Building December 2012 January 2013 by IQ Business Media

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311

CONTENTS

s. Increase moderately

Features 14 – Failing the LEED Test / More than 7,000 projects, comprising 1.5 billion square feet in 30 countries, have received the LEED stamp of approval. But builders are in uncharted legal water in Canada if they come up short. Which begs the question: who pays when green isn’t green enough? By Sharon Vogel 16 – Our Own Backyard / Downtown revitalization is not the private domain of big cities like Toronto. All urban centres are or will be looking at urban intensification to stimulate the rebirth of neighbourhoods and create vibrant destinations. “Community tourism” can be a valuable technique to do exactly that. By Peter Sobchak COVER IMAGE: Fergus, Ont. Photo courtesy of Ontario Tourism

Marketing Partnership Corporation www.building.ca

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21 – “We’re not a bad place to be.” / The consensus among the roughly 500 real estate executives, investors, developers, and market experts interviewed for the 2013 Emerging Trends in Real Estate report, by PwC and Urban Land Institute, is comforting: our markets enjoy a seemingly durable equilibrium, helped along by concerted investor discipline, lender controls, and government regulation motivated to ensure steady growth and dodge disagreeable corrections. By Jonathan D. Miller and Charles J. DiRocco Jr.

Departments 4 – Online Content 5 – Editor’s Notes 7 – Upfront 10 – Market Watch 12 – Legal 30 – Viewpoint DECEMBER 2012 / JANUARY 2013 BUILDING 3

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Life after the back cover…

what’s on BUILDING.ca Read

It’s hot in Woodstock While small towns courting new businesses is nothing new, Woodstock, Ont. has been doing an admirable job, especially with companies who are major players in their respective industries choosing Woodstock for new industrial or headquarter buildings.

Resolve disputes out of court Construction disputes have increased dramatically in number and complexity over the past few years. Chris Eagles and Trish Morrison explain why many parties are turning to arbitration or mediation to resolve construction disputes.

Watch

Attend

2013 Emerging Trends in Real Estate Over a series of four videos, Jonathan Miller, author of the 2013 Emerging Trends in Real Estate report, George Carras, president of RealNet Canada Inc., and John O’Bryan, vice chairman at CBRE Ltd. provide outlooks on Canadian and U.S. investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues to look for in 2013.

Interior Design Show / January 24-27 / Toronto Best Practices in City Building / January 31 / Cambridge, Ontario RVTR: Infra- | Eco- | Logi- | Urbanism / February 7 - April 14 / Montréal Thoughts on Agency, Utopia and Property in Contemporary Architectural and Urban Theory / February 21 / Cambridge, Ontario

4 BUILDING DECEMBER 2012 / JANUARY 2013

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The LEED 2012 Inventory “We [Canada] expect nothing spectacular [in 2013], but if the world turns around we are in an excellent position.” Jonathan Miller

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Volume 62 Number 6 Editor Peter Sobchak

The end is NOT nigh!

Art Director Roy Gaiot Legal Editor Jeffrey W. Lem Contributors Sheri Craig, Charles J. DiRocco Jr., Jonathan D. Miller, Sharon Vogel Circulation Manager Beata Olechnowicz Tel: (416) 442-5600 ext 3543 Reader Services Liz Callaghan Advertising Sales Greg Paliouras Tel: (416) 510-6808 Email: gpaliouras@Building.ca Senior Publisher Tom Arkell Vice President, Publishing Business Information Group (BIG) Alex Papanou President, Business Information Group (BIG) Bruce Creighton Building magazine is published by BIG Magazines LP, a division of Glacier BIG Holdings Company Ltd. 80 Valleybrook Dr. Toronto, ON M3B 2S9 Tel: (416) 510-6845 Fax: (416) 510-5140 E-mail: info@building.ca Website: www.building.ca SUBSCRIPTION RATE: Canada: 1 year, $30.95; 2 years, $52.95; 3 years, $64.95 (plus H.S.T.) U.S.: 1 year, $38.95 (U.S. funds) Elsewhere: 1 year, $45.95 (U.S. funds). BACK ISSUES: Back copies are available for $8 for delivery in Canada, $10 US for delivery in U.S.A. and $15 US overseas. Please send prepayment to Building, 80 Valleybrook Dr. Toronto, ON M3B 2S9 or order online at www.building.ca For subscription and back issues inquiries please call 416-442-5600, ext. 3543, e-mail: circulation@building.ca or go to our website at www.building.ca Please send changes of address to Circulation Department, Building magazine or e-mail to addresses@building.ca NEWSSTAND: For information on Building on newsstands in Canada, call 905-619-6565 Building is indexed in the Canadian Magazine Index by Micromedia ProQuest Company, Toronto (www.micromedia.com) and National Archive Publishing Company, Ann Arbor, Michigan (www.napubco.com).

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n our previous issue, I began my column with “by the time you read this the coin toss of the U.S. election will have been decided.” For this issue, I have a similar opening: by the time you read this, we’ll know if the Mayans were right. Of course I say this mostly in jest, since the idea that the end of the Mayan calendar heralds the end of the world has fairly conclusively been debunked. Heck, even the U.S. government had to release an official statement, saying “The world will not end on Dec. 21, 2012, or any day in 2012.” But nevertheless, there hangs in the air if not an apocalyptic zeitgeist, then at least a nebulous feeling of anxiety. It’s prevalent in popular culture, but it also seems to have percolated into real estate. The low-level anxiety in Canadian real estate is certainly not connected to Mayan calendar gossip, but in my mind it represents two things professionals should be a little more clear headed about: statistics and sentiment indexes. And let me cut straight to the point: do not be afraid of statistics, or sentiment indexes. The first lack context, the second are more a response to external conditions. As Mark Twain once famously said, “Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.” With statistics, we have to be very wary of information malnutrition. George Carras, president of RealNet Canada Inc. (itself a real estate information company), put it very well during his presentation at the Emerging Trends in Real Estate event sponsored by ULI/PwC when he said “Today we live in an era where it’s really easy to get a lot of cheap, quick facts. It is analogous to someone consuming a junk food diet and paradoxically thinking they are healthy because they are full, only to get sick days later due to a lack of nutrients.” Carras wisely advises to be critical of the statistics utilized by the popular media, and to always put statistics in perspective. “Newspaper headlines have reported that year-to-date high rise sales are down by 30 per cent, however last year was a record year, and 2012 has actually seen the third best year for high-rise sales on record,” he stated. This message was echoed by John O’Bryan, vice-chairman of CBRE, earlier during the event as he described a “fear versus fact” mentality in 2013 and the potential damaging implications of lowered consumer confidence on not only the condominium market, but also the commercial markets. This low confidence relates to my concern over sentiment indexes. For example, the Canadian Real Estate Sentiment Survey for Q3, produced by the REALpac and FPL Advisory Group, saw the index drop to its lowest level since 2009, saying “Canada’s commercial real estate leaders express caution and less optimism today than a year ago in regard to the broader Canadian economy and the prospects for sustained real growth.” The survey went on to note that “sentiment stemming from an unstable international economy has Canadian senior executives taking cautious approaches and wondering if Canada will be next to face financial consequences.” Yes, there exists the possibility of an even bumpier global economy ahead amidst continuing sovereign debt struggles in Europe and the U.S. fiscal cliff. But the Canadian real estate economy is still the place to be: well-established influences in the current real estate cycle, stable fundamentals (low vacancy rates, constrained supply of investment product, cheap debt), disciplined lending practices, and strong immigration and thus employment to Canada’s major cities are pillars to rally around. As O’Bryan pointed out, this environment has fuelled the “best first half in terms of investment volume on record with $14.3 billion of commercial transactions,” and buoyed by ideal REIT buying conditions such as “little risk in cash flows, open capital and debt markets, and a steady supply of sellers looking to rebalance their portfolio or repatriate their money into foreign markets.” With all these positive indicators, it comes as no surprise that 2012 is on pace to be the second best year ever on record. I echo O’ Bryan’s droll assessment: “[Even] if the iceberg rolls over I would still want to be here.”

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Peter Sobchak

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We welcome your feedback. Send your questions and comments to psobchak@building.ca DECEMBER 2012 / JANUARY 2013 BUILDING 5

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UPFRONT Carlyle + Associates join DIALOG New report card says Canada’s municipal infrastructure “at risk”

OTTAWA Canada’s municipal infrastructure is at risk, with more than half of municipal roads requiring significant repairs and one in four wastewater plants needing major upgrades. This was the key finding of the first-ever Canadian Infrastructure Report Card, which measured the condition of municipal roads, drinking water, wastewater, and storm water systems. The study was conducted by the Federation of Canadian Municipalities (FCM) working with the Canadian Construction Association, the Canadian Public Works Association and the Canadian Society for Civil Engineering. “The report card shows that core municipal infrastructure like roads and water systems, assets critical to Canada’s health, safety and economic prosperity, are at risk,” said FCM president Karen Leibovici. “Investments in infrastructure over the last few years have helped, but without long-term action we are still headed for a crisis.” The report card, which surveyed more than 120 municipalities representing 60 per cent of the Canadian population, says more than half of municipal roads are falling apart beneath our tires. One in four roads is over capacity, transporting far more people and goods than it was designed to handle. And one in four wastewater treatment plants needs to be upgraded or replaced to meet new federal standards introduced this summer, at a cost of at least $20 billion. “Two billion dollars in federal funding for local governments is going to lapse by March 2014,” Leibovici said. “The new federal long-term infrastructure plan is a once-in-a-generation opportunity to put our essential infrastructure back on solid ground.” www.building.ca

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CALGARY DIALOG is adding a new skill set to its integrated design approach with the addition of landscape architecture firm Carlyle + Associates. “We are very excited to have Doug Carlyle and his team join us,” says Tom Sutherland, firm managing principal. “Our clients realize that an integrated team is in a much better position to deliver innovative design solutions. We see landscape architecture as a critical piece to this approach.” DIALOG and Carlyle + Associates have collaborated for over a decade on award-winning projects in Edmonton including St. Joseph’s Seminary, the Edmonton Clinic, Walterdale Bridge, Louise McKinney Riverfront Park, and the Edmonton Downtown Plan. Carlyle + Associates have received awards from the Canadian Society of Landscape Architects for such projects as Edmonton’s North Bank/West Rossdale Plan, Calgary’s Bridges Neighbourhood and Lloydminster’s Border Marker.

Toronto commercial market figures take a slide

TORONTO Toronto Real Estate Board (TREB) Commercial Division members reported lease transactions accounting for almost 3.5 million square feet of industrial, commercial/retail and office space during the third quarter of 2012, down from slightly more than 3.7 million square feet leased in the third quarter of 2011. The year-over-year change in average lease rates was mixed. Based on transactions for which pricing was disclosed, the average industrial lease rate was up compared to last year whereas average commercial/retail and office lease rates were down. “The industrial market segment accounted for almost three-quarters of total leased space in the third quarter. Average lease rates were up for all industrial size categories reported by TREB. If growth in average industrial lease rates continues in the fourth quarter and into 2013, it

would suggest that market conditions are tightening with industrial firms in southern Ontario more confident about future growth,” said TREB Commercial Division Chair Cynthia Lai. Commercial Division Members reported 214 combined commercial sales in the third quarter, down 18 per cent from 262 sales during the same period in 2011. The average selling price was down for all three categories, but a comparison of transactions suggests that the decline was more the result of a different mix of property types sold this year compared to last, especially in relation to commercial/retail and office space.

Design teams selected for Joseph Brant and Peel Memorial Hospital projects BURLINGTON, ON & BRAMPTON, ON | Cannon Design Ltd. has been selected to lead the planning, design and compliance aspects of both the Joseph Brant Memorial Hospital project and the redevelopment of the former Peel Memorial Hospital. Joseph Brant’s first major redevelopment in more than 40 years will include the construction of a new, six-storey patient-care tower and significant renovations to existing space, including 77 additional inpatient beds; expansion of the diagnostic imaging and medical diagnostics unit; new operating rooms, post-anaesthetic care unit and expanded ambulatory procedures area; a new ambulatory care and cancer centre; a new main entrance; a new laboratory; and the construction of a new, standalone power plant that will serve the expanded facility. For Peel Memorial Centre for Integrated Health and Wellness, Cannon Design is partnering with Montgomery Sisam as the planning, design and compliance team. Once these aspects are completed, the two hospitals and Infrastructure Ontario will issue a request for qualifications for a company to design, build and finance the projects, using the alternative financing and procurement model. DECEMBER 2012 / JANUARY 2013 BUILDING 7

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UPFRONT CMLC completes RiverWalk Phase III promenade

CALGARY Calgary Municipal Land Corporation (CMLC) has completed Phase III of the RiverWalk infrastructure program, which now stretches two kilometres along the Bow River from Centre Street Bridge, through East Village, around Fort Calgary to 9th Ave. SE. Phase III represents 423 linear metres

phases of RiverWalk which will see the path continued south along the Elbow River toward Lindsey Park.

PEO launches investigations of Algo Centre mall collapse in Elliot Lake

TORONTO Professional Engineers Ontario (PEO) has launched investigations related to the June 23, 2012 col-

RiverWalk, Calgary

of pathway, includes a small gateway plaza that opens near 9th Avenue SE and showcases Fort Calgary’s traditional buffalo statue; a small interpretive area at the rivers’ confluence with signage curated by Fort Calgary, and two small step-down decks. As per the previous two phases of RiverWalk, Phase III, has separate, delineated paths for cyclists and pedestrians. The divided commuter bikeway and the pedestrian pathway reflect the same surfaces and materials as previous phases; plantings and vegetation include native and ornamental grasses that are reflective of the prairies and Bow River landscape; and in tribute to the North West Mounted Police, who founded Fort Calgary, red cube-styled seating is featured along the path. In 2013, CMLC begins the planning period for the final 8 BUILDING DECEMBER 2012 / JANUARY 2013

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lapse of the Algo Centre Mall in Elliot Lake, Ont. As outlined in section 33 of the Professional Engineers Act, PEO, through the Registrar, is enabled to initiate the investigative process in the absence of a complaint being filed, on reasonable and probable grounds that a member of the association or a holder of a certificate of authorization, a temporary licence, provisional licence or limited licence has committed an act of professional misconduct or incompetence, or that there is cause to refuse to issue or to suspend or revoke a certificate of authorization. Investigators appointed by the Registrar are provided powers, similar to those provided to law enforcement officials under a search warrant, to enter the business premises of the licence or certificate holder under investigation and examine

anything relevant to the subject of the investigation. These investigations could lead to discipline of PEO licence or certificate holders by the association. “It is imperative that we determine if work by PEO licence holders was performed competently and in compliance with the regulations under the Professional Engineers Act, as well as other applicable statutes, regulations, standards, codes, bylaws and rules,” said Denis Dixon, president of PEO. “This action is necessary to carry out our mandate to govern licence and certificate holders and regulate professional engineering practice to serve and protect the public interest.” In addition, PEO has offered to assist Justice Paul R. Bélanger, who is leading the public inquiry into the mall collapse, in reviewing relevant legislation, regulations and bylaws, as well as the policies, processes and procedures of provincial and municipal governments and others with respect to structural integrity and safety, and the emergency management and response to the collapse of the Mall. PEO expects to seek standing at the Inquiry Hearing. To help guard against a repeat of incidents similar to the tragedy in Elliot Lake, Dixon has recommended creating a provincial engineer position, similar to the province’s chief medical officer of health. In a letter to Ontario Premier Dalton McGuinty, Dixon advised that a provincial engineer “could take overall authority for engineering works in the province, to provide specific direction in the event of situations like Elliot Lake, and to ascertain whether such situations are indicative of systemic problems.”

B.C. developer introduces Canada’s smallest condos for sale in Surrey

VANCOUVER One of Canada’s largest municipalities is soon to be home to the country’s smallest condos. Balance, the latest project by developer Tien Sher, is a four-storey building with 56 micro suites, and will be home to Canwww.building.ca

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, Vancouver . . . ada’s smallest condo at just 290 square. . feet. Tien Sher has already built more. . than 420 homes in Surrey City Centre’s. . Gateway District through their Quat-. . tro developments first three buildings.. . Balance will be located across the street. . from Quattro3. . . “Real estate prices in the Low-. . er Mainland are among the richest in. . North America. In cities like New York,. . Tokyo and Paris they found a solu-. . tion — build smaller but build closer. . to amenities. We wanted to build suites. . that renters could afford to purchase. . — today,” says Charan Sethi, president. . of Tien Sher. “With suites starting at. . $109,900, if you can afford the $6,000. . down payment, and you make a salary. . of $17 per hour, we have a home for. . you.” 60 per cent of the Balance suites. . are 305 square feet or smaller. All micro. . suites will contain five stainless steel ap-. . pliances, hardwood floors and a balcony.. . The largest suite in the complex is a one. . bedroom at 653 square feet. “No suite. . comes with a parking stall, but they are. . available for purchase. A 2012 parking. . study we commissioned showed most. . purchasers will forego car ownership. . and its associated costs, in favor of an. . affordable home purchase,” says Sethi. . . While prices are not finalized, Sethi. indicates that the profit margin is “very.. tight” on this project to keep the homes.. affordable. “With mortgage-amortiza-.. tion periods capped at 25 years, coupled.. with the high cost of developable land.. in the Lower Mainland, micro suites are.. a sensible and cost-effective option for.. single people looking to purchase their.. first home,” says Peter Simpson, presi-.. dent and CEO of the Greater Vancouver. www.building.ca

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. . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .Home . . . . Builders’ . . . . . . Association. . . . . . . . . “This . . . . .is. an . .. .. .quisitions, . .. .. .. .. .. .. ..Cedar .. .. .. .. is .. ..seeking .. .. .. .. .. .to . .. consoli.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .idea . . .I .expect . . . . to . .see . . emulated . . . . . . throughout . . . . . . . .. .. .date . .. .. ..its .. ..portfolio. .. .. .. .. .. .. Given .. .. .. .. .these . .. .. .. .diverging . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .the . . region . . . . .in. the . . .years . . . ahead.” . . . . . . . . . . . .. .. .objectives, . .. .. .. .. .. .. .both . .. .. .. parties .. .. .. .. ..have .. .. .. agreed .. .. .. . . that . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .the . .. ..dissolution .. .. .. .. .. .. .. of .. ..our .. .. .joint . .. .. ..venture .. .. .. .. . is. .the . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .sensible . .. .. .. .. .. path .. .. .. to .. .. take,” .. .. .. .. said .. .. ..Edward .. .. .. .. . Son. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .shine, . .. .. .. ..CEO .. .. .. of .. ..RioCan. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .Once . .. .. .. .completed, . .. .. .. .. .. .. .. RioCan .. .. .. .. .. .will . .. .. .own . . . a. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .RioCan . . . . . . REIT . . . . .dissolves . . . . . . . . joint . . . . . . .. .. .100 . .. .. .per . .. .. cent .. .. .. interest .. .. .. .. .. .in . .. 21 .. .. properties .. .. .. .. . . . in . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .venture . . . . . . .with . . . . Cedar . . . . . Realty . . . . . . . . . .. .. .the . .. .. .Northeastern . .. .. .. .. .. .. .. .. .U.S. . .. .. ..that .. .. ..were .. .. .. .previ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .Trust . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .ously . .. .. .. owned .. .. .. .. ..jointly .. .. .. ..with .. .. .. Cedar .. .. .. .. plus .. .. . three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .properties . .. .. .. .. .. .. .where . .. .. .. ..RioCan .. .. .. .. .. already .. .. .. .. ..owns . . . . a. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .TORONTO . . . . . . . . . RioCan . . . . . .REIT . . . .announced . . . . . . .. .. .100 . .. .. per .. .. .cent . .. .. .interest. . .. .. .. .. ..Their .. .. .. ..total .. .. ..portfolio .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .that . . . it. . will . . . dissolve . . . . . . its . . .joint . . . .venture . . . . .. .. .in . .. .the . .. .. northeastern .. .. .. .. .. .. .. .. .U.S. . .. .. ..will .. .. ..include .. .. . . . 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .agreement . . . . . . . with . . . Cedar . . . . .Realty . . . . Trust, . . . . Inc. . . .. .. .properties . .. .. .. .. .. .. totalling .. .. .. .. .. ..5.3 .. ..million .. .. .. .. ..square .. .. . . feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .Through . . . . . . its . . Limited . . . . . Partnership . . . . . . . . Agree. . . . .. .. .(including . .. .. .. .. .. .. .shadow . .. .. .. .. ..anchors) .. .. .. .. .. .in . .. .the . .. . states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .ment . . . .dated . . . December . . . . . . . .10, . .2009, . . . .RioCan . . . . .. .. .of . .. .Connecticut, . .. .. .. .. .. .. .. .. .New . .. .. .. Hampshire, .. .. .. .. .. .. .. . .New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .and . . Cedar . . . . .have . . . amassed . . . . . a. portfolio . . . . . . of . . 22 . .. .. .Jersey, . .. .. .. .. New .. .. .. ..York, .. .. .. .Massachusetts, . .. .. .. .. .. .. .. .. .. .Mary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .properties . . . . . . . that . . . are . . .owned . . . . on . . .an . . 80/20 . . . .. .. .land, . .. .. ..Pennsylvania, .. .. .. .. .. .. .. .. ..and .. .. .Virginia. . .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .basis . . . (80 . . .per . . cent . . . by . . RioCan . . . . . .and . . 20 . . per . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .cent . . . by . . Cedar). . . . . . Under . . . . . the . . .terms . . . .of. .the . .. .. .CAPREIT . .. .. .. .. .. .. .. .expands . .. .. .. .. .. .. .. presence .. .. .. .. .. .. . . .in. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .dissolution, . . . . . . . .Cedar . . . . will . . .convey . . . . .its. 20 . . per . . .. .. .Calgary . .. .. .. .. .. .. .market . .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .cent . . . portion . . . . . owned . . . . . in . . 21 . . properties . . . . . . . to . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .RioCan . . . . . for . . . the . . .purchase . . . . . .price . . . .of. .$120 . . .. .. .TORONTO . .. .. .. .. .. .. .. .. .. .. ..Canadian .. .. .. .. .. .. .. Apartment .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .million. . . . . . RioCan . . . . . .will, . . .in. .turn, . . . convey . . . . . its . .. .. .Properties . .. .. .. .. .. .. ..Real .. .. .. Estate .. .. .. .. .Investment . .. .. .. .. .. .. . Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .80 . . per . . .cent . . .interest . . . . . in . . Franklin . . . . . . Village . . . . .. .. .(CAPREIT) . .. .. .. .. .. .. .. ..has .. .. acquired .. .. .. .. .. .. two .. .. ..apartment .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .to. .Cedar. . . . . RioCan’s . . . . . . .purchase . . . . . . price . . . .is. to . .. .. .properties . .. .. .. .. .. .. ..in.. .Calgary . .. .. .. .. .. totaling .. .. .. .. .. .405 . .. . .resi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .be . . reduced . . . . . . by . . .$750,000 . . . . . . .to. . reflect . . . . . a.. .. .dential . .. .. .. .. ..suites .. .. .. .. for .. .. ..approximately .. .. .. .. .. .. .. .. .. . $68.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .mark-to-market . . . . . . . . . . . adjustment . . . . . . . .to. . the . . .as. .. .. .million. . .. .. .. .. .. The .. .. .. first .. .. .. property .. .. .. .. .. .. is .. .a. ..high .. . . rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .sumed . . . . financing. . . . . . . . The . . . gross . . . . sale . . .price . . . of . .. .. .mid-tier . .. .. .. .. .. ..building .. .. .. .. .. .. .with . .. .. ..152 .. .. .. one.. .. . . and . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .the . . 80 . . per . . . cent . . . interest . . . . . in . . Franklin . . . . . . Vil. . .. .. .two-bedroom . .. .. .. .. .. .. .. .. .. suites .. .. .. .. in .. .. downtown .. .. .. .. .. .. . .Cal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .lage . . .is. $60 . . . million. . . . . . . . . . . . . . . . . . . .. .. .gary. . .. .. .. The .. .. .. .second . .. .. .. .. .property . .. .. .. .. .. .is . ..a.. low .. . . rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . .“While . . . . . RioCan’s . . . . . . .objective . . . . . . is. .main. . . .. .. .mid-tier . .. .. .. .. .. .. three-storey .. .. .. .. .. .. .. .. .. .building . .. .. .. .. .. . com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .taining . . . . . its . . . growth . . . . . .trajectory . . . . . . . in . . the . . .. .. .prised . .. .. .. ..of .. ..253 .. .. .one-, . .. .. .. .two. .. .. ..and .. .. .three-bed. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .northeastern . . . . . . . . United . . . . . .States . . . . through . . . . . .ac. .. .. .room . .. .. .. .apartments. . .. .. .. .. .. .. .. B.. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .My . . congratulations . . . . . . . . . . .on . .the . . article . . . . .by . .Rhys . .. .. .Phillips . .. .. .. .. .on . . . .P . .3. ..and .. .. .the . .. .. issue .. .. .. ..of .. ..account.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .able . . . ‘accounting’ . . . . . . . . .(Building, . . . . . . October/November, . . . . . . . .. .. .. .. .. .. .. 2012). .. .. .. .. ..Our .. .. ..industry .. .. .. .. .. ..is.. .currently . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .challenged . . . . . . . by . . the . . . expectation . . . . . . . . by . . all . . levels . .. .. .. .of . .. government .. .. .. .. .. .. .. .. ..that .. .. ..P..3..is .. .the . .. .. delivery .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .method . . . . . of . . choice . . . . .and . . .“value. . . . . ”. For . . .decades . . .. .. .. .. our .. .. .industry . .. .. .. .. .. .has . .. .. used .. .. .. ..different .. .. .. .. .. . mod. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .els . . --. fixed . . . . sum, . . . .cost . . .plus, . . . etc. . . . --. .as. we . . .. .know . .. .. .. .that . .. .. .different . .. .. .. .. .. .procurement . .. .. .. .. .. .. .. .. .models .. . . . . .suit . . . . . method . . . . . . . . . . . . . . . . and . . . . .. .resources . .. .. .. .. .. .. .. .. .. time .. .. .. .. .. .. .. .. ..available. .. .. .. .. . . . . . . . . .the . . . . . . . .of. construction . . . . . . . . . . . .the . .. .. .. .. .. .. .. .. .and . .. .. .. .. .. .frames . .. .. .. .. .. .. .. .. .. . . The . . . .current . . . . . fixation . . . . . on . . P. 3. indicates . . . . . . .a. lack . . .of .. ..knowledge .. .. .. .. .. .. .. .in . .. the .. .. ..procurement .. .. .. .. .. .. .. .. ..process, .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .and . . . . . . . .that . . . . . .size . . . . . all. . . . .is. fitting . .. .. .. .. .. raise .. .. .. .. .. .. .. ..financial .. .. .. .. .. .. .. .. .. .. .. . . par. . . . . . .a .belief . . . . . . .one . . . . . .fits . . . . It . . . . .. .. .. .to . .. .. .. .. ..these .. .. .. .. .. .. .. .. .. ..questions, .. .. .. .. .. . . . . . .ticularly . . . . . when . . . . the . . .procurement . . . . . . . . .agencies . . . . .. .. continue/ .. .. .. .. .. .. .refuse . .. .. .. .. to .. ..divulge .. .. .. .. .. the .. .. .real . .. . risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .and . . . . . real . . . . . . . associated . . . . . . . . . . . these . . .. .. .. .. .. .. .. perils. .. .. .. .. .. .. .. .expenditure . .. .. .. .. .. .. .. .. .. .public . . . . . . . .the . . . . . costs . . . . . . . . . . . .with . . . . . .. .. named .. .. .. .. .. .. .. .. .. .The . .. .. .. .. .. .. .. .. .. .. ..of .. . . . . . .funds . . . . without . . . . . this . . . transparency . . . . . . . . . does . . . . not .. .. .serve . .. .. .. ..the .. .. .public . .. .. .. ..well. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .David . . . . . . . . . . . president, . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . Craddock, . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . .RAIC . . . |. Architecture . . . . . . . . Canada . . . . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . .

UPFRONT

REIT Round-Up

MAILBOX

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MARKET WATCH

Commercial real estate industry contributes $63 billion to Canadian economy

TORONTO The commercial real estate (CRE) sector makes a substantial contribution to the Canadian economy, generating $63.3 billion in economic activity in 2011, according to a research report from the Real Property Association of Canada (REALpac) and the NAIOP Research Foundation. To put this value into perspective, the economic activity of the Canadian CRE sector is more than twice as large as the entire economy of the province of Newfoundland & Labrador. The CRE sector adds to the Canadian economy in various ways by: supporting 340,000 jobs, many of which are high-paying professional jobs, which is roughly equivalent to the total employment in the entire Canadian agriculture industry; generating $18.1 billion in personal income, related to labour income and other sources of income, which is more than twice the labour income of the Canadian agriculture, forestry, and fishing industries combined; generating $12.5 billion in corporate profits earned by many small and medium companies, as well as some of the largest pension funds and insurance companies in Canada; contributing $7.2 billion in personal and corporate income tax revenues for the federal and provincial governments; and ultimately, accounting for $32.4 billion in total net contribution to Canada’s GDP, which is more than the total GDP of New Brunswick. Prepared by Altus Group Economic Consulting, “The Contribution of the Commercial Real Estate Sector to the Canadian Economy” shows that capital investment in the CRE sector totalled some $21.6 billion in 2011, accounting for about half of the total spending in Canada on non-residential con10 BUILDING DECEMBER 2012 / JANUARY 2013

Building DecJan.indd 10

struction. Some $14.9 billion was spent on new buildings; the rest ($6.7 billion) accounted for capital improvements, renovations and the upgrading of existing buildings. The on-going operations of CRE sector buildings also generated $3.5 billion in building management fees and almost the same amount for commercial brokerage fees from sales of commercial properties in 2011. The CRE sector also generates an array of other benefits to the national economy such as the promotion of economic development and accommodation of employment growth. In addition, properties owned by the CRE sector provide substantial revenue to municipalities and school boards across Canada through realty taxes.

Development boom ramping up in Canada’s four largest office markets

TORONTO New development cycles are taking shape in Canada’s four largest business centres as landlords and developers launch large-scale office projects in response to strong market conditions and a scarcity of available space, according to Jones Lang LaSalle’s Look Forward series of reports focusing on Downtown Class A office development and vacancy trends in Toronto, Montréal, Calgary and Vancouver through 2016 and 2017. Based on the projects either currently under construction or confirmed, the surge in new office development in Toronto, Montréal and Vancouver represents the most significant uptick in new construction in a decade or more. The extremely low vacancy rate in Downtown Calgary (0.7 per cent for Class AA and Class A space) has recently prompted a new wave of development in the market at a time when limited office supply is leaving “captive” tenants little option but to extend existing leases. “The combination of low vacancy rates, strong demand and the continued

economic strength of these four markets creates a highly favourable environment for new development,” said Brett Miller, president of Jones Lang LaSalle’s Canada operations. “For tenants, this is a welcome trend considering the current limited space options for new and large blocks of space, and the steadily rising rental rates in this landlord-friendly environment. With major new supply being added, these markets are likely to shift closer to equilibrium over the next five years as landlords lose some of their current leverage.”

An Emphasis on Energy Efficiency One key difference between the current building boom and previous cycles is the emphasis on energy-efficient, “smart” design features. Virtually all of the projects under construction or in the planning stages are designed to receive LEED Gold or Platinum certification, which makes them attractive to tenants for the significant cost savings through sustainable design, and “will put pressure on landlords of older buildings to invest in sustainable features and technology improvements to stay competitive,” says Miller.

A New Round of Development The “Look Forward” series provides a forecast for new supply through 2016 under three scenarios — “base case,” “medium case,” and “high case,” with the medium case considered the most likely projection based on the analysis of previous development cycles. Toronto — by far Canada’s largest office market with a downtown inventory of 69.7 million square feet and a vacancy rate of 5.1 per cent at the end of the third quarter — is on pace for its most significant development boom since the early 1990s, with nine buildings forecast to provide 5.6 million square feet. Montréal is gearing up for its most substantial building cycle since 2002-2004 with three confirmed and five forecasted new developments totalling 2.5 milwww.building.ca

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MARKET WATCH lion square feet. Calgary is projected to benefit from five new buildings, including the soon-to-be fully occupied Bow Tower, totalling over 5.2 million square feet, and Vancouver is on track to add 11 buildings and over 2.7 million square feet by the end of 2017. “In addition to the strong real estate fundamentals in these markets, the positive environment for development is enhanced by the continued low interest rates and the availability of capital at a comparatively lower cost as the economy continues to rebound across Canada,” Miller said. “There is also greater interest among pension funds and third-party managers for real estate investment, thanks to higher yields in real estate compared to equities and alternative investments.”

Look Forward: Market Highlights TORONTO Confirmed projects include: Bay Adelaide Centre East, 980,000 square feet (Q1 2016 completion); One York, 35 storeys, 830,801 square feet (Q4 2016). The nine buildings totalling 5.6 million square feet of new development expected through 2016 compares to 6.9 million square feet of new supply added in 1990-1992. Despite the significant addition of new space, vacancy is expected to remain below 10 per cent by 2016 (8.02 per cent), which compares to the 18.6 per cent vacancy rate in 1993.

requirements range from 35 to 50 per cent in this new development cycle, compared to the default 50 per cent requirement in 2009.

added through 2017, significantly less than the 14 buildings and 7.4 million square feet delivered over the previous five years (including the recently completed Bow Tower).

MONTRÉAL

The low CBD vacancy rate of 0.7 per cent for Class AA and Class A space is the driving force behind the new development boom.

Confirmed projects include: Aimia Tower, 10 storeys, 236,438 square feet (Q4 2013 completion); Deloitte Tower, 26 storeys, 514,000 square feet (Q2 2015). With eight proposed buildings totalling 2.5 million square feet expected to be added through 2016, the vacancy rate is likely to peak at 10 per cent in 2016 (compared to the current rate of 5.4 per cent) before dropping to 9.3 per cent in 2017. The current wave of new construction is the first privately funded development boom since the early 1990s, when 4.3 million square feet of space was built downtown. The cycle of new construction in 2002-2004, which totalled 2 million square feet, was influenced by government subsidies.

VANCOUVER Confirmed projects include: MNP Tower, 35 storeys, 265,000 square feet (Q3 2014 completion); Telus Garden, 22 storeys, 445,000 square feet (Q3 2014); 745 Thurlow, 25 storeys, 365,000 square feet (Q2 2015); and the 725 Granville Street redevelopment, 5 storeys, 280,000 square feet (Q1 2015) With the 11 buildings totalling 2.7 million square feet expected to be added to the Downtown market, the vacancy rate is likely to peak at a five-year high of 8.5 per cent at the end of 2017.

CALGARY

The building boom under way in Vancouver follows a decade of limited construction in which two office towers and two mixed-use projects added 1.15 million square feet to the downtown market.

Confirmed projects include: Eighth Avenue Place – West, 40 storeys, 840,000 square feet (Q3 2014 completion) and Calgary City Centre, 36 storeys, 820,000 square feet (Q1 2016 completion).

If a developer secures a strong anchor tenant, pre-leasing

Four buildings totalling 3.3 million square feet are expected to be

Building DecJan.indd 11

Vacancy is expected to peak at 5.7 per cent in 2017, following the projected completion of the bulk of proposed and confirmed developments the year prior.

Pre-leasing requirements currently range from 35 to 50 per cent, depending on the ownership structure, compared to 60 per cent in the previous cycle.

This development cycle is called “South Core: Round 2” because five of the 12 projects currently tracked by Jones Lang LaSalle are located south of the Gardiner Expressway.

www.building.ca

The Downtown market could potentially run out of Class AA and A space before new supply arrives in 2016.

New buildings in various stages of development are projected to result in a 21 per cent increase in Class A Downtown office inventory. B DECEMBER 2012 / JANUARY 2013 BUILDING 11

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LEGAL

Mad Men and Conflicts of Interests in Hog Town The plight of Mayor Ford is an example of the fundamental shift in attitudes about perceived conflict of interest and corruption.

By Jeffrey W. Lem and Odysseas Papadimitriou

ad Men,

the award-winning TV series set in the 1960s, has received critical acclaim for its riveting drama, wicked visual style and great acting all-around. However, what really draws viewers to the show is its historical poignancy -- the show seems to go out of its way to reflect on how much society has changed by focusing the viewer on the mores of the past that now seem like absurdities in retrospect. So, we’re shown scenes of pregnant mothers smoking (in hospital beds no less), unfettered sexual harassment in the work place, and toddlers sitting in the laps of their mothers, in cars with no seat belts, and so on. The sheer nonchalant nature of these scenes arrests its viewers, eliciting bewilderment in the young ‘uns, and nostalgia in those who are actually old enough to remember the 1960s! 2012 has had its fair share of controversial, politicized, and precedent setting court decisions. But no decision has shaken the political landscape as much as the recent decision of the Ontario Superior Court of Justice to remove Toronto Mayor Rob Ford from office. By the time this article goes to print, even in its online version, the mainstream press will have flogged the legal issues to death and the political issues even further into the ground. Already, it is front page news in Ontario and is apparently “trend12 BUILDING DECEMBER 2012 / JANUARY 2013

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ing worldwide” on Twitter as we put the finishing touches on this article. The decision itself, Magder v. Ford, is relatively straightforward and the culmination of a long-running saga at Toronto’s City Hall over whether the Mayor was obliged to pay back $3,150 in donations made by lobbyists and corporate donors. On August 12, 2010, the City of Toronto Integrity Commissioner ruled that then-councillor Rob Ford inappropriately used the city logo, city resources, and his status as councillor to raise funds for a football charity. On August 25, 2010, City Council adopted the Integrity Commissioner’s recommendation that Mr. Ford personally be required to pay back $3,150. Over the next year, Mr. Ford repeatedly refused to pay back the funds, partly on principle and partly because some of the donors did not wish to receive reimbursement for their donations. On January 30, 2012, the Integrity Commissioner issued a report to City Council requesting that the now Mayor provide evidence of reimbursement by March 6, 2012. The matter was raised for discussion at the February 7, 2012 City Council meeting. As the dynamics of City Council had now shifted in Mayor Ford’s favour, City Council adopted a motion to rescind the August 25, 2010 decision and directed that no further action be taken on this matter. Mayor Ford voted on this matter. Paul Magder, a private Toronto resident (and not the noted furrier), brought an application for a determination that Mayor Ford contravened the Municipal Conflict of Interest Act, not so much for having solicited the donations in the first place, but, rather, by speaking on and ultimately voting upon the February 7,

2012, motions. As part of that lawsuit, Mr. Magder requested Mayor Ford’s immediate removal from office. Mr. Justice Charles Hackland of the Ontario Superior Court found that Mayor Ford was in fact in a monetary conflict of interest, even though the money did not go to benefit Ford directly. The Municipal Conflict of Interest Act barred him from speaking or voting in the City Council debate over his repayment of the sum. Mayor Ford’s actions amounted to an “unfortunate but arguably technical breach…characterized by ignorance of the law and a lack of diligence…amounting to wilful blindness” of the rules. Nevertheless, as the Act is unforgiving and ignores such nuances by imposing a mandatory penalty of removal, Justice Hackland was left with no alternative but to remove Mayor Ford from office. So how does Mad Men relate to municipal politics and enforcement of political ethics legislation in Toronto? It is quite arguable that Mayor Ford has become the latest victim of a worldwide change in attitudes towards corruption and political conflicts of interest. There was a time, not so long ago, when what Mayor Ford did (whether soliciting charitable donations using his municipal letterhead and resources in the first place, or voting on a matter in which he had a pecuniary interest) could not possibly have attracted social disdain, let alone a lawsuit that would lead to an impeachment, whether or not there was legislation on the books to that effect. In a time not so long ago, conflicts of interests in municipal politics were considered almost de rigueur, and if not quite de rigueur, then at least commonplace and a tolerable way of doing business. There is not one reader of Building who has not heard of some donation or gift, often to a totally legitimate charity or pet cause, that had to be made at the “recommendation” of a local bureaucrat or politician who just so happened to have some influence, direct or indirect, on a development permit, minor variance or other required approval. To be totally clear, we are not talking about “hardcore corruption” here. At its very worst, this sort of behaviour is “soft-core,” since the donations and www.building.ca

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LEGAL works solicited from the public are often for noble and worthy causes in their own right, and there is rarely a direct causal link between a donation to the right cause and a favourable development outcome. In particular, there was no suggestion that Mayor Ford was in any way peddling influence in exchange for a few bucks donated to a football charity, even if it was a charity with which he personally championed. In fact, it is almost absolutely certain that this was not the case. As Mr. Justice Charles Hackland stated in the case, Mayor Ford’s conduct involved “absolutely no issue of corruption or pecuniary gain.” However, the fact that this was so clearly not a “hard corruption” case underscores the point we are making — society’s views about this sort of conduct have changed over the years, and this sort behaviour simply will not be tolerated anymore, even in a relatively “soft-core” and harmless iteration. Although, technically, Mayor Ford was prosecuted for his role in speaking to and voting upon his own fate in coun-

cil, what this case really shows us is that behaviour which has the appearance of impropriety (and, yes, soliciting donations using government letterhead, no matter how noble the cause, is improper, notwithstanding protestations from the political right to the contrary) will no longer be tolerated, even when it was otherwise relatively harmless (and, yes, the $3,150 in donations at issue were a pittance, notwithstanding protestations from the political left to the contrary). For better or worse (and some would say that political correctness has swung too far the other way, and that there are aspects of the Mad Men way of life that are worth returning to), in the modern world of municipal politics at least, conflicts of interest do matter, the appearance of integrity does matter, and legislation imposing codes of behaviour do have to be respected. Nowhere will this shift in attitude play itself out more tangibly than in the development and construction industry. Hardcore corruption will still exist in this

industry – we are optimists for a more transparent playing field, but we are not naïve – but cases like Magder v. Ford will make it more difficult for hardcore corruption to flourish by making even softcore impropriety punishable by law. Regardless of your political leanings, this change in attitude is ultimately a good thing for the development and construction industry. Even if Don Draper were mayor today, he too would have to be aware of and abide by the Municipal Conflict of Interest Act! B Jeffrey W. Lem is a partner in the Toronto/Markham offices of Miller Thomson LLP, a national law firm with 11 offices across Canada. Jeffrey is Certified by the Law Society of Upper Canada as a Specialist in Real Estate and can be reached at jlem@millerthomson.com. Odysseas Papadimitriou is an Associate at Miller Thomson LLP, specializing in all aspects

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FAILING the LEED Test

More than 7,000 projects, comprising 1.5 billion square feet in 30 countries have received the LEED stamp of approval. But builders are in uncharted legal water in Canada if they come up short. Which begs the question: who pays when green isnâ&#x20AC;&#x2122;t green enough? By Sharon Vogel

reen building projects are becoming the new normal. Design professionals are increasingly involved in such projects, but that also means design professionals are increasingly exposed to potential liability for associated design issues. More and more projects are being designed in accordance with environmental sustainability strategies, which can include changing the ways in which a building is structured and the materials used to execute the design. This means with new approaches come uncertainties and therefore risk. Significantly, innovative approaches to construction may create expectations which cannot be satisfied (or differences of opinion about what was agreed), unexpected costs and unforeseen structural failings. So far there do not appear to have been a large number of claims in Canada, or the U.S. for that matter, relating to the design of green buildings, but claims against developers and design professionals, when they do arise, will be for breach of contract, negligence, products liability, and misrepresentation. Class actions against design professionals and developers are also possible, for example, by disgruntled purchasers alleging that a building does not live up to its promises of energy efficiency. Breach of contract A professional services agreement will in all likelihood govern the relationship between the design professional and the developer of the project, and require the fulfilment of the clientâ&#x20AC;&#x2122;s 14 BUILDING DECEMBER 2012 / JANUARY 2013

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expectations with respect to the project. Close attention should be paid to the scope and duration of the design professionalâ&#x20AC;&#x2122;s obligations under the agreement. The actual terms of the contract may specify that the design of the project is to be green, likely according to some identifiable benchmark like obtaining a particular level of LEED or other third-party certification (such as BOMA BESt, Green Globes, BREEAM, or BuiltGreen Canada). The design professional will be exposed to liability under the professional services agreement if the project fails to meet a required standard on completion. On an innovative project, there is the potential for the design professional to take on a higher and less-predictable level of risk than would be present on a more conventional one. Designers may be held to account for cost over-runs. Some public projects require LEED Gold certification at a minimum, which may be more difficult to obtain and expensive than the parties expected at the outset of the project. There is also the potential for liability if the professional services agreement requires the design professional to make recommendations on sustainable design alternatives and to evaluate the costs associated with their implementation. If those costs exceed what the client expected, the design professional may also face a claim for breach of contract. It is not always easy to predict costs, much less over-runs, and any design professional will want to think carefully before making a commitment to specific numbers or ranges. Damages payable for breach of contract could also include amounts representing loss of tax credits, penalties on tendered www.building.ca

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projects, loss of rentals or sales, failure to achieve promised savings in operating costs (e.g. for energy and water) and diminished asset value. Design professionals will want to be certain that they can live with the scope of the damages clause in the professional services agreement, especially as it relates to ‘consequential’ damages (i.e. those which result from special circumstances outside the ordinary course and which can include lost profits, loss of use of defective property and third-party claims). In the design professional’s ideal world, liability for consequential losses would be excluded altogether in the design services agreement. Negligence Design professionals are traditionally held to a standard of care in design based on a similarly situated professional addressing a similar project. How this standard will be applied in the context of a green building project (and the extent to which it might be altered by that context) is so far unclear. We have yet to see if a specific standard of care exists for LEED-accredited professionals or on the basis of a design professional’s particular level of experience in designing green buildings, although this seems likely. LEED-accredited professionals or those who hold themselves out as having expertise in green building design would probably be held to a higher standard of care than other design professionals. Professional standards related to green building projects may be relevant, given that a court would probably assess a design professional’s performance in light of benchmarks set by the person’s own professional body. It is also possible that the standard of care for design professionals might be applied more flexibly where the project involves novel, and therefore untested services, such as energy modelling, in respect of which it may be difficult to determine what a similarly situated design professional would have done on a similar project. For new projects, there will be no existing data against which to measure energy savings, so the design professional will want to establish a baseline to assess efficiencies. It is sometimes possible, especially on larger projects, to negotiate a standard of care, for example, a standard of “leading firms doing similar work in the industry.” Some Canadian jurisdictions have incorporated green building standards in their building codes, which would also be taken into account in determining the appropriate standard of care. Recent amendments to Ontario’s building code, for example, include requirements similar to LEED certification standards with respect to energy efficiency. To the extent that green standards are given legislative sanction, design professionals may be exposed to damages for regulatory non-compliance. Products liability A designer may also be the subject of litigation where the design of the project features materials or other elements which turn out to be problematic: of particular concern is the risk of mould or water damage associated with building envelopes, air circulation systems and green roofs. www.building.ca

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Misrepresentation Design professionals are also exposed to risk arising from advertising and marketing materials for green building projects. A claim for misrepresentation may arise if the project does not deliver the promised green benefits. An example is in Toronto Standard Condominium Corporation No. 1898 v. 743 Queen St. East Toronto Inc., where the developer and architect of a green project were sued for damages arising from construction deficiencies. The developer had marketed the condominium as a “cutting edge green building containing the latest environmentally friendly technology and features…”, including an energy-efficient, geo-thermal HVAC system. Before advertising or recommending environmentally sustainable products or services, design professionals should be sure they have independent, reliable data that confirms that the products or services are in fact as green as they are said to be. Relying on a manufacturer’s or supplier’s representations alone may prove to be a costly error. As well, a design professional should not suggest that he or she has accreditation or green experience where this is not actually the case. Insurance While professional liability policies provide coverage for the errors and omissions of design professionals in providing design services, these policies typically exclude coverage for liability which has been assumed under contract. Where the design professional has entered into a contractual obligation, the test is not whether the professional has met the requisite standard of care but whether the professional has fulfilled the contractual promise (although it is possible to be liable both for breach of contract and for negligence in failing to meet the standard of care). An insurer may well attempt to rely on the contractual exclusion of liability where the claim against the design professional arises from a warranty in relation to LEED or other third-party certification. The prudent course for design professionals is to be careful in making representations and warranties that could trigger the exclusion under their professional liability insurance coverage. Despite the proliferation of green projects, the extent of the resulting design risks for professionals remains uncertain. It is probably safe to say, however, that new technologies associated with these projects have heightened the risks for design professionals. Appropriate insurance coverage is essential. We will be watching closely to see how assessments of liability play out in U.S. litigation, as developments south of the border are sure to affect design professionals and green projects in Canada. In any event, it is clear that design professionals should take steps to mitigate and allocate the risks associated with green building projects. B Sharon Vogel is a partner in the Construction Law Group at Borden Ladner Gervais LLP. She can be contacted at svogel@blg.com. The author gratefully acknowledges the assistance of Neil Guthrie, the National Research Director at BLG, and Stephanie Young, an articling student at BLG, in the research and preparation of this article. DECEMBER 2012 / JANUARY 2013 BUILDING 15

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OUROWN BACKYARD Downtown revitalization is not the private domain of big cities like Toronto. All urban centres are or will be looking at urban intensification to stimulate the rebirth of neighbourhoods and create vibrant destinations. “Community tourism” can be a valuable technique to do exactly that.

By Peter Sobchak

We’re on the move, more so than ever.

The patterns of immigration and migration flows are showing us a continuing trend of Canadians gravitating to the urbanization model of metropolitan areas. And it’s happening everywhere. As Jonathan D. Miller pointed out in the 2013 Emerging Trends in Real Estate report, it is “extending beyond central business districts to reach interconnecting urban nodes in once-suburban expanses not only around Toronto, Vancouver, Calgary, and Montréal, but also reaching every part of the country, including the smaller cities. The shift in people’s choices regarding where they want to live has been quite profound: they are increasingly choosing in-town living over suburban subdivision, house-and-yard lifestyles.” While Toronto is still the primary landing place for new immigrants coming to the province, large numbers of Ontarians are moving around within the province, especially those for whom the Big City lifestyle is not for them, such as young families or creative classes pushed out by exorbitant real estate prices. Small towns are taking notice of this. As Canadian rural communities respond to changes in their resource-based economy, many are increasingly looking for diversification options. Some make the mistake of trying to replicate various big city appeals to draw people and investment, while often forgetting to look at some of the small town magnetisms that make them appealing in the first place. There is already ample proof that these small town attractions are becoming more of a draw for people travelling within Ontario. Recent data trends show that Ontario’s tourists are increasingly Ontarians that travel over 40 kilometres, a www.building.ca

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magic bullet number that is the United Nations standard definition for a “tourist” and that has been adopted by the Government of Ontario as “one-way within Ontario to travel for a non-routine trip.” These tourists are travelling within their own province looking for experiences shaped by local retail, dining, amenities, events and festivities, rather than major anchor attractions like theme parks. Rural areas provide a special appeal to tourists because of the mystique associated with a rural environment, with distinct culture, history, ethnic and geographic characteristics. These experiences are already found in many of Ontario’s town centres and downtowns but are generally unrealized as assets. To address this within the tourism industry, “community-based tourism” has come to be understood as a valuable pillar in rural tourism campaigns: it represents a bottom-up approach to tourism planning and development that incorporates local individuals in the planning process, in a meaningful way. But what has traditionally been a tool in the toolkit of regional tourism strategies can now be adopted by city building and development sectors as well. A vocal proponent of this strategy is Rob Spanier, senior vice president of LiveWorkLearnPlay, an international urban advisory and development firm, and he presented his advocacy at the eighth annual Ontario Tourism Summit this past October in London, Ont. It may seem odd for a developer to present at a tourism conference, but LiveWorkLearnPlay has extensive experience in the revitalization and creation of downtowns and tourist destinations throughout North America, and according DECEMBER 2012 / JANUARY 2013 BUILDING 17

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Ontario’s tourist mix as of 2011

Ontario 83% USA 11% Rest of Canada 4% Overseas 2%

to Spanier, “by creating a product development and investment strategy that invests in communities themselves, Community Tourism can be Ontario’s greatest opportunity to target Ontarians through a rigorous process of consensus building, asset leverage, business planning, partnership building, and implementation to drive urban core development.” But don’t be thrown off by the word “tourism.” Instead, look at it as a way to activate downtowns. “This is an opportunity for a developer to create a deep and meaningful relationship with a city that is mutually beneficial,” says Spanier. “If a developer positions themselves as wanting to create something of deep social and economic benefit, they will receive far greater buyin for their project, which if executed properly can create enormous value for the developer and the municipality.” “These guys in tourism don’t understand community, and guys in community don’t understand tourism, so I gave them a phrase that appeals to both: community tourism can drive downtowns. All they were trying to do is create marketing and sales packages to sell Niagara Falls, for example, based on tourism. But what I explained to them is if they want to make their numbers work, then they should revitalize the downtown. This does more for the town and province than trying to get another guy to walk a tightrope over the Falls,” says Spanier. “If I activate five centres in towns across the province by developing successful ‘places,’ that will do more for tourism than one major Cirque du Soleil show a year somewhere.” Leverage Those Assets Small towns should not feel that, because they’re not Toronto, they can’t make revitalization work. Quite the opposite! But at the same time, this is not for small towns alone. The fundamentals are true everywhere: successful approvals, entitlements, and sales are more and more being based on creating places people like, and people like animated neighbourhoods and places to be. Take, for example, Collingwood, Ont. When it was operating at full capacity, the Collingwood shipyard employed more than 1,000 people in a town of less than 5,000. When the families of shipyard workers and the support businesses were factored in, an estimated one in every three people earned their living from the shipyard at the time. When The Yard announced its closure in August of 1986, it came as a shock. Layoffs had been understood and expected, but after more than a century of shipbuilding it was hard to fathom that the shipyard was closing and would not re-open. Following the arc of many small towns, by losing its old industrial base Collingwood was left to drift somewhat aimlessly. But when it realized it could leverage its primary tourism asset – nearby Blue Mountain – the town was turned from a sleepy winter destination into an internationally recognized, vibrant four seasons destination 18 BUILDING DECEMBER 2012 / JANUARY 2013

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BETWEEN 2010-2011: +2.3% INCREASE IN ONTARIAN

(something LiveWorkLearnPlay and specifically Spanier, who spent five years with Intrawest Corporation, had a hand in), which attracted people to move there, and so on. Collingwood today offers opportunities for many popular family activities, including skiing, golf, hiking, biking and a host of water-related activities. Collingwood’s well-developed tourism base is supported by a wide range of retail, entertainment and dining experiences. And with this notoriety came a growth of various industrial bases, such as a growing knowledge-based sector, as well as significant investments in residential development, such as in 2004 when FRAM Building Group and Slokker Real Estate purchased the shipyard property in order to rehabilitate the site and build The Shipyards Harbour Residences (Building, June/July 2011). Not every small town has a mountain, but “every town has something, and they need to leverage that opportunity,” says Spanier. Fergus has a historic mill, Elora has a dramatic waterfall and historic industrial building stock, Perth has waterways, Port Dover has a beautiful beach, and so on. Of course, a city has to come to the realization that they want to do something. “But one of the first things they need to do is to see their downtown as an ‘essential service,’” says Spanier. “In order to be able to successfully get the ball rolling, they must vision out how to improve on what they’ve already got.” What they should not do is look to a casino or a Ferris wheel just because it may add a few more tourists. At the same time, small towns don’t necessarily have to think about how to court the big players – the Menkes or First Gulfs, who most likely wouldn’t come because they feel the town doesn’t have the population necessary to support a big project. But what they probably have are players in their own backyard that could be called upon, especially since those players have a vested interest in improving the market around them, making their town the best that it can be, and drawing success from that. Orchestrating a dynamic cast of retailers is certainly a challenge for small towns. The retailing sector in every downtown, big and small, was severely impacted by the creation of suburban malls in the post war era and then once more by the emergence of the ‘big box’ stores in more recent decades. This was not a phenomenon unique to the GTA; Guelph, Kitchener and Waterloo saw their downtown retail decimated by big boxes on the periphery. While many downtowns have started to recover and no longer face the reported ‘extreme vacancy challenges’ of the 1970s and 1980s, downtown retailing is still challenged by competition from suburban retailing. Notwithstanding this negative assessment, promising trends for downtown retail are emerging. In the same way that retailers followed residents out to suburban areas in the post war era, so too are retailers following people back into the core. To capitalize on www.building.ca

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CREASE IN ONTARIANS AS TOIRISTS IN THEIR OWN PROVINCE

•

-10.6% DECREASE IN CANADIANS VISITING ONTARIO

this, Spanier advises communities to “recognize your endusers, and understand what they are seeking, when and where.” Wishing for an ideal retailer to be placed on Main Street in order to try and entice a steady flow of ideal demographics rarely works. Retail follows people, not the other way around. So the key is to understand why your end-users come to your town in the first place, and then understand what those end-users want. Builders Love To Build Of course developers care about approvals, sales, and other business needs, but they also pride themselves on being first in a market. If a town can set up a business case that activates itself at a local level to drive overall opportunity, and that opportunity appears appealing to a developer, then there are rewards to be had on both sides. Developers are by nature entrepreneurs, and by identifying demand they are taking the important first steps in capitalizing on an ambitious vision. And as we are seeing more and more, there is growing demand for downtown living in authentic, place-based neighbourhoods.

Inbound same-day and overnight tourists to Ontario

Total Ontario Rest of Canada USA Overseas

120,000,000

100,000,000 104,400,000 TOURISTS IN 2011

80,000,000

60,000,000

40,000,000

20,000,000

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1980

But revitalizing a neighbourhood, or creating a place, does not just sit on the shoulders of one building. It is more than just building one building. “It goes beyond the building,” says Spanier. “If developers focus on the ground floor, and have a vested interest in that life, cities will high-five them all day.” The old behaviour of just offering to build a park isn’t cutting it with municipalities anymore. All trends point to downtowns, and if you don’t create great places for people, they won’t necessarily want to buy your product, and towns won’t want to sign off on building more of the same. After all, how does just building a park alone to fulfill public space requirements help drive vitality, if its programming isn’t also considered? How to activate that park is something that should be considered first. The act of laying sod next to a 40-storey condo tower is not community activation. “If I had $100 million dollars, I’d spend it by buying the four corners of major downtowns in a handful of small towns across Ontario, where I could improve the quality of the downtown experience from a retail mixed-use perspective, and ascertain the opportunity to drive office, residential-for-sale, residential-to-rent or institutional uses above grade,” says Spanier. “I believe downtowns are the future, and if you can control that you can control the lifeline of a community in a very positive way.” Ultimately, people aren’t just looking for cheap land and less traffic congestion. They’re also looking for that authentic small town charm, and part of that experience comes from the programming and activation of special uses such as retail and restaurants, events, and more. People seeking long-lasting, positive neighbourhood experiences flock to these locations, which are highly valued for their uniqueness. “Community Tourism is both a tool for cities and towns, and an opportunity for developers to identify opportunities where they can invest in their current model to develop their product typology, while understanding that driving community vitality will help them sell their product,” says Spanier. Moving forward, creative class and knowledge-based cities will thrive, emerging as the new First World communities, and each downtown will serve as the focus by creating and preserving an identifiable community. Commercial real estate will follow that trend, and small-box retailers will move to where the people live. And most importantly, this tendency will not stop at major markets, as urbanization will continue and spread to smaller cities. Urban growth is not necessarily stimulated by natural population increases, but driven by larger city benefits that draw investments and an educated workforce. Corporate real estate is all about strategic locations for success, and the development or revitalization of authentic, timeless communities built on dynamic real estate projects that deliver diverse main streets, plazas, squares, town centres, urban villages and mixed-use neighbourhoods offer everything the modern workforce desires. DECEMBER 2012 / JANUARY 2013 BUILDING 19

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‘ We’re

not a bad place to be.” By Jonathan D. Miller and Charles J. DiRocco Jr.

The consensus among the roughly 500 real estate executives, investors, developers, and market experts interviewed for the 2013 Emerging Trends in Real Estate report, by PwC and Urban Land Institute, is comforting: our markets enjoy a seemingly durable equilibrium, helped along by concerted investor discipline, lender controls, and government regulation motivated to ensure steady growth and dodge disagreeable corrections.

n a world struggling with managing unprecedented debt levels and economic upheaval, Canada enjoys “boring” stability, its real estate markets following along in a seeming state of near-perpetual equilibrium, at least compared with other volatile regions, including most obviously the United States. As uncertainty continues around the globe, “Canada sits in a sweet spot of low interest rates with [the benefit of] a natural resource/commodity–based economy.” “People live under the assumption that we have a profound safety net which provides confidence that things won’t go upside down.” From Vancouver’s Pacific gateway and Alberta’s oil sands in the west to Toronto’s global financial centre and Halifax’s shipbuilding in the east, Canada is well-positioned to sus-

tain its economic consistency. The rest of the world has taken notice. U.S. retailers are expanding into the dependable Canadian market, immigration waves stoke growth in housing and condominium sales, and foreign investors try to gain footholds (most unsuccessfully) in property sectors against difficult odds: Canadians tend to buy and hold long term. But “cautiously exuberant” Canadians also struggle against complacency and must remain focused on the reality of how the world’s tenth-largest economy can be dragged down by everyone else. “We cannot continue to outperform economies awash in debt. The huge deficit of our largest trading partner, the U.S., will restrain growth; energy markets and the resource sector [will] slow down.” In other words, Canada “cannot assume we’re immune” from the “gray cloud” hovering over the

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DECEMBER 2012 / JANUARY 2013 BUILDING 21

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world’s major markets. For 2013, a balanced outlook is expected. “Compared to everyone else, we will do very well, but growth trends will be pretty mediocre.” In fact, “mediocre” should be viewed as “the new ‘good,’” as real estate players “need to scale back expectations.” Canada has entered “a post-adrenaline phase after only a mild recession,” the economy bounced back quickly, helped by looser-than-normal monetary policy and sales of natural resources. Interviewees point to some of the concerns threatening the Canadian economy in 2013. “Commodities can get beaten up, especially the natural gas sector.” Household debt has increased to near-record levels, and home valuations are level or have declined in some places. It is nowhere near a U.S.-style meltdown, but “higher interest rates could create problems.” The housing slowdown affects the construction industry and retailers; fervent consumer buying quiets down from recent peaks. The government also “winds down” stimulus and tries to make fiscally responsible cuts. “Growth will depend on the private sector” alone. As a result, the unemployment rate hovers north of 7 per cent and wage growth has been “limited”— better than most global competitors, but not indicative of a vibrant jobs forecast. Call the economy and job growth “slow and steady.” There is an apparent disconnect in job opportunities and employee resources, as increasingly new jobs are concentrating in the commodity-rich west while the largest population centres are east, mostly in Ontario and Québec. The nation’s continuing immigration surge shifts gradually toward Alberta and Saskatchewan, heading to where the jobs are, and will continue to spur local real estate markets in coming years—not just in Calgary and Edmonton, but also around Saskatoon and Winnipeg.

to see 2 to 3 per cent rental growth and wait for increased demand for space to build before they fund development, resulting in pressure on rental rates.” Although investors and developers may miss out on some opportunities, they avoid painful busts: the country’s commercial mortgage defaults remain minimal, and markets have avoided a U.S.-style collapse. All signs point to more of the same in 2013, with the Canadian market expected to continue to linger in this comfortable zone. INTEREST RATE BENEFITS

As long as interest rates hold near rock-bottom lows, commercial real estate will continue to prosper: “It’s the attractive” alternative. “If I put dollars in the bank, I’ll get next to nothing, and bonds, not much more, so I’ll load up on real estate and get a 7 to 8 per cent return in markets that are generally not oversupplied,” notes one interviewee. Not surprisingly, REIT stocks benefit from the same thinking: their dividends lure a strong following of both retail and institutional investors, and refinancing at low rates should help their profit margins. Interviewees expect rates to increase only marginally, heavily influenced by U.S. and European central bankers who engage in further monetary intervention to help their ailing economies, which need to produce more jobs. UNCOMFORTABLE HOUSEHOLD DEBT

On the flip side, cheap money has had its negative impacts, relaxing the average Canadian’s usually well-served, conservative fiscal tendencies. Suddenly, “everyone is up to their eyeballs in debt; when interest rates went to zero, they loaded up [on credit] and fueled home buying with inexpensive mortgages.” Homeownership approaches a possible saturation point near 70 per cent and prices in some markets began declining in 2012 as federal regulators applied the brakes and imposed stricter lender guidelines, such as limiting amortizations to 25 years, resulting in increased monthly mortgage payments. Both house EQUILIBRIUM MAINTENANCE trends real es- hunters and condo speculators have backed off buying sprees, Year in year out, vacancy rates helpEmerging tell the commercial 2013 tate story in Canada. They average barometer in the mid-single digits across and discretionary sellers decide to pull back. Interviewees say a minor correction could be healthy for virtually all property types, keeping most markets in a healthy, Good near steady state, which gives landlords the opportunity to push markets and appear confident that anything approaching BUY rents and enjoy measured, ongoing appreciation. A small group U.S. heartache will be avoided. They point to significant difHOLD Modestly good of institutional investors dominates office markets in the lar- ferences in the two countries’ mortgage markets: Canadian gest cities and owns the best retail properties, enjoying solid in- banks have always required down payments; never engaged Fair come returns from their holdings. Like their U.S. neighbours, in “NINJA” (no income, no job, and no assets) lending pracSELL asset-rich Canadian public pension funds wrestle in a low-inter- tices, let alone offered subprime rate financing; and hold est-rate environment Modestly with how to meet a widening gap in fund- mortgages on balance sheets. Therefore, the ingredients for poor ing their long-term liabilities as more beneficiaries retire. On a a subprime-driven mortgage-backed securities environment risk-adjusted-return basis, they see real estate and infrastructure never developed. Poor investments as a solution for finding stability and low volatility 2010Strict underwriting weeds borrow2008 2009 2011 2012out most compromised 2013 with significantly better yields than fixed income. But exercis- ers and buyers take out insurance against defaults. Although ing significant discipline, they also “resist firing up the domes- new supply has not outstripped demand trends, thanks to imtic development cycle” in an attempt to boost performance and migration flows, all signs suggest the condo market needs a furunderstand that any Prospects overbuildingfor would only undermine values ther cool-down, especially for luxury units. In the meantime, Capitalization Rates on their existing portfolios. Everyone seems to benefit from the low interest rates should help recent borrowers Expected Expected make payments Rate (%) on,” evencap. rate (%)values could cap. rate shiftdown further. resulting relative balance in supply and demand: “They all want Cap. and “hold though edge

Top Trends for 2013

Property type

Regional malls 22 BUILDING DECEMBER 2012 / JANUARY 2013

Building DecJan.indd 22

Apartment residential (rental) Apartment: moderate income Central city office Warehouse industrial Power centers Full-service hotels R&D industrial

August 2012

December 2013

(basis points)

5.22 5.14 5.38 5.48 6.07 6.13 6.25 6.60

5.15 5.18 5.36 5.43 6.00 6.21 6.25 6.45

–7 4 –2 –5 –7 8 0 –15

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URBANIZATION CONTINUES APACE

Inflation and interset rate changes

1 Increase substantially

Canadians gravitate to the “urbanization model. It’s everywhere,” extending beyond central business districts to reach interconnecting urban nodes in once-suburban expanses not only around Toronto, Vancouver, Calgary, and Montréal, but also “reaching every part of the country,” including the smaller cities. “People make a choice of where they want to live, and the shift has been quite profound.” They increasingly choose intown living and high-rise apartments or townhouses over suburban subdivision, house-and-yard lifestyles. The trend is “generational,” “cultural,” and “not just economical.” Cities are more convenient and concentrate 24-hour amenities for business, recreation, and entertainment. Aging baby boomers get tired of shoveling snow and navigating roads during harsh winters, genYers are attracted to better job opportunities and a glamorous city life, and everyone wants to limit time lost in increasing suburban congestion. Retailers “start to support” the high-rise residential boom, working with developers and planners to integrate streetscape shopping into new condominium projects. Land values for “scarce” infill sites continue to increase after having skyrocketed, as local governments encourage densification and developers look to maximize returns by building as high as zoning allows. Any location near mass transit stations significantly increases in value, and developers and the business community call for increased light rail and subway funding to expand or build systems and support densification. They worry that most municipalities lack the resources to finance infrastructure projects adequately and need support from the federal government, which shies away from major outlays. Existing infrastructure, meanwhile, nears the end of life cycles, requiring expensive upgrades or replacements. As a result, concerns grow about how urbanizing nodes will connect to cores and each other. Dense development patterns require mass transit to reduce traffic gridlock and attract city dwellers to urban attractions. Ironically, regions moved to densification planning partly because of unsustainable costs related to sprawl development, including expenses for extensive road and sewer systems. “It’s time for the federal government to get more involved,” says an interviewee.

2012 next 5 years

Increase moderately

Commercial mortgage rates

Long-term rates (10-year treasuries)

Inflation

Short-term rates (1-year treasuries)

Remain stable at current levels

Change in availability of capital in 2013

Source: Emerging Trends in Real Estate 2013 survey. Note: Based on Canadian respondents only.

Equity Source Institutional investors/ pension funds

6.07

Private REITs

5.79

Private local investors

5.71

Private equity/ opportunity/hedge funds

5.70

Public equity REITs

5.69

Foreign investors

5.60

Lending Source Mezzanine lenders

5.79

Nonbank financial institutions

5.67

CONDO WAVE CURLS

Mortgage REITs

5.62

Securitized lenders/CMBS

5.32

Insurance companies

5.09

Commercial banks

5.09

Government sponsored entities

5.00

Toronto, North America’s largest condominium market, sees new apartment towers sprouting like weeds “everywhere” in an “absolute boom.” Developers have been “building where they shouldn’t.” In recent years Vancouver’s waterfront and hillsides underwent similar skyline makeovers, and more recently Montréal and Calgary have experienced strong condo building sprees. Condo mania has extended to other Canadian cities like Halifax and St. John’s as well—all part of urbanization and densification trends, encouraged by local governments and driven by significant buyer and renter demand. All the activity finally raised alarms at the Bank of Canada, and 2013 should answer the question as to whether the bank’s actions to temper demand, including establishing higher hurdles for foreign buyers to obtain mortgages, were too aggres-

very large decline

www.building.ca

Building DecJan.indd 23

5 stay the same

very large increase

DECEMBER 2012 / JANUARY 2013 BUILDING 23

12-12-13 4:06 PM

sive or helped restore a balanced market. Many interviewees wonder whether the restrictions were necessary. “Everything seems to be bought.” If buyers choose not to occupy, they find renters: either young professionals or immigrants help fill units and support relatively low mortgage carrying costs, and continued strong immigration should enable more development, some interviewees argue. Others suggest that buying had progressed to unsustainable levels, especially for high-end units, driven by an “if I don’t buy now, I’ll lose out” mentality. Concerns also grow about the staying power of offshore investors should they experience financial reversals back home. Increasingly “cautious” banks received their regulator’s message loud and clear, scrutinizing developers’ track records and project quality more closely. Greater weight is placed on loan requirements for reaching significant presales and down payments before construction starts. “More projects will be deferred or pulled back” with possible “value flatness for the next two to three years.” The biggest threat to the market would be higher interest rates. That’s when buyers would walk away from prepayments and some unit owners would have trouble keeping up with mortgage bills. However, interviewees see low risk of that scenario in 2013. REASONABLE DEVELOPMENT PIPELINE

Even though condo developers prepare for a slowdown after the robust pace of high-rise construction, cranes are expected to remain visible along major city skylines. A steady stream of projects in the development pipeline will not be delivered for several years, and with most interviewees expecting continuing buyer demand over the medium term, this should contribute to a reasonable ongoing market for new projects in “a more normalized cycle.” Any pullback in new construction should tighten already “good supply/demand dynamics,” based on encouraging urbanization trends, which support an increase in buying and renting as jobs and businesses cluster in and around city centres. If more stringent underwriting weeds out speculators and borderline borrowers, this can only translate into a more favorable balance that will support stable or increasing values over time. Recent sticker shock on downtown projects, especially in the Greater Toronto area (GTA) and the Greater Vancouver area, have spurred midrise condo construction in infill areas, as well as homebuilding outside the greenbelt. “People want larger, more affordable units suitable for families,” whereas much of the new downtown construction features small layouts marketable to young professionals and couples, or empty nesters. What happens when gen-Y residents in these buildings decide to have kids? Development charges, passed on to buyers, become “a massive issue—up to $16 or $17 per square foot” in some jurisdictions as local governments tap into the building boom to fill their coffers. The GTA municipalities charge homebuilders up to $60,000 a door because “demand allows for it.” Interviewees also continue to complain about “needless” government red tape in the zoning and permitting process, which “unnecessarily” adds to costs and can stymie projects. Slowing construction activity in 24 BUILDING DECEMBER 2012 / JANUARY 2013

Building DecJan.indd 24

some markets should help “stabilize” construction costs, which escalated during the building boom. But budgets could face offsetting increases from tariffs on imported construction materials. TYPICAL COMMERCIAL BUILDING RESTRAINT

Always under relative control, activity on the commercial side remains more constrained. Any new construction keeps up with increasingly measured demand and does not race ahead of it. Few prime development sites remain in either Toronto or Vancouver and “stay in a few hands.” Calgary, with more available building sites, can generate a semblance of boom/bust cycles, but the market never seems to stay out of kilter very long because of growing energy markets. Potential approvals of controversial pipeline projects from Alberta to the United States and into British Columbia would boost real estate construction prospects further. Although pension funds and other institutional investors resist speculative development, they selectively seek expansion and renovation opportunities in existing portfolio holdings in an effort to increase yields and maintain a competitive edge in aging buildings. TRANSFORMING TENANT DEMANDS

Office developers take notice of how changing tenant requirements—open layouts, shrinking space use per capita, hoteling and other technology impacts, as well as operating and energy efficiency preferences—spread from the United States and force altered approaches to projects. They realize the need to deliver green product to attract prime space users, while institutional owners continue to focus on upgrading existing stock to LEED standards in order to remain competitive. “Green is huge in office. It’s become an intrinsic core value for tenants and fundamental for their business in attracting talent.” But some interviewees raise a familiar complaint: “Tenants want it, but aren’t willing to pay more for it.” Retail development orients away from the suburbs to densifying city centre residential areas—particularly integrating supermarkets, other service retail space, and smaller versions of big-box chain store space into apartment complexes or convenient sites nearby. And every commercial developer wants to be as close to transit corridors as possible; businesses place an increasing premium on proximity to rail and subway lines. ESSENTIAL IMMIGRATION DRIVERS

“The trend of ‘the west is best’ will continue.” Eastern Canada gains from its “depth” of population and diversity of businesses, including Toronto’s powerful financial industry, but western Canada benefits from the “dynamics” of the jobs-generating industries of oil, gas, and commodities. Flows of about 250,000 immigrants annually from overseas—mostly from Asia and the Middle East—begin to redirect to Edmonton, “the staging ground for oil sands” work. The federal government and provinces collaborate better to identify hiring needs and bring people to satisfy them. As the profile for non-immigrant Canadians ages into graying demographic cohorts, immigration will remain the lifeblood for housing demand, commercial and multifamily development, and retail sales, especially in expandwww.building.ca

12-12-13 4:06 PM

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Building DecJan.indd 25

12-12-13 4:06 PM

Emerging trends barometer 2013

3 Good

BUY

HOLD

Modestly good

Fair Source: Emerging Trends in Real Estate 2013 survey. Note: Based on Canadian respondents only.

SELL

Modestly poor

Poor

2008

2009

2010

Cap. Rate (%) August 2012

Regional malls Apartment residential (rental) Apartment: moderate income Central city office Warehouse industrial Power centers Full-service hotels R&D industrial Neighborhood/community shopping centers Suburban office Limited-service hotels

ing relatively high-growth western cities. Traditional immigration magnets—Toronto and Montréal—will continue to prosper from flows of newcomers along established international pathways. Newer areas of economic activity, such as the Maritime Provinces, will attract greater immigration as a result of the coastal energy boom that will undoubtedly create new jobs. “LEVELING” CAP RATES

Investors’ proclivity to secure income over long-term holding periods tends to sedate deal making and helps insulate markets from volatility, although commercial markets registered record transaction volumes during 2012. Again, the Emerging Trends Canada barometer settles in a familiar positive zone for 2013 with buy/hold/sell sentiment essentially aligning ( EXHIBIT 3). Survey respondents expect little further downward movement in “lowas-you-can-go” cap rates, especially for apartments, regional malls, and downtown office space ( EXHIBIT 4). The exceptions will be for prime development sites in and around downtowns, especially for stores. “Land values in core districts will keep going up.” If anything, it may be a slightly better time to sell than buy, but then given limited investment alternatives, owners probably are better off holding. And as noted, that “is just what most successful Canadian investors do out of habit anyway.” 26 BUILDING DECEMBER 2012 / JANUARY 2013

Building DecJan.indd 26

2012

2013

Prospects for Capitalization Rates Property type

Increase moderately

2011

5.22 5.14 5.38 5.48 6.07 6.13 6.25 6.60 6.54 6.55 8.00

Expected cap. rate (%) December 2013

Expected cap. rate shift (basis points)

5.15 5.18 5.36 5.43 6.00 6.21 6.25 6.45 6.54 6.62 8.00

–7 4 –2 –5 –7 8 0 –15 0 7 0

PLENTY OF CAPITAL, NOT ENOUGH DEALS

“The stars could not be better aligned” for attracting capital into Canada’s reliably solid real estate markets: they look as good as any place to invest in the world. Rational leverage levels, extremely low default rates, high occupancies, and low interest rates all combine to reinforce investor and lender confidence in an asset class generating attractive yields. For 2013, Emerging Trends respondents expect balance in debt availability—meaning debt will neither be over- or undersupplied, although high-credit borrowers will have better access, especially for condo-related construction loans where lenders will be more discriminating and reject less-experienced developers ( EXHIBIT 6). Already-rigorous underwriting standards promise to turn stricter. “Adventurers and amateurs will be eliminated” in the condo arena, and 10-year financing is tough to secure because life insurers want to avoid getting caught with liability mismatches should interest rates rise as expected over the medium to long term. Ample cash positions search for yield but tend to find few opportunities in private equity real estate: both pension funds and “more aggressive” REITs “have capital to invest, but haven’t been able to achieve their investment goals.” As a result, institutional investors will continue to look outside the country, and REITs may muscle into pension-fund turf, bidding on www.building.ca

12-12-13 4:06 PM

available higher-profile trophies, as exemplified by the recent Scotia Plaza transaction in Toronto. Foreigners wish to enter Canadian markets “looking for a safety net,” although the Canadian dollar offers no currency advantages. Foreign investors are confronted with various legal hurdles, which only make it more difficult to compete with domestic players, who are naturally more adept at maneuvering on their home turf. New sources of capital—private REITs, boutique real estate funds structured as trusts or limited partnerships, and various other money manager vehicles—sprout up to attract high-net-worth investor interest in the asset class. Searching for product, and marketing five- to seven-year holding periods similar to U.S. value-add or opportunity funds, these nascent vehicles may keep returns lower in secondary markets and “the non-trophy asset tiers.” These vehicles could also get involved in development deals, financing borderline projects rejected by traditional lenders.

Markets to Watch

Increase moderately

As investors look for quality, through investment or development assets, other “older properties” continue to wait in limbo. A quality-based division is forming as capital continues to shy away from aged assets. Growing urbanization, transit challenges, creative and efficient space design, and a growing demand for green, energy-efficient buildings continue to shape the real estate landscape. Interviewees note, “sustainability and green: it’s here forever,” “tenants continue to become more space efficient,” and “LEED certification, more contemporary design; access to transit corridors is essential.” As these trends grow, new and next-generation companies will continue to use these features to attract and retain their best employees. Landlords looking to compete and grow should follow this direction to attract valuable tenants.

Property Types in Perspective Emerging Trends surveys highlight “modestly good” investment and development prospects Emerging across mosttrends property sectors barometer for 2013 ( EXHIBIT 7), reflective of expected solid2013 supply demand fundamentals in commercial categories. Housing sectors also Good score favorable marks, except for second and leisure homes.

“Canada’s real estate market has an appetite for transactions, but trends it is difficult to find deals.” Even Emerging during a questionable global barometer 2013 continues economy, the Canadian commercial real estate market BUY to grow and attract capital. “Real estate concerns are reducing, HOL Good Modestly good even with global economic uncertainty,” an investor says. Even Apartments The recent condo buildup has not softened BUY with that attitude, investors still have their eyes wide open on the multi-residential HOLD markets; “they’re stronger than ever.” Like Modestly good Fair European debt crisis, China’s decline, Middle East conflicts, and “bond investments,” landlords reliably can increase rents, supSELL the struggling U.S. economy. In 2013, Canada’s stable economy, ported by high occupancies and steady appreciation. Confifinancing job growth, and alluring assetsFair will continue to be an attraction dent lenders extend Modestly poor“for next to nothing,” and cap SELL to both domestic and foreign capital. Equity is in abundance, and rates reach “shockingly low levels” in some markets. With dein higher-end-market condo debt for acquisitions looks to be in balance. Investors need to allo- velopment concentrated on units Modestly poor Poor apartment cate this capital, and “instead of keeping cash, they look for great towers (which many buyers rent out), existing 2008 2009 stock 2010 201 assets—real estate.” Without aPoor correction in sight, there is antici- in middle market urban neighborhoods meets ample leasing demand for lower-cost options, from career starters pation in the industry that transactions will be based 2010 2008 continue to 2009 2011 2012 especially 2013 on sharper, more aggressive moves. It has turned into a “profes- and newly arrived immigrants. In older districts, many buildProspects for or replacement. Investors looking for sional’s market,” in which those with exceptional skills to com- ings require overhauls Capitalization Rates plete deals will succeed. However, looking for and acquiring real value-add opportunities can upgrade units. “It’s a broken recProspects for Cap. Rate (%) estate might be slightly more difficult next year as the hunt for ord: multi-res is always a good bet.” Capitalization Rates Property type August 2012 quality assets continues. “Investors are more yield-challenged, Expected Expected Regional malls 5.22 Rate (%) Rents andcap. rate (%) cap. rate Office and searching for good assets is tough,” states a potential buyer. Cap. values “keep going up,”shift reaching replaceProperty type 2012 December 2013 (basis points) (rental) 5.14 The large institutional owners of high-quality assets in August mentcost levels as a Apartment handful ofresidential new towers readily lease up Apartment: moderate income 5.38 Regional 5.22 markets, paving 5.15 –7 new construcprime markets make the searchmalls difficult due to their long-term in major the way for additional Central city office 5.48 (rental) 5.18 Warehouse 6.07 investment strategy. InApartment addition,residential prices might seem high, but tion.5.14 Developers will look to takeindustrial advantage 4of strong tenant Apartment: moderate income 5.38 5.36 –2 Power centers 6.13 most interviewees think they will still rise a little more—if you appetite for efficient layouts in sought-after green projects, Central city office 5.48 5.43 –5 Full-service hotels 6.25 Warehouse industrial 6.07 6.00 can “get the deal done.” With those struggles, and still the ap- which house more workers in less space and–7can reduce operR&D industrial 6.60 centersinvestors have focused on 6.21 and shoulders above 8 shopping 6.54 petite and desire for Power real estate, ating6.13 costs. “They areNeighborhood/community head older centers buildFull-service hotels 6.25 6.25 0 Suburban office 6.55 strong tenant-based properties in secondary markets, or “Class ings.” Brokers are starting to make headway on sales pitches for R&D industrial 6.60 6.45 Increase Limited-service hotels–15 8.00 Neighborhood/community shopping centers 6.54 6.54 B space in Class A markets.” Supporting this trend, inter- higher rents in these new-generation towers, 0highlighting offmoderately office is a demand for quality 6.55 lower expenses.6.62 viewees are quoted asSuburban saying, “there sets from “Everybody wants to7maximize everyLimited-service hotels 8.00 8.00 0 property in all markets,” “flight to quality for purchasers,” and thing. They like more output for less space.” This “inexorable” “we’re moving into secondary markets.” However, not all in- march toward efficiency is “a normal course of business”; it is vestors are ready to take on additional risk in secondary mar- as important to office markets as urbanization trends, and more kets at this stage of the game. Some interviewees state, “shy owners of existing skyscrapers must undertake “surprisingaway from the secondary markets,” and “we tend to stay away ly” expensive retrofits to stay competitive or risk dropping to from secondary markets as liquidity is an issue.” B-quality status. In the unlikely event overbuilding occurs, “it www.building.ca

Building DecJan.indd 27

DECEMBER 2012 / JANUARY 2013 BUILDING 27

12-12-13 4:06 PM

Markets to Watch: Overall Real Estate Prospects Investment

Development

Calgary

6.59

6.77

7.07

Edmonton

6.52

6.35

7.08

Toronto

6.18

5.95

6.19

Vancouver

6.14

5.83

6.00

Ottawa

5.88

5.92

6.15

Saskatoon

5.70

6.37

6.47

Montreal

5.93

5.41

5.77

Winnipeg

5.41

5.05

5.67

Halifax

5.16

5.05

5.44

1 2 3 4 5 6 7 8 9

1 2 3 4 5 6 7 8 9 abysmal

Homebuilding

fair

excellent

abysmal

fair

1 2 3 4 5 6 7 8 9

excellent

abysmal

Real Estate Capital Market Balance Forecast for 2013 50

Equity capital for investing

6.12

22.45

32.65

excellent

Prospects for Major Commercial Property Types in 2013 Investment Prospects

40 30

fair

34.69

4.08

Apartment

6.18

Retail

6.11

Office

5.87

Industrial/Distribution

5.82

Hotel

5.50

Source: Emerging Trends in Real Estate 2013 survey. Note: Based on Canadian respondents only.

0 50

Debt capital for acquisitions

30 20

2.04

34.69

42.86

18.37

2.04

Development Prospects Apartment

5.18

Retail

6.17

Office

5.77

Industrial/Distribution

5.47

Hotel

4.00

0 50

Debt capital for refinancing

30 20

8.16

32.65

42.86

14.29

2.04

28 BUILDING DECEMBER 2012 / JANUARY 2013

Building DecJan.indd 28

Substantially oversupplied

Moderately oversupplied

In balance

Moderately undersupplied

Substantially undersupplied

1 abysmal

5 fair

9 excellent

www.building.ca

12-12-13 4:06 PM

will be at the expense of older buildings with obsolete space.” A transformation in medical practice and an aging population in need of increased health care services lift prospects for medical office space. Hospitals “decant nonessential services,” and more doctors are forming multiple-practitioner clinics. Space near hospital centres commands a premium; cap rates in some markets decline to 6 per cent. Doctors and lab operations seek “large floor plates” and “flatter buildings” that provide patients with dedicated medical environments. Retail Already-tight markets will tighten further as U.S. retailers expand into Canada, led by Target, Nordstrom, and Lowe’s. The entry of new chains precipitates “a dynamic moving around of tenants” and “sounds the death knell” for some weaker domestic brands in “the most Darwinian of property sectors.” Owners revel in the activity as the U.S. interlopers find difficulty securing sites and force out struggling competition by taking their space, often at higher rates. The sector’s small club of developers, meanwhile, continues to work “hand in glove” with retailers to meet their needs and “keep supply from getting out of whack.” Zoning restrictions and ever-vigilant lenders also keep a check on new development. But owners must begin to contend with integrating e-commerce platforms and dealing with retailers’ locational strategies. Given high occupancies and strong demand, the expected preference of tenants for smaller store layouts should not undermine property revenue streams or values. All the chains fight for good sites in undersupplied urban centres. The wave of new condo residents demands convenient shopping at familiar brandname stores, and developers look to accommodate: they pay up for land, but can charge premium rents. Older suburban centres make prime candidates for redevelopment into new shopping formats. Unlike the United States, Canada is not oversupplied with retail space. Interviewees register only minor concern about whether more subdued housing markets and high household debt could affect store sales. Industrial Warehouse vacancies have declined and investors like the steady cash flows, but the sector seems mired in comparatively “slow growth,” hampered by the strong currency and related exchange-rate issues, especially around Toronto and Montréal. Import/export flows remain somewhat compromised by south-of-the-border turbulence. “It’s difficult to find pockets of real growth with auto and aerospace industries still off.” At least supply is not an issue because developers have backed away in the face of generally “weak leasing markets,” with rents below replacement cost, but “creeping up.” Not surprisingly, smaller western distribution markets perform considerably better, boosted by commodities activity; owners can register rent “leaps” on new leases. Generally, a widening gap in the level of investor demand develops between more favoured new, high-ceilinged distribution space—where tenants tend to Increase concentrate leasing activity—and increasingly obsolete older moderately warehouses, which suffer noticeably higher vacancies. www.building.ca

Building DecJan.indd 29

Hotels Prospects for hotels should continue to improve. Occupancies and room rates crawl back to 2007 peaks in the big cities, and RevPAR is not far behind. Outside of Calgary, interviewees see little room for much new development, with the exception of adding popular all-suite limited-service brands, catering to business travelers, in certain downtown markets. Housing Housing markets appear primed to hold relative values, and population inflows from overseas almost guarantee steady future demand for new homes. Respondents appear modestly bullish about prospects for condo (high rise and midrise) and home construction, especially in urban and infill areas, as well as town centres. Increasingly steep prices for housing closer to urban cores should create greater demand for more affordable single-family homes in outer suburbs. Expensive high-end condo units lose some luster as demand tails off; affluent offshore buyers become less active. All in all, “we expect nothing spectacular, but if the world turns around, we are in an excellent position”—and not a bad position under any circumstances.

Best Bets HOLD CORE REAL ESTATE IN MAJOR MARKETS. For institutions,

Emerging trends opporonly five or six cities—“the traditional suspects”—offer barometer 2013these martunities to place money, and they happily dominate kets, enjoying consistent payoffs from solid income-producing Good trophy properties across all property categories.

BUY

HOL

Modestly good

DEVELOP GREEN OFFICE IN DOWNTOWNS. Major tenants want

this more efficient space and will move from older buildings Fair into layouts with operating-system advantages.

SELL

LAND BANK IN WESTERN MARKETS. In Canada, the beckoning Modestly poor

of “go west, young man” still applies, and opportunities for real estate investors and developers to take advantage of escalating Poor inflows of workers for available jobs will continue, with 2008 2009 an obvious caveat to unexpected reversals in energy and commodity markets. Buy and hold sites in and around the larger cities should see values escalate nicely, and infill sites will score deProspects for velopment projects more quickly.

2010

2011

Capitalization Rates

SECURE INFILL SITES. Any low-rise inner-city real estate “has got Property type intensification written all over it,” especially if located near mass Regional malls transit. “Go for the sure-shot redevelopment capital play.”

Cap. Rate (%) August 2012

Apartment residential (rental) Apartment: moderate income DEVELOP HOUSING AWAY FROM Central cityURBAN office CORES. Soaring conWarehouse industrial do pricing and family-unfriendly units create an opening for centers homebuilders to meetPower the underserved market for larger layFull-service hotels outs, which can better R&D accommodate children. industrial Neighborhood/community shopping centers Suburban BUY LUXURY CONDOS IN THE DIP.office With urbanization baked into Limited-service hotels

future demand, upscale space in the best downtown locations will reclaim any lost value quickly. B

5.22 5.14 5.38 5.48 6.07 6.13 6.25 6.60 6.54 6.55 8.00

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VIEWPOINT

Small company, major steps Toronto’s Urban Capital is involved with several innovative residential condo projects that are helping redefine how people live in downtown urban neighbourhoods.

By Sheri Craig

n the world of large, established development conglomerates, a two-partner upstart Toronto-based company is making significant waves. Founded in 1999 by David Wex, a lawyer involved in development, and Mark Reeve, who was working in real estate, Urban Capital Property Group is involved with a number of intriguing residential condominium projects in several cities across the country. Most recently, the focus is on River City, a $300-million, 1,000-unit condo project in the former gritty industrial area of Toronto where King and Queen Streets meet by the Don River. Part of Waterfront Toronto’s 80-acre West Don Lands redevelopment, River City is being built on a long rectangular site running from King Street East to River Square, a public meeting place with cafes and restaurants adjacent to the new park on the south. Phase one is a 14-storey, grey-tinted glass building on King Street, with 350 units ready for occupancy in March. Construction will begin in January on phase two, a sleek, 12-storey building divided into three mini-towers connected by glass passageways and housing 250 units. Marketing for phase three, a darker grey 20-storey complex near River Square, begins next fall. Phase four, including about 200 units, is down the road. The design for the project is by award-winning Montréal architects Saucier + Perrotte, with ZAS Architects. River City could be seen as a stretch for a firm that doesn’t have much of a residential background, but Wex and Reeve liked the challenge it offered the design firm, especially since their mandate was also to build it to LEED Gold standards, the first residential development in Canada to focus on that goal. “It wasn’t always easy bringing a museum sensibility to the budget and peculiarities of a residential project but they grew the design out of the site and context. As a result, the design looks like nothing else,” says Wex. Phase one’s origi30 BUILDING DECEMBER 2012 / JANUARY 2013

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David Wex

nality won the BILD award for best building design in 2010. Urban Capital has projects in Ottawa and Montréal and will begin a 160-unit residential condo on top of a parking podium in Winnipeg as soon as that podium is completed, probably next year. Glasshouse is part of Winnipeg’s Centrepoint development, a mixed-use project including a hotel and 100,000 square feet of office space plus two restaurants, designed to help rejuvenate downtown Winnipeg. The company is also short-listed for a municipally-owned site that the Halifax city government plans to develop. Then there is Tableau. Designed by Wallman Architects, the 36-storey mixed-use development now under construction on a former industrial site in Toronto’s entertainment district, is divided into three parts with its symbolic table separating office and retail space in a heritage-inspired structure under the table from condo amenities on the table top and then a 410-residential suite tower rising above. A public plaza designed by Claude Cormier Landscape Architects from Montréal, with a 90-foot sculpture by Canadian artist Shayne Dark, completes the project, which is being developed jointly by Toronto-based Malibu Investments and Alit Development. A lot on the go for a small company: just Wex and Reed, two project managers and support staff. “We’re traveling a lot. I think I’m number 11 on Porter’s VIP list,” jokes Wex. “But we also always partner locally.” He adds that they were lucky getting into residential condo development when they did. “From 2000 to 2012, so far it’s been a boom time. I don’t think we could have picked a better time to do what we’re doing.” The partnership has been a learning experience. Wex focuses on design and marketing; Reed is more grounded on the financial side. “For both of us, it’s kind of like being a producer where you have to keep a lot of people happy — purchasers, municipal regulators, partners,” says Wex. “It can’t only be about the design but has to be about balancing it all. And having a strong vision about what we want to achieve.” He says they want to continue developing urban residential projects in downtown spaces across the country. “We’d like to do more in Montréal. I don’t think we’d expand to Vancouver though. Vancouver’s got its own well-established expertise. Eventually we may run out of cities but I don’t think we’d look at the U.S. Certainly not right now. There are still many opportunities here.” B www.building.ca

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