FALL 2019 / ISSUE 81
Ottawa’s New LRT, A Game-Changer For Purpose-Built Housing
Ofﬁce Tower Conversion Comes With Upgrading Challenges
Ofﬁce, Industrial Rents Ready To Rise
How One Company Avoided An Ofﬁce Crisis
Disruptive Technology: Ottawa’s Biggest Growth Engine
Calgary Tech Acumen To Transform Energy, Agriculture, Transportation Industries
Safe, Stable Investors’ Haven Poised To Grow
Industrial Keeps Crown As Calgary Market King
SIMMERING CITIES, SLOW AND STEADY
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SIMMERING CITIES – SLOW AND STEADY George Przybylowski Vice President Real Estate Informa Markets
Ottawa is on the boil. Not the fast-boil of boom-and-bust but percolating like a fine coffee. You can feel it on the streets, where its new rapid rail stations whisk commuters around what is now a big city. You can feel it in the cafés of Kanata, whose cluster of tech firms each day finds new ways to do the hitherto impossible. Ottawa’s one million residents will witness their renewed capital rise along its new transit corridor as well as the secondary corridors that inexorably integrate it and its neighbour Gatineau as they evolve into a modern metropolis. Now that the Capital has at last joined the ranks of Canada’s major cities, it has some distinct advantages. Government remains a stabilizer, even as the private sector increases its contribution to the economy. The Conference Board of Canada forecasts the capital region’s $79B economy will grow by 1.9 per cent annually from 2020-2023. realestateforums.com
Massive, multi-billion dollar municipal infrastructure investment will also lay the groundwork for Canada’s sixth-largest market as it continues to grow well into the future. Ottawa’s city core is prospering. Ongoing office, commercial, retail, residential and entertainment investment together with an affordable, live-work-play ethos are attracting newcomers to the city. Tech firms are increasingly opting to locate downtown. House prices have jumped 17.5 per cent during the past two years, unlike other major cities which—with the exception of Montreal—have seen prices sink from four to nine per cent. Even so, with a median price just over $450,000, you can still find a great home in Ottawa for half the price of a Toronto or Vancouver equivalent. Despite this positivity the Ottawa market continues to face a supply shortage. When April drew to a close, there were only 2,900 single-family homes and 800 condos for sale, down 18 per cent and 40 per cent, respectively, from last year—maybe this will drive prices up. On the outskirts, industrial properties are also experiencing simmering demand, and Ontario government legislation aims to significantly streamline the provinces land use and development planning processes. Calgary continues to rebound and is increasingly diversifying its economy as it
continues to distance itself from the energy downturn. Its economy is growing again, like Ottawa, at a sustainable simmer. Likewise Calgary’s population, which has hit 1.3 million, continues to increase by about 40,000 a year, helping to drive demand for residential development. The city’s strong rental market has spurred several large rental projects. Other, integrated developments are also underway, with some master plans that stretch as far as 25 years into the horizon. As in Ottawa, Calgary’s industrial remains strong. The city has positioned itself well as a regional transportation hub, where it handles logistics as an inland distribution centre, to relieve the overstretched Port of Vancouver. Industrial, commercial and retail development near Calgary’s airport has also proved popular. Though Calgary’s downtown office market continues to underperform, the city has seized the opportunity to repurpose existing space and to foster mixed-use development to attract newcomers to the urban core by integrating retail, entertainment and hotel properties with modern housing. As we kick off the Fall season with the Ottawa and Calgary Forums, we hope the following highly curated collection of articles will provide invaluable insights for your business. We look forward to welcoming you to the Forums and to continued conversations. ■
3 Simmering Cities – Slow And Steady 6 The Altus Report: Ottawa Remains A Favourable Investment Market, While Calgary Aims For Growth
12 Adaptive Reuse: Breathing New Life Into Old Buildings
14 Why The Commercial Real Estate Industry Needs PropTech
59 Latest Commercial Market Statistics Across Canada
64 REALPAC 64 Three Tools To Improve Industry Diversity & Inclusion 66 It’s Time For Politicians To Get Creative On Rental Housing Tax 68 The State Of Innovation In Canadian Commercial Real Estate 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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20 Keeping Ottawa On Track For The Future
40 The Ever-Resilient City Of Calgary
22 Ottawa’s New LRT A Game-Changer For Purpose-Built Housing
42 Large-Scale Development Proliferation
22 Urban Ottawa Brings Positive Change For Retailers 24 Strong Demand Stimulates Ottawa Ofﬁce Development 26 Industrial Space Is Scarce In Ottawa 28 Ottawa Ofﬁce, Industrial Rents Ready To Rise 30 Capital Cities Cooperate More Closely 32 Safe, Stable Investors’ Haven Poised To Grow 36 Disruptive Technology: Ottawa’s Biggest Growth Engine
44 Ofﬁce Tower Conversion Comes With Upgrading Challenges 46 How One Company Avoided An Ofﬁce Crisis 46 Building New Rentals Out Of Condos And Concrete 48 Institutional Investors Invigorate Industrial Properties 50 Calgary’s Long-Term Future Is Still Bright: Opportunities For Investment Continue Through The Downturn 50 Calgary: Seeing Is Believing 52 Calgary Tech Acumen To Transform Energy, Agriculture, Transportation Industries 53 Calgary 2.0: Renewal Centres On City Core 54 Industrial Keeps Crown As Calgary Market King 56 Make Them Want To Shop
THE ALTUS REPORT OTTAWA REMAINS A FAVOURABLE INVESTMENT MARKET – WHILE CALGARY AIMS FOR GROWTH The Canadian economy has shown signs of resilience in the past year and continues to remain in a robust and competitive state as the global economic outlook teeters amid escalating US-China trade conflicts, and energy and geopolitical uncertainty. Domestically, interest rate hikes have stalled, and the economy looks to be operating close to potential with inflation holding steady at the 2% target. Canadian investor sentiment remained relatively flat, yet cautious across all sectors as the market adapts to evolving economic conditions.
Kruti Desai Manager, National Research Insights, Data Solutions Altus Group
Raymond Wong Vice President, Data Operations Data Solutions Altus Group
Chart 1: Chase for Yield – Alberta & Ottawa Trending Up Location Barometer - All Available Products (Q2 2019)
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Canadian investment volume declined in the first half of 2019 by almost 21% to $22.3 billion compared to the same period last year at $28.1 billion. Investors continue to seek asset types that add to the diversification of quality income streams with Land and Apartment being among the most active sectors. The Ottawa market area had the highest increase in investment activity with total volume going up by 52% to $1.1 billion compared to the first half of 2018 at almost $732 million. Ottawa is a transforming city and still has room for growth with several strategic redevelopment projects in the works. Expansions in infrastructure, with the arrival of the new LRT line, may open up opportunities for new development. According to Altus Group’s Investment Trends Survey for Q2 2019, Ottawa also saw a positive buy/sell momentum with Multi-Tenant Industrial, Downtown Class “AA” Office and Suburban Multi-Res topping the list as the most preferred product-market combination. In Calgary, transaction volume declined by 26% to $1.2 billion, and deal counts dropped by 24% in the first half of the year compared to the first half of 2018. However, the Calgary market showed improvements in the buy-sell momentum ratio with Single- and Multi-Tenant Industrial and Suburban Multi-Res being the top preferred product types according to the Altus Group’s Investment Trends Survey. At the same time, a growing tech sector and warehouse and distribution sectors are maturing at a rapid pace and strengthening leasing activity and sales within both markets. To remain competitive and boost economic growth, companies are partnering with the federal and local governments and actively working together to attract and retain the right labour force for the future.
Source: Altus Group’s Investment Trends Survey, Q2 2019
Canadian Real Estate Forum / FALL 2019
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Chart 2: Top 5 and Bottom 5 Favoured Real Estate Segments (Q2 2019) 4".(? PI1("$5&$(K$"3( 3",+(KA2"#$&5V
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Source: Altus Group’s Investment Trends Survey, Q2 2019
Chart 3: National Investment Volume Weakens ^I$,+(JA*K(9:;Y (W;9Q
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Source: Altus Group
Emerging Technology Firms May Help Alleviate Vacancies Overall employment growth tends to lag behind overall economic activity, which may indicate a potential slowdown in the labour force in the next year due to a decline in investment activity. Therefore, growth in the working-age population will be a crucial factor in addressing labour and skilled worker shortages in order to sustain economic growth. Canada’s unemployment rate remained stable in July and August at 5.7% according to Statistics Canada, while overall employment saw gains predominantly in the financial services, professional services, and education sectors. While the top employment in Calgary centres around the energy sector and in Ottawa, the federal government, both markets are also being influenced by a strong tech sector which has been tempering office vacancy rates. Immigration programs targeted towards skilled workers have boosted employment within this sector, and government investment into new and emerging technologies has also signalled employment opportunities in both markets, which may increase competition of high-quality space. As quality space and limited talent become more constrained, companies may be forced to raise wages as a way to attract and retain talent or look to secondary locations with higher availability of workers and office space. Ottawa’s high-tech region of Kanata has attracted several major tech players in the last few years from Apple Inc. to Nokia, to Blackberry QNX and last year Ford Canada, which took over 40,000 SF for its connectivity and innovation centre, 8
while also securing a 62,0000 SF building from Cominar for another research facility expected to open by 2020. Ford also secured another 20,000 SF on the same street to support its expansion plans. Ottawa’s office market is even tighter than Calgary with vacancy rates dropping to 8.0% in the second quarter of 2019, the lowest level since 2014. This trend may impact the growth of the tech sector within the city as competition with the public sector pushes tenants to seek availability within Class C buildings. Almost 290,000 SF of Class A office space in the Ottawa Market Area is under construction with an availability rate of only 15.1%. No new construction is underway in the downtown Ottawa area. DREAM recently secured a 15-year lease with the federal government for about 158,000 SF of office space in Zibi Block on Booth St, a prime location minutes from the CBD. The building will include a mix of more than 450,000 SF of retail and commercial space and is expected to be completed by late 2020. As of Q2 2019, only 4 Class A buildings in the downtown core were 100% available for preleasing with a combined space of almost 1.5 million SF. Calgary’s downtown office market, as well as its labour force, continues to deal with job losses from the oil and gas sector, but the tech sector has helped bolster some of its office leasing activity. Alberta overall had some slight gains in employment from the information, culture and recreation sectors, which offset some of the losses in the energy sector. Although Calgary’s unemployment rate rose slightly to 7.3% in August from 6.9% in July, its office market is slowly recovering. Calgary’s downtown office vacancy rate dropped to 21.5% in Q2 2019, from 22.8% a year earlier. Fight to quality continues in office space due to lower rental rates as the demand for Class AA spaces increase. With limited availability in the core, several suburban office markets have been outperforming the downtown market in both Ottawa and Calgary. Vacancy rates fell below the downtown rate in areas such as Gatineau, Ottawa West, Nepean and Kanata, and in Calgary’s Beltline, and North and South Calgary. Many technology firms have already settled in Calgary and looking to expand, but the issue has been finding skilled talent, not space. A recent announcement from BC tech firm Finger Food Advanced Technology Group stated the company would be opening its first tech centre in downtown Canadian Real Estate Forum / FALL 2019
90% leased. OxWorx provides flexible lease terms and allows tenants to lease a single desk or an entire office. The property previously underwent an exterior renovation a few years back.
Chart 4: National Ofﬁce Vacancy Rates Inch Downwards 89(9:;Y
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Source: Altus Group
Chart 5: Ofﬁce Markets Await Arrival of New Supply (Q2 2019 – All Classes) N15&$(C"1,+$#%+I"1
Companies like Oxford continue to invest in their assets and stay competitive as they adapt to the changing workforce by providing a diverse range of options from newer amenities to flexible office spaces. This trend mainly caters to tenants looking for flexible work environments such as tech companies, professional services firms, contract or “gig” workers as well as mature companies looking for satellite office spaces. Reducing commute times and achieving a work-life balance may be another factor for tenants to choose coworking spaces. Coworking company WeWork will be opening two downtown office spaces: The Edison at 150 9th Ave. S.W. occupying 76,000 SF and set to open at the end of 2019, and; Stephen Avenue Place at 700 2nd St. S.W. which is expected to open by early 2020 and occupy 66,000 SF.
Source: Altus Group
Calgary by 2023. No news has been announced on the exact location of the centre. The company is a tech-solution provider to many large companies like Suncor, Enbridge, Microsoft, Lululemon, and TELUS. Calgary’s Opportunity Investment Fund has been helpful in attracting companies to the region and creating tech jobs. The City launched the tech investment fund in 2018, which helped add jobs to the city and is open to private companies, non-profits, as well as public institutions. The fund has since increased more than 1,000 jobs and has also led to $150 million of investment into the region. Workspace needs are changing: Modernization and Flexibility are Key The rise of innovative, vibrant spaces and modern amenities in the workplace are still a thing of the present. Landlords are investing mega-dollars to future proof their assets as a means to address high vacancy rates and attract tenants. In Calgary, Oxford Properties invested $40 million in redeveloping the four-tower Bow Valley Square office/retail complex. The upgrade will add an array of amenities such as a HUB tenant lounge, a sports area, multiple meeting room centres, a park site, and a rooftop patio which include bocce ball, ping pong tables and beehives. One of the towers will also include OxWorx, a modern co-working space that will occupy two floors of the building and has already been realestateforums.com
Global workspace company Spaces will be opening their first Ottawa location by occupying 75,000 SF of office space at 66 Slater St, a former modernized government building owned by KingSett and located near Confederation Park and Parliament Hill. Toronto-based iQ Office Suites also recently announced their location in the Ottawa region at 222 Queen St. and will be occupying over 13,500 SF of space. iQ Office Suites will also be expanding locations in Vancouver, Toronto, Calgary and Montreal. Innovation, entrepreneurial and incubator hubs are also making an impact in office. Impact Hub will be expanding its office by moving up a floor at 123 Slater St and will be occupying 6,200 SF, after taking up 10,000 SF of space just a few years ago. And it’s not just in the private sector. In Ottawa, the federal government initiated a 2-year pilot project to set up coworking spaces for its government workers. Two coworking offices were opened at the renovated L'Esplanade Laurier located in downtown Ottawa and at 335 River Rd. near the Ottawa airport. The feds have plans for further expansions in the Ottawa and Gatineau region and across the country in Toronto, Laval, Dartmouth, Vancouver and Edmonton.
Chart 6: Strong Demand and Tight Supply for Suitable Industrial Space 89(9:;Y
Distribution Centre of almost 500,000 SF in the Great Plains industrial park. With a lot of older product in the Calgary market, demand for more modern state-of-the-art facilities with higher ceilings will continue to strengthen as e-commerce, and other distribution sectors compete for quality product.
Geopolitical uncertainties, escalating global trade tensions along with low oil prices and 9>YS 9>YS \S 9>ZS pipeline expansion hearsay will continue to 9>;S 9>:S 9>:S put pressure on Canadian investment and 9S ;>XS economic growth. However, with robust ;>9S :>YS ;S employment growth and high population gains in urban areas due to immigration, the :S @A1%"#2&$ B53"1+"1 CA*DA$6 4"$"1+" E++AFA G"1+$&A* MA+I"1A* Canadian market is expected to remain Source: Altus Group healthy as investors and companies maintain a steady appetite in core markets. Investors are seeking better yields and will continue to focus their efforts Chart 7: Featured Investment Property Sales Transactions on diversification, seeking GA$`&+ aA+& !&%+"$ 4$A1,A%+I"1(1A3& b#$%]A,&$P,V b$I%&(PWGI**I"1, Q#I*5I1DT well-priced product in prime UA15(!Ic& locations, and strategically CA*DA$6 ?T;[T9:;< O&,I5&1+IA*(UA15 CA*DA$6(_&,+(CA3.D$"#15 J"3&,(H6()2I W((((((((;<7:::7:::( [Y>[X:(A%$&, obtaining significant trophy CA*DA$6 [T9?T9:;< EKKI%& !]&$FI1(Q*"%` )**I&5(OB04 W((((((((;979:?7<Y9( \:7<[<(!^ assets to achieve their goals. !I1D*&=4&1A1+( Real estate firms have also GA1#KA%+#$I1D CA*DA$6 \T9<T9:;< 9Y?;YY(^$"1+I&$(O"A5 OC-(-$"#. W((((((((X;7:::7:::( ;<<7;;?(!^ been investing more capital CA*DA$6 ;T\;T9:;< U"F(OI,&().A$+3&1+ 4]&(8#A$+&$, GI1+"().A$+3&1+(-b(01%> W((((((((X\7Z?:7:::( ;<<(#1I+, into upgrades, retrofits and G#*+I=4&1A1+(_A$&]"#,&( X:Z?(YX+]()2&1#&(!>B>7(X:X:(<:+]( )2&1#&(!>B>(d(YY:;(X:+](!+$&&+(!>B> !#33I+(015#,+$IA*(01%"3&(OB04 d(aI,+$IH#+I"1 W((((((((Z<7??:7:::( Y[<7\\Y(!^ CA*DA$6 ;T;:T9:;< newer amenities to attract C"1%&$+(b$".&$+I&,(U+5>( !I1D*&=4&1A1+(_A$&]"#,&( d(aI,+$IH#+I"1 e<:S(I1+&$&,+(,A*& C#3H&$*A15 <T;:T9:;< ?99?(d(?\Z;(Q"#15A$6(O"A5 W((((((;?X7:<[7\[<( ;7:9\79?:(!^ and retain tenants and talent and keep up with demand. M&.&A1 YTYT9:;< EKKI%& CA$*I1D(BL&%#+I2&(bA$` C$"F1(O&A*+6(bA$+1&$, W((((((((?X7?::7:::( 9YZ>[Y:(!^ Q&1+A**(f&11&56 Outdated supply may be e?:S(I1+&$&,+(,A*& E++AFA [T9\T9:;< EKKI%& !#1(UIK&(^I1A1%IA*(C&1+$& W((((((9:Z7[<<7<<X( <YX>X\\(!^ impacted due to the need for )*ID12&,+(!+#5&1+(J"#,I1D(OB04 W((((((((<97:::7:::( ;?<(#1I+, E++AFA \T[T9:;< !+#5&1+(J"#,I1D 9X?(UA#$I&$()2&1#&(BA,+ more modern, high-quality 9:;9(= 9:\X(EDI*2I&(O"A5(A15( ;[:?(d(;[;?(Q*AI$(b*A%& -*"#%&,+&$ ;T\;T9:;< 0C0(UA15 C",+%"(_]"*&,A*&(CA1A5A(U+5> W((((((((\?7:\\7X[Z( ;[>Y:[(A%$&, product from the tech, logistics, and warehouse & Source: Altus Group distribution sectors, putting more pressure on new product completions. The tech sector continues to be one of the strongest drivers of change in the office market, demanding more innovative, amenity-rich workspaces for their employees. The Limited New Supply for Cumberland region was completed in Q2 evolution of the workplace is being driven by Industrial 2019 and was the only completion in the changing behaviours and the power of It is no surprise that Industrial entire region since the end of 2017. product sits comfortably at the top Recently, Concert purchased 90% interest in newer technologies leading to a demand for more flexible workspaces. Over the past few of the list as one of the most the distribution facility, while Broccolini will years, Ottawa has increasingly become one attractive asset classes this year, retain its 10% share. It is now the largest according to Altus Group’s industrial building in Ottawa. Costco recently of the top, stable markets partly from the federal government’s presence as well as an Investment Trend Survey in Q2 purchased almost 15 acres of ICI land expanding tech sector. With expansions in 2019. Supply continues to be a located near Gloucester Centre which infrastructure and the new LRT line, people challenge, yet the industrial already has plans for redevelopment. and businesses will be able to move more leasing market has remained Calgary’s industrial vacancy rates rose to efficiently throughout the region which will active. In Ottawa, industrial 7.0% in Q2 2019 from 6.3% in Q2 2018 and help better distribute growing industries and vacancy rates have shown a construction in Calgary was slow. Only two populations. Calgary on-the-other hand continuous drop in the past year buildings at the Hawthorne-Stevenage faces its own future to be a sustainable and from 2.7% in Q2 2018 to 2.0% in Business Park were under construction as of attractive market and will be dependent on Q2 2019. As for new supply, Q2 2019, with each building totalling 47,680 how well the city strategically plans and Amazon’s new 1 million SF SF. The largest completion was Hopewell’s adapts to growth in the years ahead. ■ fulfilment centre in Ottawa’s Building 1 at its 38-acre South Calgary 10
Canadian Real Estate Forum / FALL 2019
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ADAPTIVE REUSE: BREATHING NEW LIFE INTO OLD BUILDINGS Ottawa, Calgary and Edmonton’s empty o ces lay new ground for multifamily development
Scott Figler By Scott Manager Figler National Research NationalMarkets Manager, Capital Markets Capital JLL Canada Research, JLL Canada Like any living organism, cities change over time. The way they manage this change comes to characterize that place and its inhabitants. Some cities, usually the older ones, value a stronger connection to the past and have strict ordinances that govern historical preservation. Think Quebec City, most of Europe, or Jerusalem. Other cities – like those out west – began as boomtowns, or like Toronto went through periods of rapid growth and build-up. These places are less sentimental about preserving the past because they don’t have as much of it to begin with. Whatever the case, times change and what worked 100 years ago might not work today. A healthy and dynamic market often requires 昀exibility so that scarce land and property can be allocated to its most e cient use. Real estate practitioners have a phrase for this 昀exibility: “adaptive reuse,” or the conversion of older buildings into uses more in line with present day needs. This concept is hardly earth12
Strategic Group’s Cube in Calgary shows the potential of o ce-to-multifamily conversions
shattering. Downtown strips of big cities and small towns alike are typically lined with handsome 2-storey retail storefronts that were residences in a past life. If you’ve ever gone for a beer in downtown Pittsburgh or Cleveland, chances are it may have been in the warehouse district, which at one point was actually used for warehousing. Amazon is gobbling up failed malls throughout the U.S. because they provide an excellent solution to ful昀lling the last-mile problem. Internationally recognized urban makeovers like New York’s Meatpacking District, Toronto’s Distillery District, and Buenos Aires’ Puerto Madero are examples of giving new life to obsolete buildings. But most adaptive reuse happens on a smaller scale: just look around your town and notice the schools, 昀re stations, concert venues, and community centres that were sculpted from someone’s mansion, or a church, or a paper mill. Adaptive reuse is all around us and it has been around since humans began putting rooves over our heads. So why is it the subject of this article? Because Canada needs more of it. Progressive immigration policies and a 40year bull run have attracted millions of new residents to a handful of Canada’s most productive urban centres. This is creating urgent imbalances between supply and demand for residential units. Since it takes
a long time for buildings to get designed, approved, and built, the lagging supply is pushing rental vacancies to their lowest levels in 20 years. Adaptive reuse of existing buildings into multifamily residences could be a crucial component of a broader solution to delivering much-needed urban housing to Canadian families. Low grade o ce buildings make for intriguing candidates. In each of Canada’s six largest cities, Class C o ce buildings have higher vacancy than the rest of the market. This makes sense – these are generally older properties that are outdated and require capital expenditure to update mechanical systems, façades, and common areas. If these properties require investment anyway, and are in markets where multifamily vacancy is signi昀cantly lower than o ce vacancy, then there is an argument to be made that conversion to residential would be the highest and best use. This happens to be the case in three cities: Ottawa, Calgary, and Edmonton. These cities have the largest spread between Class C o ce vacancy and multifamily vacancy of all major Canadian markets: 12.2%, 12.4%, and 11.5%, respectively. The context is di昀erent in Edmonton and Calgary versus Ottawa. Overall o ce vacancy in Calgary (20.7%) and Edmonton (17.7%) are among the highest in Canada. Class C Canadian Real Estate Forum / FALL 2019
ClassClass C Ofﬁce vs Multifamily Q2 2019 CVacancy Office Vacancy vs. Vacancy, Multifamily Vacancy,
Class C Office Vacancy Multifamily Vacancy Spread
The good news is if a developer can acquire such a property, zoning challenges are often less daunting than one might expect. Beyond bringing the converted building up to code, permitting processes are often fast-tracked because the city recognizes the need for this project to reach the market. For example, buildings in Calgary that fall inside an Enterprise District don’t require a development permit for conversion – just a building permit that is fast-tracked.
5.55% 5% 1.50% 0% Calgary
in a dense urban neighborhood with some surrounding amenities as opposed to a suburban o ce park o昀 the highway. Oh, and if such a hypothetical building does exist, the owner must be willing to sell it.
Source: JLL Research, CMHC (2019)
vacancy in both markets (18.8% that multifamily vacancy is extremely low at and 17.9%, respectively) is near or 1.6% – its lowest in 20 years. With one of the However, once capital costs have been The context is different in Edmonton and Calgary versus Ottawa. Overall office vacancy in Calgary below overall o ce vacancy, which country’s highest population growth rates, (20.7%) and Edmonton (17.7%) are among the highest in Canada. Class C vacancy in both markets incurred, developers have generally seen the need for churning out more housing units means that Class C landlords are positive results. An informal survey of (18.8% and 17.9%, respectively) is near or below overall office vacancy, which means that Class C in the nation’s capital is only growing more competing for tenants, in many landlords are competing for tenants, in many cases with higher-grade buildings whose rents are not that conversion developers found that an NOI urgent. cases with higher-grade buildings much higher. Multifamily vacancy in both markets (6.6% and 5.5%, respectively) is much lower than it premium of 20-30% for multifamily conversion whose rents are not that much This sounds reasonable in theory, but then was in 2016, and appears to be stabilizing. With immigration continuing to trend positive, the need for relative to low grade o ce is not uncommon. higher. Multifamily vacancy in come the design factors. To successfully rental housing should outpace the need for low grade office. Commented [MJ11]: Low grade offices? Office buil This 昀gure is boosted by strong lease-up and both markets (6.6% and 5.5%, pull o昀 an o ce-to-multifamily conversion, Office space? higher rents relative to market. respectively) is much lower than the 昀oorplates must be relatively open to Commented [FS12R11]: This is industry speak, I th it was in 2016, and appears to Alleviating Canada’s urban housing shortage Multifamily Rental Vacancy Rates minimize demolition cost, there must be be stabilizing. With immigration will require action on several fronts. To ample parking on site, the curtainCanada wall must 12% continuing to trend positive, the Ottawa be converted to operable windows, balconies unleash adaptive reuse as a supply response Calgary mechanism, municipalities would be wise 10% need for rental housing should might need to be added on, signi昀cant Edmonton outpace the need for low grade to do less micromanaging when it comes to changes may need to be made to the 8% o ce. Ottawa presents a di昀erent plumbing system for bathrooms and kitchens historic preservation. Strict rules governing set of circumstances. Here, overall the size of storefront windows, the color 6% to be installed, and the façade may need to o ce vacancy is at 7.7% – its of the awning, and what beams can and be altered to give it more of a residential feel. 4% lowest mark since before the cannot be touched do little more than to There are many variables that are di cult Great Recession. Class C o ce chase developers away. This results in less, to benchmark because each project is so 2% vacancy has come down over not more, utilization of historic buildings. customized, which presents its own set of the past few years and at 13.2% And as land becomes more expensive and 0% challenges when setting budgets. is relatively high, but much lower cap rates continue to compress, developers Location is also critical – this type of than in Alberta. However, what will increasingly have to reimagine existing conversion would probably have to happen is unique to Ottawa’s story is structures rather than building from the Source: CMHC (2019) ground up. Allowing for 昀exibility of use allows buildings to stay vibrant and useful for generations after their initial use becomes obsolete. Meanwhile, preserving rather than demolishing creates a stronger connection with the city’s history.
1177 11th Ave SW, before Strategic Group’s conversion
Source: JLL Research, CMHC (2019)
Many in the private sector complain about onerous historic preservation rules that add to their cost line, but rave about the architectural heritage while strolling through Old Montreal or Quartier Petit Champlain. Perhaps we will begin to look at multifamily conversions in the same way we look at those storefronts on Main Street: while they are not as quaint to look at, they serve as a reminder of how the built environment changes and adapts to the needs of its people over time. ■ 13
WHY THE COMMERCIAL REAL ESTATE INDUSTRY NEEDS PROPTECH
Zach Michaud Vice President Strategic Investments | Global Colliers International
Significant shifts in technology have forced property companies in recent years to think about what the digital age means for them. In the last decade, we’ve seen other industries like taxis and vacation lodging face massive disruption. For them, technology has become the new norm, not simply an add-on. At the same time, we’ve seen other industries, like media, healthcare and financial services, make huge strides to integrate technologies and improve their service offerings for the better. We know innovation will be key to remaining competitive and as we help shape the industry, we want to ensure we are staying ahead of the changes our clients are seeing in their businesses. According to Darwin, the species who are most adaptable to change are the ones who survive. And there’s no better way to adapt to the future than for us to be a part of creating it. As we think beyond just adoption for the sake of playing catch-up with other industries, there are massive opportunities to tackle operational inefficiencies within commercial real estate that will help optimize our industry.
With the right technologies, we can help improve our people’s productivity and our clients’ revenue and cost profiles by reducing low-skilled, repetitive work, and enable us to deliver smarter, more personalized client advisory. This is likely the thesis behind venture capitals’ $27 billion investment into the commercial real estate tech sector from 2016 to 2018. Commercial real estate is undergoing an evolution, stemming from changes in the way people are working and their expectations of employers, which are fueling how companies think about – and use – their office space. Shifting demographics plays a role too, with a younger workforce who want more flexibility and are gradually becoming key real estate decision makers. According to KPMG, 60 per cent of real estate decision makers globally think digital and technological innovation change will impact their business, up from 46 per cent in 2017. In the short term, productivity tools and data collection and analytics are seen as having the biggest impact on the industry – solutions we view as early stage on the real estate value chain, while automation, Canadian Real Estate Forum / FALL 2019
At Colliers, we’ve always viewed proptech as an opportunity, not a threat. As a traditional commercial real estate incumbent, we’re very eager to work with startups to ensure solutions are focused on the biggest pain points for the sector such as building management, performance measurement and tracking, and data management and solve real-world problems.
Venture Capital in Real Estate Tech Amount invested in commercial real estate tech from 2016-2018
Source: CREtech Full report: cretech.com/reports
artificial intelligence, augmented reality and blockchain are on their minds further down the road. At Colliers, we’ve always viewed proptech as an opportunity, not a threat. As a traditional commercial real estate incumbent, we’re very eager to work with startups to ensure solutions are focused on the biggest pain points for the sector such as building management, performance measurement and tracking, and data management and solve real-world problems. For example, companies we support like Booqed and Upsuite through our Colliers Proptech Accelerator powered by Techstars, were able to leverage our expertise and global network to address clients’ growing demand for flex platforms. This helps our investor clients by lowering the costs associated with vacancy and adds value for occupier clients by giving them more options beyond longer-term 16
or larger workspaces. Basking, another Proptech Accelerator startup, helps our clients understand how their office spaces are actually being used through data-driven insights provided by existing infrastructure like Wi-Fi, HVAC and sensors. By leveraging machine learning, corporate occupiers receive utilization reports and recommendations on how to optimize their real estate expenses. With average utilization of office space hovering around 65 per cent, there is room for better use of spaces. The use of blockchain technology is another possible gamechanger in commercial real estate that our 2019 cohort is exploring. It has the potential to drive transparency, efficiency and cost savings for owners. For example, it could help improve the property search process, expedite pre-lease due diligence and enable better processing of financing and payments, among others. Property touches nearly every aspect of daily life, so everyone in the industry needs to be asking tough questions like: What is it that people want in order to feel as if they can work and/or live their best lives in a building?
How do you differentiate a building with technology? How do you use technology to create a sense of community in a building? How do you use it to create an additional revenue source? And how do you integrate proptech’s many systems and tools? Considering the real estate market’s size – with total assets of more than $220 trillion worldwide, these are transformative questions to ponder. And for the companies that develop the technologies to provide valuable solutions, the benefits are tremendous. It’s clear that proptech has the potential to change how we do business over time. And innovation will continue to be a process – it’s an ongoing activity that thrives on acceptance of failure and a culture of experimentation. We are building on existing processes and practices, and working to eliminate unnecessary inefficiencies, instead of entirely uprooting how we think and behave. We hope that our enterprising culture and recognition of the opportunity and insight that technology is bringing to commercial real estate will help propel the industry forward. ■ Canadian Real Estate Forum / FALL 2019
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Canadian Real Estate Forum / FALL 2019
Canadian Real Estate Forum / FALL 2019
KEEPING OTTAWA ON TRACK FOR THE FUTURE Bernie Myers Senior Vice President, Real Property The Regional Group
Ottawa is brimming with attributes. On my first ride on the new LRT I could not help but simultaneously feeling,” Wow! this does not feel like Ottawa and Wow!, this is the new Ottawa. Factor in the cleanliness of a city with virtually no heavy industry, an educated, largely bilingual, and multicultural population, a relatively affordable cost of living and a low unemployment rate, and it’s no wonder that people who move here for work, stay for the superior quality of life. We are a city surrounded by green space, with Gatineau Park reaching right down to the Ottawa River. Recreation here is unparalleled. Where else can a worker leave the office downtown and be on a ski hill in 30 minutes or less? The federal government continues to evolve and, fortunately for everyone, will never go out of business, provides a stable base. The hi-tech sector, heretofore primarily in Kanata, is now increasingly in the downtown core, is growing, hiring, thriving, and adding to demand for space. Ottawa’s attributes are not a well-kept secret. The city is experiencing some migration from “Toronto refugees” finding housing at half the cost of the GTA with all of the benefits mentioned above. While driving up real estate prices, Ottawa remains a comparative bargain. Life is good. It’s important, however, to recognize a shift in the city’s identity. No longer a “big small-town”, rather, with a population of just over 1 million people Ottawa is now a “small big-city.” This shift brings new opportunities. Ottawa now has the critical mass build upon it’s attributes; make its art community even more dynamic, and support a proliferating restaurant scene and nightlife. Demand for public transportation will increase. As a city we must continue moving realestateforums.com
forward and not fall behind. Having turned the corner, we must start to think more like a “big-city”. Ottawa is first and foremost home to over 1,000,000 people. Ottawa is also our national capital, benefitting from the opportunities, yet with added responsibilities, and challenges which come with this significant stature. Our downtown remains relatively compact. We will need to embrace, foster and promote more towers, more density and, potentially in the short term, more congestion. All of this growth needs to be proactively and positively managed; after all it also comes with increasing tax revenue for the city, and greater access for citizens to live downtown, close to transit, and close to the workplace. Our newly opened LRT is a fantastic first start; but only that. Until the system reaches Kanata, Orleans, and beyond the airport, it will remain under-utilized. With the first Phase complete, Phase 2 and Phase 3 must be fast tracked with the urgency befitting a multi-billion dollar investment yearning to best serve the citizens, reduce traffic congestion, and maximize the return on this investment. In the coming year our biggest challenge will be to not just keep up with the demands of growth, but get ahead of the new demands, and manage new development without unnecessarily impeding progress. This challenge applies to politicians and administration officials from municipal, provincial, and federal governments. Growth involves a certain measure of risk. This is no time for timidity. Real estate investors at our Forum will learn about the host of opportunities in Ottawa. There are older buildings in need of retrofitting, modernizing or replacing, and obsolete buildings or properties needing redevelopment in innovative ways. Investors who embrace the change in our dynamic “small big-city” have limitless opportunity to invest, re-invest, re-capitalize and, frankly, do it profitably. ■ Michelle Morra 21
OTTAWA’S NEW LRT A GAME-CHANGER FOR PURPOSE-BUILT HOUSING Hendry, Chief Executive Officer at Homestead Land Holdings Ltd.
Alfred Hendry Chief Executive Ofﬁcer Homestead Land Holdings Ltd.
With one of Canada’s lowest vacancy rates at 1.5 per cent, a brand-new LRT system and ongoing net migration into the city, it’s safe to say the demand for rental in Ottawa will continue to soar. “Our view right now is it is a strong market and that it’s going to remain quite strong all the way through the next 12 months,” says Alfred
URBAN OTTAWA BRINGS POSITIVE CHANGE FOR RETAILERS
Candice Lerner-Fry First Vice President, Leasing Marcus & Millichap
As online shopping and other trends continue to alter the shopping habits of people all over the world, there are forward-thinking retailer investors who believe that, no matter what, storefronts will always exist 22
“The economy seems to be working quite well in the City of Ottawa. We are seeing demand for rental, although we are also seeing some supply being constructed. We have built four buildings over last few years and we're actually getting ready to go in the ground with another tower in the next six months. “We'll likely keep our development program going in Ottawa as we continue to find sites in our portfolio that make sense to intensify.” The new LRT system will be a game changer for those who specialize in purpose-built rental housing, says Hendry, who adds that their newest project is being built along its route. “I think it’s going to create a demand node all along the corridor of the LRT where the city's going to want to see more supply of rental housing being built, to encourage active use of these transportation models.
because consumers will always want to be able to see, touch, and feel what they buy. “It’s just that the whole retail market is trying to find a new way of getting people interested,” says Candice Lerner-Fry, First Vice President, Leasing, Marcus & Millichap. The Ottawa market evolves with the trends, and Lerner-Fry says retail is doing well. “Our population has finally hit 1 million in Ottawa, so our market is growing. Residential is being built, and retailers are feeling confident.” New LRT lines are now fully functioning in some parts of Ottawa. As the system continues to expand, retailers will have to adapt to people’s changing shopping patterns. “We’ll see how it goes. Hopefully we’ll see less cars on the road and more people using the LRT and bus system,” Lerner-Fry says. “It’s brand new to Ottawa and we’ll see a lot of changes in the next 12 months, in terms of how the LRT will affect everyday business.” Another trend that’s changing the face of downtown is that older malls are being torn down to be replaced with residential developments. It’s a phenomenon that’s happening in other Canadian cities, and one that appeals to real estate developers because malls are already linked to public
“We've seen this in many, many cities, even smaller ones like Kingston that try to get multi-res built around transportation routes. The benefit of the LRT is that it is a quicker form of transportation for the most part.”
“Our view right now is it is a strong market and that it’s going to remain quite strong all the way through the next 12 months.” Whenever it comes to new construction, at the end of the day Hendry says it’s important for cities and developers to have a give and take relationship. “You have to try to create a win-win situation for both. If it ends up not being a win-win, then usually projects don't get built, and we just have to be cognizant that both sides have to give a little bit to make it happen.” ■ Barbara Balfour
transit. “A lot of our B and C class malls in Ottawa, which are having vacancy problems and are eyesores, are being torn down,” Lerner-Fry says. “And it’s brilliant. These new residences will be right on the LRT line.”
“Developers have spent a lot of energy building in the suburbs and not downtown, so we absolutely have to do that.” Lerner-Fry adds that other investments being made in urban Ottawa, such as refurbishing the Sun Life Financial Centre and other heritage buildings, are necessary. “Developers have spent a lot of energy building in the suburbs and not downtown, so we absolutely have to do that,” she says. “Retailers in the ByWard market are complaining about business loss because people don’t have to go all the way back downtown to go to their favourite restaurants for date nights. They can go to these amazing restaurants and activities right in their backyards. But now money is being spent to get new retailers interested in the downtown core.” ■ Michelle Morra
Canadian Real Estate Forum / FALL 2019
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STRONG DEMAND STIMULATES OTTAWA OFFICE DEVELOPMENT
Hugh Gorman Chief Executive Ofﬁcer Colonnade Bridgeport
“Ottawa is finally coming into its own as a great, world-class city to live, work, do business and raise a family in. Economic diversification and infrastructure investment offer very positive prospects, as we move forward.”
Technology sector growth and immense infrastructure investment will continue to buoy Ottawa’s economy for the foreseeable future, forecast Hugh Gorman. “Autonomous vehicles and fifth-generation (5G) mobile telephone networks are the major drivers on the private sector side,” noted the Colonnade Bridgeport CEO. “Plus, there’s a long, continuous pipeline of projects on the public sector side—and not just long-term federal government renewal plans like Parliament Hill. Public infrastructure like light rail and major sewer refits are also driving the construction sector.” While that has driven up construction costs, Ottawa hasn’t seen the sky-high prices playing out in other cities, especially Toronto. “We’re seeing annual construction cost increases equivalent to what they see in a single quarter in Toronto,” Gorman reported. “We’re not witnessing dramatic increases. People are largely transitioning labour from one project, when it’s complete, to the next one.” Short-term, the biggest opportunity is in office development downtown and in Kanata. “We’re seeing occupancy at its highest level ever. Demand is definitely strong. Availability is tightening fairly dramatically and, as a result, rates are rising. Once your over 25,000 sq.ft., you’re down to one option, so there will be office built in Kanata,” he predicted. “You will see office demand driven by a major user who will kick
off predevelopment with a substantial amount preleased. I wouldn’t be surprised to see it built on spec in Kanata.” While the brokerage community has expressed concern about a supply shortage, Gorman remains nonplussed. “The market will respond to the demand,” he reassured. “I’m not overly concerned.” Colonnade Bridgeport is also watching its multi-family, mixed-use portfolio. “There are a lot of projects in the preliminary planning phase,” Gorman observed. “No one has pulled the trigger, and that doesn’t mean that they will be built. I don’t think it’s a critical issue, but we’re watching very closely to ensure that the multi-family market doesn’t get overbuilt. That could happen fairly quickly. Hopefully market discipline will prevail.” A change of government could also influence the real estate market. “We go through cycles of tearing down inside of government and building up again,” he said. “We’re at the peak of one of those cycles.” “The story is generally positive,” Gorman concluded. “Ottawa is finally coming into its own as a great, world-class city to live, work, do business and raise a family in. Economic diversification and infrastructure investment offer very positive prospects, as we move forward.” ■ Robert Frank
Canadian Real Estate Forum / FALL 2019
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INDUSTRIAL SPACE IS SCARCE IN OTTAWA
James Beach Director, Real Estate & Business Development Broccolini
With a definite shortage of industrial real estate, Ottawa’s industrial rates are currently among the highest in the country. “They’re getting close to Vancouver rates. They’re up to $10 for sure,” says James Beach, Director, Real Estate & Business Development, Broccolini. He doesn’t foresee any immediate change to the shortage and says a lack of new builds in the pipeline, on the large scale, will likely exacerbate the situation.
the servicing would be multiple years away.”
“Industrial is moving away from measurements in the two-dimension, i.e. square footage. Now we’re into three-dimension, i.e. cubic feet or cubic metres, which is really tied to storage space for product.”
As a sign of the times, Beach expects to see an increase in spec buildings in the near future. Building on spec is a trend in which Broccolini, a family-owned, single-source provider of construction, development and real-estate services, is one of the players. “Absolutely, we’re an opportunistic group and we’ve identified Toronto, Ottawa, and Montreal as three cities where we’d be comfortable developing on spec,” Beach says.
distance dimensions in terms of clear heights,” he says. “That building, I think, plays well to deploy for a 225,000 or 250,000 square foot tenant. It’s a great opportunity for repurposing an existing space.”
Interchange lands that are zoned and serviced are ideal for development, but these are in short supply. “That’s a challenge here in Ottawa,” Beach says. “We couldn’t go tomorrow and pick up a nice zoned, serviced parcel of land if we had a tenant knocking at our door. We’d have to wait easily a year before we’d be in a position for the zoning to be in place, and
Today the industrial real estate opportunities in the Ottawa market lie in repurposing existing space. Beach points out Regional Group’s recent purchase of a 258,000 square foot warehouse in the city’s east end that’s currently occupied by retailer Giant Tiger. “There’s a building sitting in a prime area that’s zoned and serviced and has
The right building, particularly in a serviced area, can often be upgraded for industrial tenants with specific mechanical and electrical needs as long as the interior dimensions, or clear heights, are adequate. “Clear heights are really becoming the new standard,” Beach says. “Industrial is moving away from measurements in the two-dimension, i.e. square footage. Now we’re into three-dimension, i.e. cubic feet or cubic metres, which is really tied to storage space for product.” ■ Michelle Morra Canadian Real Estate Forum / FALL 2019
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RÉALISER WE MAKE IT HAPPEN Montréal | Toronto | Ottawa
OTTAWA OFFICE, INDUSTRIAL RENTS READY TO RISE
Michael Swan Assistant Vice President, Property Management Leasing Ofﬁce and Industrial, Morguard Ottawa office owners can expect to see improvement, suggested Michael Swan, as a decade of densification which depressed demand for office space appears to have drawn to a close. “Where some 70 people once occupied a full floor, today, the government employs about 100 people,” reported Morguard’s Assistant Vice President, Property Management Leasing, Office and Industrial. “Now that that densification has been implemented in a great deal of locations, the government needs new space.” That demand has breathed new life into well-situated facilities with modern systems and amenities. The federal government’s determination to lease all its space within 600
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metres of the new commuter train stations will also drive up rates for properties in proximity. “You are going to see increases in office rental rates and occupancy,” he predicted. “They have been very flat for the last ten years and are finally starting to rise. If you have kept your property up-to-date and are close to a new light rail station, you will see an increase in office rents.” Downtown development difﬁcult to justify It’s premature to talk new buildings and development in the city core, though, Swan cautioned. “Construction and land costs are so high that you would have to charge $30 per square foot,” he observed, some $6 or more above the current market. “Until rents rise, I don’t see another new tower going up downtown, unless you find a tenant who will pay a premium price.”
“If you have kept your property up-to-date and are close to a new light rail station, you will see an increase in office rents.”
There are also great prospects for industrial properties in Canada’s capital, he added, which have witnessed higher rates and very low vacancy. “It’s very stable should see good growth,” he forecast. “With so little available, even challenged units without proper ceiling height or loading bays are seeing quite a bit of activity and getting leased.” The internet revolution has also bolstered demand from online retailers who don’t need retail frontage but want industrial space, Swan added. “They have taken up some of our industrial portfolio.” Limits to land available for industrial development also add to the lustre of legacy properties. “New zoning for industrial properties is not close to transportation routes. It won’t offer an advantage over existing locales where you can make improvements to your property.” Swan firmly intends to remain a buyer during the coming year.
“Morguard is Ottawa’s largest landlord,” he concluded. “We’re here for the long haul and very active in purchasing.” ■ Robert Frank
Canadian Real Estate Forum / FALL 2019
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CAPITAL CITIES COOPERATE MORE CLOSELY
Miguel Tremblay Partner FoTenn Planning + Design
Ottawa and Gatineau are drawing closer to one another daily. “We’re starting to see the two cities move toward the Washington, D.C. Area (DCA), model,” observed FoTenn Planning + Design partner Miguel Tremblay. “It won’t happen overnight, but I see the gap closing and witness more synergy.” Projects that straddle provincial lines have already started to bridge the two cities together, he said. Transit coordination could further revolutionize the relationship. 30
“Thanks to the new light rail (LRT) network, Ottawa and Gatineau are talking to one another about integrating interprovincial transit,” Tremblay said, akin to the DCA Metro subway system, which links Maryland, District of Columbia and Virginia suburbs seamless in a single mass-transit network. Ottawa environment-friendly, transit-oriented development plan contains provisions that could eventually enable integration.” The LRT has already prompted a development boom in proximity to the new line, as well as along its feeder arteries.
“The LRT success has led the cities to talk to one another about interprovincial transit links and how to deal with buses.” “Streets once characterized by low-rise residential or single-storey retail will now witness buildings up to 24 storeys because they are located on transit priority corridors,” he explained. Tremblay is optimistic that newfound openness to integration could enable Quebec’s fourth-largest city to gain from the same economic drivers as Ottawa has. “Both Ottawa and Gatineau mayors now sit on the National Capital Commission (NCC) board as non-voting members,” Tremblay
noted. “The LRT success led the cities to explore interprovincial transit links.” Investors need to understand that Gatineau’s processes are very different from Ottawa’s, though. “Approvals take longer and are less predictable,” he underscored. “Ottawa is about transit and heritage. In Gatineau, the environment looms large. Planning committees meet in camera and you have to be prepared to be prepared to work in French there.” “Their geographic juxtaposition of both city cores across the river is a best-case scenario,” Tremblay concluded. “There is already extensive interplay. People live in one city and work in the other. Barriers are dropping quickly. We’re starting to see overlap between developers, the community, tenants and residents. Some of that is the market. Some of it is employment. Mass transit will add more to that.” “Gatineau’s apartment market is really healthy, he added. “More and more people are coming from Ontario to rent there for its affordability and proximity. If you work downtown, you’ll be better off. If you rent in some Ottawa suburbs, you could be in store for a two-hour bus ride. The potential is tremendous.” ■ Robert Frank
Canadian Real Estate Forum / FALL 2019
SAFE, STABLE INVESTORS’ HAVEN POISED TO GROW
Nico Zentil Senior Vice President National Investment Team CBRE Limited
Ottawa’s growing population and burgeoning technology sector have sparked a transformational change that will drive growth for years to come. With capitalization rate compression having run its course, it has become harder for investors to recycle their capital. Ottawa’s growing population and diversifying economy improve its rent prospects, which has burnished its allure to investors.
“Ottawa checks all the boxes for growth. It is also a stable market. A predictable market. A safe market. Investors like that. So do we.”
“When you pass one million people, the city goes from being a big small town to being a small big city,” observed Nico Zentil, Senior Vice President, National Investment Team, CBRE Limited.
Safe haven from economic storms “Slow and steady wins the race,” he continued. “Ottawa is a stable market. A predictable market. A safe market. When the rest of the market goes through the roof, Ottawa enjoys modest growth. When the market tanks, Ottawa helps to offset the downturn. So, if you’re a portfolio manager looking at investment prospects across Canada, you’re going to ensure that you have holdings in Ottawa. We don’t experience the sharp peaks and valleys of markets like Calgary. Investors like that. So do we.”
He cited the Ottawa’s newly opened light rail commuter train network as a sign of the city’s metamorphosis, as well as entrepreneurial technology triumphs like Shopify. Heavy investment in basic infrastructure is also driving growth. Unlike main economic centres like Toronto, Vancouver and now Montreal, 32
though, the federal presence here keeps Ottawa a pretty safe bet.
office are, by far, the leaders of the pack, Zentil said.
“When you witness rising rents, burgeoning population and intensive infrastructure spending coupled with steady government employment, Ottawa ticks all the boxes,” Zentil suggested. “It augurs well for the value of real property in the capital.”
“Anything with an urban flair,” he explained. “Those three concentrations embody the concept of going urban which—together with industrial—are all very hot right now.”
Multi-residence and high-density development land, industrial and downtown
“As much as they’re investing in real estate, we tell investors that they are really investing in a rising city,” Zentil emphasized. “It’s a good feeling for groups coming in, to know that the city is performing so well on so many fronts. Other market categories continue to face challenges, he acknowledged. “I once would have included fringe office as well as suburban office, but it is struggling,” Zentil added, “and retail is obviously struggling as well.” “It's all about urban and industrial right now,” he concluded. ■ Robert Frank
Canadian Real Estate Forum / FALL 2019
BUILDING SOMETHING BETTER
Building in Cyber Resilience Digital technologies are increasingly prevalent in today’s real estate and construction industry. But these so-called ‘smart’ properties are only as smart as the cyber security strategies behind them.
For all the beneﬁts internet connected elevators, security and HVAC systems offer, they also introduce new risks for tenants and property managers – and new opportunities for cyber criminals to wreak havoc. MNP can ensure your cyber wellness by helping you understand your vulnerabilities, test your safeguards and implement a plan to quickly and effectively respond to any worst-case scenario. To learn more, access our free Cyber Wellness Guide at www.mnp.ca/raccybersecurity Contact: Lee Thiessen National Leader Real Estate and Construction T: 403.269.8450 E: email@example.com
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INSIGHTS FROM INDUSTRY LEADERS DURING THE CONTENT FORMATION OF OTTAWA REAL ESTATE FORUM
2019 Ottawa Real Estate Forum
OTTAWA ECONOMY IN GROWTH MODE
FEDERAL GOVERNMENT COMPETING FOR OFFICE SPACE WITH TECH FIRMS
OTTAWA OFFICE VACANCY RATE HITS EIGHT-YEAR LOW IN Q2 2019
Signi昀cant population growth and a healthy job market propel housing prices past the $500,000 mark.
The growth in the Federal Government and the tech industry is putting pressure on a tight of昀ce market.
Robust demand for space and limited construction creating challenges for 昀rms looking for large blocks of space.
OTTAWA SUBURBS BENEFITTING FROM TIGHT OFFICE MARKET
GATINEAU FLOURISHES WITHIN THE NATIONAL CAPITAL REGION
OTTAWA RETAIL STABLE AMID EVOLUTION
TENANTS STRUGGLE TO FIND SUITABLE SPACE
Suburbs generating a lot of activity as tenant vie for space.
Demand for housing grows as people 昀ock to the CMA amid job growth and new infrastructure projects.
Retail sector remains stable due to Ottawa’s strong economy and high income levels.
Ottawa’s industrial pipeline the lowest across Canada’s largest cities.
ROCK BOTTOM VACANCY RATES CAUSES RENTS TO SURGE
LRT A “CATALYST” FOR MAJOR DEVELOPMENT ACTIVITY
HEALTHY FUNDAMENTALS MOTIVATE INVESTORS
In the wake of the biggest increase in rents, co-living comes to the Capital.
Ottawa’s expanding population and strong economy has led to a number of major developments.
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Investment volume and transactions velocity in Ottawa accelerated through Q2 2019 and this trend looks poised to continue into the second half of the year, according to CBRE.
For further details on these top trends please visit the Real Estate Forums Portal at realestateforums.com and search under Markets Insights, Publications & Real Insights
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DISRUPTIVE TECHNOLOGY: OTTAWA’S BIGGEST GROWTH ENGINE
Sonya Shorey Vice President of Strategy Marketing and Communications Invest Ottawa
Of all the ingredients responsible for the explosion of smart technology in the Ottawa region, there are three that are key: proximity to federal policy makers, telecommunications capabilities unrivalled by anywhere else in North America, and a four-season climate. From plus 40-degree Celsius summer temperatures, to snow, sleet and ice in the winter, Ottawa weather provides a tremendous competitive advantage for companies testing autonomous vehicles in all types of conditions. So does having access to the only autonomous vehicle test track on the continent – the first integrated tech facility of its kind that’s also being used by giants like Nokia, Ericsson and Microsoft to test services such as cloud computing and 5G wireless. Fast becoming the single greatest driver of the local economy, disruptive technology
holds applications in countless, ever-evolving sectors, says Sonya Shorey, Vice President of Strategy, Marketing and Communications at Invest Ottawa.
“Smart homes, smart cities and smart government are three areas of tremendous global market opportunity where we recognize the Ottawa region has a lot of assets, resources and expertise.” Those applications will translate into opportunities in multiple sectors and at a mind-boggling scale within the next decade – a trillion-dollar market according to some authorities, says Shorey.
Canadian Real Estate Forum / FALL 2019
intelligence to the vehicles of the future, while partnering with post-secondary institutions who are customizing their curriculum to address future hiring requirements. Related opportunities include helping the federal government digitize their programs and services, or guiding teams of hospital physicians and researchers to work collaboratively with innovators and entrepreneurs. “We’re taking steps towards making that commercialization process simpler and making sure all the regulatory hurdles are known and prepared for,” says Shorey.
“Ninety per cent of all the telecommunications R&D that takes place in that field is happening in Ottawa,” she says. “Smart homes, smart cities and smart government are three areas of tremendous global market
opportunity where we recognize the Ottawa region has a lot of assets, resources and expertise. Those areas are the ones we've chosen to focus on based on our research and consultations with the community.” More than 90 companies and organizations in the city are contributing technology and
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The current levels of activity in the city act as an incredible vote of confidence, she says. “Why is that so important? Because it will help us to attract other firms and other business. And of course that drives many other economic impacts, not the least of which is in the real estate sector as we attract new companies that want to spend money, be anchored here and build out new facilities or renovate existing ones to support their goals.” ■ Barbara Balfour
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Canadian Real Estate Forum / FALL 2019
THE EVERRESILIENT CITY OF CALGARY
Murray DeGirolamo President Hopewell Development
What will Calgary look like, exactly, when it revitalizes itself and grows up? The city needs a push to diversification. Calgary cannot be an oil and gas centric sort of town anymore. There are initiatives toward diversification, but these are slow and a long road. As a result, so is real, real estate growth. Calgary is experiencing a continued challenge with vacancy in the downtown office market. Office buildings have traded, albeit at a discount. Pricing in the industrial market has held firmly, and that market continues to be the darling of any of the asset groups. Much of the industrial market’s growth has been driven by e-commerce fulfillment, consumer distribution—as bricks-and-mortar retail has suffered, industrial bricks-and-mortar has benefited, hence the demand for industrial space. The biggest struggle for retailers has been the tax game that has been played within Calgary. We’ve seen a shift of the burden to retail and industrial away from office buildings, which has put upward pressure on gross rents in the retail sector specially and therefore erosion of net rents. Landlords are struggling to keep tenants at in-place rents given the gross up in operating cost and the effective erosion of net rents. Here’s an interesting tale of two cities: While Calgary’s downtown office core has always been heavily oil and gas reliant, its industrial market has more consumer and realestateforums.com
distribution tenancies than oil and gas. Calgary’s industrial market has always been diversified. In Edmonton, the situation is reversed. The downtown office core in Edmonton is not as reliant on oil and gas—it’s diversified—but Edmonton’s industrial market has been predominantly oil and gas, as a result has suffered. In the ever-resilient city of Calgary, economies are merging. The city remains a vibrant place to live and work with a young, educated workforce, but let’s face reality: Calgary needs a kickstart. Many players in this industry are crossing their fingers for pipelines to be built, and for a new federal government that would perhaps do a better job at helping the Western economy. Even when the taps get turned back on, however, oil and gas can’t be relied on to be the long-term future for the economy. Even when that sector picks up again, it will not be the same as it was. Oil and gas companies will not have the same CapEx or occupy the same amount of office space as they did in the past. At our Real Estate Forum, as you enjoy a rich networking experience and take in the wisdom and experience of experts in your field, I encourage you to think bigger for Calgary. Think economic diversification. Think healthcare, science, engineering. Think of our city’s potential to become as much a renewable resource community as it is an oil and gas community. Change could take several years but, meanwhile, it’s time to think of real estate’s infinite possibilities in this new light. ■ Michelle Morra 41
LARGE-SCALE DEVELOPMENT PROLIFERATION As a growing population puts pressure on existing infrastructure, Calgary is in the process of pushing densification.
Fraser Dyer Senior Director & General Manager, Altus Group
“The thriving rental market has spurred rental apartment development. Large-scale development has proliferated.”
“The net population is growing by up to 40,000 a year,” observed Altus Group Senior Director & General Manager Fraser Dyer. “We’ve seen strong demand: Despite all the new product that has become come available during the past 24 months, vacancy has crept down. The thriving rental market has spurred rental apartment development. We still have less rental stock than 15 years ago, because so much was converted to condos. So large-scale development has proliferated.” Live-work-play Most new construction is mixed-use, he said. “City planners want integrated live-work-play projects that will relieve the pressure to provide more public transit, roads and other municipal services,” Dyer explained. “Developers are either partnering with other groups to do something slightly different or servicing the land and selling off parcels to specific developers whom they want to involve in their projects.” Build it and they will come The market remains receptive, as do developers. “Retailers who enter these new neighbourhoods seem to be thriving,” he reported. “Despite a bit of a lag in population density, retailers have proved willing to await the new residents’ arrival.” While a surfeit of vacancies has left the downtown office market sluggish, the city’s live-work-play predilection has spurred some mixed-use developments to integrate new office space.
“There is some significant development going on at the moment,” Dyer said. “That’s not to say that there’s a lot of office construction.” He cited several examples that exemplify large-scale projects in the pipeline: • University District (West Campus Development Trust) One of the largest currently underway, it mixes condos, apartments and townhouses with some commercial and office space planned, and some retail town centre, as well. • Trinity Hills (Trinity Group) Apartment rental, townhomes and 55+ living as well as a town centre surrounding main street retail with some commercial space like a grocery store and some entertainment as well as bike and hiking paths and a master-plan community will rise adjacent to the Olympic Park. • Greenwich (Melcor) The townhouse, condo and apartment development will comprise a mixed-use town centre and a farmers’ market that will attract ample traffic from elsewhere as well as residents. • East Village Already in the second half of a 20-year, high-density development plan, Calgary’s east core has seen more than $350 million invested in infrastructure upgrades and connectivity to downtown, the Bow River and Victoria Park. Attractions include the National Music Centre, the Calgary Public Library and restored historic buildings. Work is currently underway on a project with a large retail destination at the podium level above it which will comprise a full-size grocery store—which downtown has long lacked. continued on next page Canadian Real Estate Forum / FALL 2019
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• 9th Avenue (ONE Properties) Four apartment towers will rise at the western gateway to the downtown core, two blocks from the commuter train station. The project will ultimately comprise 2,160 units above a substantial retail podium. ONE Properties is also building about 1,000 residential units at its 12th Avenue beltline site with retail at its main floor. • Township (Royop) This southwest Calgary development will integrate mostly single- and multi-family homes where Royop is building about 4.5 million square feet of commercial space which will include some retail, office, residential and potentially a hotel. Prelease is underway with kickoff expected in 2021.
• Kingsland Junction (Trico Communities) The five-building mixed-use development will include retail, commercial and rental residences. Some seniors housing is also envisioned, providing a place where residents can remain from mid- through later-stages of life. • Tsuut’ina (Canderel) This massive, 25-year, 1,200-acre leasehold project could eventually comprise 17 million square feet of real estate. Some retailers are already lined up for the south, within reach of existing municipal services. That could commence later this year or early in 2020, and the rest of the project could kick off in 2021, if the ring road is completed. That could deliver commercial services currently unavailable to that part of Calgary, with senior housing and a medical campus also mooted.
• Hotel on 5th Avenue Southwest (PBA Land & Development) The proposed site could see construction start soon on a 27-storey, 300-room hotel—the second significant downtown hotel project during the past 18 months. • Stonegate (ONE Properties) Bound to become Western Canada’s biggest business park (Stonegate Landing) and a retail development (Stonegate Common), it will comprise up to 14 million commercial square feet just north of Calgary airport, 10 million square feet of industrial and 2.5 million square feet of suburban office development, hotels and car dealerships. • Belvedere (Tristar Communities) With a primarily single-family tinge, this new east side community will comprise some multi-family and commercial development near the east leg of the ring road, a relatively short drive to downtown. ■ Robert Frank
OFFICE TOWER CONVERSION COMES WITH UPGRADING CHALLENGES
rentability of the tower, says Rowland, “especially if you can get a restaurant or coffee shop or a grocer on the main floor.”
could pose barriers to accessibility through existing infrastructure such as stairwells, exits and elevators.
While the relatively larger floor plates of an office space compared to a typical residential unit might appeal to potential tenants, they can pose an additional headache for landlords.
Brian Rowland Associate Zeidler Architecture With an office vacancy rate currently hovering around the mid-20% range in Calgary, property owners are increasingly looking at repurposing their assets into multi-residential units. However, there are some notable challenges involved in the conversion of an office space, including capital expenditures that can be significant, says Brian Rowland, associate at Zeidler Architecture. Many office buildings are older properties that were built decades before current building codes and 44
“These can pose a challenge, whether you try and upgrade them or speak with the jurisdiction-holding authority about how you might maintain existing conditions, but with some safety-improving measures,” says Rowland.
“These properties were built to look like office towers, not residential buildings. So there's also a visual challenge, to convert them to something that appeals to a tenant who might want to live there.”
“These properties were built to look like office towers, not residential buildings. So there's also a visual challenge, to convert them to something that appeals to a tenant who might want to live there.” As most office towers are located in busy downtown areas, it is either not feasible to create a townhouse or yard front or would be prohibitively expensive. As a result, these properties are still retaining commercial units on the ground floor, which can benefit the
“There are certainly developers who want to maximize the number of units they can get into these floor plates, and there are times when we have to say we really can't accommodate that,” says Rowland.
“There's also discussions about whether bedrooms need access to natural light and how we can facilitate that, whether they have to be on the exterior wall or whether we can have borrowed light from the living room space or use some type of mechanical ventilation to get fresh air into the room. “Sometimes there’s a bit of a push back and forth between the architectural design and the developers. But for the most part, I think we're able to work everything out.” ■ Barbara Balfour Canadian Real Estate Forum / FALL 2019
INSIGHTS FROM INDUSTRY LEADERS DURING THE CONTENT FORMATION OF CALGARY REAL ESTATE FORUM
2019 Calgary Real Estate Forum
ECONOMY SLOWLY GAINING TRACTION
POLITICAL UNCERTAINTIES POSE POTENTIAL CHALLENGES FOR ALBERTA
OFFICE VACANCY RATE SLOWLY COMING DOWN
A weak start to the year is giving way to an improved performance in H2 2019 and into 2020.
From the pipeline approval to trade uncertainty in the wake of CUSMA & Brexit, Alberta faces both challenges and opportunities on different fronts.
Can co-working become one of the primary drivers of of昀ce demand in Calgary?
INDUSTRIAL VACANCY RISES IN THE WAKE OF NEW PRODUCT DELIVERY
RETAIL VACANCY INCREASES SLIGHTLY
RENTAL HOUSING VACANCY PLUMMETS EVEN AS HOUSING MARKET BEGINS TO SHOW SIGNS OF NORMALIZING
KEY INFRASTRUCTURE PROJECTS CATALYST TO REVITALIZATION OF THE RIVERS DISTRICT
The completion of 2.2M sq. ft. of new product in the second quarter pushes overall industrial vacancy to 6.5%.
Despite economic challenges and disruption to the sector, retailers remain bullish on the Calgary market.
Demand for rental housing propelled by mortgage stress test and solid migration numbers.
SECONDARY MARKETS THRIVING
CANADIAN PROPTECH COMPANIES TAKING CRE BY STORM
GOOD SUPPLY OF DEBT & EQUITY FLOWING INTO CALGARY MARKET
Attracted by lower tax rates and developer-friendly policies, commercial development has been ‘proceeding at an impressive rate’ in Calgary’s outlying areas.
As our tech ecosystem expands and matures, Canadian PropTech companies are making a signi昀cant impact on CRE.
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Calgary investment market appears to be driven by the industrial sector as well as the quest for yield, driving up transaction volume.
CMLC’s $1.5B Rivers District Revitalization plan set to invigorate the Calgary landscape.
For further details on these top trends please visit the Real Estate Forums Portal at realestateforums.com and search under Market Insights, Publications & Real Insights.
HOW ONE COMPANY AVOIDED AN OFFICE CRISIS
Randy Ferguson President, Strategic Group In early 2013, Strategic Group began to diversify its portfolio from primarily Class B office space to also include multifamily rental. “We could see where we were headed as an office industry in the west, based on a lot of things like the price of oil and gas and transportation,” says Randy Ferguson, President, Strategic Group. “Everything was starting to come to a head, so we anticipated challenges in the office market.” The company chose multifamily because of a number of economic indicators coming together in
what Ferguson describes as a “perfect storm.” The populations of Edmonton and Calgary were getting younger. More than 50 percent of the rental inventory in those two cities were more than 50 years old. And there was a growing propensity in people to rent. “This younger population that was starting to take up residence and Edmonton and Calgary wanted mobility,” Ferguson says. “They lived a different lifestyle, lived through a shared economy. Home ownership wasn’t high on their radar.” Strategic Group started with 232 rental units in 2013 and now has more than 2000 in Alberta. Making the decision to diversify allowed the company to then take another step—to reexamine its Class B office portfolio and identify assets that could be repurposed. For instance, the company converted 22,000 square feet of long-dormant office space in south Calgary into a farmer’s market and food hall. It also converted a downtown office building into a “very classy, very successful mini-storage facility,” Ferguson says. And as a third example, the company is converting office
buildings to multifamily rental. “The repurposing of those buildings was driven by physical structure, where it was located, the neighbourhood it was located in, and putting all of those pieces together we very quickly found four buildings in the portfolio that could be repurposed from office to residential.”
“We could see where we were headed as an office industry in the west, based on a lot of things like the price of oil and gas and transportation. Everything was starting to come to a head, so we anticipated challenges in the office market.” Ferguson is proud of what his team has accomplished but stresses that these projects involve a lot of highly detailed planning and analysis. “If we left this as an office building, how long would it take us to normalize the vacancy? And if we transform it into a residential building, what does that look like on a stabilized basis for the same period of time, and how much money is left over after what you’ve spent? So it’s simple to say,” he laughs, “but really hard to get to.” ■ Michelle Morra
BUILDING NEW RENTALS OUT OF CONDOS AND CONCRETE product is being absorbed,” says Samuel Dean, Senior Vice President, Capital Markets, Multi-Family Alberta, JLL. “We are seeing some developers missing their pro formas—they’re being pro ‘forma’d out’ due to rental incentives—but I think we are seeing the rents rise above $2 to $2.50 per square foot.” Samuel Dean Senior Vice President Capital Markets Multi-Family Alberta, JLL As tougher mortgage regulations pose a challenge to condo sales, multi-res rental continues to perform well in Calgary. In fact, some investors are opting to convert proposed market condominiums to rental units. “I think if we look back at stats for the last two quarters of 2019, we are seeing positive momentum as the 46
Real estate prices in Calgary remain relatively low compared to Toronto or Vancouver, and rental rates compared to income levels remain fairly attractive. Dean believes there’s a lot of room for rental rates to grow in the newer buildings as market conditions improve but says that when it comes to older assets—concrete 1960s and 1970s builds—owners and investors are very interested in renovating and modernizing suites. He is seeing huge demand for concrete, institutional quality rental towers that are fully stabilized. “We haven’t seen many trade,” he says, “but I
think there are a few on the market or coming to market that would trade at fairly aggressive cap rates.” Apparently size matters, and that is where older buildings shine. With rising construction costs it doesn’t always make financial sense today to build very large units, yet there is a market to renovate the large units found in older buildings. “No one is building 1000 square foot two bedrooms,” Dean says. “Everyone is building smaller units, but in the older buildings you can compete on size and oftentimes location, as well as some of the things that new buildings just can’t do, like storage and parking. “For an older concrete high-rise built in the 70s, somebody might pay $300 a square foot and put $200 per square foot in renovations, and they’re still significantly below the $550 to $650 per square foot that someone’s paying for a new tower. So the numbers still do make sense on these older buildings to buy them at the lower price per square foot.” ■ Michelle Morra Canadian Real Estate Forum / FALL 2019
“The value of those leased buildings continues to grow as demand ramps up day-by-day throughout North America for A-class products, and B-class, for that matter. C-class industrial real estate also remains in high demand.”
Large-bay properties here currently earn about $6-7 per square foot; mid-bay $7-8. Calgary’s main challenge, compared with Canada’s other major markets, is slower rent revenue growth for smaller product.
INSTITUTIONAL INVESTORS INVIGORATE INDUSTRIAL PROPERTIES
Phil Brown Vice President Acquisition & Leasing Industrial Hopewell Development Calgary’s very strong distribution and industrial sector as well as the highly-educated, entrepreneurial demographic of its 1.3 million population has helped make more independent of the energy economy, bolstering demand for industrial real estate here. Where once institutional investors like life insurers and pension funds spurned industrial in favour of retail and office assets, now, they can’t get enough. 48
“Everyone wants industrial,” declared Phil Brown, Vice President, Acquisition & Leasing, Industrial, Hopewell Development. “Ivanhoé Cambridge is a great example of that. They’ve really ramped up their worldwide industrial portfolio during the past five years. It’s very smart. The value of those leased buildings continues to grow as demand ramps up day-by-day throughout North America for A-class products, and B-class, for that matter. C-class industrial real estate also remains in high demand.” Institutions’ newfound interest in industrial has made the market very competitive and increased the cost of acquisitions. “All our competitors and their partners are extremely well-financed,” Brown observed. “That’s the challenge. There is intense demand whenever land becomes available. When a user who needs 200,000 sq.ft. or more comes to market, all the owners of prospective properties are institutional owners, all of whom will aggressively court those tenants.”
“Though growth trails Toronto and Vancouver due to Alberta’s economic downturn, Calgary’s market remains stable,” he averred. “Deals are just a little slower to come by than they were during boom times.” Electronic commerce continues to drive demand, especially for larger users: Amazon, Indigo and Home Depot have all set up Calgary facilities of late. “We’re absolutely seeing demand from those guys,” Brown said, “though last-mile is less important because in Calgary doesn’t have traffic issues like Toronto, Vancouver, New York or Los Angeles. Those cities have infrastructure issues in moving trucks and people around.” “You might see a little of that in Calgary, but not as much,” he added. “Amazon did do a small last-mile here, but they’re the exception, not the rule. That’s how Amazon goes into any market.” “We’re cautiously optimistic that there will be some absorption during the coming year,” Brown concluded. “A lot of space can get eaten up rapidly. We’re very confident in Calgary and firmly intend to remain in its industrial market. ■ Robert Frank Canadian Real Estate Forum / FALL 2019
CALGARY’S LONG-TERM FUTURE IS STILL BRIGHT: OPPORTUNITIES FOR INVESTMENT CONTINUE THROUGH THE DOWNTURN are showing signs of interest in the city,” he says, noting their own assets have held up extraordinarily well through the downturn.
Michael Emory President & CEO Allied Properties REIT
Even in times of economic slump, opportunities for investment persist in Calgary. In part, that’s because the city’s long-term prospects are still good, says Michael Emory, President and CEO of Allied Properties REIT. “I think Calgary will begin to transform in a way that will diversify its economic base, especially as technology users
“I don’t think coworking is anywhere near as large a market as some of the active, providers would suggest. And, “I think there is there's always going to be risk in a downturn when you've got a material growth long-term lease commitment with potential in short-term leases from the users who appreciate the flexibility.” Calgary.
I believe in the However, Allied Properties REIT “We’re 92 per cent leased at the moment, with most of our city long-term.” will continue focusing on creating distinctive work spaces for the vacancy in storefront retail knowledge-based economy, downtown. The acquisitions whether through the adaptive reuse of older we've made in the last two years are small and existing heritage buildings or the and not terribly numerous, but they have construction of new ones, says Emory. been very opportune with good yields and long-term intensification potential. So, I think “The experience we had in redeveloping there is material growth potential in Calgary. heritage structures for office use above I believe in the city long-term.” grade and retail use at grade has definitely informed the attributes of what we build, and As the global competition for talent heats up I think has contributed meaningfully to the and immigration into Canada increases, it's desirability of the work space we can create entirely possible that more tech users will in either new space or restored older migrate to Calgary to not only benefit from space.” the talent pool, but also take advantage of the lower cost space available in the city, ■ Barbara Balfour says Emory.
CALGARY: SEEING IS BELIEVING substantial residential construction, with some office and hotels going up closer to the airport.
Michael Brown President & CEO Calgary Municipal Land Corporation (CMLC) Getting prospective investors to Calgary to witness the growth here is the pivotal to attracting the capital that this city needs to move forward, affirmed Michael Brown, President and CEO, Calgary Municipal Land Corporation (CMLC). “The community continues to grow,” he reminded. “It’s just not growing as rapidly as it was.” Calgary continues to see 50
While he acknowledges that coworking enterprises are satisfying the demand for flexibility from users in early stages of growth, “coworking will never be more than a very, very small portion of our portfolio,” he says.
“On the project side, we have a new arena and event centre. We’re in the early phase of working through the up-front work so we can build and complete it in the 2023-2024 timeframe,” Brown reported. “We also have an expanded convention centre that we’re working through. In addition to that, are a number of placemaking projects such as underpasses and crossings on light rail transit tracks that we’re working through.”
“We’re conscious of projects in the market, but there remains significant interest in what we’re trying to do,” Brown underscored. “Our priority is to attract private investment that will complement the public projects. It will come in the form of residential towers or units. There is also the potential for office space as well as a hotel in the area. That will work well with the convention centre. It needs the office piece to connect up with it.” The first step to bringing that investment capital is to overcome the erroneous perception in Eastern Canada that there is nothing going on in Calgary.
He acknowledged that vast projects like the Tsuut’ina nation’s long-term collaboration with Canderel linked with completion of the ring road in Calgary’s south-west would influence market absorption.
“In terms of external investment, once folks come out here and see to their surprise that there are some things going on, we start getting some of the external investment that we need,” he explained.
“The market can only support so much development,” Brown observed.
Would he like to see more?
However, he underscored the positive reception that CMLC’s initiatives continue to receive.
“Of course,” Brown smiled, “That’s why we bring people here: Seeing is believing.” ■ Robert Frank Canadian Real Estate Forum / FALL 2019
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CALGARY TECH ACUMEN TO TRANSFORM ENERGY, AGRICULTURE, TRANSPORTATION INDUSTRIES in the world for machine learning and AI,” she said. “We’re working with the Alberta Machine Intelligence Institute to bring those skills to Calgary. It’s a strong magnet for people to come here.”
Mary Moran Chief Executive Ofﬁcer Calgary Economic Development Efficiency has replaced growth as the energy industry mantra. Two decades ago, Alberta explorers drilled 24,000 wells a year. With today’s figure a mere tenth of that total, firms are turning to machine learning, artificial intelligence (AI) to target their investment. That technology puts Calgary in a position of long-term strength, observed Calgary Economic Development CEO Mary Moran. “University of Alberta is ranked third 52
The tech transformation goes well beyond energy. Agriculture giants like BASF, Bayer-Monsanto and DowDuPont have also pitched their tents here, and the city remains strong in logistics as well as transportation, with a strong Canadian Pacific, Canadian National and WestJet presence. “We just did a research study which forecast $18 billion of technology investment in Alberta in those industrial sectors, by the end of 2021,” Moran reported. “Calgary is a place where this industrial transformation will take place. Data scientists are flocking from around the world to weigh the projects underway—and they’re very excited about it”. With the University of Calgary’s biotechnology acumen attracting almost a half-billion dollars
of research funds a year, the city’s life sciences innovation hub has also grown much more rapidly than anticipated. “We just opened it in March,” she explained. “The labs are already 80 percent full as is 60 percent of the office space. We thought that it wouldn’t be full until the end of 2020.” Moran also credits Calgary’s concentrated urban core and attractive amenities for creating the collaborative environment that has lured leading tech players. “We have great infrastructure, with housing, parks, restaurants and the like all in close proximity,” she underscored. The transition has often been painful, Moran acknowledged, but she has seen a sea change in the energy industry that has buoyed her optimism. “Calgary is the place to come to take tech and make energy better. We’re witnessing environmentalists, renewable energy and conventional energy firms come together to explore alternatives to carbon in a way that would have been unthinkable five years ago. We’re also transforming agriculture, transportation and, increasingly, the life sciences,” she concluded. ■ Robert Frank Canadian Real Estate Forum / FALL 2019
CALGARY 2.0: RENEWAL CENTRES ON CITY CORE
and bike more,” underscored QuantumPlace Developments Managing Principal Chris Ollenberger. The challenge is consistency: How to reliably map out the costs and risks that downtown redevelopment entails. “One of the most effective ways to foster new projects is to make the costs and risks predictable,” Ollenberger suggested. “People doing due diligence need to be able to reliably predict offsite levies, impact fees and prospective bonus densities.”
Chris Ollenberger Managing Principal QuantumPlace Developments The days of building green field sites on the outskirts aren’t over, but development has finally come full circle back to Calgary’s core, where it all started. “By providing incentives to redevelop established area, the city clearly wins on public transit, operating costs and maintenance and encourages people to walk
The city has already improved development timeframes and streamlined processes, in harmony with the industry. It has reviewed regulation, reduced red tape, eliminated duplication and improved its internal information flow. “They’re trying to fix it. I’ve definitely seen some improvement,” he affirmed, and “urged industry insiders to get involved.” While some pilot projects have proved promising, redevelopment reform remains far from complete. “It’s such a new initiative that few developers, investors and financiers are familiar with it,” he
continued, “so I encourage all stakeholders to stay in close contact with the city and keep close tabs as redevelopment reform progresses. The more we participate, the more likely we’ll end up with better balanced and improved results at the end of the process.” The city is currently considering rezoning some areas in advance of development applications. “That can be a challenge to get right,” Ollenberger conceded. “Every development has to contribute its fair share of off-site levies, but to encourage redevelopment in the urban core, the city has to weigh land prices there against the outskirts and come up with a fair formula that will make redevelopment the current footprint more attractive.” Though some owners have successfully repurposed downtown office space as residential or mixed use, Ollenberger sees such conversions as a niche market. “The asset has to have really good bones and be suited for residential,” he concluded. “Some industry groups have estimated that less than 15 per cent of buildings are suitable—and even fewer would be economic.” ■ Robert Frank
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INDUSTRIAL KEEPS CROWN AS CALGARY MARKET KING What do real estate investors want when they look at placing their capital in Calgary? The answer is that the level of demand varies significantly by market segment, replied RBC Capital Markets Real Estate Group Managing Director Jason Cottle. Jason Cottle Managing Director RBC Capital Markets Real Estate Group
“We’re witnessing considerable leasing demand for industrial premises. That demand has driven intense interest to invest in industrial properties.”
“If you look at the office segment, we are witnessing a welcome increase in the amount of interest, but the buyer market here remains opportunistic,” he said. The strongest investment demand on the office side is coming from private, entrepreneurial investors who are trying to time the market bottom or who have adopted a long-term strategy and are seeking to buy at a low enough price point that they are comfortable that they will do well over the long term. “They’re trying to buy on more of a price per foot basis,” Cottle said. “The office side of Calgary’s real estate market really remains more the domain of the private buyer.”
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Retail investment also faces a bit of an uphill struggle at the moment, but this is more due to the growing impact of online retail sales and its negative impact to conventional bricks and mortar retail. “That’s a phenomenon that we’re witnessing across Canada and is not unique to Calgary or the Alberta region,” he clarified. Who is buying retail? That depends upon the size of the deal. “Interest in lower price point assets is being driven by private buyers,” Cottle explained. “As soon as the size of the deal rises into the over-$40 million range, that’s when you traditionally see it move into the REIT or institutional investor segment. Unfortunately, neither REITs nor institutional investors are seeking to increase their exposure to retail or their general exposure to the Alberta market at this time. That has led to a quieter market for retail investment over the past 12 months. On the positive side, with retail cap rates moving up and borrowing rates at favourable levels, more recently we are seeing investors taking a new, opportunistic look at retail based on the attractive equity returns that can be structured. The strongest demand of any segment of the city’s real estate market is, by far though, industrial. “We’ve seen good strength in Calgary’s industrial market from the logistics sector,” Cottle reported. “We’re also seeing considerable demand on the leasing side being driven by the e-commerce market; particularly for larger, big bay space and fulfillment centres. That industrial leasing demand and its positive impact on occupancy and lease rates has driven intense investment demand for industrial properties.” In terms of capital coming into Calgary’s industrial sector, it is being driven by private investors for lower price point deals and real estate investment trusts and institutional investors for larger transactions, he concluded.
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MAKE THEM WANT TO SHOP
Eve Renaud Vice President Rencor Developments Inc.
“The bottom line is that people still need to get necessities. If you have a shopping centre today you need to look at your existing tenant mixes and what types of experience you’re providing for customers.”
Opening a store takes considerable capital. It’s a big economic decision to make and, according to Eve Renaud, some investors in Calgary are waiting for the upcoming federal election before making that decision. “I think there’s a sentiment amongst retailers that with the current liberal government, getting our oil to market is very difficult,” says the Renaud, who is Vice President, Rencor Developments Inc. “I think that on the local scale people are just being a bit cautious with agreeing to open stores.” In general, Renaud adds, Calgarians are cautiously optimistic about the local economy. While retailers everywhere find ways to keep up with e-commerce and other major shifts, “the bottom line is that people still need to get necessities,” she says. “If you have a shopping centre today you need to look at your existing tenant mixes and what types of experience you’re providing for customers.” From Renaud’s vantage point, the tenant mixes in shopping centres have changed. Rather than a lot of new, large-format fashion stores opening, “you’re seeing grocery stores, gems, and spas as the new anchor, being able to provide services that people need,” she says. “So you’re looking at different experiences, like a great
restaurant. I think you’re seeing some of the fashion malls looking at being more amenity based, and creating social media platforms that complement that with a multi-sensory experience.” Until the economy picks up, Renaud believes that the highest-tier shopping centres like Chinook Centre, and others that have a niche, are still going to be okay. Others, she says, will have to add different amenities to make shopping more appealing, and also consider repurposing their space. Some malls might benefit from becoming mixed-use centres, for instance, adding residential or office tenants to the current retail mix. “These malls are really well located, in established communities,” Renaud says. “They just have to look at their tenant mix to know how best to serve those communities. “It’s so easy to shop online these days, but people are going to go shopping somewhere they want to go. Whether that’s a great experience, a product, a feast for the senses, the propensity of going to places like that is higher.” ■ Michelle Morra
Canadian Real Estate Forum / FALL 2019
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THREE TOOLS TO IMPROVE INDUSTRY DIVERSITY & INCLUSION Kris Kolenc Manager Research & Sustainability REALPAC Canada is known as one of the most diverse countries in the world, but many of our industries have trouble reflecting our diversity in the workforce. This has certainly been the case with commercial real estate (CRE), which has traditionally had the reputation of being composed of mostly white, able-bodied males. In the last two years, REALPAC has acknowledged this challenge and devised a plan to try and improve diversity and inclusion (D&I) in Canadian CRE. Along the way, we created a D&I industry group, conducted industry D&I research, and most recently hosted a D&I industry breakfast which over 235 CRE professionals attended to generate greater dialogue around the issue. Although REALPAC is focused on improving D&I within Canadian CRE, much of what we learned and our resources are applicable to other parts of the globe. Much more still needs to be done to improve industry D&I. REALPAC has accordingly taken three steps to continue the process. We’re pleased to provide the following tools for industry-use:
REALPAC Panel Pledge One of the first actions we took to support industry D&I was creating a REALPAC Panel Pledge. We noticed that many industry speaking events had panels with only male speakers (also known as ‘manels’). Adhering to the REALPAC Panel Pledge requires agreeing to speak at or participate in a professional industry forum on a panel of two people or more, not including the Chair or moderator, only if there is at least one woman on the panel. In addition, we encourage the inclusion of persons from underrepresented groups (e.g. race, sexual orientation, and age, to name a few) on the panel. We believe multiple, diverse points of view should be included in a meaningful way in industry discussions, and all event organizers, panel chairs and moderators, and co-panelists, should create an environment in which all persons feel welcome, included, and able to comfortably contribute to the conversation. If someone withdraws from speaking on a panel to give the speaking opportunity to another diverse speaker, if possible, we encourage them to suggest other potential speakers to the event organizers. REALPAC staff, our Board of Directors, and many of our member and corporate partner CEOs have taken the REALPAC Panel Pledge. We encourage others in the industry to also take the pledge to help improve D&I at our industry events and to send an important signal to industry.
Indigenous Land Acknowledgement REALPAC has begun including an Indigenous Land Acknowledgement at the start of their events to recognize the traditional land that the event is taking place on. Territory acknowledgment is a way that people insert an awareness of Indigenous presence and land rights in everyday life. For example, a Land Acknowledgement we used at our recent D&I industry breakfast was “we wish to acknowledge that this event is being held on the traditional territory of the Mississaugas of New Credit First Nation, the Haudenasaunee, the Huron-Wen-dat, and is home to many diverse Indigenous peoples.” Some resources that we used to help us better understand traditional territories in Canada include Native Land and Whose Land. Of course, Land Acknowledgements vary based on location so we encourage others to conduct their own research and seek out contacts in their local community to help them determine an Acknowledgement to use, if applicable and appropriate. REALPAC also includes an Indigenous Land Acknowledgement on our website to acknowledge the traditional land our office is located on. D&I Clearing House There are numerous D&I resources available, but it can be challenging to sort through and determine which are the most useful for your needs. To help to organize this, REALPAC has created a D&I Clearing House on realpac.ca to provide different resources on topics such as accessibility, board diversity, and LGBTQ+, to name a few. This is an evolving resource which we will continue to grow and curate over time based on stakeholder feedback. REALPAC also plans to complete more D&I research pieces over time which will be added to the Clearing House. Next Steps The REALPAC Panel Pledge, Indigenous Land Acknowledgements, and the D&I Clearing House are three resources REALPAC has used to support D&I within the commercial real estate industry, as a start. Of course, there is much more work that needs to be done. One gap we have noticed is the need for more ‘inclusion’ resources that can help people create more inclusive, welcoming, and participatory workplaces and environments for peoples of all backgrounds. REALPAC looks forward to leading the industry and continuing to promote D&I in Canadian commercial real estate. n Canadian Real Estate Forum / FALL 2019
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IT’S TIME FOR POLITICIANS TO GET CREATIVE ON RENTAL HOUSING TAX Brooks Barnett Director Government Relations & Policy REALPAC
Graeme Kennedy Coordinator Policy & Planning REALPAC 66
How Canadians live, work, and play is changing. Our housing expectations, desires for choice, and needs for flexibility should change as well. Ownership-oriented housing is becomingly increasingly more expensive in certain Canadian cities, wage growth is slow, and commutes are generally longer. When considering how best to adjust the housing markets to encourage affordability, we need to remember that ownership may still be a preferred choice for many households, but it is not the only choice and may not be a realistic option due to a multitude of socio-economic factors. The availability of purpose-built rental housing fulfills an important role in serving
market needs, but as an asset-class is often overlooked by politicians looking to make housing more affordable for Canadians. The Liberal Party’s National Housing Strategy attempts to address housing affordability from a ‘whole-of-market’ approach by creating subsidies for the development of new ownership and new purpose-built rental projects. Under the National Housing Co-Investment Fund, some funding is available to help modernize existing housing stock, but it is largely limited to shelters, transitional, and supportive housing. The National Housing Strategy documentation does not advance Canadian Real Estate Forum / FALL 2019
“...a root problem regarding purpose-built rental; that certain provincial programs, and certainly the attitudes of some local municipal counsellors, constrain the development of purpose-built rental, limit the ability of rents to adjust to market conditions, impose high land transfer taxes, development charges and other types of fees, leading to projects being cancelled as uneconomic or being converted to condominium for sale.”
improvement or operation of existing purpose-built rental housing options. The NDP platform similarly seems to indicate they would waive all federal sales taxes on new rentals. This does not address a root problem regarding purpose-built rental; that certain provincial programs, and certainly the attitudes of some local municipal counsellors, constrain the development of purpose-built rental, limit the ability of rents to adjust to market conditions, impose high land transfer taxes, development charges and other types of fees, leading to projects being cancelled as uneconomic or being converted to condominium for sale. In contract, the Progressive Conservatives and the Green Party have both established platform planks on housing that do not address policy that can help support existing rental housing. The Conservative platform advocates for deregulation of the market while the Green Party platform seeks to incent production of new supply and recognize housing as a “legally protected fundamental human right for all Canadians”. There are many creative solutions across the political spectrum for creating more housing but, how to better support the long-term sustainability of existing supply
needs to be part of any housing policy analysis.
and certainly does not recognize how limited an operator’s cost recovery options are.
A 2017 CMHC analysis of rental housing within six of Canada’s major housing markets1 found that cash-on-cash returns on purpose-built rental developments were typically negative. In the case of Toronto, average annual 10-year returns ranged from -7% to +3% with an average of -3%. This data stands in stark contrast to the experiences of some of our members, who are still building purpose-built rental and doing so profitably, nevertheless under difficult conditions. Developing rental apartment projects is still challenging, given rising construction costs and pricey land, especially in big cities.
Federal tax reform as part of a new multi-family construction incentive initiative could alleviate rental housing pressures in Canadian cities. Applying the same tax-treatment to rental housing service delivery that is enjoyed by other ‘basic necessity’ providers could make great strides in supporting sustainable, well maintained, and high-quality apartment buildings for tenants.
The long-term goal of most housing policy is to encourage supply that can be affordably maintained in perpetuity; that is, the rents being paid to the building’s operators cover the operations, capital improvements, and provide a return on investment. In provinces with rent control regimes, an operator’s options for cost-recovery are limited. Unlike in other businesses, taxes paid on services cannot be recovered through claiming ‘Input Tax Credits’ as part of the cost of doing business. At the same time, unlike in other ‘basic necessity’ sectors like groceries, taxes paid on required operations costs are not ‘zero-rated’, that is they are not rebated back to the operator and also cannot be passed on to the tenants through a sales tax on their lease. Current tax treatment effectively asks rental housing service providers to absorb taxes paid on services which benefit their tenants. This tax treatment does not recognize the importance of rental housing as an option that fulfills wide need in the housing market
For these reasons REALPAC recommends that any party forming government include supporting existing rental supply as part of a comprehensive housing policy initiative by way of: • Exploring creative options for reducing taxes on required operations and maintenance costs • Addressing the tax treatment imbalances between the rental housing sector and other ‘basic necessity’ service providers • Treating the sale or capital improvement of existing supply as equal to the production of new housing by ensuring similar exemptions apply Rental housing plays a vital role in supporting households entering the housing market, leaving it, and everyone in between. Using policy levers to support existing supply maintains a wider spectrum of housing options and can help alleviate pressures on the development of new supply. REALPAC believes that any attempt to address housing supply issues in Canada can only be benefitted by helping to sustain our existing rental stock. n
The Economics of New Purpose-Built Rental Housing Development in Selected Canadian Markets, 2017. Retrieved from: https://www.cmhc-schl.gc.ca/en/housing-observer-online/2017-housing-observer/the-economics-of-developing-purpose-built-rental-housing
THE STATE OF INNOVATION IN CANADIAN COMMERCIAL REAL ESTATE Kris Kolenc Manager Research & Sustainability REALPAC
Innovation and PropTech are two current hot topics in the commercial real estate industry. CRE companies are starting to designate their own Innovation Officers and Innovation teams, vendors are rapidly releasing new and improved technologies to the industry, and venture capitalists and funds are investing in new PropTech start-ups. If you have attended any major industry conference in the last two years, it is likely that it had a panel or some focus on Innovation and PropTech. It is clear the worlds of tech and real estate are overlapping, especially through new technologies and trends such as smart buildings, smart cities, the Internet of Things, artificial intelligence, blockchain, and cyber security, to name a few. However, the rate at which our industry is adopting and implementing new technologies is unclear, especially compared to other industries.
To get a better understanding of technology demand and adoption in Canadian CRE, REALPAC, R-LABS, and PwC conducted a survey of REALPAC Chief Executives between December 2018 and January 2019, as a â€˜state of the industryâ€™ assessment to measure the growth of innovation in Canadian CRE. The survey had 44 respondents with a total staff headcount of 157,000 employees, and a combined AUM of $628 billion CAD. The survey had a number of interesting findings, including how technologically advanced CRE companies think they are. Twenty-one percent of respondents viewed
themselves as being technologically advanced, 76% of respondents viewed themselves as moderately advanced, and only 3%, or one respondent, viewed themself as being a laggard. This was surprising, as CRE is often viewed as a laggard industry when it comes to the adoption of new technology. For example, the survey also determined that on average, CRE companies spend only 1% of their revenue on research and development, whereas other industries invest much more, such as pharmaceuticals and biotechnology (15%) and software and computer services (11%). continued on page 70
Perception of Technological Advancement in CRE Survey respondents were asked how advanced they thought their firms were in relation to the adoption of new technology. Most CRE companies perceive themselves to be moderately advanced as shown below.
Canadian Real Estate Forum / FALL 2019
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Another theme that emerged from the survey was “co-opetition”. Fifty-nine percent of respondents said that they plan to develop partnerships to address technology and minimize risk. To meet the industry need, REALPAC recently created an Innovation Committee to allow members to share best practices related to innovation and new technology.
The survey also revealed that the top three motivations for respondents to adopt technology are to make better decisions (85%), increase labour force productivity (82%), and maintain competitiveness (64%). The survey showed that CRE companies like technologies that are easy to use. Eighty-six percent of respondents said they choose a technology based on its ease of use, and 64% said they choose it based on the vendor support that they receive. The survey also revealed the human element and challenge of technological change. Thirty percent of respondents said that they do not have sufficient human resources to manage new technology, and that it is difficult to shift their corporate culture to embrace new technologies. When managing technology, 79% of respondents use a traditional functional department, such as IT. Forty-four percent use external consultants, and 33% of respondents have a dedicated Innovation Officer or innovation group. Although innovation-specific roles are relatively new to our industry, it will be interesting to see if they increase in the coming years. It is also interesting to note that several Canadian CRE companies have combined their sustainability and innovation functions. This is likely because both disciplines deal with new technology and change management. Another theme that emerged from the survey was “co-opetition”. Fifty-nine percent of respondents said that they plan to develop partnerships to address technology and minimize risk. To meet the industry need, REALPAC recently created an
Innovation Committee to allow members to share best practices related to innovation and new technology. Although CRE companies remain competitive, they are also willing to collaborate in order to minimize risk, cost, and to be successful. Finally, respondents reported which technologies they have invested in to date, as well as the ones in which they plan to invest in the future. The top technologies respondents are currently investing in are building management and automation systems, data integration and collection platforms, and cybersecurity. The top technologies that respondents plan to invest in in the future are smart buildings, data collection platforms, cybersecurity, and tenant focused technology solutions. Blockchain and autonomous vehicles were the only technologies identified that no respondents are invested in currently, but plan to do so in the future. Overall, the survey revealed that CRE leaders in Canada are taking a more active role in employing technology to develop solutions that are better equipped to solve unique challenges of the industry. It is clear technologies must have a strong return on investment in order to be adopted, and challenges such as human resources and a resistant corporate culture must be overcome. Canadian CRE companies are considering innovative ways to execute business strategies by evolving with the changes in their ecosystem. All these signs indicate the CRE industry is open to new ways of doing business: the outlook for innovation adoption is strong. n
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The Canadian Real Estate Forum Magazine is published three times annually. Editions coincide with key Canadian Real Estate Forums and associ...
Published on Oct 17, 2019
The Canadian Real Estate Forum Magazine is published three times annually. Editions coincide with key Canadian Real Estate Forums and associ...