Real Estate Forum - Spring 2014 by g bruce Chapman

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SPRING 2014

THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

Calm Seas Ahead? KEEP A STEADY HAND ON THE WHEEL, JUST IN CASE MONTREAL: With New Infrastructures, a Whole New Metropolis Emerges

VANCOUVER: EDMONTON: Getting Natural Resources to Foreign Markets

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CANADA’S LEADING

THE REAL ESTATE FORUM TEAM: Jennie Biltek Dennis Chui Emma Cimolini Nikole Dunlop Maria Encarnacion Christina Marie Jager Katharine James Xiao Shu Lan Vivian Lin Erin Osborne Jessica Petrucci Jean Pickering Frank Scalisi Informa Canada Inc. Will Morris President George Przybylowski Vice President Mark Stephenson Vice President About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-tothe minute information and highly specialist 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 organisations.

Real Estate Forum THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

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www.informacanada.com REAL ESTATE FORUM MAGAZINE The magazine is published three times a year to coincide with the following conferences: SPRING Edmonton/Montreal/Vancouver FALL Calgary/Ottawa WINTER Toronto EDITOR Michel Rémy Michel Rémy is the editor of TheSquareFoot.ca, a commercial real estate publication that specializes in timely market information, news and networking. ASSOCIATE EDITOR Jean Pickering Informa Canada DESIGN gbc-design.com ©2014 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

EDMONTON 4 Navigating the Real Big Seas 6 THE ALTUS REPORT – Battling Obsolescence, New Threats, Weapons and Tactics

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12 Quebec City moves closer to becoming one of Canada’s Major Markets 66 The Voice

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Canadian Real Estate Forum / SPRING 2014

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CANADA’S LEADING

Real Estate Forum THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

Navigating the Real Big Seas Trying to speculate the future of the real estate industry is more about understanding each player’s role in our market and less about crystal-ball gazing.

nd that is precisely why forums like these are so important.

We begin 2014 on the West Coast, where planned pipeline projects continues to be the topic du jour and the major indicator on whether that province’s economy will move forward or remain teetering on the double-edge sword of green sustainability. The bright side, of course, is that B.C. has Vancouver. This real estate hotbed has investors hopping to get on the city’s growth train. Domestic or offshore; private or institutional – the market is ripe for active buyers. While the cities skirting Vancouver are building its burb office space, Vancouver itself is taking the arduous step in building up its downtown office options. As the Gateway to the North, Edmonton is poised with being the link to not only the oil sands near Fort McMurray but the growing energy sectors in Grande Prairie and Yellowknife, as well. With this distinction come interesting challenges for developers, investors and brokers who wish to capitalize on the city’s strategic location. Edmonton is seeing strain not only on the housing and commercial real estate market but

Canadian Real Estate Forum / SPRING 2014

on the city’s infrastructure, as well. Throw into the mix the changing retail landscape, and you’ve got one heck of an energized marketplace. Moving East, innovation and creativity have long been the key instigators in Quebec’s many sectors, be they technological or transportation based. As the cultural and knowledge hub of Canada, Montreal has become a major incubator of talent. As a result, it’s seen more than 175 planned infrastructure projects valued at $16.5 billion. What all this boils down to, of course, is where to place your bet and, like most fortune tellers, all bets are off when it comes to predicting growth. We take this opportunity to thank all participants, speakers & volunteers for making these Forums an essential market knowledge source. As you may know, Vancouver celebrated its 20th Real Estate Forum this year and we are tremendously grateful for your continued support.

George Przybylowski

Mark Stephenson

Vice President Informa Canada

George.Przybylowski@informacanada.com

Mark.Stephenson@informacanada.com

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THE ALTUS REPORT

Sandy McNair

BATTLING OBSOLESCENCE 2

New Threats, Weapons and Tactics The battle starts before opening day, even before the ground breaking ceremony. By Sandy McNair

T 3

he battle begins with the choices made - location, design, image, tenant mix and management strategy.

And the battle never stops. Even when demand exceeds supply, vacancy is low, tenant retention is high and rents are climbing - the battle with obsolescence continues. Some time ago occupants, investors and managers viewed office space as a commodity, but if once true, this is no longer an accurate view. To better understand past and current dynamics as well as outlooks for future performance, industry participants have often segmented the market – most frequently by building image and location. For many the thinking has been if the behaviours and resulting performance of an appropriate peer group can be understood then the future performance of a specific building can be anticipated.

Age and Design

During the past eleven decades breakthrough innovations in elevators, air conditioning and curtain wall resulted in leaps in design of office buildings and the occupiers’ spaces within them. During the 1970’s, 1980’s and 1990’s the pace and impact of innovation on the design of office buildings slowed even though occupiers use of the space continued to evolve. The past decade has seen a new leap in design and use of both office space and office buildings, resulting in a keen interest by many occupants in new versus existing buildings. Most new office buildings (typically those larger buildings under construction and built since 2000) have more daylight, better and more personal control of HVAC systems, increased capacity for more people and equipment and lower operating costs on a per square foot and per employee basis. Improving and updating the design, layout, materials, functionality, image and performance of the tenants’ premises most often requires a move to different floors in the same building or to a different building, be it a new or existing office building. 1. TELUS Garden, Vancouver, Q3 2014, 477,185 sq. ft., 2. 745 Thurlow Street, Vancouver, Q2 2015, 368,080 sq. ft. 3. The Exchange, Vancouver, Q4 2016, 357,379 sq. ft. 4. Kelly Ramsey, Edmonton, Q3 2016, 595,000 sq. ft., 5. Calgary City Centre, Calgary, Q2 2015, 810,987 sq. ft. 6. 707 5th Street SW, Calgary, Q2 2017, 542,300 sq. ft.

Canadian Real Estate Forum / SPRING 2014

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“One vocal and visible segment of the market is moving from densities in existing office buildings of 160 square feet per person to new buildings that have been designed to accommodate densities of 100 square feet per person.” Sandy McNair, Altus InSite

Office Space Currently Under Construction

Battle for Talent and Density Decision makers have become increasingly focused on attracting, growing and retaining key employees – the best and brightest. The design, image and performance of both the tenants’ premises and the entire office building are weapons in the battle for talent. Increasing density (more people in the same space, the same people in less space or more people in less space) is an accelerating theme in many industries (banking, professional services, telecommunications) and in most all downtown and suburban markets across Canada, even though the current and desired densities vary widely. One size does not fit all and one strategy will not be chosen by all occupiers. One vocal and visible segment of the market is moving from densities in existing office buildings of 160 square feet per person to new buildings that have been designed to accommodate densities of 100 square feet per person. The specifics vary widely from building to building but many existing buildings, including many in the best locations and with the best classifications, have a density limit of 135 to 150 square feet per person. A building’s density limit is impacted by the capacity of HVAC and electrical systems, the elevators and the washrooms, but the density limit is most often determined by the capacity (width) of the fire stairs.

Age and New Supply Impacts To varying degrees each of Canada’s major office markets have experienced a spike in new supply. As the chart below indicates, a significant portion of the total inventory has been completed since 2000. Once again, the specific timing, location (downtown, midtown or suburbs) and design details vary from building to building, but in most all cases these new buildings were filled and remain well occupied by taking tenants from older, existing inventory.

New Supply of Office Space Since 2000 Vancouver 11,778,684

Total New Supply Since 2000 (sq. ft.) % of Existing 22.5% Inventory

Edmonton 3,084,392

Calgary 20,164,922

Toronto Montreal 27,993,734 13,544,577

13.1%

31.6%

16.3%

14.6%

Vancouver 4,617,961

Total Currently Under Construction (sq. ft.) % of Existing 8.8% Inventory

Edmonton 1,489,859

Calgary 7,044,639

Toronto 7,329,089

Montreal 2,755,090

6.3%

11.0%

4.3%

3.0%

As of March 16, 2014. Altus InSite © Altus Group Limited 1998-2014

Tenants will be moving out of their existing premises and into these new buildings on a staggered basis – some later this year and some not until 2018. The specifics of each market, district and node vary widely. Since white collar job growth is moderate and occupant densities are increasing or stable at best, the impact on the existing inventory of this backfill will be material. Initially the pain / opportunity will be focused on the donor building, but as occupiers move into some or all of the initial backfill the leasing risk and renewal rental rate risk becomes felt by a growing portion of the entire existing inventory. Traditional market dynamics have meant that the pain cascades through the market place with the B- buildings being most impacted with lower vacancy and rental rates. That view is anchored by the belief that office space and office buildings are largely homogeneous. The link to that anchor may have been broken in some markets more than others by the segmentation of occupants in a distinctly different way. The newest buildings are often being occupied by tenants moving out of existing buildings that have traditionally been viewed as ‘top-of-the-market’ – those with some of the best locations and classifications. Tenants who currently occupy class B buildings may be unwilling to move to the top-of-market buildings no matter the inducement or rental rate – the image may simply be inappropriate for them and their clients. Relocating tenants from smaller, funky or heritage buildings and office premises into top-of-market buildings may also be difficult due to even greater image and battle for talent reasons. The resulting impact may be that the Class A and Class A- buildings may feel the greatest impact of the current and continuing spike in new supply. The specifics and magnitude of the impact will vary widely by market, district and node.

As of March 16, 2014. Altus InSite © Altus Group Limited 1998-2014

Driven in part by the continuing investment appeal of commercial real estate, new supply is being accelerated by pressure to place capital, the desire of those with large portfolios to add new to their existing and the belief that there are even more occupiers who seek new and/or more densely occupied premises. The chart below identifies the total amount of office space that is currently under construction and expresses it as a percentage of the existing inventory.

Canadian Real Estate Forum / SPRING 2014

Weapons and Tactics Doing nothing beyond riding the wave is a strategy that has rewarded some owners, managers, lenders and advisors over the past decade as cap rates have compressed with stable or growing rent rolls. However we believe the market is pivoting and will reward those with a more proactive approach to tenant engagement, service, asset and image differentiation and upgrades and more to battle complacency and obsolescence.

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“With these tax incentives, it’s like we already filled 10 units.” People who know Real Estate & Construction, know BDO.

The Real Estate & Construction Practice at BDO Real estate markets globally are undergoing a period of virtually unprecedented turmoil. Now more than ever, it is crucial to have proactive ﬁnancial guidance to help you address these issues. BDO’s Real Estate & Construction Practice combines in-depth knowledge of the industry with a truly global network of support. All through a single point of contact. Assurance | Accounting | Tax | Advisory www.bdo.ca/real-estate-construction

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1. EY Tower, Toronto, Q2 2017, 899,064 sq. ft. 2. Bay-Adelaide East, Toronto, Q1 2016, 1,012,388 sq. ft. 3. 1 York Street, Toronto, Q2 2016, 800,000 sq. ft. 4. Aimia Tower, Montreal. Q1 2014, 240,425 sq. ft. 5. Deloitte Tower, Montreal. Q3 2015, 495,067 sq. ft. 6. 1960 101 Street NW, Edmonton, Q3 2016, 572,000 sq. ft. During a market peak it is easy to be lulled into complacency and actively listen to your tenants less often or with less interest and passion for action. If you haven’t already, now is the time to step up your listening, communication and actions plans. It is clear that tenant retention, referral and recommendation of your buildings and your management services are the key to superior performance. Do you have formal processes to identify and communicate your strengths, positioning and image as well as recognize and address your weaknesses, as perceived by your tenants? What combination of improvements, if any, to your communication channels, your service offerings and your capital plans will have optimum impact on tenant retention while achieving superior rental rates? To do this well, requires much more than a periodic lunch or a review of the dispatch log as a lease expiry approaches. In 2014 and for the next several years the key to success will be retaining and stealing tenants. It would be unwise and risky to wait for incremental demand to fill or keep your building(s) full. The winners will be those teams and firms that are proactively listening to their tenants and are able to identify, communicate and implement the optimum bundle of services, physical experience and differentiated image to retain their current tenants and recruit new ones at desirable relative rents.

A Decade of Progress Ten years ago fully one third of all office building occupants in Vancouver, Edmonton, Montreal and across Canada did not report their building and property management related concerns or problems to anyone. Today that figure has been cut in half. Significantly, awareness, use, satisfaction and referral of centralized customer service and dispatch functions have climbed across the industry. However the gains are not evenly shared across the industry – the design and implementation of these programs varies widely from one manager to another with the result that some managers have experienced huge gains compared to others and the industry benchmarks. Communication Channels is the first of a family of performance metrics that address Tenant Retention. The full family includes a series of forward looking performance

Canadian Real Estate Forum / SPRING 2014

measurement and industry benchmarks focused on each of: • Communication Channels, • Issue Resolution Rates, • Overall Satisfaction, Momentum, • Refer and Recommend this Building and • Refer and Recommend this Manager – that is, interest in moving to another building managed by the same management company. The result is that building owners and building managers now have the ability to measure the intention of tenants to stay and their willingness to pay a premium to do so. Also identified are the key property-specific actions needed to increase the tenants’ intention to say and willingness to pay a premium.

Performance Measurement and Industry Benchmarks The Industry Benchmarks vary from city to city and from year to year based upon market dynamics – the office market in Vancouver is very different from Edmonton’s or Montreal’s in terms of tenant mix, service requirements, manager capabilities, leasing conditions and so on, resulting in very different expectations and levels of perceived performance. Very rare is the firm or team that has the people and money to do everything they can think of, let alone at a very high level of performance. So the key has been and will continue to be focus. Focusing your communication initiatives, service refinements and capital budgets on the two or three key items and programs where they will have optimum impact on your tenants’ intention to stay and pay a premium to do so, is essential to success. As you enter the 2015 and 2016 planning cycles for your properties and portfolios, choose your Tenant Retention Initiatives well. For some, that may mean boosting your performance measurement and benchmarking capabilities. ■ Sandy McNair is the President of Altus InSite, a division of Altus Group. Since 1997 Altus InSite has conducted more than 1.7 million tenant satisfaction surveys for many of Canada’s leading office building owners and managers. sandy.mcnair@altusinsite.com www.altusinsite.com

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Marie-France Benoit

Quebec City moves closer to becoming one of Canadaâ&#x20AC;&#x2122;s Major Markets The recent pace and scale of commercial real estate investments by leading pension funds and life insurance companies indicates that Quebec City may no longer be viewed as a second tier investment market. By Marie-France Benoit

ften overlooked by major players only a decade ago, the momentum has changed and the provincial capitalâ&#x20AC;&#x2122;s healthy and stable economy has made it more attractive to a wider range of institutional investors. OMERS/Oxford sent a strong signal to the market last summer when it purchased 50% of the 1.5 million square foot super regional mall Les Galeries de la Capitale. Often compared to a small West Edmonton Mall, Les Galeries de la Capitale was sold in 2006 for $360 M to CPPIB (who still owns 50% in partnership with Oxford). While the value of

Canadian Real Estate Forum / SPRING 2014

the 50% acquisition is not public, the mall has since been expanding. Only a few months later, Oxford also acquired a recently built (2011) 417-unit multiresidential complex nearby Les Galeries for $83.5 M. OPTrust was also active in the Quebec City market in 2013, buying two dominant power centres with its partner CREIT in May for a total of $239 M. The seller, Rio-Can sold its third power centre in Beauport in February 2014 to GWL Insurance for $46.7 M. Pension funds were also active on the development side: After investing $75 M to revamp its iconic Chateau Frontenac, Ivanhoe Cambridge recently

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“Quebec City’s developers are generally prudent and are now waiting to see the available rate decrease further before launching more projects. Only two office projects are currently under construction. However, the municipal administration’s more flexible outlook on maximum building heights, allowing for taller buildings in areas like Laurier Boulevard, makes it appealing for developers to explore and launch new projects. Groupe Dallaire already announced its intention to build new high rises on the boulevard starting in 2015.” Marie-France Benoit, Altus InSite

Projected Leased Area QUEBEC CITY / ALL OFFICE CLASSES in 000,000’s • User Supplied Values (0 sf/yr) 20

9.3% 9.3%

19 18 17

6.8% 6.9% 6.9% 6.9% 6.9%

16 15 14 13

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

■ Direct Available Area (sq ft) ■ Leased Area (sq ft)

Total Office Area (sq ft) Projected Leased Area ■ ■ ■ ■ Projected Inventory Floating percentages indicate projected availability rate

■

■■■■

entered into a partnership to build Project QB, a mixed multiresidential and commercial complex that will initially comprise about 300 rental units and 100 condo units.

Office Vacancy remain low in spite of new construction On the office side, life insurance companies continue to spur market occupancy and investment activity. IndustrialAlliance has been particularly active, buying buildings and occupying more of its own space. La Capitale’s and Desjardins’ new head offices just added 600,000 square feet of new top quality LEED inventory that they will occupy entirely. SSQ Insurance continues to develop the city’s first Green-Neighbourhood (La Cité Verte – 800 residential units) and is planning a large two-tower complex on Laurier Boulevard, the city’s increasingly prominent CBD. In spite of the active development activity (almost 3 million

Canadian Real Estate Forum / SPRING 2014

square feet of new office space has been built in the last five years, on a market that is 17 M square feet in total), the office market remains tight, with 6.3% available rate, down from the 7.6% peak the market reached last year. Total leased area continued to grow, fuelled by insurance companies’ need for space. The region has a significant concentration of insurance companies’ head offices and the sector now accounts for almost 10% of all jobs in the region. Quebec City’s developers are generally prudent and are now waiting to see the available rate decrease further before launching more projects. Only two office projects are currently under construction. However, the municipal administration’s more flexible outlook on maximum building heights, allowing for taller buildings in areas like Laurier Boulevard, makes it appealing for developers to explore and launch new projects. Groupe Dallaire already announced its intention to build new high rises on the boulevard starting in 2015. Can the market absorb new office towers? A conservative growth in Leased Area forecast projecting no growth in leased area and taking into consideration space available in buildings currently under construction as well as probable backfill from the new projects seem to indicate that it does. Adding an extra 500,000 sf in new supply in 2017 would still maintain the overall available rate below 10%, as shown on the green line on the graph. Backfill is currently not a huge issue in the provincial capital’s market. Given Quebec City’s tradition of conservative new supply, it is not expected that tightening vacancy would lead to excessive new supply. However, given Quebec City’s past performance, new office buildings may be started partly in response to continuing global pressures to place capital. Quebec City’s heighten profile and place with major investors, ensures that the pace and dynamics of the market will evolve. ■ Marie-France Benoit is a Senior Director of Altus InSite. The Altus InSite team leverage extensive team-wide experience and market information to provide perspective to clients in Canada’s Commercial Real Estate Investment, Development, Lending and Leasing communities. marie-france.benoit@altusinsite.com and www.altusinsite.com

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Downtown Montreal: Build, renovate or bail out The real estate investors who will gain from Montrealâ&#x20AC;&#x2122;s current city core renaissance are the ones who offer quality properties, stated Claude Sirois.

Canadian Real Estate Forum / SPRING 2014

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CLAUDE SIROIS

“O

ne of the strongest trends is the return to urban life,” Ivanhoé Cambridge’s co-chief operating officer advised. “The demand for downtown living has driven the city to develop its core lifestyle amenities – offices, shopping centres and other asset classes.” “It’s not just about diversification,” Sirois suggested. “It also rests on the quality of those assets.” “Managers and owners will have to work harder and invest in their buildings, in order to attract the capital that is currently available in today’s highly liquid international market,” he forecast. “Major customers expect to “Major customers couple more space efficiency and energy efficiency with an urban expect to couple lifestyle and advanced technology,” more space effiSirois asserted. “The best tenants want to locate in the best areas, which ciency and energy benefit new office developments.” efficiency with an Ivanhoé Cambridge itself has banked on the future of the downurban lifestyle and town Montreal market. It has invested advanced conspicuously in the city core, with significant work planned for the technology.” Fairmont Queen Elizabeth Hotel, Claude Sirois, Montreal’s iconic Place Ville Marie and Ivanhoé Cambridge’ the soon-to-be launched 900 de Maisonneuve West office tower. “We see more and more sub-lease and a strong move into downtown Montreal,” Sirois explained. “Owners who are slow to upgrade their office buildings there will have major catch-up to do. That’s why we invested heavily in Place Ville Marie in recent years, and will continue to do so. It competes fiercely with younger buildings.” La Grande Dame, as she is referred to, is still downtown Montreal première address. “Don’t expect to see any strong movement in occupancy rates,” Sirois predicted. “There is also a counter-movement to relocate to new industrial clusters in other parts of Montreal, such as Mile End. The losers will be aging office space in the suburbs.” He noted that Montreal is well-placed to profit from global real estate capital’s recent flight to safe havens. “There’s a trend for Asian money to move into European and – increasingly – North American real estate,” Sirois said. “Institutional and private investors want stable returns, so they value the resilient Canadian market.” “Let’s be clear, though,” he cautioned. “The United States is poised to outperform Canada, where a weaker dollar fails to compensate for poor productivity and excessive household debt.” Furthermore, “our aging population limits our ability to take advantage of U.S. growth,” Sirois concluded.

Robert Frank Canadian Real Estate Forum / SPRING 2014

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DOMINIQUE ANGLADE

Montreal attracts more foreign investment A skilled talent pool, low corporate taxes, high quality of life, a dynamic environment and a network of integrated companies in key industries makes Montreal an attractive location for foreign investment

“I

n the last ten years, people come here because there is a dynamic environment and the pool of talent is not only growing but it is developing as well,” says Dominique Anglade, who was appointed as president & CEO of Montreal International last year. Anglade’s new role has begun on a positive footing. Under her leadership, Montreal International negotiated 39 deals last year, a record result that brought $1.28 billion into the city and created or maintained 2,700 jobs. Anglade says that these results were obtained using an award-winning strategic approach. “We really go after specific companies from important clusters,” she says. “Information technology, including the special effects field, is going to

be critical for us. It already represents the vast majority of the investments we are getting, and so it will be critical.” Other important opportunities include medical equipment and devices, aerospace and the food industry. “The food industry is “Information technology, going to become more including the special important moving forward,” she said. “Transformation, effects field, is going to be innovation about how we critical for us. It already process food; there are many things we are exploring represents the vast within the sector. A lot of majority of the investpeople are getting excited about that.” ments we are getting.” Anglade has big plans for Dominique Anglade, Montreal’s future, including Montreal International taking better advantage of international agreements around the world. “We need to be more ambitious,” she said. We need to take risks. We need to be better organized.” Tracey Arial

ROB KUMER

Montreal opportunities Like other cities in Canada, Montreal real estate opportunities are limited, although less so now than at the end of 2013. Institutional investors compete for top quality assets and hold on to decent properties unless offered a good price.

“P

industrial products to encourage KingSett to invest in retail ricing is very aggressive on the As, and on the Bs, and multi-res across the country. it’s been soft,” says Rob Kumer, a partner with In Montreal, the company has invested in existing propKingSett Capital. “There hasn’t been a ton of erties that can be retrofitted and reposiproduct coming out of Montreal. Frankly, “The type of product that tioned. According to Kumer, such a there hasn’t been a ton of product coming out of any of the major markets across the they typically sell – their non- strategy usually makes sense because older buildings usually have superior locations country.” core, non-strategic assets – and development land isn’t often availKumer says that pension funds and financial institutions are continuing to which is really sort of that able in the same areas. If rents are below market rates, growth in income is also invest in the top quality real estate as they always have. They aren’t however, culling mid-market A-minus B-plus possible. New buildings don’t have those positheir properties as aggressively as they quality assets, that pricing tive qualities but they also don’t require normally would because they aren’t has really softened.” major capital expenditures to bring them getting good prices and they aren’t sure up to modern-day standards. where else to put their money. Rob Kumer, KingSett Capital The trade-off analysis hasn’t led the “The type of product that they typicompany to build new in Montreal yet, but it is building new cally sell – their non-core, non-strategic assets – which is product in other markets. really sort of that mid-market A-minus B-plus quality assets, “Rents have pushed up as a result of a net migration to that pricing has really softened,” said Kumer. “That’s because the urban cores of all these cities,” he said. “That has the buyers of all that product are publicly-traded entities combined with financing that is so cheap and residual cap which have really softened their appetite because their cost of rates that are so low that you can actually afford to build and capital has increased.” make money. This has not been the dynamic in most markets Despite the current market stall, Kumer says that he in this country for quite some time.” believes that inflation will happen relatively soon. That Michelle Morra-Carlisle conviction ties in with current challenges in the office and

Canadian Real Estate Forum / SPRING 2014

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Photo credits: Cadillac Fairview

SAL IACONO

Cranes in Montreal’s Sky Montreal’s downtown office market is at a standstill. Vacancy and available sublets are up, and the sector isn’t seeing much growth. Yet the current real estate climate is of no great concern to companies targeting a specific type of office tenant, according to Sal Iacono of Cadillac Fairview Corporation Ltd.

Above: Deloitte Tower, Montreal. Left: 600 rue Peel, Montreal.

“C

says, if they have a base lease and receive their full rent; and ertain clients are looking for an upgrade in their for tenants who occupy space in a great location that allows experience,” says Iacono, the company’s senior them to grow. vice president, development and portfolio Looking ahead a year or two, Iacano is confident about management, eastern Canada. “They are looking for LEED Cadillac Fairview’s ability to secure certified space, a much more effi“Certain clients are looking for an continued leasing with firms that cient floor plate, and quality of space that is suitable to the expec- upgrade in their experience. They are have a long-term commitment to being a part of Montreal’s business. tations of today’s employees.” looking for LEED certified space, a “For those firms,” he says, “there is Tenants that are attracted to sublet office space are a different much more efficient floor plate, and no better way to make that statement and that commitment than clientele from those seeking a new building such as Cadillac Fairview’s quality of space that is suitable to the to be in a brand new building.” Our 26-story Deloitte Tower. While expectations of today’s employees.” latest announcement is part of a $2 billion development plan, called certainly not ideal, Iacano sees Sal Iacono, Cadillac Fairview Corporation Ltd. Quad Windsor, which, once several potential benefits to sublet completed, will completely transspace. form the downtown core, creating a new district that offers a “It’s not always suitable for everybody,” he says. “It’s less modern, state-of-the-art place to work and live,” concluded secure, the lease terms are not always ideal for those Iacono. subtenants, but the one positive is cost.” Michelle Morra-Carlisle Sublet space can be a good news story for landlords, he

Canadian Real Estate Forum / SPRING 2014

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CLAUDE MARCOTTE

A lack of employment growth and political uncertainty are hindering major growth in Montreal now, but quality top-of-line buildings and good retro-fits will do well over time, says a key Quebec developer.

Game-changing investments in five different Montreal neighbourhoods are rejuvenating the face of Montreal.

DANIEL PERITZ

“T

here is still a desire for quality,” says Daniel Peritz, a senior vice president with Canderel Management. “I think that users now understand the greater relationship between the quality of their work environment and the productivity of their working staff. That spans across the urban and suburban environments.” “I think that users now There is a shortage of large office blocks in understand the greater Montreal. Those that do relationship between exist are older and weren’t physically designed to the quality of their handle modern office work environment and requirements for occupancy, energy efficiency, the productivity of electronics distribution, their working staff. ceiling heights, washrooms, air quality, elevaThat spans across the tors and the size of exit urban and suburban stairs as they relate to the occupancy levels on the environments.” floor. Daniel Peritz, Canderel Those that can’t be Management retrofit to handle the new requirements must cater to “less significant” companies, which have lots of alternatives. “In the mid-term, there could be buildings that we’ve always seen as better quality buildings that slip ranks because they can no longer accommodate large users and they may end up just accommodating smaller users who don’t have the same criteria in regards to occupancy that some of the larger national tenants do,” says Peritz. “Buildings with tenants that average 10,000 square feet in the last three years may end up with an average size down to 5,000 square feet five or ten years from now.” New projects, including the one by Canderel, are modulated within multiple phases to meet the needs of large national tenants who want large blocks now and the potential to grow or shrink with the market. Tracey Arial

Canadian Real Estate Forum / SPRING 2014

o says Claude Marcotte, a partner and executive vice president in Carbonleo Story Builders. “Despite what we hear and what we read in the paper about Montreal, the city is moving. There’s lots of action. This kind of intensity has never before happened in Montreal.” The most exciting projects surround the Bell Centre, which has created a vibrant new entertainment district in the city. “The Bell Centre is one of the busiest arenas in North America,” says Marcotte. “On that same site, you have the Deloitte Tower, which is an office building where Rio Tinto and Deloitte will have their head offices here in Montreal.” Residential towers in the area sold out soon after being announced. Le Tour des Canadiens, Montreal’s tallest residential building, sold out in a week. The developer of L’Avenue Condos, a fifty-storey tower due for completion at the end of the year, announced 58% sold so quickly that observers doubted the figure. Provigo rented space in the twin towered Roccabella Condos, which are also selling out.

“The hotel operator hasn’t been identified but I can tell you that it’s a major player in North America and the banner doesn’t yet exist in Montreal. It’s going to be a jewel for Montreal.” Claude Marcotte, Carbonleo Story Builders Other developers hope for similar responses. Icône plans to build a condo tower on de la Montagne and René Lévesque. Samcon has a residential project on Drummond Street. Cadillac Fairview plans two more residential towers on the south side of St. Antoine. Marcotte says public investment in the city has also rejuvenated the neighbourhoods surrounding two new hospitals and a cultural entertainment district known as the “quartier des spectacles.” A new symphony hall and improvements to Place des Arts set the scene. Angus will break ground for two mixed-used towers south of Ste. Catherine later this year, and the provincial government will be among its tenants. Canderel and FTQ will also build “more than million square feet of office” on Ste. Catherine between St. Urbain and Jeanne Mance.” Marcotte’s favourite rejuvenation is a luxury shopping development his company has underway in the block between Ste. Catherine Street, De Maisonneuve, De la Montagne and Crescent. The project will combine Ogilvy, Holt Renfrew, upscale condos and a new hotel. “The hotel operator hasn’t been identified but I can tell you that it’s a major player in North America and the banner doesn’t yet exist in Montreal,” says Marcotte. “It will be very special. It’s going to be a jewel for Montreal.” Tracey Arial

Photo credit: Canderel - Fonds Immobilier FTQ

Achieving growth in the Montreal market

Major developments change the face of Montreal

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CLÉMENT GIGNAC

Demographics drive Montreal’s real estate growth Montreal’s ability to attract foreign brains keeps Clément Gignac upbeat about the city’s outlook.

he inscription at the base of the Statue of Liberty greeting newcomers to America might read “Give me your tired, your poor, your huddled masses yearning to breathe free” but the Industrial Alliance chief economist pointed out that nowadays it is instead Canada that, proportionate to its population, welcomes the most immigrants of any OECD nation. “That’s one reason for the real estate boom that we currently see in Montreal,” he explained. “Quebec’s demographic decline make immigrants particularly important to Montreal. The measure of their presence is a crucial variable that permits us to predict the prospects for the real estate market.” The finding is consistent with study after study, which shows that, in the long-term, it is demographics and human capital that drive economic prosperity, not profits. “It’s very important, therefore, that regardless who wins the April 7 provincial election, Quebec remains open for business and open to talent,” Gignac asserted. “It’s the lynchpin of our prosperity.” “Montreal has done well during the past year or so, compared with many

Canadian Real Estate Forum / SPRING 2014

other large North American cities,” he observed. “Montreal has increased employment by 3.2% since 2008, ranking it fifth in job creation among North America’s major cities, after Dallas, Houston, Washington and Toronto.”

“It’s very important, that regardless who wins the April 7 provincial election, Quebec remains open for business and open to talent, it’s the lynchpin of our prosperity.” Clément Gignac, Industrial Alliance “Nonetheless, our purchasing power hasn’t increased as much as other Canadian cities, in terms of disposable income per capita,” Gignac acknowledged. “GDP growth has also trailed other Canadian cities significantly, though Montreal has held its own against cities in the United States in that respect.”

“The recent acceleration of the American economy, coupled with the weaker Canadian dollar, augurs well for the Montreal economy, though, which had hitherto lost many manufacturing jobs not to China or Mexico, but to Tennessee,” he continued. “Interest rate exposure, though, remains a risk for all economies over a 3-4 year horizon, though it is not as significant in the shorter term, as inflation seems to have been tamed.” Gignac sees Montreal’s infrastructure renewal program as a significant boost for the city. “It reflected longstanding government underinvestment in infrastructure,” he said. “Suddenly, everything needs to be done at the same time.” “Boston dealt with that more than a decade ago,” he recalled. “Like Montreal, it’s an old city. The massive infrastructure project launched under Mayor Thomas Menino’s leadership proved to be the right way to improve Boston’s long-term outlook.” “It was all for the best, but it came at the expense of considerable shortterm pain for Boston citizens,” Gignac concluded. Robert Frank

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RICHARD HYLANDS

Montreal midtown gets massive makeover Montreal’s midtown boom is nothing new to Richard Hylands. He saw it 15 years ago, when downtown Toronto tenants fled to his Liberty Village development there.

“T

he whole Mile X (Mile End-Park Extension) area is transwhich is a great place to go eat.” forming very, very rapidly,” says Kevric’s chief executive Meantime, he foresees downtown Montreal facing a rough ride in the officer. “You have the Royal Bank going in; the university is not-too-distant future. across the street from us. There’s plenty of activity happening in that area.” “Very few Montreal tenants have to pay to stay downtown – and they “Laurentian Bank did so some time ago, and won’t, when they can save half the rent and get now TD Bank is consolidating there,” he “Very few Montreal tenants have LEED gold or silver space in a converted midtown observed. “They’re coming from the West Island. industrial building,” Hylands asserted. to pay to stay downtown – and They’re coming from downtown. Some are He expected that unbridled state intervention coming from Laval.” they won’t, when they can save will cause the downtown hollow-out to gather “It’s strategically located adjacent to subway pace, after the government announced 1 million half the rent and get LEED gold or sq.ft. of new city core projects, December 20. and commuter train stations,” Hylands said, explaining that “any future expansion outside of “The rules of the game have changed,” silver space in a converted the downtown core has to be public transit Hylands suggested. “The normal ebb and flow of midtown industrial building.” driven.” supply and demand is hard to adhere to in “Companies that set up in the suburbs found Montreal, where there’s no competitive process Richard Hylands, Kevric that their free parking doesn’t attract employees to get the best proposal for the government.” to work in their call centres,” he said, “because those people don’t have cars. “Downtown Montreal already faces a very high level of vacancy, even So tenants now want buildings close to mass transit, with very large floor before any of the new buildings are delivered,” he concluded. “Be it politiplates and a lot of redundancy such as backup power.” cally or market driven, it remains quite discouraging for private investors “It’s a live-work area, which is really the trend for what corporate tenants in Montreal.” want,” Hylands explained. “You have the Little Italy open-air market nearby, Robert Frank

ARMAND DES ROSIERS

Montreal’s diverse economy appeals to investors Montreal’s size appeals to pension funds that have seen their real estate allocations going up, says Armand Des Rosiers, one of Montreal’s key real estate experts.

“P

eople understand that Montreal, being the second largest metropolitan area in the country, is a large market,” says Des Rosiers, who directs RBC Capital Markets Real Estate Group. “Investors are very sophisticated and they understand how our economy works. They see that our economy is diversified. Investments over the years in Montreal have produced the expected returns. Montreal is looked on favourably by investors across the country.” Montreal’s real estate market has benefited most from active development projects by pension funds that have teamed up with private developers to offer opportunities for buyers, says Des Rosiers. “There has been a lot of retail development around Montreal and that has created opportunity for investors. I see that continuing.”

At the same time, there’s “Investors are very sophisa big difference between top ticated and they undertier assets, which sell quickly at premium prices and B class stand how our economy assets that generate higher works. They see that our cap rates and move more slowly, if at all. economy is diversified. “Most investors have Investments over the years ample liquidity and are looking to acquire properties in Montreal have produced that produce quality cash the expected returns.” flow, but they’re very discriminating,” says Des Armand Des Rosiers, Rosiers. RBC Capital Markets The most appealing projReal Estate Group ects right now are those in which people are creative about finding alternative uses for properties, especially in the less-risky asset classes, such as multi-residential, retail and some office. “We’ve been selling some office and some industrial and people are finding upsides in those markets,” he says. “I think now people look at properties and they see alternative uses for these properties. You are seeing many office buildings being converted to residential use.” Tracey Arial Canadian Real Estate Forum / SPRING 2014

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VINCENT CHIARA

Cautiously healthy: a snapshot of the Montreal market

hat could distinguish Montreal from other markets is a sizeable gap in value compared to those of more mature or expanding markets, like Toronto. There, says Vincent Chiara, president of Groupe Mach Inc., the difference between rental rates in brand new buildings and existing class A buildings is not as wide as what Montreal tenants will soon encounter.

With an aggressive lending environment and more buyers than sellers of quality real estate, the Montreal market is holding its own. Development activity is cautious but healthy. “We’re looking at 35-40$ net for the new Groupe Mach has been approached to work in towers with all the bells and whistles,” Chiara says. other cities, but for now prefers to focus on its And with operating costs around $25 we’re looking comfort zone, the province of Québec. Besides, at $65 gross, which is pretty unusual in our Chiara says that market is far from exhausted. market.” As a result he Most notably, Québec “We probably won’t see expects many rent-sensiCity is seeing considertive tenants to consider growth and absorpanother 50-story tower in able existing properties that tion as it transforms Montreal, so those existing itself from a civil servant are being upgraded and LEED certified. “We probto a new horizon for Class A buildings deserve to city ably won’t see another pharmaceutical, softbe put up to par.” 50-story tower in ware, gaming and other Montreal,” he says, “so sectors. “There’s still so Vincent Chiara, Groupe Mach Inc. those buildings deserve much to do here that to be put up to par.” He we’re not so tempted to adds that those upgraded buildings will still be go discover new markets,” Chiara says. competitively priced. Michelle Morra-Carlisle

GUY CHARRON

Are you experienced? As web sales increase year after year, the success of physical shopping malls will rely heavily on the experience factor they provide to the consumer.

“Y

ou have to do everything to make sure the consumer has a great experience, whether they’re finding parking or physically inside the mall,” says Guy Charron, executive vice president of operations-retail at Cominar REIT. “When you provide that, they will spend time there, and if they are spending time in your mall, they will probably buy something.” A stronger focus on experience is part of the evolution of retail, and what it will look like will continue to change over time, says Charron. “It’s so easy to buy a lot of things on the web – but you can’t get a haircut online. The impact of the web on retail is that we’ll see a lot more services being offered. And certain

Canadian Real Estate Forum / SPRING 2014

malls will have to be demolished because the demand is not there anymore. But this is no different than with industrial or commercial office buildings. “Landlords have to be proac“It’s so easy to tive with their assets and decide buy a lot of things what to do for the future. For many of us, the arrival of Target was the on the web – but time to improve the malls and you can’t get a their common areas and services.” The introduction of large haircut online. The American retailers to the Canadian impact of the web market and the construction of luxury specialty projects such as on retail is that the premium outlet mall in we’ll see a lot Mirabel, Quebec – bringing Canada’s first Max Mara outlet, more services among others – are all part of the being offered.” new experience being offered to customers. Guy Charron, Barbara Balfour Cominar REIT.

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LLOYD COOPER

Tenants rule as space abounds in downtown core A perfect storm is converging in downtown Montreal, just as ample new office space is about ready for delivery.

“W

e face a softening market and an abundance of sublease – or gray market – space,” said Lloyd Cooper. “We’re not tracking close to 800,000 sq.ft. of sublet space, market-wide. So there is fear out there.” “With hundreds of thousands of square feet of pending inventory to hit the market 2015-2017, coupled with the Heenan Blakie meltdown, Montreal has become very much a tenants’ market,” concluded the Cushman & Wakefield vice president. “Coupled with the slow economy and political pressure, this has put landlords on edge.” Meantime, a parade of players – big and small – are marching out of the city centre. “Midtown is taking tenants out of the downtown core who don’t need to be there,” Cooper underscored. “Tenants have already committed to more than 300,000 sq.ft. of space.” “They’re cutting their gross rental rate in half, without accounting for paying half price on parking,” he said, “and still offering tenants proximity to public transit because

JACQUES VINCENT

Slow down, look and listen

Jacques Vincent, President of condo developer Prével, says the market is slower in Montreal than it was in the past couple of years because of increased competition. “There are a lot of projects downtown especially,” he says. “Also, the spirit of the consumers is a bit on the wait and see.” 30

Canadian Real Estate Forum / SPRING 2014

they’re near the Metro and light rail.” “Major firms like TD Bank, Royal Bank have committed to relocating their back office operations to refurbished garment manufacturing buildings,” Cooper said. “Likewise, even more small companies like Media Experts are trailblazing, moving there to save money.” “They’re getting live-work-play joie de vivre because employees live in those areas: Mile End, Park Extension and Villeray,” he added. “That just puts more pressure on the downtown core.”

“With hundreds of thousands of square feet of pending inventory to hit the market 2015-2017, coupled with the Heenan Blakie meltdown, Montreal has become very much a tenants’ market” Lloyd Cooper, Cushman & Wakefield The dynamic could make it costly for owners of secondtier properties to remain in the game. “Owners of B properties are under pressure to upgrade,” Cooper observed. “The new towers that are about to be delivered are LEED platinum and gold. So B-class owners have to invest in bringing their product up to date with new elevator systems, upgraded lobbies and toilets and base building components – without necessarily getting greater return on their investment.” “They’re just treading water to maintain their occupancy rate,” he concluded. Robert Frank

hile he is confident the city’s economic structure will support the market in the long term, he expects 2014 to be a year of consolidation – and of caution. “It’s not a year to go and buy land, because the prices are still quite high,” he says. “We shouldn’t be aggressive by “It’s not a year to taking on projects that are too large.” go and buy land, Instead, Vincent sees this slower time as an opportunity to really listen to customers because the prices and understand how best to meet their are still quite high. expectations. He describes two types of consumer We shouldn’t be on the market today. One is the experiaggressive by enced consumer who is in no rush to buy and waiting for the market to stabilize. The taking on projects other is a consumer who may just be leaving the parental nest to start a new life, that are too large.” but might not be as market savvy. Jacques Vincent, Prével Regarding the latter, Vincent says, “We must be attentive to give them a product that fits their budget.” For example, he refers to a reduction in apartment size over the past year, leading to what many tenants consider small but ideally suited to their current living needs. “Those tenants don’t need a large bedroom, but they want storage and a very nice place to live,” Vincent says. Michelle Morra-Carlisle

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NANCY SHOIRY

NATALIE VOLAND

Montreal’s future depends on commercial renewal

Can older buildings go green?

Montreal’s most charming retail districts are emptying out in the face of changing consumer patterns and crumbling infrastructure. A strong partnership between planners and stakeholders could reverse these trends.

“W

e need a new paradigm for commercial development,” says Nancy Shoiry, the primary director of Montreal’s land-use development department. “Planning restrictions should offer more flexibility to help landlords make better use of their empty properties. Measures such as subsidies to maintain and renovate commercial buildings or to help start-up businesses are essential.” Shoiry says that Montreal’s downtown commercial streets are defined by a distinctive attractive character that could play a crucial role in a future retail branding exercise to reinforce competitive advantages. Right now, their positive qualities are hurt by a lack of accessibility, on-going urban infrastructure works and limited parking in comparison with newer options in suburbia. As suburban neighbourhoods in Montreal have rapidly urbanized, they’ve attracted even more families away from the downtown core. Montreal’s “We need a new sustainability goals have also been hurt as car-dependent paradigm for commercial centers compete with commercial those on urban transit lines. Meanwhile, both lose out as more development.” people shop online. Nancy Shoiry, Shoiry says there are lots of City of Montreal opportunities to turn these trends around if planning authorities work in partnership with business and property owners, consumers and the marketplace itself. “The city can be committed to helping these stakeholders, but to work in a partnership approach, we must share our knowledge of the ever-evolving economic and social dynamics,” she says. “Local stakeholders are bestplaced to know what makes a commercial street thrive.” Tracey Arial

Canadian Real Estate Forum / SPRING 2014

Canadian builders who retrofit existing properties find it next to impossible to be certified for their environmental efforts.

“W

hy is it more environmentally sustainable to rip down a building and build a new one?” asks Natalie Voland, president of Gestion immobilière Quo Vadis and a board member with the Quartier de l’Innovation. “Sure, it’s good for energy use, but that’s not all there is to an environmental footprint. When you rip down a building, you put all the garbage in a landfill. Three parts of the environmental movement are reuse, reduce and recycle, so shouldn’t we be reusing some of these old buildings?” Voland brought her concerns to the Building Research Establishment Environmental Assessment Method (BREEAM) recently. “It’s just not possible to pay for the infrastructure upgrade on an old building with lofts,” she said. “For me to get a LEED certification, I would have to change my entire mechanical system.” Voland once considered replacing an old steam heating system that made rooms either too cold or too hot with a new heating system, but found that it was too expensive. Instead, she hired engineer after engineer to figure out how to make the old “Why is it more envisystem operate properly so that rooms could be climate controlled. ronmentally sustainIt took months to figure out, but able to rip down a she finally did it. Despite her success, there was building and build a no easy way to market the benefit new one? …Three with potential tenants. The BREEAM representative told parts of the environher that his organization might offer three types of credits for the mental movement are project. Environmental credits could reuse, reduce and be attained for good waste recycle, so shouldn’t management because she avoided throwing out all the plumbing and we be reusing some of kept the original brick facia. Coming these old buildings?” up with a way to make the existing system work better would get an Natalie Voland, innovation credit. Gestion immobilière He also told her about the orgaQuo Vadis nization’s testing facilities so that building owners get updated information about good materials for retrofitting old buildings. Voland says that BREEAM isn’t well known in Canada yet – only one building in Toronto currently holds BREEAM certification – but she expects that to change soon. “I’m very excited because it looks like we’re moving forward on something that works for us but that will work for others too.” Tracey Arial

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CELEBRATING 25 YEARS MILESTONES OF GROWTH IN VANCOUVER VANCOUVER’S BUILDING CITY SHAPERS

HISTORY OVER 25 YEARS 1989

Expo Lands Development on False CreekNorth Shore begins.

1989

Skytrain is extended to the Fraser Valley.

1993

Surrey becomes a city, now the fastest growing in the province.

1994

Redevelopment of Coal Harbour begins.

1994

Vancouver International Airport (YVR) begins expansion

1995

1998 Construction begins on the Wall Centre complex on Burrard Street.

2001 Former Vancouver Mayor Gordon Campbell elected BC Premier

2005 The Vancouver Agreement, to revitalize the city, receives the United Nations Public Service Award.

2008 Living Shangri La opens as Vancouver’s tallest – 62 storey – building.

2009

New Vancouver Public Library, modeled after the Coliseum, opens.

The green-roofed Vancouver Convention Centre West opens.

1995

2009

GM Place (now Rogers Arena) opens

Canada Line transit system opens

he first BUILDEX in Vancouver, held 25 years ago, began just as the city started its transformation into a world-class metropolis. As that first BUILDEX welcomed delegates to its venue in the Hotel Vancouver, Hong Kong’s Li Ka-shing completed the purchase of the former Expo ’86 lands. Within a year, Concord Pacific would begin the city’s largest urban redevelopment on the 150-hectare False Creek site and herald Vancouver’s first huge wave of Asian real estate investment. Under a visionary Vancouver Planning Department, the city had just launched its liveable city agenda aimed at creating a progressive centre for business, families and the environment. Within a decade, the reshaped city was named the best place in the world to live by the Economist magazine, a ranking it has held virtually ever since. In 1989, the average house price in Metro Vancouver was $150,000 and condominiums were just beginning their ascension to what would become the city’s characteristic home of the 21st century. Skytrain was up and running, but in 1989 the Skybridge across the Fraser River would bring the first rapid transit line into Surrey, now the fastest growing city in British Columbia. Twenty-five years ago also marked the opening salvo of an impressive eight-year cycle of downtown development capped with the completion of the Bentall 5 tower in 2007. Today, as at least eight new LEED-standard office towers and a score of condominium high-rises ascend across the skyline, one thing remains constant: BUILDEX, which was

CIT Y SHAPER PARTNERS

Mark Stephenson, vice-president Western Canada Division, Informa Canada

co-located this year with the annual Vancouver Real Estate Forum, itself celebrating its 20th anniversary. “Like Vancouver itself, BUILDEX and the Real Estate Forum have become more than we could have imagined and both continue to grow every year,” said Mark Stephenson vice president of Informa Canada Western Division, owners and producers of BUILDEX and the Vancouver Real Estate Forum. BUILDEX, which began as a commercial real estate event under ownership of the Building Owners and Managers Association (BOMA), is now the longest running, largest flagship in the BUILDEX brand and the biggest real estate trade show and conference in Western Canada.

CITY SHAPER SPONSORS

WHAT MILESTONES DOES YOUR LIST INCLUDE? SHARE THEM! Join the conversation at: @BUILDEXshows @re_forums #BuildexVan #VREF14

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CITY SHAPERS

MILESTONES

CONTINUED 2009

In many ways, BUILDEX and the Real Estate Forum both mirror the progress of their host city, remarked Stephenson, “During their history, the Forum and BUILDEX showguides read a like ‘who’s who’ of Vancouver’s developers, property management, construction, interior design, architectural and real estate industries,” Stephenson said. BUILDEX is where ideas and people have come together each year to learn about the latest in new building materials and systems and to hear, often for the first time, about groundbreaking trends and technology that eventually reshape real estate and the building industry. The Forum is famous for its focus on key issues and challenges facing investors, developers, asset managers, brokers and others active in every facet of commercial, industrial, residential and investment real estate. That legacy continues as BUILDEX 2014 and the highly-respected Vancouver Real Estate Forum together welcomed an estimated 14,000 delegates, 450 exhibitors and in excess of 75 seminars led by more than 100 of Canada’s top real estate professionals and thought leaders in the stunning Vancouver Convention Centre West. The Vancouver Real Estate Forum and BUILDEX delivered two days of inspiring insights and updates on a vast range of topics, from the outlook of the real estate industry to green buildings and the changing role of finance and foreign investment, all back dropped by hundreds of exhibits in the largest construction show of the year and Canada’s most spectacular waterfront.

Highlights of this year’s landmark BUILDEX were a look at the home of the future, predictions on the commercial real estate industry, plus architectural and design panels detailing how new offices and retail space will match the demands of Generation X Y and Z. This year, BUILDEX comes full circle back to its original roots, remarked Paul LaBranche, executive vice-president of BOMA. The first BUILDEX was a trade show and conference with the theme “State of the Real Estate Industry,” he explained. “The state of today’s industry can be seen at BUILDEX,” LaBranche said, noting it remains the annual highlight of BOMA’s calendar, and the inclusion of the Vancouver Real Estate Forum makes it a true educational experience. Like BUILDEX, Vancouver is a much bigger, bolder and confident than it was in 1989. In celebration of BUILDEX’s 25th anniversary and the anniversary of the Vancouver Real Estate Forum, the following pages include 25 significant ‘city-shapers’ over the past quarter-century that changed the skyline, the landscape, the demographics, and how the world sees Metro Vancouver. www.buildexvancouver.com www.realestateforums.com Photos: Informa Canada * Article originally appeared in Issue 2165 Business in Vancouver, Jan 28 – Feb 3, 2014.

2013

The Lions Gate Bridge is outfitted with highefficiency LED lights.

Seven new office towers under construction in downtown Vancouver, the most in 20 years.

2009

2013

Woodwards redevelopment opens in Gastown.

The Trump International Hotel and Vancouver Tower begins construction downtown.

2010 Vancouver Winter Olympics and Paralympics Games are held.

2013

2011

2013

Port Mann Bridge expansion opens.

Vancouver average detached house price tops $1 million for the first time.

Construction of Skytrain’s Evergreen Rapid Transit extension to Coquitlam and Port Moody begins.

2011

2013

Vancouver’s loss in 7th game of the Stanley Cup finals sparks a massive riot.

2012 BC Place renovated and outfitted with the world’s largest retractable roof.

Forty-kilometre South Fraser Perimeter Road opens.

2014

The revised Vancouver Building Bylaw is enacted, aimed at making the Vancouver the “greenest city in the world” by 2020.

NEXT YEAR’S DATES THE VANCOUVER REAL ESTATE FORUM APRIL 9, 2015 VANCOUVER CONVENTION CENTRE WEST

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FEBRUARY 25 & 26, 2015 VANCOUVER CONVENTION CENTRE WEST

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VANCOUVER REAL ESTATE FORUM THANK YOU TO OUR SPONSORS P L AT I N U M

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Greater Vancouver: Decades in the making To understand what made Vancouver the vibrant city it is today, one must look at where expansion really started, 20 to 30 years ago. The stage was set when Vancouver hosted Expo â&#x20AC;&#x2DC;86. The 2010 Winter Olympics was another opportunity to showcase Vancouver, and a good time to work on infrastructure.

Canadian Real Estate Forum / SPRING 2014

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BILL TUCKER

ill Tucker, chief executive officer of Omicron Canada, credits businessman Jack Poole for “sticking his neck way out there, saying the Olympics would be fantastic for the region, and making it happen.” As a result the city turned the once-problematic highway 99 into one of the nicest. The Olympics also led to SkyTrain and Rapid Transit. Today Vancouver enjoys a healthy real estate market. With substantial new office buildings planned for the next 24 months, Tucker notes that developers are doing their best “We have great to learn from the past by not neighbourhoods, oversupplying the market. “We’ll see if the market can but only because somehow govern itself so that people had the we have an appropriate mix of supply and demand,” he says. vision and Developments are also determination to underway on the retail side, some in pioneering locations, make it happen.” others downtown like the new Bill Tucker, Nordstrom flagship departOmicron Canada ment store in Pacific Centre. As for residential, Tucker doesn’t foresee significant rises in pricing but says the region is still seeing solid immigration. “I think that, overall, the housing market will continue to be a very stable component of the real estate investment market,” he says. “Greater Vancouver has a mix of housing ranging from entry-level to the most spectacular real estate in the country and in North America.” Looking back, Tucker says that early in his career he was fortunate to see industry veterans at work. “So many great developers and builders have changed the face of many neighbourhoods in our city,” he says. “We have great neighbourhoods, but only because people had the vision and determination to make it happen.” Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2014

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BART CORBETT

Office demand in Vancouver stalled WARD MCALLISTER

Fundamentals stable, though immigration policy remains a wild card “Interest rates, pricing, value and approval processing time during the coming year are going to be much as they were in 2013,” Ward McAllister forecast.

he only question mark on the horizon, said the president and CEO of Ledingham McAllister, is how Ottawa’s immigration policy could influence Vancouver’s residential real estate market during the coming year. “The federal government recently imposed a moratorium on its immigrant “There will be a great investor program,” he explained. “That could deal of pressure on affect some 45,000 municipalities to densify, people who were in the process of coming to in order to handle all the the Lower Mainland.” population growth during “Most Asian buyers enter Canada based on the next 20 years.” professional qualificaWard McAllister, tions or as immigrant Ledingham McAllister investors,” McAllister said. “That could affect the housing market here if the immigration program remains on hold for too long.” Nonetheless, he predicts that the cities in the region will have to cope with an influx of 650,000-1 million more residents over the course of the decades to come. “There will be a great deal of pressure on municipalities to densify, in order to handle all the population growth during the next 20 years,” he predicted. “Municipalities have to develop ways to work together to orchestrate a coordinated regional growth strategy that will permit each of them accommodate their fair share of the coming increase.” “We will see a lot more pressure to densify nodes, especially around rapid transit stations,” he anticipated. “Cities like Vancouver are have been slow to act, even with respect even to the Cambie corridor. They need to pull up become much more proactive about regional planning, rather than self-interest as a single municipality.” “Vancouver will remain the core business hub,” McAllister predicted. “The North Shore, Burnaby Coquitlam and Richmond area – anything West and North of the Fraser River – will definitely be affected.” “Outlying areas will see increased pressure as well, but not to the same extent as the inner areas,” he added. Robert Frank

Canadian Real Estate Forum / SPRING 2014

There’s a lot of excitement in the Vancouver market recently, primarily due to three big developments due to open next year. Still, the top expert in the market says there’s now a lull.

“W

hen three or four buildings came out of the ground, they got a lot of immediate take-up with pre-leasing so that’s positive, but there’s been a bit of lull in existing clients taking a look at the offering,” says Bart Corbett, Cushman & Wakefield’s top producing tenant representative. “Maybe we’ll have to hunker down for the next 24 months.” The lack of announcements from three other projects now underway backs his assertion. The Credit Suisse project that will incorporate the former Vancouver Stock Exchange building has no committed tenants for now. The Sears building renovation still has lots of space available too. The leasing agent for the CDAE building says they’re talking to a potential anchor tenant, but Corbett doesn’t know who it might be. Plans for an additional seven buildings close to the downtown core could get underway anytime, but Corbett doesn’t think they will. “There’s lots of new supply potential, but you’ve got to think that those six or seven property owners “There’s lots of new are going to think long and hard before they commit to supply potential, but buildings unless they can find a you’ve got to think that pre-lease tenant or an anchor tenant.” those six or seven propVancouver’s position as the fourth market for office devel- erty owners are going to opment in Canada limits its think long and hard potential, says Corbett. “We’re before they commit to not known for explosive growth like Calgary. We don’t buildings unless they can have the depth of corporate find a pre-lease tenant Canada like Toronto, and in some ways Montreal.” or an anchor tenant.” His best hopes come from Bart Corbett, the tech industry, especially if Cushman & Wakefield you count TELUS among them. TELUS’s decision to establish TELUS Gardens downtown is the most notable of the new developments, he says, especially now that Amazon and Bull Housser & Tupper will also take space in the complex. Other tech companies may follow their lead. “Facebook has quietly come into market,” says Corbett. “Twitter is looking for space. Microsoft is in our city, and there are rumours that they’re looking for expansion.” Meanwhile, SNC Lavalin has taken the majority of the 754 Thurlow Building, and McCarthy Tetrault has joined them. The 1021 West Hastings site is also close to fully-leased, with MNP, CBRE, Atimi and Gencom all ready to move into the building next year.

Tracey Arial

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JUSTIN BOSA

Canadian REITs due to recover Real Estate Investment Trusts should perform relatively well in the second half of 2014 as investors continue to realize current market prices are providing attractive yields and the sector continues to trade at a discount to net asset value which accounts for potential increases in interest rates. So says a banker from one of the few Canadian investment dealers that has led a REIT equity deal so far in 2014. “When we look at the U.S. REIT model, we see that these REITs typically have lower leverage and lower payout ratios, effectively producing a lower yield for investors.” Justin Bosa, Canaccord Genuity

“R

ates will continue to be low on a relative basis. The economic recovery in the U.S. is not linear and will take time, in fact, bond yields have actually decreased year to date, which is good news for the REIT sector,” says Justin Bosa, a managing director at Canaccord Genuity. “Overall, the real estate sector is currently trading at a fairly attractive valuation, with most issuers trading below net asset value, and at cash flow multiples that are in line with historical averages.” That being said, the market has been volatile and many Canadian REITs experienced significant market losses last year. Institutional investors are being very selective and are focusing on REITs that

have the ability to grow cash flow organically, and that are not dependent on the capital markets to fund growth through external acquisitions. This is effectively the operating model used by REITs in the United States. “When we look at the U.S. REIT model, we see that these REITs typically have lower leverage and lower payout ratios, effectively producing a lower yield for investors,” says Bosa. “These conservative structures give them the ability to invest excess liquidity in their portfolios to grow cash flow internally.” According to Bosa, Canadian REITs are slowly moving towards the U.S. model, which he believes is a positive. But that being said, challenges may exist. The Canadian REIT sector is significantly younger and less-developed than its American cousin. Therefore, an evolution to a more conservative financial structure will take time to formulate. “In addition, as the U.S. is much a larger and more liquid market, U.S. REITs ultimately attract a different investor base,” he says. “Their investors are pension funds, endowment funds and institutional funds that are longer-term thinking. Canada is a more retail-driven market that wants higher yields now.” Tracey Arial

DAVID PODMORE

Rental development makes a comeback “We’re already seeing and will continue to see a rental building resurgence,” predicted David Podmore.

“D

“Home sales are up 31% and values are up 8.5%,” and Podmore evelopment community attitudes are shifting,” the predicts, “For many years, there will be a continued focus on ready CEO of Concert Properties conveyed. “Though it access, particularly locations in close proximity to rapid transit.” remains very, very difficult financially, there’s strong “The downtown peninsula also has a large, young reverse demand for rental housing principally because of its affordability.” commute population that likes the lifestyle in “It’s very difficult especially for young “The real opportunities the urban core but takes public transit to jobs in people starting out and seniors who want an alternative to their home, to find something increasingly lay in very locations like Burnaby,” Podmore observed. He attributed Vancouver’s dynamism to the within their means,” observed Canada’s largest large developments, international exposure that it garnered during rental builder, who expects that other develExpo 86 and the 2010 Winter Olympics. opers will be following Concert’s lead. ...a lot of very large “It was well-timed to coincide with the “Returns are modest in the early years, but undertakings with very market resurgence of the early 1980’s,” Podmore we end up with a wonderful long-term asset,” recalled. It attracted a significant influx of mainly Podmore explained, “one that provides good, long timeframes.” Asian as well as Latin American investors.” reasonably priced accommodation. It has been David Podmore, Podmore sees plenty of prospects here for very well-received.” Concert Properties young newcomers who enter Vancouver’s real Given the dearth of infill opportunities in estate industry with strong educational credentials. Vancouver, he underscored that developments must achieve “British Columbia has a wonderful industry – very sophisticated economies of scale. with lots of opportunity and very refined skills,” he smiled. “The real opportunities increasingly lay in very large developFinally he recommended, “Don't be afraid to start small, learn all ments,” Podmore observed, “a lot of very large undertakings with very aspects of the business and then pick a stream”. long timeframes.” Robert Frank Meanwhile, Vancouver residential real estate remains frothy.

Canadian Real Estate Forum / SPRING 2014

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THE SKY IS BARELY THE LIMIT We’ve had a growth spurt – for the past 25 years. As our reach has grown, from BC to Alberta and Ontario, so too has our grasp. As limitless as our growth opportunities may be, we continue to hold true to our corporate vision of excellence.

www.ConcertProperties.com

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BRUCE MACKENZIE

Addressing the talent shortage takes business savvy How are employers dealing with the exodus of baby boomers and the arrival of the next generation of workers?

Current recruitment programs are t depends on how much they care and, according to Bruce MacKenzie, based on a time when there was more many don’t care enough. The presi- supply than demand. But today there is dent of Vancouver-based Chapman & “no supply, a lot of demand, and we’re still trying to select Associates says, “What financial impact people and put ads in “They continue to say people are their does the absence of a posi- the paper for people that don’t exist,” he most valuable asset tion have on your busisays. Change always but they have zero knowledge of that ness? Most can’t answer involves risk, but MacKenzie believes asset outside the the question. They can’t companies that will confines of their take this business chalbusiness.” divert the necessary lenge seriously will be What financial resources to the problem light years ahead of impact does the absence of a posibecause they don’t even the competition. As for how to tion have on your the young business? “That’s know what the problem is.” retain generation, he suggests where it gets interBruce MacKenzie looking beyond the esting,” MacKenzie Chapman & Associates usual perks, such as says. “If it’s a business problem, it needs to be managed benefits or flex hours, and asking people with a business solution, which starts what they want. And keep them in the with a business case. Most can’t answer loop, he adds: “Research consistently the question. They can’t divert the shows that the number one driver for necessary resources to the problem change in employees is understanding because they don’t even know what the what’s happening next in their career.” Michelle Morra-Carlisle problem is.”

IAN THOMAS

Canada’s retail landscape rapidly evolving Walmart has shown that the Canadian market can outperform other regions while forcing traditional Canadian retailers to right-size and evolve to keep their market base. Now other international players are moving in too.

2003 & YTD 2013 (AS OF NOVEMBER) $750 $700 $650 $600 $550 $500

■ Canada ■ British Columbia

$450

hese forces are radically changing the retail landscape across the country, says large-scale retail specialist Ian F. Thomas.

Thomas has a front-row seat on how Canada’s retail market is evolving from his Vancouver office, where the shopping landscape is the most advanced. Mall sale productivity in British Columbia has outpaced the rest of the country year-on-year since 2003. British Columbia mall sales reached almost $700 million in 2013, whereas those in the rest of the country were barely above $600 million. “We’re seeing things happen at opposite ends of the spectrum,” he says. “On the one hand we’ve got the luxury stores, the Nordstrom and Saks and then Yorkdale in Toronto is adding more luxury specialty stores. I think we’re going to see a lot more of that.” Thomas sees Yorkdale’s latest evolution as something that will continue across the country as European luxury fashion houses enter suburban markets. “On the opposite side of the luxury spectrum is the discount,” he says. “We’re going to see this proliferation of outlet centres. Already, there’s strong competition with RioCan and Ivanhoé Cambridge and others rushing

Canadian & British Columbia Mall Sales Productivity Source: ICSC Research

Canadian Real Estate Forum / SPRING 2014

$400

2003 2004 2005 2006 2007 2008 2009 2010

2011

2012

2013 YTD

to develop outlet malls. That’s where the retail landscape is really going to change quite a bit.” Thomas believes that Target’s entry into Canada will eventually be profitable even as strong Canadian operators rapidly change how they do business. “You have stores like Canadian Tire that have revitalized themselves very successfully. You have regional stores like London Drugs in Western Canada that sell a lot of products at a Target. You have the Canadian Superstore.” Best Buy and Future Shop are closing stores and downsizing to meet contemporary demands. Chapters Indigo is focusing on turning bookstores into cultural retail centres, with toys, hobbies, home décor, food, beverages and in-store demonstrations. “It will become a totally different experience from what we’ve expected from a bookstore in the past,” says Thomas. “Our landscape is going to change substantially in the next five years.” Tracey Arial

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BEN SMITH

The market seems to welcome mixed-use Bare sites are scarce for developers, especially in cities. That’s why many are incorporating mixed use – whether by adding a residential component to a mall, or incorporating a coffee shop on the main floor of a residential building.

“C

onsidering how people are living, mixed use really works well for the biggest buying groups,” says Ben Smith, vice president, Sales & Marketing, Rennie Marketing Systems. That means both “downsizers” who want to drive less and be closer to their small communities, and Gen Y’s who are buying their first home and want to be closer to work, friends and amenities. Also, with today’s high gas prices, proximity to transportation nodes makes sense.

Looking ahead, Smith says there are three big drivers to watch: The first is demographics. “Out west, there is 88 billion $ in clear title real estate owned by boomers who are starting to get that money out of their homes “Out west, there is and are buying smaller,” Smith says. “Many are giving money to 88 billion $ in clear their children who in turn will title real estate go through the cycle of upsizing and starting families.” owned by boomers The office product too is who are starting to changing, he says. As traditional nine-to-fivers leave the market get that money out space, they are replaced with of their homes and younger generations who Skype their calls or work from home. are buying smaller.” The third driver will be Ben Smith, retail. “Do customers still want Rennie Marketing Systems to come in and buy things, or is the showroom model taking over?” Smith says. “As companies like Best Buy figure out how they manage an online business and what people physically want, that will change the buildings that developers create for those tenants.” Michelle Morra-Carlisle

“I

DANIEL SANDER

Why the shift toward purpose-built rental housing? After a 50-year domination by condominium construction, Vancouver’s housing market is developing a portfolio of purpose-built housing. While not a major shift as yet, the trend is definitely progressing.

t’s exciting for everyone,” says Daniel Sander, director & vice president, Hollyburn Properties Ltd. He says a few variables are contributing to the shift. The condo market is less robust than it used to be. Municipalities are giving tremendous incentives (such as fast tracking for zoning processes) to build rental product. Also, rather than condos, several major developers in Vancouver are turning to rentals they can keep to generate their own cash flow. “Now, with these Another factor is that the pricing for existing product has incentives and other reached such a high level. "With 85% of the rental product in Vancouver changes in the market, in 30 unit or less wood frame build- purpose-built projects ings that are on average 50-60 years seem more viable.” old and in need of capital upgrades, savvy investors really have no Daniel Sander, choice but to look at alternatives to Hollyburn Properties Ltd. achieve efficient growth in this market. Whereas until recently investors could buy existing properties below replacement cost, buildings today are trading above replacement cost. "That, Sander says, changes an investor’s perspective. For an example of how the trend could unfold, he points to Seattle. “They’ve had a tremendous rental housing boom, added 12,000 units last year, 8,000 the year before. They’re not building condos, they’re building all new rental product.” He sees Vancouver’s closest big city to the south as an interesting comparable – what has worked there might perhaps work here. “The challenge in the past was that if the land costs were the same, construction costs were similar and yet condos were 2 to 3 times more profitable, builders were building condos, not rentals,” Sander says. “But now, with these incentives and other changes in the market, purpose-built projects seem more viable.” Michelle Morra- Carlisle Canadian Real Estate Forum / SPRING 2014

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JOCK FINLAYSON

In British Columbia, resources fuel real estate As an economist, Jock Finlayson is often asked about the resource sector’s effect on real estate in British Columbia. “First I ask myself, ‘How important is resource related economic activity to the province of BC in aggregate?’ It’s critically important,” he says.

he executive vice president & chief policy officer, Business Council of British Columbia points out that threequarters of BC exports are from resource based industries. Also key is that Canada’s west coast has two significant ports – including Canada’s largest, in Vancouver – that export a lot of resourcebased goods to the rest of the world. At a more granular level, Finlayson looks at who is occupying office space in Vancouver and its adjacent suburbs. A substantial portion of the downtown central business district is comprised resource companies and their service providers. “Resource based companies are a quarter of the head offices of the largest BC-based compa-

“Having the pipeline capacity is essential to enable Canadian energy to reach global markets.” Jock Finlayson, Business Council of British Columbia nies,” he says. “Also, a significant proportion of the demand for locally provided business services emanates from resource companies. Law firms, accounting firms, engineering companies, headhunters, environmental consulting firms, scientific

and technical consulting firms… many are selling their services to forestry, energy and mining companies.” Back to a macro-economic perspective, Finlayson considers the proposed oil pipeline projects, particularly the Trans Mountain Pipeline Expansion project, critical to the future of BC’s resource sector. “Having the pipeline capacity is essential to enable Canadian energy to reach global markets, whether it’s south or offshore,” he says. “If for some reason we didn’t build these pipelines or we started to shut some of them down, the impact would be devastating on the Canadian economy and on BC.” Michelle Morra-Carlisle

JENNIFER PODMORE RUSSELL

Growth, transit and desires drive Vancouver office development Almost four million square feet of new office construction is currently underway or proposed within downtown Vancouver and its surrounding suburbs. Almost all of the new space in the downtown core is pre-leased, but the suburban half won’t be so quickly absorbed, says Deloitte’s real estate director Jennifer Podmore Russell.

“T

office, whether that’s downtown or otherwise.” he very short term and even medium term for Lots of the extra office development forms part of mixedVancouver means that office product outside of use projects on major transit lines. The office the downtown core is going to be highly competitive for the next few years “We aren’t seeing a portion often gets added to meet the regulatory requirements of municipal jurisdictions with until we get to the point where demand can general trend of visions of local sustainable job growth. come back into equilibrium with supply,” she “If you look at the Skytrain lines you have says. groups looking to major office developments occurring within Developers are creating the suburban office move out to the Vancouver, Burnaby, proposed within space in part to meet growth demand, but other projects are designed for current tenants who suburban markets, Coquitlam, Surrey, Richmond, New Westminster, as well as more of the non-downtown locations want to consolidate their operations. but rather that of Vancouver along the Canada line or along one “We aren’t seeing a general trend of groups looking to move out to the suburban markets, they’re establishing of the Skytrain lines,” she says. “There’s increased competition because there’s increased density but rather that they’re establishing secondary secondary locations.” coming in each one of those nodes.” locations,” she said. “Deloitte would be a Unless new institutional users move into perfect example of that. In our taking 20,000 Jennifer Podmore Russell, the marketplace or pension funds stabilize lease square feet in Langley, it didn’t shrink the footDeloitte prices on new product, Podmore Russell believes print that we have in the downtown core but it that current trends could lead to a fragmented office market did give us an opportunity to expand into suburban markets. in Vancouver. If anything we are seeing a lot of major tenants looking for a Tracey Arial space that will enable them to consolidate into one central

Canadian Real Estate Forum / SPRING 2014

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AVTAR BAINS

Is the Vancouver real estate market outpacing BC’s economy? Institutions want in. Private capital still wants in. So does foreign flight capital.

“E

veryone seems to want a piece of real estate in Vancouver,” remarked Premise Properties president Avtar Bains. “Tremendous demand is keeping prices aggressive.” “People want more real estate where the next generation of economic growth will happen,” he explained. “We still trade at some of the lowest yields in the country. Plus, the worse things get outside Canada, the more attractive we become as a safe haven for capital.” “Every asset class is thriving,” Bains continued. “There’s hot demand for all key asset classes:

Canadian Real Estate Forum / SPRING 2014

“If you have an office, residential retail or even Industrial. Retail, if you can find the product. an entertainment building that’s associated with Office space downtown and along transit lines. In Vancouver’s excellent rapid transit system, it will multi-family, there are far more buyers for aparttypically enjoy less vacancy as well as higher rents ment buildings than there is supply. and employee retention,” he He added that even the “People want more said. “It’s clean, bright, modern, hotel sector is witnessing a strong comeback, after more real estate where the efficient and really inviting.” “I was arrogant about taking than a decade of doldrums. next generation of public transit,” Bains confessed. “There’s more liquidity in hotels than we’ve seen since the economic growth will “I would drive everywhere. Now, I almost always take the Skytrain events of 2001 in the United happen.” to the airport. If you can get States,” Bains observed. people like me on board, it’s The runaway success of Avtar Bains, fantastic! No one in Canada Vancouver’s Skytrain means that Premise Properties comes close to Vancouver’s transit-oriented developments commute.” will command top returns, he predicted. “Everyone takes it,” he concluded, “whether “No question about it,” Bains declared unequivyou live here or are just visiting.” ocally. “They definitely have a leg up on developRobert Frank ments that are not located close to transit.”

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 49

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Canadian Real Estate Forum / SPRING 2014

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 53

DARIN RAYBURN

n his 20 years in the Edmonton business community, Darin Rayburn has never seen this level of construction activity. Growth is happening in every quadrant of the city and in every asset class, and it’s coming from not only the oil and gas industry but spinoff sectors as well, “a natural progression for a very healthy, strong, buoyant economy,” says the CEO of Melcor REIT. He says the new multi-use Rogers Place arena has been the catalyst. “It’s very exciting, and it has been a long time coming.” “How do we avoid All of this growth brings challenges, however, the most the runaway boom glaring being a shortage of we saw from 2004skilled labour. Another is infla2007? Having a lot tion. “The challenge we have as developers is to be able to of on-spec continue to produce in light of construction can increasing construction costs, labour costs and material result in a high costs,” Rayburn says. level of vacancy, He believes the city is making a concerted effort but which can drive says developers, too, have a rates down.” responsibility to change the city in only positive ways. Darin Rayburn, “How do we avoid the runaway Melcor REIT boom we saw from 20042007?” he says. “Having a lot of on-spec construction can result in a high level of vacancy, which can drive rates down.” Sustainability is another factor as tenants increasingly question builders about whether they are working toward BOMA BESt ratings or LEED Gold certification. Also, worklife balance is more important to the working demographic than it may have been in the last round of development. Rayburn is optimistic that developers can escape the sins of the past – the days of boxy, uninspired projects quickly built to fill space. “You can change the face of a city with creativity,” he says. Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2014

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 54

MARG SEBZDA

When supply exceeds demand, office lease rates tend to plunge In the next few years, we’ll see some great leasing opportunities, predicts Marg Sebzda, a senior associate with Canada ICI Capital Corporation.

“T

are how to get this product to the market in a timely fashion he Edmonton market will continue to be and how to fast track the funding for the projects through the strong in all sectors, but there will be chalgovernment. There needs to be some forward thinking in this lenges with all the developments going on area; maybe it should be spearheaded downtown and in the arena district. by the private sector.” There are several new developers that “Challenges we face are how to Sebzda, also the 2014 president of have jumped on the bandwagon to get this product to the market the Edmonton chapter of the build high rise residential condos, Commercial Real Estate Women while we still have some newer in a timely fashion and how to fast (CREW) Association, is focused on product out there that hasn’t been track the funding for the projects developing mentorship programs for sold” says Sebzda. Local developers young women considering this career who own high rise sites in the downthrough the government. path. CREW however is not only for town area, are either just sitting on There needs to be some forward women, we have several male members the land or contemplating the sale.” as well, who together form a strong At the same time, the rising thinking in this area.” network of reliable sources of informaneed for seniors’ housing continues Marg Sebzda, Canada ICI Capital Corporation tion. With the CREW Network, there is to go grow. collaborative networking with women “In the hospitals you’ll see beds and men and quality responsiveness to work across all specialbeing occupied by seniors who don’t need to be there. They ties in commercial real estate. are occupying a bed in the hospital because there’s no room Barbara Balfour for them in the medium care facilities. Challenges we face

RANDY FERGUSON

Getting Edmonton’s office market up to par

“W New additions to the downtown core are just another opportunity for Edmonton landlords to seize the day, says Randy Ferguson, chief operating officer at Strategic Group. 54

ally opt for higher quality, LEED-certified buildings. e need to view it as an “As space and vacancy appears in A class prodincentive to improve our ucts, tenants in B and C product will move to a office and rental environhigher class if they get a discount, because it gives ment, get new product on the ground and their companies higher prestige,” he says. leverage it as a business attraction tool. When a While most buildings in Edmonton are showing firm flies in from China or France to look for office their age, landlords have space in Edmonton, we don’t “When a firm flies in from been discouraged from reinwant them to say, ‘Our choices are too limited and China or France to look vesting in them. Since the bulk of tenants are governyou can’t service us here’,” for office space in ment offices, rents have had says Ferguson. “We still have too many Edmonton, we don’t want to stay economical. But for landlords to buildings that have reached them to say, ‘Our choices compete in a market into their functional obsolescence, where the land are too limited and you which new supply is introduced, they’ve got to reinshould be repurposed for can’t service us here’.” vest in their product. something new, like another "Edmonton is one of the asset class.” Randy Ferguson, Strategic Group top five markets in the Existing landlords will country," says Ferguson. "We need to start looking carry the advantage of price as developers are like it." limited in how much they can reduce rents to attract new tenants. However, tenants will eventu- Barbara Balfour

Canadian Real Estate Forum / SPRING 2014

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DAVE YOUNG

Industrial & retail lead the way Due to the world’s insatiable demand for our resources, Alberta has become the economic engine of the entire country, says Dave Young, executive vice president and managing director at CBRE Limited.

“W

e have the resources everyone on the planet still below replacement cost. needs and we’re sitting on the world’s most Going forward, Young believes the city should continue to secure source. Look at the challenges in Russia leverage its educational institutions. “What’s really important is its or Venezuela,” says Young. well-educated workforce. We have world“Trying to secure long term class educational institutions that spin off Driven by the booming energy industry, low unemployment, great GDP growth, and industrial positions in the city multiple billions of dollars of GDP annually. good migration numbers, the real estate They’re a massive contributor to our is what I’d be focused on. That’s economy. We talk about oil and gas, but business is extremely active in Edmonton, from an industrial, retail and residential where the growth will be.” education is a just as important part of the perspective, says Young. message. Dave Young, CBRE Limited “Trying to secure long term industrial and “With one of the lowest unemployment retail land positions in the city is what a lot levels in the country, employers in the region of our clients are focused on. That’s where the growth will be. face the challenge of finding workers. The number of students we We are also very bullish on the small bay industrial market as the have in the region, make up a key democost of construction creates a barrier to entry into this segment. graphic in our growing economy.” There should be continued rent growth in this asset class as rates are Barbara Balfour

RICHARD KNIBBS

Use of land is a balancing act Demand levels for industrial lands will remain consistent over the next few years – though not comparable to what we saw in 2007, predicts Richard Knibbs, vice president at Remington Development Corporation.

“I

don’t think we’re going to hit that kind of pandemonium again,” says Knibbs. “Currently available buildings are not enough, however, and whether the industrial land strategy is effective is open to debate. I feel that there needs to be a balance between the city and the counties for servicing the users, and the Capital Region Board is trying to find that balance.”

Canadian Real Estate Forum / SPRING 2014

Most people from eastern Canada think of consumer goods distribution when they think of industrial space – “big, 400,000 square foot distribution

“Currently available buildings are not enough, and whether the industrial land strategy is effective is open to debate... there needs to be a balance between the city and the counties for servicing the users.” Richard Knibbs. Remington Development Corporation facilities. That’s not the complete call for what’s required out here,” says Knibbs. “As soon as you get into light manu-

facturing and retooling, you need more specialized facilities that stand alone and have big yard spaces. It’s quite the eye opener for people who haven’t seen these facilities before.” Facilities that don’t require too much land can be serviced within city limits, but those with yard requirements will require locations in counties, where they can also benefit from savings on land costs and property taxes. They may run into roadblocks as the City of Edmonton has the most powerful influence on the Capital Region Board, says Knibbs. “They don’t like to approve too much new industrial land in the counties, because they want something that resembles their proportionate share in the city. What we need to see is, hopefully, some kind of balance between the players.” Barbara Balfour

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 57

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! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 58

BRETT KILLIPS

Edmonton retailers thrive, despite challenges If they can even find a location to rent, retailers in Edmonton can expect to pay high rents driven by construction costs that are typically 40% higher than other markets.

espite these challenges, the market is well worth entering, says Brett Killips, an associate partner with Cushman & Wakefield.

“Those who are good at what they do are marvellously successful,” he says. “Retail, particularly in Edmonton, is mostly driven by strong household income and a strong local economy. Average store sales are typically better in Alberta than anywhere else in Canada for most retailers.” That’s a trend that L.A. Fitness may cash in on soon. “They don’t have a store open yet, but they’re rumoured to have planned three stores,” said Killips. “Our landscape is made up of relatively few box anchors so having another one is positive.” It’s not unusual for new entries to take an unusually long time to find appropriate space to rent in Edmonton. “Our retail vacancy is about 3%, so

MICHAEL DAL BELLO

Canadian commercial real estate mostly healthy Other than potential saturations in the office markets in Toronto, Edmonton and perhaps Montreal, the fundamentals for commercial real estate in Canada are strong.

o says Michael Dal Bello, senior vice president real estate, Alberta Investment Management Corp.

“The fundamentals are very good in Edmonton, in terms of industrial, retail, and multi-family demand. They’re all pretty strong and frankly supply is in pretty good balance for

Canadian Real Estate Forum / SPRING 2014

landlords have lots of choices,” says “Our retail vacancy is Killips. “By the time anything is built, it’s fully pre-leased. There isn’t about 3%, so landlords much vacancy sitting on the have lots of choices.” market.” Brett Killips, Some space may open up as Cushman & Wakefield Safeway and Sobeys determine which stores they’ll sell or close, as Loblaw and Shoppers’ Drug Mart consolidate locations and if online shopping becomes more prevalent, but for now, landlords are firmly in control. “On the quick service retail side, the burger guys and whatnot, there’s a half dozen possibilities anytime a retail owner wants to make a deal.” Tracey Arial

demand. The office market though is a little tougher. We’ve got a number of projects that are coming on and our office market isn’t that deep in terms of demand and so we’ll probably have a bit of oversupply and run up in vacancy. That’s the big risk in our market in Edmonton.” “For Canada, most markets are in fundamentally good shape, barring office markets in Toronto, with a lot of new “We’re probably supply coming on downgetting into the zone town, and to some extent maybe Montreal.” where people are not Dal Bello says that willing to pay much there’s still a large pent-up demand for quality product more, given the amongst institutions and prospects of interest pension plans, but he doesn’t believe prices will rates rising.” increase in the short term. Michael Dal Bello, “We’re probably getting into Alberta Investment the zone where people are Management Corp. not willing to pay much more, given the prospects of interest rates rising.” That philosophy will keep his company mostly developing industrial, multi-family and retail assets rather than buying them, as they’ve done since 2005. “Unless we can find a very good property with intrinsic value that’s available at a discount, we’d rather invest in the development of new assets to add to the portfolio.” Tracey Arial

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:57 PM Page 59

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Buoyant market attracts talent A strong economy, tight labour market and steady population growth will continue to define Edmonton’s environment, even in 20 years, says Triovest’s vice president of Investments, Alex Thomson.

hat’s why the quality of work environments will become an increasingly important factor in employee retention. “In a market where we only have a 4.5 per cent unemployment rate, people can easily move somewhere else,” says Thomson. “Traditionally there’s been a struggle to retain the best and brightest here. If we handle the city’s growth correctly, there’s a great opportunity to hang onto our best young people, and to attract talent from other cities in Canada, even other countries.” Thomas suggests consolidating the city’s current growth into nodes, where residential and commercial developments are concentrated around transit hubs, and residents can commute more efficiently.

“If we handle the city’s growth correctly, there’s a great opportunity to hang onto our best young people, and to attract talent from other cities in Canada, even other countries.” Alex Thomson, Triovest

He also urges landlords to re-examine and reinvest in their product, particularly those assets nearing the end of their lifetime. “A lot of commercial real estate product here was built in the 1970’s,” he says. “As an industry we’ll have to ask ourselves, if we built a building in 1975 and we’re in 2025, what’s the highest and best use of the property in the long run? “In the past we’ve had high vacancy rates that led to landlords struggling to invest capital. At the moment, Edmonton’s vacancy levels are pretty good. Landlords will have to manage these renovations and upgrades now, because it may be more difficult to do so if the vacancy picture changes.” Barbara Balfour Canadian Real Estate Forum / SPRING 2014

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VIVIAN MANASC

LRT energizes the downtown core Recently announced funding for a new public transit system in Edmonton will lead to a wealth of opportunity in its downtown core, says Vivian Manasc, senior principal at Manasc Isaac.

“T

activity-based workspace. People are realizing that reimaghe LRT system will have a big influence over ining existing buildings is much more sustainable than what’s happening downtown, “says Manasc. tearing them down and building new – “What’s the attraction of “Once you put in the LRT, it’s quicker, better for the environment suburban markets? Free parking. Once you put in the LRT, everything changes. everything changes. Suddenly and gives a better return on investment.” Having a livelier downtown is also Suddenly you have affordable access, you have affordable access, key to attracting foreign leaseholders, says where you can get in and out of the city at peak hours, in a pleasant way and where you can get in and out Manasc. “Every company looks at what the without any trouble. “What I am now seeing is that some of the city at peak hours, in a quality of life will be like for its employees tenants who used to be in the suburbs are pleasant way and without and especially in the downtown core. We already have the best cultural, visual and considering the downtown core a more any trouble.” performing arts facilities. What’s missing attractive option.” are more walk-able communities with Manasc says this is not an overnight Vivian Manasc, Manasc Isaac housing downtown. trend, but will certainly become one over “The future of sustainable cities is where people can live, the next few years as many of the buildings constructed in work and play in one walk-able area.” the 1970’s are reaching the age of 40. Barbara Balfour “Those buildings will be reimagined to form a livelier,

Canadian Real Estate Forum / SPRING 2014

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! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:58 PM Page 62

GREG CHRISTENSON

Edmonton’s development disconnect While other cities face residential land shortages and struggle against urban sprawl, Edmonton’s transportation system ensures access to surrounding municipalities that compete to attract developers.

“W

e’ve just built a ring road that’s approximately ten miles in all directions from the downtown core,” said Greg Christenson, president, Christenson Developments, a senior housing developer in Edmonton. “It’s a major freeway system that opens up access to all the bedroom communities. In the Capital Regional plan, they say we have 24, but more realistically there are 16. Each one of those municipalities has land.” On the other hand, Christenson says that developers like him who serve markets that rely on collective transportation are not as wellserved. “There’s a disconnect between where developers want to develop and where transit is going,” he says. “The transit progress is tenuous and slow and very much dependent upon what I call home-

run infrastructure funding. They’re not really based on sustainable models of infrastructure funding. They’re based upon municipal govern-

“There’s a disconnect between where developers want to develop and where transit is going.” Greg Christenson, Christenson Developments ments begging to higher levels of government – usually the provincial government – to get money for a sort of manna from heaven for major LRT projects. There is quite a high level of capital expenditure on infrastructure that is not neces-

NEIL MACGILLIVRAY

Growth, prosperity and red tape

Western Canada is growing, and Edmonton is no exception. Work is plentiful, particularly from the oil patch, and a local labour shortage means an influx of outsiders moving to Edmonton to work, buy homes and set down roots. That residential growth is spreading to smaller communities as well.

he downside to such a healthy market? It can take up to a year to obtain a building permit. Compared to the 1990’s when a drawing was enough, “Today you

Canadian Real Estate Forum / SPRING 2014

sarily targeted to light and rapid transit, so there’s a disconnect. Transportation is becoming a greater and greater cost and it affects affordable housing for families.” There’s also some uncertainty in serving the growing seniors’ market due to changing standards. “There’s risk around that because of the heavy intrusion of politics and a crisis management system of looking after seniors and housing.” Like all the other developers in Edmonton, Christenson also has to plan for an ever-changing market that he says operates on a 12-year cycle that ramps up slowly. “We’re really coming out of a relatively slow time, which is a little bit different than other Canadian cities because many of them are in a 15 or 20 year up-cycle.” Edmonton’s local housing market has been healthy enough in the past four years that few people noticed its negative trend, he says. Instead, they dealt with the usual challenges of a short construction season, a very high cost of labour, and the ever-lengthening time it takes to get projects approved in his province. “In Alberta, more people are taking on more projects because of uncertainty of when the project is going to start, he says. “It takes more juggling.” Tracey Arial

need a traffic study, four or five elevations of site plan and possibly a landscaping plan,” says Neil MacGillivray, president of Camgill Enterprises Inc. Yet there is no turning back. “We own land that won’t be developed for five or 10 years so we’re not walking away from it, but it’s very frustrating,” MacGillivray says. “And it means the manufacturer has to pay more money to build something in Edmonton than if the system was faster.” “We’re making yieldHe would like to see a based deals because genuine commitment by the local mayor and council to it’s very hard to support the planning departpredict what somements and help speed up turnaround. Meanwhile, it isn’t thing’s going to cost always possible to sign a 18 months out.” complete lease initially. In Fort McMurray, for example, Neil MacGillivray, Camgill has been signing Camgill Enterprises Inc. letters of intent but can’t give tenants an exact start date. “We’re making yield-based deals because it’s very hard to predict what something’s going to cost 18 months out,” he says. “We will do it, but we will err on the side of caution and put out the higher rent number so that we’re protected in case the steel or concrete cost more or the construction takes a month longer than expected.” Michelle Morra-Carlisle

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TODD HIRSCH

Three myths about Alberta’s economy Albertans are proud of their economy, and with good reason. Yet there exist certain misconceptions about the province’s financial status according to Todd Hirsch, Senior Economist at ATB Financial.

The first has to do with the labour market, specifically the idea that there are lots of jobs in Alberta for everyone. He says there are ample jobs being created at the top end of the pay scale (in oil and gas, construction, professional and scientific occupations) and at the very lowest end of the pay scale (in the food, accommodation and retail sectors). All of the other jobs in between, however, aren’t as plentiful. “The average paying jobs like information and cultural services, public sector, and transportation jobs are closer to the national average,” Hirsch says. “For those people, the notion that job opportunities are fantastic for everybody is a bit of an illusion.”

“There’s a very strong sense, and sometimes even a bit of grumpiness, that wealth flows from Alberta and the other ‘have’ provinces to the ‘have not’ provinces through Ottawa’s equalization program.” Todd Hirsch, ATB Financial The second illusion has to do with inflation pressures being low. In Alberta they’re running slightly higher than nationally, around 2% at the time of writing. But a closer look at the numbers reveals very high inflation in what economists call non- discretionary expenses such as home heating, fruits and vegetables, gasoline, electricity, and intra-city transportation. “At the same time,” Hirsch says, “we’re seeing offsetting deflation – outright price decreases – in things like home furnishings and electronics, health and beauty aids, and telecommunication services.”

The third illusion Hirsch points out involves transfers of wealth in and out of Alberta: “There’s a very strong sense, and sometimes even a bit of grumpiness, that wealth flows from Alberta and the other ‘have’ provinces to the ‘have not’ provinces through Ottawa’s equalization program.” What people fail to account for, he says, is the very strong inflow of wealth into Alberta through interprovincial migration. In 2013, a record number of people from other provinces moved to

Alberta. This helps employers find the workers they need and makes for a favourable tax climate. “When people move to Alberta to work, they bring with them their education which is paid for by the taxpayers of other provinces,” Hirsch says. “When a young person finishes college or university, packs up and moves to Alberta and starts contributing to our economy, this represents a huge inflow of wealth. It’s something to think about.” Michelle Morra-Carlisle

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EVERYTHING IN THE PALM OF YOUR HAND POWERED BY Download the Real Estate Forum mobile app to stay in tune and updated on the real estate industry and our events. Plan your time at the Forum with a complete list of sessions, room numbers and presenter biographies. Join live twitter conversations, watch event interviews with key industry leaders and connect with everything our events have to offer. BlackBerry: visit www.realestateforums.com/mobile on your mobile browser For sponsorship opportunities, please contact Frank Scalisi (416) 512-3815 frank.scalisi@informacanada.com For mobile app questions, please contact Emma Cimolini (416) 512-3462 emma.cimolini@informacanada.com

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! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:58 PM Page 66

The Voice We all have to thank Ontario lawyer Rocco Galati for successfully appealing the proposed appointment of federal court judge Marc Nadon to the Supreme Court of Canada. As most of you will have read, that appointment was deemed unconstitutional by the Supreme Court judges on a reference, ostensibly because Mr. Nadon was not a current sitting Quebec Superior Court judge or practising lawyer from Quebec.

Michael Brooks

By Michael Brooks

r. Galati wasn't particularly surprised at the outcome, but seemed almost resentful that he, a private citizen, had to be the one at his own cost to stand up for the Constitution. The particular point he made, which resonated with me, was that the Constitution belongs to the people of Canada, not the current ruling party in any government. Would you have had the courage, the time, the conviction and the skill to have taken a similar stance? Could you have found your voice? The commercial real estate (“CRE”) industry is huge in Canada, adding some $63.3 Billion in annual economic activity based on the REALpac/NAIOP Research Foundation/Altus Group report from 2012. Capital investment alone in the CRE sector was $21.6 Billion in 2011 – our industry is making big bets on the future of Canada. We support 340,000 jobs. We generate $18 Billion in taxable personal income, and contribute net $32.4 billion to Canada’s economy. We should have a voice, and a strong one at that. Governments want to hear industry’s concerns through a single voice if possible. While everyone may have a view, governments like to deal with industry associations like the Real Property Association of Canada (“REALpac”) to help inform them by gathering and synthesizing industry views, and presenting them in a well-researched, professional manner. Many governments don’t have the budget or resources to do the kind of research an industry association can do. As a Canadian government relations-focused industry association, REALpac scours the national and international real estate waters for such illadvised policies on behalf of investment real estate. There is no shortage of issues. While our successes on international and national real estate taxation, capital markets, planning and the environment have been recognized, new issues arise regularly from the minds of cash strapped and governance-challenged governments and governmental agencies. Many of those issues are at the local level, including regional

Canadian Real Estate Forum / SPRING 2014

growth plans, transit, densification, natural resource conservation, parking ratios, assisted housing, landfill siting, wind farm siting, and infrastructure financing. Many are at the provincial level, including regional and provincial growth plans, incentives for energy conservation, location of major highway and utility corridors, the locations of local energy supply facilities, and provincial policies around land use planning. Some straddle both levels, like development charges, parkland dedication, bonusing or density payments, matching zoning to official plans, and appeals. We currently also still regulate public real estate companies provincially in spite of former federal Finance Minister Jim Flaherty’s best efforts to create a single national securities regulator. This inefficiency merely increases the cost and time of compliance and is a hindrance to capital formation in Canada. All this begs the question: what's your vision for this country? REALpac bases its representation on the traditional three pillars of economic, social, and environmental prosperity. Our value statement is very clear in reflecting our industry’s need to be good corporate citizens and avoid what economists might term “market failure" or “negative externalities". However, we also need to articulate a positive operating environment for the real estate industry nationally, provincially and locally. In taxation, fund management and capital markets regulation, regulatory environment and with local governments. We are not a lever to be pulled. And increasingly, we need to be vigilant against government policy mistakes, what economists might call non-market failure. We need to take governments to task over governance failures. We need to grow our voice. Since 1970, REALpac has been a strong voice for the investment real property industry in Canada. Through growing regional participation in both Western and Eastern Canada, we hope to continue to speak on your behalf for our industry and our collective vision for this great country. ■ Michael Brooks is CEO of REALpac.

! REF Spring 2014 v9_! REF Win08 Toronto 2014-03-24 5:58 PM Page 67

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