that they will have to be even more creative and adaptive in future, in order to identify and take advantage of the opportunities that will present themselves.

“That, of course, is a concern,” Love said. “The federal government is prioritizing social issues which need to be addressed – but not to the exclusion of fiscal concerns or creating jobs.”

“Leaders will all respond to that with different strategies, which is exactly what one would want,” he concluded. “Everyone will interpret the external stimuli differently – and that’s what makes for an effective market.”

The downstream effects of inattention to

■ Robert Frank

40

employment issues could create an “interesting” real estate market in coming years, he added.

Canadian Real Estate Forum / WINTER 2017


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DECADE-LONG ExPANsION NEARING ITs END

David Rosenberg Chief Economist and Strategist Gluskin Sheff + Associates All good cycles must come to an end, which includes long growth cycle that the world economy has enjoyed since 2009. “All the work that I’ve done tells me that we’re 90 percent through the current United states economic cycle,” said David Rosenberg, Chief Economist and strategist,

Gluskin sheff + Associates. “We have one year left in the tank, so enjoy it. This time next year, we’ll be talking about the next downward cycle.” Although global economic growth currently remains in sync, the International Monetary Fund has signaled that, for the first time in the current expansion cycle, different parts of the world are positioned at different stages of their expansion phase. “Emerging markets – Japan and parts of Europe – are more in mid-cycle rather than late-cycle,” he said, and advocated distributing risk globally. “My theme is go east or go west – but just go.” A shifting political landscape will drive a great deal of the economic shifts that Rosenberg forecasts that the world will see in 2018. “We will be having mid-term elections in the United states Congress, where the odds are very high that the Democratic party will take the house of Representatives,” he said. “With populism once again rising in Europe, we will next see now that plays out in elections in Italy which will take place by May.” East Asia also face the prospect of shifts

that are not predicated on politics-as usual, Rosenberg added. “2018 will be the first year of the new plenary in the People’s Republic of China, in which President xi Jinping sees himself as solidifying his power base and gaining ore dominance in the south China sea and southeast Asia,” he observed. “That might be coupled with a new and more militaristic Japan. Until now, we’ve only known Japan as a pacifist power, not a military power, though that is its history. Now that Prime Minister shinzō Abe has solidified his power base, wants to amend the Japanese constitution to permit it.” Rosenberg also expects to see an end to the longstanding predictability of currency, bond and stock markets that have enjoyed significant central bank support during the past decade. “We will be into quantitative tightening in the United states in 2018 and will likely witness interest rate hikes in the United Kingdom and tapering at the European Central Bank as well,” he predicted. “Longstanding ultralow volatility will likely be affected materially during the coming year.” ■ Robert Frank

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“With institutional investors now starting to focus on Montreal because they’re sort of out of favour with Alberta, and the increasingly strong market fundamentals in Montreal, I think Montreal is primed for some real growth in 2018 and beyond.”

shIFTING TIDEs BRING LOssEs AND GAINs

opportunity, she expects continued growth in Vancouver, Toronto and Montreal – the real winner being Montreal. “With institutional investors now starting to focus on Montreal because they’re sort of out of favour with Alberta, and the increasingly strong market fundamentals in Montreal, I think Montreal is primed for some real growth in 2018 and beyond,” she says.

Christina Iacoucci Senior Vice President & Portfolio Manager Bentall Kennedy

In terms of asset classes, from an office perspective, Iacoucci expects to see upward pressure in Toronto, Vancouver and Montreal. While the office market in Alberta remains weak, she believes it has bottomed out: “The rates are terrible, but I think we’re really starting to see at least some movement.”

The year 2018 promises to be another year of shifting decline and growth. From the perspective of Christina Iacoucci, senior Vice President & Portfolio Manager, Bentall Kennedy, demand for real estate in general will remain strong in 2018. In terms of

Retail, on the other hand, continues to worry people. Iacoucci believes that while some retail will continue to do well, other types have suffered – “the secondary market or enclosed community centres, big box type centres” – and will continue to suffer. “That’s a kind of retail that will continue to be difficult to maintain and have any value increase at all,” she says, “while I think experiential, urban mixed-use

42

type retail will continue to gain strength.” Where retail loses, industrial gains. With e-commerce and other changes occurring, retailers need more industrial space. “so I believe we’re going to see industrial continue to be in favour,” Iacoucci says. “We’re also going to see that last mile delivery reinvigorate some of the older industrial that are closer to urban markets.” she sees ongoing demand for new purpose-built rental, from the tenant side. And although new regulations could make it more challenging for some investors, “Bentall Kennedy will continue to build multi-res in 2018 and beyond.” Asked what her greatest concern is for the coming year, Iacoucci says it’s “unforeseen global events that might affect the Canadian market in an unpredictable way.” however, she adds, “If you’re not willing to accept change and the unknown you probably shouldn’t be in real estate.” ■ Michelle Morra Canadian Real Estate Forum / WINTER 2017


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ChANGE: IF YOU CAN’T BEAT IT, MEET IT hEAD-ON

Rick huijbregts Thought Leader, Advisor, Strategist, and Innovator Rick huijbregts, Thought Leader, Advisor, strategist, and Innovator, is committed to helping people and businesses prepare for technological change. he calls technology “the greatest enabler” and sees it through two lenses: foundational and transformational.

just a matter of time,” huijbregts says, “and it’s about who is taking charge of this.”

What does it take to truly transform a business in this environment? huijbregts says businesses need to have the right strategy, technology and culture. On strategy he says, “Do we have a real, What he calls “the very foundational considerate strategy supporting this technologies” are things like digital transformation? It cannot be an afterthought. networks, cyber security, video, mobile It cannot be on the side of someone’s desk.” applications and As for technology, “If you’re in real estate and you don’t he believes that’s mobility. “If you’re in any business have a mobile or a video strategy, you the easy part; it’s and don’t have a here to stay and don’t have a cybersecurity approach, will only get better strategy on you don’t have the infrastructure that – “but we need a embracing those capabilities, you allows you to scale and grow and be discussion that’s are frankly tied to strategy, fluid, you’re behind.” doomed to be left and whether we’re behind,” applying huijbregts says. “To me, if you’re in real technology for the right reasons.” estate and you don’t have a mobile or a The toughest part, is culture. According to video strategy, you don’t have a huijbregts, if businesses don’t think about cybersecurity approach, you don’t have the re-training their workforce and providing job infrastructure that allows you to scale and opportunities for people who are impacted grow and be fluid, you’re behind.” by technology, and if they don’t think about The other technologies he describes are integrating the tech-savvy new generation more “transformational” or “advanced”. with the older generation and its institutional “These are coming at us fast and furious,” knowledge, the consequence could be a huijbregts says. These include mixed reality, massive talent shortage. “We’re really artificial intelligence, robots, drones, looking at all businesses opening up the autonomous vehicles and self operating hood, looking at what drives these devices – new solutions that help us businesses and what needs to change,” he reimagine how we manage facilities, how we says. “That means the culture and the ability clean our buildings, and how we fix them. of people to embrace and adopt this change will be the biggest focus for the next few “We’re still trying to figure out what they years.” mean, but I think the path is paved for those technologies to be truly disruptive. That’s ■ Michelle Morra

46

Canadian Real Estate Forum / WINTER 2017


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AGING, TECh AND E-COMMERCE REshAPE REAL EsTATE LANDsCAPE

Neil Cunningham Senior Vice President & Head of Global Real Estate Investments PSP Investments If securing strong, stable cash flow is your objective, the best bet in the real estate business is to build facilities that serve seniors, suggested Neil Cunningham, senior Vice President & head of Global Real Estate Investments, PsP Investments. “Demographics are unstoppable,” he said. “Anything which relates to how you house seniors and meet their needs will have the trend going with you. Whatever you do on that front, you will have the wind at your back.” 48

Multifamily properties also ought to outperform retail and office, despite Ontario’s decision to implement rent controls, which took off some of its shine. Looking further into the future, Cunningham foresees today’s flight from the suburbs reversing, as millennials begin to have children and move back out to the suburbs. “Logistics remains another attractive space for investors seeking to secure cash flow,” Cunningham added. Downtown, technology businesses are increasingly taking up office space “because that’s where their employees want to live because that’s where the action is.” Flexible office properties are a must, he insisted, in order to accommodate those tech firms’ broad range of needs. “An office building which doesn’t have a good combination of ceiling height, good fenestration and maximum column-free space will be uncompetitive in terms of what people want to do with their office space these days,” Cunningham said. Live, work, play amenities remain essential,

he acknowledged, but “I would add ‘learn’ to that.” he advocates adding a fourth dimension – education – to the real estate industry’s credo. “People definitely want continuous, lifelong learning and retraining.” Electronic commerce is exerting another irresistible force that will transform real estate markets, Cunningham observed. “We will not be going back to retail-as-usual,” Cunningham predicted, though it remains unclear to what extent and how online purchases will reshape the balance of distribution and sales. “It won’t be a clearly delineated line,” he affirmed, “because there are many ways of buying, picking up and returning products.” With a flood of capital continuing to drive up valuations, the quest for returns will remain a challenge to real estate investors heading into 2018, Cunningham expects. “It’s definitely a market in which avoiding mistakes – especially big mistakes – is the name of the game,” he advised. “so we’re being very careful. Until 2016, overall market movement meant that anything which you bought did well. Today, you need to play the niches more.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2017


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POsITIVE ‘sECONDARY’ MARKET OPPORTUNITIEs expect that there will be a lot of opportunities for quite some time.”

Nurit Altman Partner Brookfield Financial As far as Nurit Altman, Partner at Brookfield Financial, is concerned, the rapid growth of cities has created several interesting opportunities for real estate investors who can appreciate and understand what can be done with well priced assets located in cities and suburbs across the nation. “There’s so much positive momentum in all these cities like Toronto, Vancouver, and Montreal,” said Altman. “There’s lots of job growth … and young people want to move there so I 50

little or no interest in moving to a new address. Despite all the talk about the relative value of downtown office space, Altman also believes that there are a lot of opportunities to be found in the suburbs where there ‘s often enough people to support the buildings that represent a popular shift away from the necessity of a daily commute to the city’s downtown core.

Ever the optimist, Altman also discussed how several prime Canadian real estate assets have been getting a lot of bad press “These contrarian asset classes are going to thanks to American media outlets that tend drive better yields, and people who are to ignore what’s happening in cities and willing to take the risk and find the right sectors that are located to the immediate opportunities…will north of the American “These contrarian asset classes do very well,” she border. said. are going to drive better yields, “Retail in this country While she does and people who are willing to is getting tarred with admit that there’s a the very same brush take the risk and find the right “…scarcity of as is American retail” opportunities…will do very well.” product,” she also she said. “And that’s believes that far from the case investors are working here where retail is performing very well.” within a strong and resilient market that still offers up its fair share of opportunity for the According to Altman, the bad press has right investor. Because of all the capital that, created several well priced opportunities for in her words, “…is still out there,” she investors who can recognize a bargain believes that “…we have such a strong and when they see it. Not only are some of these diversified economy…and that we’re going commercial sectors overbuilt, but their to continue to have a pretty strong market tenants tend to be well-established over the next year.” small-to-medium sized business interests that are well rooted in their communities with ■ P.A.Sévigny Canadian Real Estate Forum / WINTER 2017


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MORE TECh sTART-UPs IN ThE REAL EsTATE sPACE: CONVERGENCE OF TWO INDUsTRIEs AN EMERGING OPPORTUNITY

Emily hanna Partner, investments Crown Realty Partners In a market where capital is plentiful and opportunities scarce, an ongoing challenge is to identify innovative new investments that carry an appropriate risk-adjusted return. At the same time, all industry players are facing a number of overarching political and exogenous risks, says Emily hanna, partner of investments at Crown Realty Partners. 52

“In particular, I think there may be a number of unforeseen consequences of government policy changes, whether tax changes or adjustments to mortgage rules. As government implements rules that affect affordability and business decision-making, it will have an inevitable effect on our industry.

effects on how buildings are bought, managed and leased – as well as how owners, tenants and investors interact with each other and with their real estate. “I’m excited about understanding how to effectively apply new advances in technology across a portfolio of assets and tenants,” says hanna. “The prominence of technology, advertising, media and information technology companies among our tenants has certainly changed the way people work and interact within their work environments.

“Much commercial real estate is owned by private companies that have actually fuelled the growth of the industry and the growth we’ve see in valuations in our markets. These pressures will ultimately spill over to the markets within which we operate.”

“Improved technology ensures we have better data to manage our buildings more efficiently and has even changed how we interact with our investors. In our portfolio, we’re seeing more features like automation systems that track indicators of energy usage in our buildings.

Meanwhile, a growing recognition of the lack of innovation and technology in the real estate space has led to a flurry of new activity. since 2015, more than 130 new tech start-ups that focus on the real estate space have emerged – from augmented reality and automation, to cryptocurrency.

“Most of our buildings are effectively recycled older properties that we try to reposition and put in a competitive space to attract these spec-type tenants. They expect the buildings they’re in will offer them a high level of interaction and communication and the ability to integrate and co-work.”

These new technologies will have profound

■ Barbara Balfour Canadian Real Estate Forum / WINTER 2017


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METROPOLITAN GROWTh OUTsTRIPPING INFRAsTRUCTURE Plenty of opportunities remain for real estate investors next year. Moray Tawse expects demand for commercial real estate and condominiums to buoy the property market in 2018. Moray Tawse Co-Founder and EVP Mortgage Investments First National Financial LP

“I don’t see interest rates rising in 2018,” forecast the Co-Founder and Executive Vice President, Mortgage Investments, First National Financial LP. “They’ll probably finish lower than 2017 levels. That will keep commercial fairly strong.”

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Residential demand in major cities, particularly Montreal, Toronto and Vancouver, will also continue to rise, in the wake of the federal government’s decision to hike immigration upward of 300,000 newcomers to Canada a year, who tend to flock to major cities. Those factors have reversed residential development decisions. Builders who had shifted to rental projects are back to building condominiums. Although some observers blame tighter rent control strictures, Tawse sees it as bottom line logic. “The government might be a scapegoat for that change, but condos simply have become a lot more profitable than they were a year ago,” he said. “Condo values have jumped so much that they’re very enticing. That’s not healthy for any city. Major cities need cohesive rental apartment development plans to ensure that rental accommodation remains available at a reasonable price.” “Capitalization rates will start to diverge between markets,” Tawse predicted. “We’re going to see them widen out to 1.5-2.5% for small markets, where once there might only have been a half-percent gap. People also remain very negative on retail. That will hurt the smaller markets.” While rock-bottom interest rates bolster demand, they also stoke inflationary pressures. “The challenge will be increased construction costs, increased values and garnering rent increases to offset costlier buys and builds,” he observed. Another concern is that big-city population growth is outstripping basic infrastructure. “They’re outgrowing their capacity and need to figure out how to find more money for drinking water, waste management and mass transit,” Tawse cautioned. “We’re starting to see that come to a head in Toronto. Montreal’s new mayor wants to put a lot of money into infrastructure – and have developers pay for it. That will be a major concern that could slow down the market.” ■ Robert Frank

Canadian Real Estate Forum / WINTER 2017


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CANADIAN RETAIL sCRAMBLING TO KEEP UP WITh PACE OF TEChNOLOGY

“Canada is certainly behind – from the sharing economy and intelligence economy, to 3-D printing and autonomous cars, there have been so many technological innovations, I don’t think everyone has yet determined how to leverage and maximize them.

Inge van den Berg Vice President, Strategic Insights The Cadillac Fairview Corporation Limited Ten years ago, Inge van den Berg’s position as Vice President of strategic Insights for Cadillac Fairview would not even have existed. That’s how fast the pace is of the retail disruption that is occurring in the industry right now. “Our challenges lie in our ability to anticipate it and adapt quickly enough,” says van den Berg. www.realestateforums.com

“With my position, Cadillac recognized the opportunity to bring more retail perspective into the organization so we can collaborate more effectively with our retail clients.” Van den Berg sees a three-fold opportunity within the service industry, which entails effective partnerships with office clients, retail clients, and shoppers. “We need to focus on providing engaging and differentiated experiences, which could range from digital initiatives such as loyalty programs and mobile wallets to new entertainment, food and retail offerings. “In the past we were always investing in the development of our assets, but we are now recognizing we need to shift and evolve to meet shoppers’ new needs.”

At Cadillac Fairview, this has resulted in investments in marketing experiences that haven’t always been prevalent in the commercial real estate industry. One example is their recent sponsorship of the Canadian Olympic Committee. Van den Berg says they are currently examining how such a partnership aligns with their position of wanting to empower and support youth and athletes through charitable donations. “Those are investments that have not always been made in this industry. so we’re transitioning to the new needs and expectations of our shoppers and what the community in general is interested in,” she says. “We’re measuring the returns we will ultimately get on some of these, but it is a new evolution in how we need to continue to connect with shoppers and address their expectations – having a more express connection that in the past may have been more reliant on our retail clients.” ■ Barbara Balfour

55


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GOVERNMENT INTERFERENCE NOT GETTING IN ThE WAY OF POsITIVE FORECAsT FOR 2018

Brian McCauley President and CEO Concert Properties Ltd.

Despite the negativity of front page headlines and an increase in government interference, Brian McCauley remains cautiously optimistic that 2018 is going to be a good year. “All the things that various levels of government are doing to tamper with the marketplace is of concern - whether it’s the federal government and mortgage stress testing on the condominium sales side, or the provincial government in Ontario removing rent control exemptions for new purpose-built rental,” says McCauley, President and CEO of Concert Properties Ltd. “This is mostly due to the fear of an overheated market, particularly in Vancouver and Toronto. In spite of all these obstacles, the market fundamentals remain reasonably strong, and certain measures like 56

opening up our immigration policy are very good news for us.”

in the planning pipeline in Victoria, metro Vancouver and the Toronto area.

With 300,000 new immigrants coming to Canada in 2018, and up to 350,000 permitted entry over the next four years, those in the rental residential business can count on keeping their apartments full and rented quickly.

“We did that to ensure an opportunity to build the range of housing we do which includes purpose-built residential, for-sale condominiums and seniors’ lifestyle communities. It takes some pressure off of us so we don’t have to complete to buy land today for new development,” says McCauley.

“historically, over half of new immigrants to Canada have landed in the greater Toronto area and a high percentage are renters first as opposed to homeowners. This will put continuing pressure on rental accommodations in the greater Toronto area as in most other cities across the country,” says McCauley. Over the past five years, Concert Properties Ltd. has acquired several large land holdings and currently has about 8,000 housing units

“This has also enabled us to position ourselves really well. We’ve got land at historic land prices, not current market prices, which gives us flexibility. If the market was to correct in some way, we could still be financially viable and successful building any one of those asset classes on land we currently own.” ■ Barbara Balfour Canadian Real Estate Forum / WINTER 2017


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RETAIL: DEsPERATELY sEEKING sEAMLEssNEss

Maureen C. Atkinson Senior Partner, Research Insights J.C. Williams Group how should retail respond to its biggest revolution since department stores revolutionized the definition of service and opulence in the mid-19th century? “Today, the trend is for brands to becoming stores, opening their own bricks-and-mortar locations to redefine their relationship with their customers directly,” explained Maureen C. Atkinson, senior Partner, Research Insights, J.C. Williams Group. “Online shops are proliferating and will increasingly complement their capabilities with bricks-and mortar in coming years.” It’s not a matter of choice, she explained. Regardless of the 58

channel, all retail boils down fulfilling client needs. Customers clearly want more and the advent of the internet has shown them how they can get it – and they don’t care which channel they get it through. “It’s transformative, highly disruptive and will remain that way well into the future,” Atkinson said. “Ultimately, it’s about making your brand a seamless experience for shoppers. That starts with formulating a clear vision for your direct-to-consumer strategy.” From there, brand managers need to shrewdly assess how best to blend traditional bricks-and-mortar with a mix of non-store alternatives like online commerce, multi-level marketing, and subscriptions. It also entails rethinking relationships with wholesalers, distributors, licensees and franchisees. “Today’s customers are demanding and diverse. They can take a photo of something that they want to buy and an app will search the internet and find them that product,” she said. “Once that technology becomes commonplace, it will create a host of opportunities – but obviously a lot of challenges for those who steer clear of it.” Between bricks-and-mortar and online strategies lie partnership opportunities as well as mutually beneficial shop-in-shop enclaves. “Customers like to combine different ways to shop, using a variety of physical and digital touch points,” Atkinson reported. “Our research demonstrates the growing global

“Ultimately, it’s about making your brand a seamless experience for shoppers. That starts with formulating a clear vision for your direct-to-consumer strategy.” trend of brands to open shops. The most activity is observed in fashion, sports and footwear, followed closely by cosmetics and consumer-electronics brands. During the next three years, all product groups are expected to show a moderate increase.” By going retail, brands gain total control over their marketing, branding and shopper experience. Their newfound independence from retailers lets them broaden the range they offer, increase direct margins, collect consumer data and test out new products. Flagship stores and brand-owned electronic commerce rank remain pivotal, with store positioning and differentiation, cross-channel opportunities as well as logistics and supply also ranking high in importance. Finally, the talent equation is difficult to overemphasize, to ensure that brands optimize their clients’ customer-service experience in their new, store-based settings. “Market optimization, which accounts for local habits, cultural differences and preferences, also play an important role,” Atkinson concluded. ■ Robert Frank Canadian Real Estate Forum / WINTER 2017


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Willy Kruh Partner, Canadian & Global Chair, Consumer & Retail KPMG LLP Even many some success stories, let’s face it, Canada has seen an alarming number of store closures. Yet Canadian retail can and will grow if it speeds up the process of getting on board with an online platform – one that gets the consumer in quickly, provides a good consumer experience, and offers a quick and easy exit. That’s according to Willy Kruh, Partner, Canadian & Global Chair, Consumer & Retail, KPMG LLP. Kruh believes Canadian retailers need to better understand millennials and the “truly transformational” consumers that they are. Imagine the impact of this powerhouse demographic that stands to inherent more than $ 30 trillion in North America. “Uber, craft beer, Apple and Airbnb are all in large part driven by millennials,” Kruh says, adding that understanding millennial behaviour is even key to understanding boomers and Genxers, since there’s “a little millennial in them as well.”

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how to target this demographic and keep people shopping? Kruh points out that it’s not just about customer service but about technology as well. Retailers, he says, need to get with the program with innovations like, say, the “LoweBot” that speaks multiple languages and assists customers at Lowes stores in the san Francisco Bay area, or Amazon Go, which lets shoppers select an item, pay with the app and walk out without ever seeing a cashier. Meanwhile, challenges abound. Kruh is concerned about NAFTA negotiations because if cross-border tariffs go way up, there will be a lot more Us retailers competing to ship to Canada. Retailers are also fighting other forces, namely consumers’ personal debt, store closures, and the threat of rising interest rates – all the more reason to ramp up the customer experience. Besides understanding consumer demographics and getting on-board with technology, this also means going global. “The world is getting smaller,” Kruh says. “We’re competing with something that a store has from France. As a consumer, I can call France directly and have it shipped. Retail is now global and Canadian retailers need to get on board.” The good news is that retailers here have a captive audience, a rich country, and a history of great success in their industry. They just need to adapt to the changing needs of their clientele. “Attention spans have been diminished over time, even in my generation, by iPads and mobile phones and laptops, so you need to grab the consumer quicker,” Kruh says. “The trend to make the customer journey simple, and the experience memorable, is where retail is heading.” ■ Michelle Morra

60

Canadian Real Estate Forum / WINTER 2017


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URBAN OFFICE sPACE ThE BEsT OPPORTUNITY OF 2018 One of the greatest opportunities in 2018 will be in urban office space in Montreal, Toronto and Vancouver, says Michael Emory, president and CEO at Allied Properties REIT. The real estate investment trust Michael Emory owns properties in nine urban President and CEO Allied Properties REIT markets and holds a major piece of the office construction pie, wooing tenants who are leaving older buildings in search of newer, more modern spaces in urban centre. Putting on a particularly strong performance in the sector these days is, hands-down, the Toronto market, says Emory.

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â&#x20AC;&#x153;Toronto is enjoying a period of incredible demand velocity that I think will last another two to three years, so I expect 2018 will be very strong,â&#x20AC;? he says. â&#x20AC;&#x153;Montreal has outperformed expectations this year quite materially, although we have to acknowledge those expectations may have been somewhat low to begin with. â&#x20AC;&#x153;And Vancouver has been enjoying an incredible demand for office space in the urban core as well. so to me, without question, the principal opportunity for a company like Allied and others in the office segment of the market would be in the urban core of those three cities.â&#x20AC;? On the flip side, the biggest risk that keeps Emory up at night would be the potential creation of an oversupply in any of those three markets. â&#x20AC;&#x153;I think the risk is probably greatest in Toronto because that market is enjoying the greatest demand. Oversupply is something that always harms an otherwise good market,â&#x20AC;? he says.

â&#x20AC;&#x153;Toronto is enjoying a period of incredible demand velocity that I think will last another two to three years, so I expect 2018 will be very strong.â&#x20AC;?

â&#x20AC;&#x153;human beings are always capable of over excess and overexuberance and that can change the equation quite significantly. Itâ&#x20AC;&#x2122;s what Calgary has been working through for the last three years â&#x20AC;&#x201C; a significant oversupply in relation to the needs of the market. some of that was created and some of it happened because of the downturn in the oil prices.â&#x20AC;? Nevertheless, Emory says the risk of this occurring is minimal, given the way in which real estate is being financed today, and the size and sophistication of market players. â&#x20AC;&#x153;I donâ&#x20AC;&#x2122;t think the conditions are right for the creation of oversupply but thatâ&#x20AC;&#x2122;s the one risk I would remain alert to in 2018 and beyond, particularly in Toronto and to a lesser extent in other cities,â&#x20AC;? he says.

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REAL EsTATE NOT IMMUNE TO TRANsFORMATION FROM TECh

Amy Erixon Principal and Managing Director – Investments Avison Young

Conversations about technology often raise the question of how it will impact – or whether it will steal – our jobs. According to Amy Erixon, Principal and Managing Director – Investments, Avison Young, technology is as likely to create new jobs as to displace them, but businesses must brace themselves for the retraining demands that massive change ushers in. her white paper, Architecture of the Fourth Industrial Revolution – Distributed Networks

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and Artificial Intelligence, says real estate will not be immune to the transformation to a more distributed, automated and digital economy. For example, Erixon writes, “… a building’s connectivity could, in many cases, become even more important than its location. As power and cybersecurity demands increase, buildings will be called upon to provide more backbone infrastructure.” she tells us in an interview that some of the activities now being done by accounting firms and law firms will be automated, such as self populating your financial reports. Erixon said an effort is underway in Europe to automates regulatory compliance checks and populates various mandatory reporting schemes. “It makes perfect sense to automate the regulatory compliance function for a whole bunch of reasons, not the least of which is transparency.” As for artificial intelligence (AI) innovations, Erixon says it’s going to be applied absolutely everywhere. And she says autonomous vehicles are going to change development patterns in ways we can’t even imagine. “It’s unclear whether autonomous vehicles will revitalize the suburbs or accelerate the urbanization effects seen in the last decade,” she says. “They won’t need to mandate parking in the ratios that we are providing, and autonomous, electric, cars as a service, will have profound implications on how people move around and what you need to build in your buildings to support that.” On the matter of whether or not these technologies are disruptive, Erixon believes that few technologies genuinely are. “To be disruptive,” she says, “you need to either provide for the same price an incredibly more compelling value proposition, like the difference between a smartphone and a cell phone, or you need to radically reduce the cost to such a point where the old service or product or way of doing things becomes obsolete.” Erixon sees the latest technologies and business platforms as largely innovative, rather than disruptive. “‘Transformational’ is a variation on ‘disruptive’ in that it may help accelerate the evolution of an industry over time, but it’s less likely to make all existing players obsolete,” she says. ■ Michelle Morra

www.realestateforums.com

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INTELLIGENCE KEY TO BETTER, FAsTER DECIsION-MAKING while the expanding needs of occupiers and investors bring opportunity, economic or geopolitical external drivers could cause nervousness and slow, or change, their decision-making. Chuck scott Chief Executive Officer, Canada Cushman & Wakefield The needs of real estate occupiers and investors are changing fast, requiring increasingly complex decision-making, and at an ever faster pace. Chuck scott, Chief Executive Officer, Canada, Cushman & Wakefield, says the time is ripe for adding scale to the company and building its toolbox, to be an integrated partner for its clients – occupiers and investors – on a national and global basis. he acknowledges, however, that

scott says that one of two To address this concern, “We’re hopeful that we things will happen after new scott says, Cushman & can be the antidote to recruits spend time in all Wakefield stresses the those external drivers areas of the business: need for intelligence. “We “Either they come out of the take great pride in by offering intelligence cycle, still want to be a producing all kinds of super to our clients so they broker but now are a much data for our clients, but better broker, or they say, ‘I can make smart what our clients really need went in thinking I wanted to is the intelligence that decisions.” be in brokerage but I really comes from that data,” he would love to be in says. “We’re hopeful that research, or in valuation and advisory we can be the antidote to those external services, because the two months I spent drivers by offering intelligence to our clients there really opened my eyes to that side of so they can make smart decisions.” the business,’” he says. “Doing things like that, once you’ve got the talent on board, is That intelligence, of course, involves a coveted skill set. That’s one of many reasons really important in the war on people.” why Cushman & Wakefield is laser focused on attracting and retaining top talent, which is key to weathering any storm. The

FROM B2B TO B2C: CUsTOMER Is KING IN TODAY’s RETAIL sPACE experience, success in retail is not just about making malls prettier and user-friendly,” he says.

Blake hutcheson President and CEO Oxford Properties Group Inc. staying competitive in today’s retail market requires investments in both technology and the interface between hard assets and customers.

company has a program, called the Cushman & Wakefield Rotation Academy, whereby new recruits will spend several months learning all angles of the business before becoming brokers. They might spend two months in research, two months in valuations, two months in corporate services, two months in capital markets, and so forth.

“It’s about the backbone, the infrastructure, and the experience. It’s not for the faint of heart but we think the payback will be massive, so it should be seen as an investment, not an expense.” hutcheson says industry players are facing disruptors that are changing a former business-to-business mindset into a business-to-consumer relationship instead.

And this requires deep pockets, says Blake hutcheson, President and CEO of Oxford Properties Group Inc.

“We’re seeing this not just in retail, but also in the industrial and office spaces as well. As a large owner and developer, determining how to design a platform that interfaces with the end customer is a complex and vastly growing relationship.”

“Along with innovation, a long view and some very creative people focused on the customer

In 2018, hutcheson foresees positive momentum on the growth and expansion of businesses in most markets.

■ Michelle Morra

“We’re talking steady, reliable appreciation of rents and therefore values. The markets that are outperforming are Toronto and Vancouver. Eastern Canada is a little weaker, Montreal is steady as it goes, and Ottawa is quite weak. “While we’ve seen a return to normalcy in Alberta in the industrial space, rental and office markets remain weak in Calgary. While we anticipate some incremental improvement in the price of oil, it’s not nearly enough to correct what is the worst market on the continent from a supply and demand standpoint. “Today when we say, ‘West is best,’ that means Vancouver, not Alberta. Is there still opportunity in Alberta? We think so, but not in 2018.” hutcheson considers it a blessing to be doing business in Canada. “We are in a disciplined nation where supply doesn’t outperform demand and there’s no geopolitical risk. “Part of being in an industry where we can come together at a real estate forum and cheer on each other’s successes is that there’s been enough money to go around, which is a blessing in of itself.” ■ Barbara Balfour

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FROM RIsING MINIMUM WAGE TO NEW RENT CONTROL LEGIsLATIONs: GOVERNMENT RULEs ADDING UNCERTAINTY TO REAL EsTATE LANDsCAPE “Most of our tenants employ young people who make minimum wage. All those part-time, entry-level jobs at Cineplex theatres, supermarkets, and restaurants that young people get while going to school – those jobs are being cut back dramatically.” Ed sonshine Chief Executive Officer RioCan REIT

And if people don’t have jobs, they don’t spend money, buy new condominiums, or move into new apartments, says sonshine, who also voices concern with recent changes to the Residential Tenancies Act.

Unlike many of his counterparts in the retail business, it’s not the advent of the Internet that keeps Ed sonshine up at night.

The new regulations have expanded rent control to most private rental units in Ontario, from what previously applied to only units built before November 1, 1991.

Rather, it’s the impact of sweeping new government regulations affecting everything from rising minimum wages to rent controls in Ontario.

“There’s no question that a number of buildings, including one of ours, that were planned to be rentals are now going to be condominiums or not built at all,” says sonshine.

“My fear is there will be a real slowdown in 2018 and a lot of it will be government-driven,” says sonshine, the Chief Executive Officer at RioCan REIT.

“Real estate and construction account for over 20 per cent of our GDP. When governments make those kinds of rules without consultation, they don’t think about how the very people they purport to help will be hurt.

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“By the time we got into the 1980s with the rent control legislation that was passed in the 1970s, there was a housing crisis. In Toronto, we grow by around 125,000 people every year and they all need somewhere to live.” Yet sonshine’s outlook as far as keeping their retail facilities full is “mildly positive,” he says. Despite the departure of both Target and sears and the closure of a significant number of smaller tenants, the worst is well behind them. A rise of alternative tenants has helped to fill the void – from off-price retailers such as Dollarama and Winners, to food offerings including speciality and ethnic supermarkets and an expansion of personal service stores such as gyms, nail shops and spas. “People still like to get out of their houses. Everybody’s occupancy rates in Canada are up in the high 90s, and that doesn’t sound like a retail apocalypse to me,” says sonshine. “There have been a lot of bumps going down this road but it’s worked out pretty well. I call myself mildly positive only because the world just keeps changing and the pace of it has accelerated.” ■ Barbara Balfour

Canadian Real Estate Forum / WINTER 2017


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QUEsT FOR QUALITY TO BOOsT RENTs

With Canada expected to fare relatively well in the coming year, companies will increasingly compete for quality staff, as the cost of attracting and retaining top-tier talent gains greater bearing on profitability than their real estate position. “That will push rents higher on tier 1 buildings, which will have a knock-on effect for tier 2 properties,” senst said, “especially in the industrial world. The cost of input is increasing.”

Peter senst President Canadian Capital Markets CBRE Limited Institutional investors can look forward to some good news on a number of fronts in 2018, said Peter senst, President, Canadian Capital Markets, CBRE Limited. “The surprise upside going into 2018 will be office and industrial rents, due to tightening fundamentals” he predicted.

www.realestateforums.com

senst expects crude oil prices to continue rising as well, which will bolster Alberta and saskatchewan’s hard-hit energy sectors in 2018. “We’re not going to return to record highs, but slowly and surely we will begin to see numbers that can deliver profitability to producers, which will bring economic stability back to Western Canada.” Job creation is crucial - while forecast falling unemployment will put upward pressure on rents in 2018, the good news on the job front could be even better, senst suggested. he credited Quebec for its success in

prioritizing job creation, and urged other provinces and the federal government to follow suit with a similar winning formula for their economies. “Quebec has succeeded in getting business and policy to work together to bolster employment,” he said. “Were we to really focus on jobs elsewhere, this country will be much better off. Without jobs, it’s a big miss.” Concerns for 2018 include rising vacancy rates and other challenges in tertiary retail real estate markets. A struggling Canadian dollar and North American Free Trade Agreement woes add to the uncertainty. Finally, climate change is unexpectedly rising on the real estate industry’s radar. “We’re witnessing more scrutiny of weather-related issues on insurance costs and the impact on building systems of higher winds and more water,” senst concluded. “Are they engineered well enough? We’ve never seen Toronto Island under water. There’s a surprising amount of discussion of those topics.” ■ Robert Frank

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sMART sYsTEMs: As NEEDs ChANGE, CONNECTED BUILDINGs MUsT FOLLOW

sheila Botting Partner & Canadian Real Estate Leader Deloitte A decade ago, the real estate industry put a premium on lean, sustainable buildings. Today, developers are responding to demand for smart building systems. “We’re talking about smart, connected buildings with embedded technology that goes well beyond wiring and connectivity – all the way to systems like lighting, hVAC, heating sensors, etc., that can talk to one another and inform operators and space users alike,” said sheila Botting, Partner & Canadian Real Estate Leader at Deloitte. “The building becomes an integrated ecosystem for the space user, technology and real estate.” “This trend is accelerating beyond just the base wiring of the 70

building,” she explained. “For example, in a smart connected building, you’ll know when a component such as an hVAC pump is expiring because sensors will identify the longevity of the component. The integrated technology can also show CO2 emissions and operational efficiencies.” The changes are not optional. They’re essential to adapt to digital pressures that are now disrupting the real estate market. “Corporate occupiers no longer need the same scale of office or retail space and are rationalizing their footprint, in turn reducing space requirements” Botting said. “Digital disruption is changing how people work, shop and live. As a result, organizations are redeploying resources from vacant commercial space into technology and analytics – to drive their business whether that is employee productivity, retail omni-channel sales or warehouse efficiency.” “Technology is changing how people live, work and shop, and what commercial facilities are needed and where to locate them,” Botting explained. “For example, retailers might replace a hub-and-spoke portfolio with an analytics based approach toward their overall retail ecosystem including stores, supply chain and distribution.” “Buildings have to accommodate this digital disruption by embracing technology to

become high-performing smart assets,” she said. “In order to accommodate more people in office space with higher density, building systems and sensors will need to track the movement of people and identify available heating. Elevators, washrooms and hVAC systems will need to be right sized to accommodate this density, and enhance the user experience. Within the shopping centre, sensors and connected enabling technologies allow property operators to understand customer traffic patterns and ideally spending in order to optimize the customer experience and ultimately sales revenue and asset valuation. Those properties without these enhanced technologies will fall behind as corporate occupiers distinguish high performing assets.” As fundamental concepts about how buildings function and operate, new standards like connectivity and wellness certification have already emerged. They reflect a shift of real estate mindset from its longstanding focus on transactions toward the overall user experience. “Look beyond the edges and you will see an abundance of opportunities around the corner,” Botting concluded. “This is just another natural evolution of our real estate industry as investors and operators focus toward value optimization.” ■ Robert Frank Canadian Real Estate Forum / WINTER 2017


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ThE FIVE BIG TRENDs IN COMMERCIAL REAL EsTATE

Michael Brooks Chief Executive Officer REALPAC

One of the great joys of leading REALPAC is meeting people at both ends of the corporate ladder, and everyone in between. And there’s a lot of ladders to get to know, not only in Canada but increasingly in the U.s. and around the world. Our collective context is now global. Regulation now spreads from region to region quicker, as do ideas, money, and best practices. But what are the big themes that we see month in and month out, year in and year out, that your management teams need to keep on top of? As we move into 2018, REALPAC and its members are driven by these five trends:

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1. People. It’s not just that Gen x and Millennial talent are younger and have more energy. They are more tech savvy and much more used to multi-tasking. They’re wanting meaningful work, in a flexible, diverse and inclusive work environment, in a company that appeals to their values. Come to think of it isn’t that what we all want? It’s all about finding and hiring the best people, instituting ways to incent and promote the best people, investing in training and education of those people, and finding good mentors and sponsors for them.

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Look around the room at the Real Estate Forum. Is our industry representing the population of Canada? REALPAC believes that a diverse and inclusive Canadian commercial real estate industry is essential to attract and retain top talent, and to create a broader, richer workplace environment that enhances creative thinking, innovation and problem solving. Our industry is lagging behind and we need to accelerate our efforts in this regard. REALPAC has started a new diversity and inclusion initiative, with a blue chip advisory board, aimed at developing tools and resources to make Canada’s commercial real estate industry more inclusive and diverse. Through leadership and action, REALPAC’s goals are to ensure that the composition of the Canadian commercial real estate industry is reflective of the diversity inherent in Canadian society at all levels, and to ensure that the industry benefits from the range of perspectives, ideas and experiences that diversity provides, whether grounded in gender, sexual orientation or gender identity, age, race, nationality, ethnicity, cultural heritage, religion or language.

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2. Governance. The old boys club of prior Boards of Directors has given way to not only explicit diversity and inclusiveness targets, but a higher governance bar around meetings, conflict of interest, financial disclosures, tone at the top, risk, benchmarking and transparency. Those skill sets require better qualified directors, possessing a range of experience and perspectives. The evaluation of Environmental, social and Governance (EsG) issues of our public entities by third parties such as Bloomberg, sAsB, MsCI and others, means that your governance standards are on display whether you explicitly disclose policies and practices or not. The threat of a negative proxy report from Iss or Glass Lewis, or even the risk of hostile takeover, is also increased in the public sphere. EsG issues have been a major focus of REALPAC for years. REALPAC has a highly engaged EsG Committee and are running a current initiative regarding the proxy solicitation firms. 3. Sustainability. This is no longer nice-to-have; it’s a must-have for every entity with real estate assets. Governments, tenants and investors are increasingly requiring a building and a space with green credentials, and more recently with a health and wellness credential. The pressure on buildings to disclose their energy, water and carbon footprints, will continue to spread across Canada, following the lead in Ontario next year. One company is already voluntarily disclosing to get ready for the new law. At the entity level, a good GREsB score is the new benchmark for investors looking to ensure their partner or asset manager is itself sustainable and reflects best practices in the marketplace. sustainability guidelines now exist for global investors, for stock exchanges, for banks, and even, after COP 21, for governments. REALPAC is the Canadian Industry Partner of GREsB and has been a leader in sustainability initiatives for the industry since 2006. 4. Technology & Innovation. The ability of technology to enable the sharing of expensive assets, such as UBER, Lyft, WeWork, Rocketspace, Breather, zipCar, and others, has changed the way people design and manage those assets. The ability of technology to impact mobility and delivery through autonomous vehicles

and drones will continue to alter the landscape and may change the way parking is designed and managed, and packages delivered. From smart sensors in buildings, to sophisticated management platforms and API’s, backend and building management systems are also transforming. Transactional systems such as smart contracts and distributed ledger technology may also transform real estate, leasing, and lending practices. Assessing the impact of the Amazon juggernaut on retail sales is an evolving practice. Figuring out expected impacts of consumer demands on last mile delivery affects industrial location and logistics. REALPAC has started a new initiative around technology and innovation aimed at synthesizing and sorting the real from the unreal. 5. Money. Money attracted to institutional grade real estate now both originates and searches for investments globally, keeping tax lawyers busy, and pushing brokerages to have international platforms. That mobile money looks for the best risk adjusted return, best management platforms, high governance standards, top sustainability credentials, and leading technology and innovation. That mobile money looks to partner with good people, who are trustworthy and honest, and possess that high social license that comes with being worldly in its staffing composition and openness to diversity and inclusion. For those looking for money, your market is now global. For those with money to place, your market is also now global. REALPAC’s affiliations with global associations in both the listed and non-listed space, and our global partnerships with MsCI, UNEP FI PWG, and GREsB, better enable us to keep on top of what money wants. Management teams that are able to stay in front of these trends will find they have a tailwind from customer, shareholder, Board, tenant, and regulator perspectives. The future of global real estate is high transparency, high governance standards, high sustainability practices, low carbon, and high-tech. And of course profitable, both in addition to the foregoing and because of the foregoing. ■

Canadian Real Estate Forum / WINTER 2017


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Making the CASE for REALPAC

REALPAC is the national industry association dedicated to advancing the long-term vitality of Canadaâ&#x20AC;&#x2122;s real property sector

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Connecting senior real estate executives

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Advocating nationally directly with government at all levels

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COMMERCIAL PROPERTY TAx RATIOs sURVEYED; sTILL MUCh WORK TO BE DONE since 2002, REALPAC has tracked the

Brooks Barnett Manager, Government Relations & Policy REALPAC

property tax data of top Canadian municipalities and used that data to advocate for tax policies that improve the overall physical health of many of Canada’s provinces and regions. This year, REALPAC has partnered with Altus Group to produce the Canadian Property Tax Rate Benchmark Report, which studies the 2017 commercial-to-residential tax ratios of Canada’s 10 largest municipalities. The findings revealed detail trend points for key real estate markets and help to identify which of those markets are best set up to attract real estate investment, generate stable municipal revenue and promote job growth. As REALPAC has argued for several years, a lower commercial property tax ratio is not only good business for real estate, but good business for government as well.

This year’s study indicates in eight of the 10 cities surveyed, commercial property taxpayers are paying more than double the common tax burden of residential taxpayers. For the same amount of assessed value, commercial property taxpayers could pay anywhere between 2 to 4 times as much tax than residential taxpayers. The report finds that Vancouver (4.87 to 1), Toronto (3.81 to 1), and Montréal (3.77 to 1) have the highest commercial-to-residential rate used in the country. Vancouver continues to be the only municipality to continue to post a commercial-to-residential tax ratio in excess of 4 to 1. With a considerable gap between the next highest, Toronto, Vancouver continues to be an outlier among all surveyed municipalities – with an 11% increase to the ratio gap in the last year alone. Conversely, Toronto’s commercial-toresidential tax ratio declined for the 13th consecutive year. While Toronto City Council voted to temporarily step back from a council policy to reduce this ratio to 2.50 to 1 by 2023, it is encouraging to note that gains have still been made on improving the ratio in 2017. REALPAC has maintained a significant advocacy effort to encourage the City to recommit to the lowering of the ratio over time, extended well beyond 2023, but there is some concern that there could be a negative impact on the overall tax picture in the city, if potential tax programs currently being reviewed are eliminated and the burden on commercial grows through the 2018 budget process. As a historically high-tax environment, Montréal is gradually improving its commercial-to-residential ratio, yet it still carries the highest commercial property tax rate in Canada. With the recent election of a new mayor and City Council administration, commercial real estate stakeholders will have a new opportunity to pursue advocacy for competitive tax rates. We look forward to this dialogue.

Source: Canadian Property Tax Rate Benchmark Report

84

Canadian Real Estate Forum / WINTER 2017


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“A city’s property tax rate is directly linked to its competitiveness. High commercial property tax rates send business and economic development elsewhere, and work at cross purposes with infrastructure investments, particularly transit. Further efforts should be made in all cities to bring commercial property taxes down to more reasonable levels.” Michael Brooks, CEO, REALPAC While Canada’s largest cities remain a central focus for our advocacy efforts, we continue to actively monitor the tax environments of major cities in Canada’s Atlantic and Prairie regions and are generally encouraged by the positive progress made there. saskatoon, Regina, Winnipeg, Edmonton, Calgary and halifax all sit well below the national average identified by REALPAC. Certain municipalities have made great progress in decreasing their ratio sometimes by as much as 21% in a single year as Regina has done. For others progress has been slower but still significant.

REALPAC will continue to work with municipal thought leaders and budget authorities to identify strategies that lessen the burden on commercial property taxpayers and keep rates and ratios somewhere within a range that is fair and will enhance cities’ competitiveness over time. high commercial property tax rates send business and economic development elsewhere and work at cross- purposes with infrastructure investment such as transit. Further efforts should be made in all cities to bring commercial property tax down to reasonable levels. We look forward to assessing future gains in 2018. To download your copy of the Canadian Property Tax Rate Benchmark Report, visit altusgroup.com/news_insights/altus-groupproperty-tax-report ■

ThANK YOU TO ALL OUR ADVERTIsERs AND sPONsORs Reach a Targeted National Audience. For more information on how you can advertise in Real Estate Forum Magazine, contact: Frank scalisi at frank.scalisi@informa.com or 416-512-3815 • realestateforums.com Altus Group

75

Atrium Mortgage Investment Corporation 40 Bentall Kennedy

35

BMO Capital Markets

31

Broccolini Real Estate Group 53 Cameron stephens Mortgage Capital Ltd. 71

CMLs Financial

45

JLL

21

Regional Group

65

Colliers International

25

Kingsett Capital

33

Rick hansen Foundation

74

Concert Properties

57

Largo Capital

59

Cushman & Wakefield

67

M&G Real Estate

Romspen Investment Corporation

8-9

FCT

13

stewart Title Guaranty Company

55

Fiera Properties Ltd

44

MCAP Commercial Mortgages Group 39

TD securities

27

Firm Capital Corporation

47

Timbercreek Asset Management Inc.

49

TREz Capital

23

Yardi systems Inc

15

Canadian Urban Limited

29

First National Financial LP 2 (IFC)

Canderel

19

Global Furniture Group

85

CCIM Institute

63

Graph synergy

69

Chicago Title Insurance Company Canada

43

CIBC Capital Markets

51

City of Oshawa

54

86

Menkes Developments Montoni Morguard Peoples Trust Company

16-17

4-5 64 87 (IBC) 41

harbour Equity Capital Corp 60

RBC Capital Markets Real Estate Group Inc. 88 (OBC)

harbour Mortgage Corp

REALPAC

83

RedPath Financial Inc.

64

61

Informa Exhibitions 62, 72, 73, 74, 80

Canadian Real Estate Forum / WINTER 2017


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Price Undisclosed Sale

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Term Financing

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Term Financing

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2-Year Senior Secured Credit Facilities

Acquisition of Home Capital Loan Portfolio Lead Arranger, Sole Bookrunner and Administrative Agent

$600,000,000

Senior Unsecured Debentures

Joint Bookrunner, Lender

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$175,000,000

Convertible Debentures

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Trust Units

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3-Year Senior Unsecured Revolver

$125,000,000

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Trust Units

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Joint Bookrunner

$400,000,000

$300,105,000 Trust Units

Senior Unsecured Debentures

Joint Bookrunner

Joint Bookrunner

Joint Bookrunner

Promenade Shopping Centre Vaughan, ON

700 University Avenue Toronto, ON

$113,885,000

$113,000,000

~$170,000,000

$70,000,000

$60,736,000

Sale-Leaseback

Senior Unsecured Debentures

Sale

Preferred Shares

$266,000,000

2-Year Senior Unsecured Term Loan

$400,000,000

Senior Unsecured Debentures

Convertible Debentures Joint Bookrunner, Lead Arranger

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Sale

$550,000,000

Joint Bookrunner, Co-Lead Arranger

$300,000,000

Term Financing

RBC Commercial Mortgages 100 & 107 Alfred Kuehne Brampton, ON

SNC-Lavalin Headquarters Montréal, QC

$46,400,000

$25,750,000

$15,800,000 Sale

Senior Unsecured Debentures

Senior Unsecured Debentures

$125,000,000

$77,019,525

5999 Monkland Montréal, QC

Lloyd Manor Plaza Toronto, ON

St. Albert Square St. Albert, AB

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Place Vertu Shopping Centre Saint-Laurent, QC

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$175,000,000

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CREF Winter Magazine 2017 final  

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