Canadian Real Estate Forum Magazine - Fall Issue 2016

OTTAWA

FALL 2016 / ISSUE 72

Urban intensification is here to stay: Opportunities abound near transit nodes Ottawa economy filled with good news stories Recipe for rental growth: Give tenants what they want

CALGARY

Short-term decrease in value a long term opportunity for investors The silver lining of an economic downturn: More diversification, jobs in other sectors Suburbs continue to sparkle

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CITIES TACKLE CHALLENGES WITH INNOVATION AND DIVERSIFICATION the low-down on how to facilitate this growth, whether it is through leasing, investment or development.

George Przybylowski Vice President, Real Estate and Construction Informa Canada

Whether you are hoping to cash in on Alberta’s sluggish economy or delving into Ottawa’s hot, yet challenging, real estate sector, the Canadian Real Estate Forums are the places to be if you want the know-how to maneuver the marketplaces.

For the past 22 years, Ottawa has been the country’s fifth largest real estate marketplace and has forged a path in trends, issues, strategies and opportunities in Canada’s National Capital Region.

As such, this year’s Ottawa Real Estate Forum will give attendees www.realestateforums.com

Topics to be discussed include the recently completed comprehensive Employment Land Review that will address the city’s growth; the influx of American department stores to Canadian cities as investors realize the potential in this country amid a low Canadian dollar; how the downtown office market is remaining competitive and attractive to renters and investors; and the demand for more ownership and rental properties from homeowners and students.

While the Calgary real estate market continues to feel the tight squeeze of low oil prices and their effects on the employment and housing markets, sessions at this year’s 18th annual Calgary Real Estate Forum Oct. 25 will buzz with talks of new revenue streams.

The largest conference of its kind in Western Canada, the Calgary forum will touch on tapping into new markets, including China, U.S. and other areas of Canada, as well as new opportunities, such as pharmaceutical manufacturing and logistics technology, both of which have high growth potentials.

With a dangling carrot of $700 million in federal funding for provincial infrastructure projects and the city’s $22 million to be spent on a green transit line in the next four years, it is the opportune time to build, especially when you consider that the municipality has traditionally had to compete with oil and gas projects for workers. When all is said and done, these new transportation projects will attract even more baby boomers to the city’s core.

Though a Shark Tank interaction between brokers and investors, the forum will give new perspectives areas of growth, cap rates, portfolios and where the best property returns lie.

Other highlights include the rebuilding of oil sands’ city Fort McMurray after it was devastated by wildfires just six months ago; how a drop in single-family home developments could mean a rise in multi-family sales and rentals; how vacancies in the core could attract investors and renters from outside the city and upswing in suburban office opportunities; and how when you crunch the numbers, this could be the prime time for entrepreneurs to get their start-ups off the ground. ■ 3

CONTENTS

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Cities tackle challenges with innovation and diversification

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The Altus Report: Do the New Kids Now Rule the Block?

49

Latest Commercial Market Statistics Across Canada

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Managing Risk in Leasing to Public Services and Procurement Canada

55 Inclusionary Zoning: Policymakers Need Not Reinvent the Affordable Housing Wheel 58 Update on the Alberta Municipal Government Act (MGA) 60 Turning Clear and Present Danger into Clear and Present Opportunity: Commercial Real Estate a Focus for Sustainability Policymakers

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

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The Canadian Real Estate Forum Magazine is published three times annually. Editions coincide with key Canadian Real Estate Forums and associated markets:

Conferences For more information on our Conferences visit www.realestateforums.com See our ad on page 53

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

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

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

Editor & Associate Editor Michel Rémy Jean Pickering

Design Informa Canada Design Studio

Canadian Real Estate Forum / FALL 2016

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OTTAWA

CALGARY

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16 Ottawa: New Projects Directed toward Mixed-Use and LRT

34 Calgary: You’re in the Right Place

18 Urban intensification is here to stay: Opportunities abound near transit nodes 18 Ottawa’s industrial lands too far from the highway: Municipal review suggests further development 20 Ottawa economy filled with good news stories 22 Recipe for rental growth: Give tenants what they want 22 Growing downtown vacancy rates an opportunity for new industry to move in 24 Ottawa an Exciting Scene for Developers in 2017 26 Service: The secret of occupancy success 27 Downtown market steady, ready 28 Retail responds as residential, office demand beckons 30 Global entrepreneur is Ottawa’s #1 fan: National capital is already reclaiming its tech heyday

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36 The silver lining of an economic downturn: More diversification, jobs in other sectors 37 Lenders’ perspectives on Alberta: Office markets’ pain shared by other asset classes 38 Suburbs continue to sparkle 38 Worst is over for oil 40 Integrity key to Canderel-Tsuut’ina project 42 Retail ‘Soft’ but Resilient 42 Short-term decrease in value a long term opportunity for investors 44 Potential to Acquire: the Upside of Market Distress 44 Surviving the Slump in Calgary 46 Office tenants move upmarket 46 Entrepreneurial Alberta weathers the storm 48 Appetite for high quality Canadian real estate assets continues unabated

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THE ALTUS REPORT

DO THE NEW KIDS NOW RULE THE BLOCK?

By Sandy McNair

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Shifting Downtown Office Market Dynamics are Great News for Some, Not So Good for Others.

Not long ago in each of Canada’s major downtown office markets there were a handful or two of large office buildings that were widely recognized as being at the ‘top-of-the-market’. Their center ice location, superior design, responsive management and ownership that invested in compelling upgrades earned these buildings higher rents, lower vacancy and often the highest levels of tenant retention as well as superior investment returns. Many in the industry gave these buildings their highest designation, be it Class A, AA or even AAA. Most industry participants still do.

Canadian Real Estate Forum / FALL 2016

During the past decade in each of Canada’s major office markets, there has been to varying degrees a construction boom adding many office buildings that are not only new, they are different. Most of these new office buildings are focused on occupant needs that have evolved since the iconic top-of-market buildings were designed and built. An initially small, but now significant portion of the tenant population expects much more from their office premises. As employers become increasing engaged in the ‘Battle for Talent’ that includes attracting, retaining and growing the best and brightest employees they expect the location, design, manager and owner of their office building to contribute to their success in this battle. Many employers are also choosing to more intensely use less but better space thereby reducing occupancy costs per employee while also seeking to boost vibrancy, morale and productivity.

operating costs, increase personal comfort control, access more daylight and increase occupant density while enhancing vibrancy, morale and productivity.

While pressure on pension funds and other investors to place capital has contributed to this decade long spike in construction of new office buildings, it would have been a much smaller spike and ended much sooner if fewer tenants in the iconic top-of-market building had not chosen to move to a brand new building. With very few exceptions the new downtown office buildings have leased

up quickly and successfully often at the initial expense of the iconic top-of-market buildings.

Also during the past decade downtowns have been intensifying with emphasis placed on Live-Work-Learn-Shop-Play lifestyles and the corresponding development of a wide range of building types and uses. Interestingly and significantly while downtown is intensifying, center ice is dispersing or becoming distributed. Many of the iconic top-of-market office buildings are located at or near a single intersection - center ice.

To achieve these goals many new and some of the iconic top-of-market buildings are designed and / or retrofitted to use new technology to reduce their environmental footprint and www.realestateforums.com

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5. Traditional Downtown Core Class B But even these nuances fall short. To even more accurately capture the differences that office building occupiers experience we would ideally want credible metrics to track and communicate: a. Location Attributes – center ice, financial core, north, south, east, west node with transit, parking, shopping and other amenities considered b. Building Design Attributes – personal climate control, daylight, capacity, environmental footprint, premises fit out flexibility and costs, operating and occupancy costs, etc. c. Building Manager Brand Value – Proactive Programs, Responsive Services, Aligned with Occupants’ Goals

During the past decade large new office buildings have often been located at new nodes or clusters, in many cases with non-traditional neighbourhood vibrancy. Part of the appeal of these neighbourhoods is their vibe, their coolness or that they are funky.

While tough to define and create for some employers being in funky premises, in a funky building, in a funky neighbourhood is an important competitive advantage.

Being funky is so important to a segment of the market that some large traditional office buildings have invested in redesigning and repurposing the building’s public spaces and image to become

funky or at least funkier. Some new buildings have been built in older funky neighbourhoods with the design team working hard to make new feel funky.

In spite of all these changes within our markets many in the industry continue to think in terms of Class A, B and C buildings whereas a more nuanced and more accurate view might include the following: 1. Traditional Downtown Core Class A 2. Traditional Downtown Core Class A Converted to Funky 3. New and Nearly New Class A buildings located in the Downtown Core and in Nearby Nodes

d. Building Owners’ Commitment – to invest in compellingly valuable and relevant upgrades e. Image and Vibrancy – of the neighbourhood, the building and the management team – traditional financial core, funky fringe, entertainment node, fashion node, waterfront, etc.

In practical terms, the best evidence and ultimate measure of success for tenants and landlords is superior levels of employee referral, recommendation and retention for the employer and high levels of tenant referral, recommendation and retention for landlords. The opportunity and challenge for industry participants is to identify the most appropriate combination of leading indicators for each specific and often unique situation.

4. Old Brick and Beam Upgraded and Expanded with New all with a Funky attitude

SOUND BITES Compelling Facts Shaping the Future of our Markets • As of July 2016 Canada's population was 36,286,425 up 1.2% in the past year. The portion of the population over 65 years old is 16.5% with 21% being under 20 years old.

• In 2015 the number of Millennials (born 1981 to 2000) in Canada exceeded the Boomer (born 1946 to 1964) population.

• In 2013-2014 the number of students enrolled in Universities and Colleges in Canada reached a new high of 2,048,019 with 56% of them being female.

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• In 1960 the average American, British or Japanese 65 year old man was expected to live for another 12 years. Women could expect 15 more years. Today it is 19 more years for men and 22 more years for women.

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

Canadian Real Estate Forum / FALL 2016

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invest wisely to be seen and in some cases reclaim their top-of-market stature for their targeted market segment.

Moving down the block to a nearby node in each downtown market is in some markets another cluster of top-of-market buildings.

They are most likely appealing to a different market segment of office building occupiers with different objectives, strategies and performance criteria.

Do the new kids rule the block?

The most accurate view is that the question is flawed. The office building occupant community is no longer homogeneous and is becoming even more fragmented.

The office building occupant community is now starkly segmented by leadership style, corporate culture, strategy, industry, size and other factors that result in very different real estate occupancy objectives and solutions. Some office buildings, their locations, their managers

and their owners have positioned themselves to achieve the objectives of one or more of these emerging and diverse occupant segments. The era of one size fits all is well behind us.

Some of the iconic top-of-market building managers and owners have invested in compelling upgrades and services to ensure they meet or exceed the objectives of their targeted segment of the marketplace. Over the past decade most every iconic top-of-market building has lost or donated tenants to the new or nearly new office buildings. But the best of these older buildings are continuing to work hard and

The key point is this. The market place has changed. There is now room for more than one strategy and room for more than one cluster of top-of-market buildings. However, with office locations, buildings, managers and owners becoming even more de-commoditized there are now an infinite number of ways to underperform the market.

For those that doubt this to be the new reality they are most likely on the path to being an example of yet another way to underperform the market. For those that are willing and able to embrace and lead these changes the rewards of being top-of-market are well worth the effort. ■ Sandy McNair is the Data Curator at Altus Data Solutions a division of Altus Group.

In January 2016 Altus InSite, RealNet and several other businesses and teams within Altus Group were integrated to form Altus Data Solutions.

SOUND BITES Compelling Facts Shaping the Future of our Markets • An expanding segment of office building occupiers are more intensely using less but better office space. While national, this trend varies by industry, by city and by number of employees at each location. Multiple floor occupiers in the banking, professional services, government, high tech and telecom industries have been moving from densities of roughly 160 to 250 square feet per person to densities ranging from 100 to 140 square feet per person. While most evident in Toronto and Ottawa we can expect this pattern to become national.

• Headcount and other costs are being removed from the energy industry. With densities commonly in the area of 300 square feet per person, when office premises are reconfigured or firms consolidate, we can expect densities to shift downward toward those being utilized in other industries by other large office space occupiers.

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• Calgary's new office supply spike will end in 2019 with a 12 year total of 22.8 million square feet or 32% of the 2019 total inventory. Calgary's previous and more dramatic new office supply spike ended in 1983 with a stunning 5 year total of 23.8 million square feet or 72% of the total inventory in 1983.

• The proportion of the current office inventory in each major downtown office market that has been built since 2000 is: Vancouver 16.7%, Edmonton 6.6%, Calgary 27.3%, Toronto 13.7%, Ottawa 15.7% and Montreal 8%.

• The proportion of the current office inventory in each major downtown market that is currently under construction is: Vancouver 1.8%, Edmonton 11.1%, Calgary 7.1%, Toronto 5.5%, Ottawa 0% and Montreal 1.6%.

Canadian Real Estate Forum / SPRING 2016

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Brexit through to the other side: UK shows its resilience

By Richard Gwilliam, Head of Property Research, M&G Real Estate

It’s a decision that has been months in the making but now we know the UK government’s intentions for sure; according to Prime Minister Theresa May, the UK will trigger Article 50 of the Lisbon Treaty and begin formal talks to exit the European Union before the end of March 2017. The end of the beginning of Britain’s EU exit is now within clear sight.

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Source: Bloomberg, September 2016

Fig 2 : UK commercial real estate value falls are moderating 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0

Source: MSCI, September 2016

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This move from panic and fear to a more sanguine outlook has fed through to the real estate market, where valuation declines have decelerated. While the immediate post-Brexit hit to average capital values in July was 2.8%, according to MSCI, the August decline moderated to only 0.7%, with September’s

property markets where pricing has recently been overstretched (such as in central London), while other more defensive sectors – such as private rented residential and long lease property – will continue to offer attractive income streams for pension funds and other institutional investors.

Fig 1 : UK consumer confidence has bounced back

Aug-13

Property market: starting from robust position

outturn likely to be a similar modest fall.

Going forward, we remain of the view that any property market dislocation will be limited and that values should begin to recover as the uncertainty lifts. What’s more, we believe that short-term volatility will open up attractive investment opportunities in

All property average capital growth (% per month)

But what has really changed as far as the UK real estate market is concerned? In truth, little. The uncertainty that the referendum result generated remains, as it is still unclear what the terms of Brexit will be. That said, arguably there is now less uncertainty given there is more clarity over timing.

In the short term, firms may put some hiring and investment intentions on hold, while consumers could cut back on discretionary spending. But with the Bank of England intent on supporting the economy, having cut interest rates to a fresh historic low of 0.25% and signalled its intention to ease monetary policy even further, and the government rowing back on austerity policies and preparing supportive fiscal measures, British business and consumer confidence has already recovered from its initial post-Brexit wobble.

The UK economy seems to be proving its resilience, at least for the time being. Despite the uncertainty since June, the IMF’s latest forecasts see real GDP growing by 1.8% over 2016 as a whole – not hugely down on 2015’s 2.2%. This represents the strongest 2016 growth expectation of all G7 economies. Although the economy may lose some momentum, the vast majority of forecasters still expect Britain to avoid a recession and that economic expansion, albeit moderating, will continue in the near term (the IMF forecast 1.1% growth over 2017).

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Completions by sector (million sq.ft.)

Fig 3: Modest construction activity supports prices

O ces

Retail

Industrial

Historic average '98-'15

Source: PMA, Summer 2016

We still think the ultimate outcome of the Brexit negotiations is likely to be one that meets the interests of both the UK and the EU, so we anticipate a “soft” Brexit scenario in which the UK retains some access to the single market. This, coupled with potentially favourable trade deals with non-EU partners (which admittedly may take a long time to negotiate), means the medium to long-term economic outlook remains benign, supporting demand for real estate from occupiers and investors alike.

Occupier markets also offer comfort for the short term, with tenant demand for space holding up, deals proceeding, and a lack of supply characterising many locations.

The UK has just experienced seven consecutive years of construction running well below its historic average level. This period of restricted development – the likes of which has not been seen since the early 1990s – should lend support to rents, particularly in the more prime locations.

Crucially, overseas investors – both from Europe and further afield – still view the UK as a very attractive long term investment opportunity and London as a global safe haven. From Germany to the Middle East, anecdotal evidence suggests that a number of institutions are already looking to take advantage of the recent depreciation of sterling, and we expect that any short-term falls in capital values will only increase this buying momentum.

It looks like the short-term pain may

already be largely behind us, with capital values beginning to stabilise, at least for prime property. This would mean a decline in values since Brexit of less than 5%, with maybe a little more to come over the coming few months. Of course, there remains the possibility of a further leg down should the Brexit negotiations take an unfavourable turn.

Riskier assets and vulnerable markets are likely to suffer more, although it is notable that many industrial assets continue to see values grow, while liquid shop assets have traded frequently at prices not dissimilar to pre-Brexit levels. Helped by income, positive total returns should come back in by the start of 2017.

Central London: risk and opportunity We believe central London offices are likely to underperform in the months ahead. This is partly because of weaker sentiment regarding occupier demand given the exposure to the financial services sector, which is likely to be hit disproportionately hard by Brexit. But this market is also much further advanced in its cycle compared with the rest of the country. Average capital values for central London offices by the middle of this year had surged to 20% ahead of where they were prior to the financial crisis, in contrast to the wider market, which remained 20% below. So this is where we expect larger overall falls in capital values as

well as potentially attractive entry points for investors with a longer time horizon.

Prime central London residential also appears more exposed due to the significant rises in capital values already seen up until this year and adverse tax changes.

Generally, though, prime or good secondary UK property in undersupplied markets should fare well. With uncertainty prompting greater risk aversion, we expect a renewed focus on prime assets, with investors looking for high quality buildings with high quality tenants in core locations.

Greater resilience UK residential, supermarkets, industrials are probably the most resilient sectors.

Although we do not expect the economy to fall into recession, taking a defensive position in the short term should benefit performance. We see supermarkets as being one of the top performers over the next couple of years. This reflects, on the one hand, the defensive nature of the occupiers’ business and, on the other hand, the long-term inflation-linked leases on offer to investors. Long income UK property generally, including sectors where these types of leases are prevalent such as student accommodation, is likely to prove more resilient.

Central London aside, the private rented residential sector also demonstrates defensive qualities since weaker employment prospects and a cooling housing market are likely to push more would-be buyers into the already under-supplied rented sector and for longer.

As a result, significant potential exists for rental growth, particularly in Outer London and South East England.

The UK industrial sector is another potential near-term outperformer due to ongoing ecommerce-related structural change, which is generating continuing Well-established stores with strong occupier and investorfood demand. cOn balance, while we do anticipate some short-term falls inspace capitaloffering values, these should Flexible retail experiences remain restrained given expectations of a a subdued but not dismal economic outlook.

Assets with weaker retail prospects With UK gilt yields having plunged to new b lows, increasing the risk premium afforded to property, and equity markets particularly volatile, the bond-like qualities offered by commercial property continue to make the asset class appear very attractive on a long-term basis.

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

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Canadian Real Estate Forum / SPRING 2015

OTTAWA Anthony Broccolini Chief Operating Officer, Broccolini Construction

NEW PROJECTS DIRECTED TOWARD MIXED-USE AND LRT

With government occupying a large portion of office space in Ottawa, new activity is slow in that real estate market. On the residential front, which is sluggish, the city has seen a shift from condos to apartments over the last five years. What has really become prevalent in Ottawa’s urban centres are mixed-use developments.

“Interesting larger-scale projects have been planned,” says Anthony Broccolini, Chief Operating Officer, Broccolini Construction. “Lebreton Flats will be a big game changer for the Ottawa market, whenever and however it unfolds. Another one is 900 Albert, basically right across the street and happening before Lebreton, which will have some nice mixed use.”

His company recently completed a mixed-use apartment complex at 319 McRae Ave featuring offices, rental

apartments, and retailers on the ground floor. “There are a lot of challenges that come with that type of project,” Broccolini says, “certainly a far larger level of complexity than single use projects, but you definitely do attract a lot more people.”

Confederation, Ottawa’s upcoming LRT line, will likely spur new real estate activity. “Especially in our climate, being able to have transportation almost door to door is a great thing,” Broccolini says. Trinity Group’s proposed mixed-use towers at 900 Albert Street would be just steps from the Bayview station. Broccolini isn’t sure if other developers have really reacted to the LRT, yet, by taking advantage of stops. “Certainly from an investment perspective I think real estate is going to be sought after in locations at or in close proximity to those stops,” he says.

■ Michelle Morra-Carlisle

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URBAN INTENSIFICATION IS HERE TO STAY: OPPORTUNITIES ABOUND NEAR TRANSIT NODES When commute times increase, people start moving closer to where the work is,” says Cuthbert.

Peter Cuthbert Partner & Chief Operating Officer Fiera Properties Ltd. The fairly well-established trend of urban intensification is going to continue for years to come, says Peter Cuthbert, Partner and COO at Fiera Properties Ltd. “In cities where transit infrastructure has not been well developed, congestion and getting around is a problem.

“A second factor is that municipalities are terribly inept at setting aside reserve funds for infrastructure like sewers and roads.

When you allow intensification of land use, you create a new set of taxpayers who will use the infrastructure, and you then have more tax dollars to reinvest.”

A desire for a more eco-friendly lifestyle is another motivational factor. “People want to live closer to work, play where they live, don’t want a big car spewing into the environment and are quite happy to car share, especially the younger generation.”

Fiera Properties is currently involved with an Ottawa project located near a future light

trail transit stop in the Westboro neighbourhood. They also own a piece of property adjacent to the site.

“We’re looking at an office, retail and residential mixed-use project on an undeveloped site in an established neighbourhood, and we knew we would have very strong demand from occupiers,” says Cuthbert.

“It’s a great established neighbourhood, close to downtown, with access to parks, shops and services, in a pedestrian-scaled neighbourhood – it ticks all the boxes.”

While Cuthbert stays away from the downtown office building market, he sees opportunity in suburban office space.

“In these times you can get some good bargains. In a few years, all those millennials who are just starting their families now are going to start saying, ‘I’d like to move out of this but don’t want to commute – I’d like to work at a company with an office in the suburbs.’”

■ Barbara Balfour

OTTAWA’S INDUSTRIAL LANDS TOO FAR FROM THE HIGHWAY: MUNICIPAL REVIEW SUGGESTS FURTHER DEVELOPMENT “We still have localized manufacturing that accommodates needs from plumbing supplies to commercial bakeries - because people in Ottawa need hot dog buns too.”

Russell Mathew Partner Hemson Consulting Ltd. While Ottawa’s economy is focused more on office space, industries such as manufacturing and distribution play an important part in keeping the local economy going.

Striking a balance when looking at the long term needs of a community is what Russell Mathew, a Partner at Hemson Consulting Ltd., helps achieve through a municipal comprehensive review.

“What we’re doing is forecasting over a 20-year period how much 18

industrial-type land the city requires, whether there’s surplus or if they need some new designations,” says Mathew. “If you want to change the allowable use of industrial employment lands to another use, you can only do it at the time of a municipal comprehensive review, which occurs about every five years.

Because the value of land for industrial-type uses is much lower than for retail, commercial or residential purposes, land owners and developers often seek to change to other uses to increase their value.

“We don’t want to convert all our industrial areas into residential, as they don’t keep the economy going or create jobs for the community. We still have localized manufacturing that accommodates needs from plumbing supplies to commercial bakeries - because people in Ottawa need hot dog buns too.”

The conclusion of Mathew’s report was there is a surplus of industrial-designated land in the city, particularly in the vicinity of the airport in the Riverside south neighbourhood, as well as just across the river from the area.

“The land is quite far from the highway so it’s not that well-located for industries that are truck-based, distribution or manufactured based. Most of the demand for this is in the east end, because of access to Montreal, but you can’t add any land there because of the green belt.

“To address this, the city is looking at development around the rural interchanges in Vars and Rockdale, as well as highway-oriented land on highway 416 near Fallowfield and in the west end along 417 in Kanata.”

■ Barbara Balfour Canadian Real Estate Forum / FALL 2016

OTTAWA ECONOMY FILLED WITH GOOD NEWS STORIES the departments. It’s really a big positive change for Ottawa, where one in six jobs are in the federal public service.”

Pedro Antunes Executive Director and Deputy Chief Economist The Conference Board of Canada From Canada’s fast approaching 150th birthday to a growing IT services sector, there’s no shortage of good news stories for the Ottawa economy.

A forecasted growth in employment in the city, soaring from 0.5 per cent to 1.7 per cent in 2017 is in part due to the public sector’s recent move from restraint to adding and contributing, says Pedro Antunes, Executive Director & Deputy Chief Economist at the Conference Board of Canada “We saw departmental budgets cut in 2012 by 10 to 15 per cent and lot of that affected employment in the city. Over a period of three years, from 2012-2015, we saw a loss of 15,000 jobs in public administration,” he says.

“We’re really seeing this pick up and turn around. At the federal level, it’s not just departmental budgets that are increasing but also more hiring occurring within

The construction industry in Ottawa is thriving too, supported by major projects ranging from the light rail transit system to the renovation and renewal of the parliament buildings. Some of these projects are associated with Canada’s sesquicentennial celebrations.

“We’re still getting a handle on what that will mean for the area in terms of the overnight visits and the tourism industry, but we have

a sense the events around Canada’s 150th birthday could add significantly to GDP growth in 2017, perhaps as much as .4 percentage points on the economy.

“The special events being planned, combined with a weak dollar which is going to stay, and a strong US consumer, will power up the tourism sector.

“We also see Ottawa continuing to do well on the IT software and services side, who also benefit from a weaker dollar.”

■ Barbara Balfour

“We have a sense the events around Canada’s 150th birthday could add significantly to GDP growth in 2017, perhaps as much as 0.4 percentage points on the economy.”

Employment in Ottawa-Gatineau 000’s • Sources: Statistics Canada; The Conference Board of Canada.

740 730 720 710 700 690 680 670 660 650 640 08

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RECIPE FOR RENTAL GROWTH: GIVE TENANTS WHAT THEY WANT

Jamie McKenna Senior Vice President of Finance and Investments Minto Properties Inc.

“You’ve got to give the tenants what they want, because there’s a lot of competition out there.”

In a market with increasingly more options, today’s tenants are looking for rental product that reflects what they could have gotten in a condo or home but at a more affordable price.

When it comes to purpose-built rental, one of the biggest opportunities in the Ottawa market lies in the densification of the downtown core, says Jamie McKenna, Senior Vice President of Finance and Investments at Minto Properties Inc. “More central living, taller buildings, brand new rental products, and the ability to work and play in an urban environment – that’s where the opportunity for rental growth lies,” she says.

“But you’ve got to give the tenants what they want, because there’s a lot of competition out there. If your product is tired, you have to make that capital investment, whether it’s an extra $100 for better green features which is a huge demand from tenants – or better amenity and collaboration space for

millennials to get out of their suites, and be in the same room together with their laptops.”

Patience is also a virtue for players in the Ottawa market, which is never going to get the tight vacancy rates of larger centres such as Vancouver or Toronto. “The economy here chugs along but is never going to have that huge boom, that velocity in growth. It takes longer for the opportunity to come to the land that you own, and we need to be more conscious of this,” says McKenna.

Recent growth in high end retail and the light rail transit system have brought Ottawa into a new level of maturity, while the Liberal government’s cash injection in infrastructure investment across the country has also been a driver of growth in the city, she adds.

“We’re growing across the country, but Ottawa continues to be a key anchor market for us.”

■ Barbara Balfour

GROWING DOWNTOWN VACANCY RATES AN OPPORTUNITY FOR NEW INDUSTRY TO MOVE IN Significant changes to the Ottawa landscape could bring a level of sass and sizzle never seen before in this government town.

Shawn Hamilton Vice President and Managing Director, CBRE Limited

“Right now we have all the pieces of the puzzle to support a vibrant work, live, play ecosystem that attracts the new style urban worker who doesn’t want to commute.”

“For the longest time Ottawa has been steady with extremely low vacancy rates – sometimes the lowest in North America – and an unchanging market due to the moderating effect of the federal government,” says Shawn Hamilton, vice president and managing director at CBRE Limited.

“They were a consistent consumer of office space over and above our private sector and never changed their footprint. But right now, both sectors are employing new workplace strategies and using space differently, which has resulted in increased vacancy rates. Government occupies 50 per cent of all leased space in the downtown core and the private sector doesn’t seem to be growing.

“For the next few years, the market could continue to be soft. Who is going to fill that

22

space? What opportunities does that hold for the city and how do we capitalize on them?

We need to find a new industry to fill it back up – and right now we have all the pieces of the puzzle to support a vibrant work, live, play ecosystem that attracts the new style urban worker who doesn’t want to commute.”

With older vacant buildings that can be modified into funky living spaces at affordable prices, transportation infrastructure, five tertiary educational facilities in the city to churn out talent, and a success story like Shopify located in the downtown core, conditions are perfect for US tech companies looking to expand their presence in a talent-rich environment.

“All we need to do is get our message out to North America. Our dollar is cheap, our labour is cheap, our residential and commercial real estate is cheap. It’s the perfect ecosystem for a new urban tech industry to blossom,” says Hamilton.

■ Barbara Balfour Canadian Real Estate Forum / FALL 2016

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OTTAWA AN EXCITING SCENE FOR DEVELOPERS IN 2017

Miguel Tremblay Director of Planning and Development FOTENN Consultants Inc.

“These projects have the ability to transform entire communities and neighbourhoods.”

If you’re looking for a good-news story about Canadian real estate, Miguel Tremblay says to look no further than the nation’s capital. “If you’re in the development industry, in the planning industry, or if you’re a consulting engineer in Ottawa, what a great place to be in right now,” says the Director of Planning and Development for FOTENN Consultants Inc. After three very strong years of Ottawa real estate, 2016 brought a steady decrease in smaller applications. Easing this downward trend, however, is a significant increase in city-building projects such as Ottawa’s Lansdowne Park, the 18-acre sports, exhibition and entertainment facility developed on the old Lansdown Park fairgrounds by the same name.

A recent example of a city-building project is the proposed redevelopment of LeBreton Flats – derelict industrial land with formerly contaminated soil – into five distinct neighbourhoods centred around a major

24

events centre. “If LeBreton is successful and it comes downtown, it will change our downtown forever,” Tremblay says.

Another project that promises to alter the city core is Zibi, a project by Windmill Development Group and Dream Unlimited Corp. The plan is to build residential, commercial and retail properties, as well as extensive public space, on former Domtar lands. A further example is Rideau, a principal downtown street that the city is reconstructing to be transit friendly and to coincide with the recent expansion of the Rideau Centre shopping centre. “Not only do you have private sector investment into the Rideau centre,” Tremblay says, “but you have the city trying to match that by rebuilding an entire right-of-way to get transit to it and get people to it. That’s an important partnership in the development community.”

With so many large-scale projects underway, Tremblay expects there will be a lot of eyes on the city in 2017. “These projects have the ability to transform entire communities and neighbourhoods,” he says.

■ Michelle Morra-Carlisle

Canadian Real Estate Forum / SPRING 2016

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SERVICE: THE SECRET OF OCCUPANCY SUCCESS

Martin Vanderwouw President, KRP Properties With its vacancy rate at an achingly low eight percent, KRP Properties president Martin Vanderwouw wants to replicate his Midas touch beyond Kanata’s golden mile. He is eyeing expansion beyond his thriving Kanata powerbase and is scouting opportunities in the city core.

KRP has already thrived mightily by providing thriving Kanata tech

firms with the properties that keep their staff happy. With triple Canada’s average productivity per worker, tech firms have a make-or-break stake in sustaining their highly mobile employees’ morale.

The prosperity of those Kanata companies – overwhelmingly medium-sized firms with fewer than 50 workers – have generated so much economic spinoff for Ottawa that the city has decided to extend its new commuter train line there 20 years sooner planned.

“We know tech firms and we provide them superlative service,” Vanderwouw said.

“That’s our secret sauce. Our tenants notice.”

Keeping KRP’s geographic locus tight is another ingredient in its success formula.

“Co-location gives us economies of scale,” he explained, “not just from a staff standpoint but also in terms of service. Levering service across multiple properties in proximity works well. For example, it makes it easier – and therefore less expensive – to subcontract top-quality HVAC, electrical, mechanical and cleaning tasks.”

Despite KRP’s unequivocal success, Vanderwouw recognizes that his firm needs

to move farther afield, as the Kanata market matures.

“We know that we need to grow outside the Kanata area,” he acknowledged. “There are pockets of technology firms downtown, so we might look at some properties there.”

During the 18 months, KRP has digested a dream portfolio through two acquisitions: Bentall Colonnade’s Kanata properties as well as a 400,000 sq. ft. Ottawa-Gatineau all-or-nothing deal, which took KRP far beyond its familiar Silicon Valley North power base. Vanderwouw said that he will sell the bits that don’t fit KRP strategy, though he intends to keep a property near the airport.

Kanata nonetheless remains poised to grow for years to come, he reminded.

“The pending National Defence relocation will cast a huge ripple in the residential pond, and DND contractors will be looking for locations in the west end,” Vanderwouw predicted. “Moving more than 8,000 people here will be a first for the federal government.”

■ Robert Frank

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DOWNTOWN MARKET STEADY, READY

Nathan Smith Senior Vice President, Capital Markets Cushman Wakefield

Office space is back on the menu in Canada’s capital city.

After suffering through a significant shakeout during the past couple of years of austerity, Ottawa has welcomed much-needed stability’s return to

its office market, said Cushman Wakefield’s capital markets Senior Vice President, Nathan Smith.

“We’ve gone through a difficult period of federal government downsizing and are at last seeing steadiness come back to what had been a volatile city core office market,” he acknowledged.

With Ottawa’s (Kanata) technology office market percolating nicely at 13.4 per cent thanks to thriving tech tenants and the vacancy rate for downtown offices now at 8.6 per cent, the way is clear for potential growth, Smith anticipated.

“There is already significant momentum in the office market in Kanata and stability in the city core,” he reported. “With the growth in federal government spending announced by the new Liberal government, we are certainly anticipating a strengthening of the central business district market.”

Renewed demand has spurred several big, promising deals that Smith said augur well, including a large residential portfolio sold by Minto to CAPREIT.

1:45 PM

“It’s probably the biggest transaction so far this year,” he observed. “Other great deals include KRP’s acquisition of Dream Suburban Office portfolio, mostly in the Kanata north. Another is Morguard’s $67 million purchase of a 21-storey, 370-suite residential tower at 160 Chapel.”

Other deals during the past 12 months that Smith cited include Mohawk Medical’s purchase of Carling Medical Centre in early 2016 as well as the Kanata Medical Centre that it bought late last year. He estimated the combined value of the two deals at about $25 million.

Smith also flagged new capacity about that will come onto the market imminently.

“Controlex, which owns the Ottawa Train Yards will be completing its second office tower at Train Yards during the first quarter of 2017,” he predicted. “It’s nearing the capping off phase; they’ve already started to install curtain wall on the lower floors. That will add 160,000 sq. ft. of rentable office space to the 250,000 sq. ft. property that they recently built and leased to the feds.”

■ Robert Frank

www.realestateforums.com

27

RETAIL RESPONDS AS RESIDENTIAL, OFFICE DEMAND BECKONS

Richard Getz Vice President Retail Colonnade Bridgeport You can spare the despair over retail vacancy, reassured Richard Getz. Colonnade Bridgeport’s Vice President Retail sees opportunity when there are vacant 100,000+ sq. ft. outlets on the Ottawa landscape. “Historically we have seen cycles like this and retail Landlord’s always creatively respond”, he said.

It’s not as though there’s a lineup of retailers queuing to fill the void left by Target and other retailers who are retrenching in response to increased competition and in part to online shopping, he conceded. Rather, Getz contended, those challenges offer owners opportunities to unlock the overlooked potential of their prime 28

locations and benefit from serving other markets.

across the street from the transitway and the future light rail station.

“Growth in the shopping centre industry is going to be through transformation, it is happening now,” Getz advised. “It’s an occasion to take stock of the existing inventory of medium-to-large-format retail assets.”

“They’re almost all rented, as is the office and Farm Boy is booming,” he smiled. The next phase on adjacent land is already being worked on.

Renew, repurpose, redevelop “The days of buying 10-30 acres in suburban setting and building a power centre, are few and far between,” Getz declared. “Retailers are reformatting. Today, Walmart and other traditionally large format users are looking very hard at adding 30,000-60,000 sq. ft. spaces in urban areas where they can become urban retailers. The key players have embraced those challenges and are moving forward with redevelopment, renovation and revised use.”

With about a third of Ottawa condos on the rental market and few apartment towers going up, Getz advocates scoping out opportunities to transform empty big box stores so as to soak up strong rental demand.

He cited newly merged Bridgeport’s own experience. It received more than 400 applications to fill 143 apartment units that it added in Westboro, together with an office tower, Farm Boy, Day Care and other shops

Getz complimented the successful Rideau Centre’s win-win renovation and enlargement, which has spurred adjacent development that has attracted more retail clients to the urban core. He also acknowledged Lansdowne Park for its redesign to a people place that caters primarily to a younger demographic from a perennial eyesore on the urban Ottawa landscape.

“Football games are sold out; they’re exciting as hell to attend!” he said. “It’s heading in the right direction and will continue to grow as its office and retail components move toward being fully rented.

Conversion of tired assets to other more profitable uses is where it is at and RioCan is leading the charge with its capital investment in existing retail assets in Ottawa to mixed use including residential. Look for many of the major players to follow suit.”

■ Robert Frank Canadian Real Estate Forum / SPRING 2016

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GLOBAL ENTREPRENEUR IS OTTAWA’S #1 FAN: NATIONAL CAPITAL IS ALREADY RECLAIMING ITS TECH HEYDAY

Sir Terry Matthews Founder and Chairman Mitel, Wesley Clover

Welsh-Canadian entrepreneur Sir Terry Matthews could live and do business anywhere on the planet.

Yet for the past 45 years, he has chosen Ottawa, where he has not only raised a family but also founded or funded more than 100 companies in the high tech field.

“Ottawa has been home to me for more than 45 years now. I have built my businesses here, and raised my family here. I travel all over the world, and could live and work wherever I want. I want to keep doing so right here in Ottawa,” says the founder and chairman of Mitel and the investment management firm, Wesley Clover.

Though he has weathered his fair share of ups and downs in the tech industry, Matthews believes Ottawa is once again returning to its position as a formidable tech centre.

Over the next 15 years, City of Ottawa data projects a growth in population of 16 per cent and a corresponding increase in jobs of 14 per cent. Home to the most educated workforce in Canada, Ottawa boasts the second largest concentration of scientists and engineers in North America, second only to Silicon Valley.

The last time that private sector employment outstripped public sector employment in Ottawa was 1999, and Matthews believes the city will see this happen again.

30

OTTAWA

“Ottawa has been home to me for more than 45 years now. I have built my businesses here, and raised my family here. I travel all over the world, and could live and work wherever I want. I want to keep doing so right here in Ottawa.”

The tech industry is already back in Ottawa in a big way, but more diversified and sustainable this time around.

At its peak, Nortel employed 60,000 people (by comparison today, Google employs 51,000). Those individuals have since resurfaced in the region, with 1,700 technology companies already employing more than 68,000 people in industries ranging from aerospace and defense to clean technologies, digital media, life sciences, and software.

They range from start-ups to larger players entering the region for the first time like Apple and Amazon, all of which bring along innovation, employment and growth, and

suggest confidence in the technical talent supply and supporting ecosystem.

In the past five years alone, Ottawa technology companies have raised more money on the public markets than all other Canadian cities combined. The city is home to the biggest technology park in the country and accounts for well over $7 billion in gross domestic product.

Matthews believes the next five years will bring another technical revolution in massively increased broadband networks, which will surely spawn another wave of spin-off innovation and growth to Ottawa.

■ Barbara Balfour Canadian Real Estate Forum / SPRING 2016

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Canadian Real Estate Forum / SPRING 2015

CALGARY Arthur Lloyd Executive Vice President, Office – North America, Ivanhoé Cambridge

YOU’RE IN THE RIGHT PLACE

Welcome to the Calgary Real Estate Forum. Calgary has historically been a cyclical market, driven by oil and gas prices. All of us in nearly every business sector have been hit hard by energy prices and by the oil and gas industry’s challenges in getting its resources to market. Yet while that reality persists, entrepreneurs in this city have seen downturns before and are known to be particularly resilient. “However challenging the immediate term might seem, I have no doubt that the long term affords significant opportunity.”

If the oil patch is experiencing a downturn, that is not necessarily the case in real estate. Some assets are more directly impacted by economic volatilities than others.

“Looking ahead to 2017, property classes that should outperform in the near term are those that have not seen www.realestateforums.com

excess supply delivered, and whose performance is more correlated with population growth than on the price of oil.”

Specifically, the coming year likely holds bright prospects in the areas of industrial, apartments and mixed-use properties for savvy investors.

“My hope is that participants of this forum will take away a deeper understanding of our current economic environment.” As you will learn from our many inspiring, expert panelists, Calgary is a vibrant city with an entrepreneurial spirit. Though times might be challenged today, don’t count this city out for long.

Arthur Lloyd, Executive Vice President, Office – North America, Ivanhoé Cambridge ■ Michelle Morra-Carlisle 35

THE SILVER LINING OF AN ECONOMIC DOWNTURN: MORE DIVERSIFICATION, JOBS IN OTHER SECTORS “The strengths of other sectors like hospitality, education, health, and sciences and technology is increasing in multiples.

There are tremendous opportunities to build on those markets and to create new jobs that will occupy those spaces.”

However, the economic uncertainty has led to significant growth in the multi-family rental residential asset class in Alberta, says Ferguson.

“The market here has been traditionally underserviced because there was always a propensity to buy – now there is more propensity to rent.

“We’ve also noticed how much younger these cities are becoming. The average age in Calgary is 34. We’ve got a sizable millennial workforce moving into the cities and this is a cohort that “This economic downturn is a wants independence, golden opportunity to come mobility, and prefers renting quality housing.

Randy Ferguson Chief Operating Officer Strategic Group Every time there is an economic downturn, minds turn to diversification, says Randy Ferguson, Chief Operating Officer at Strategic Group.

“We live in an economy where 31 per cent of our GDP is driven by one sector. But what that really means is 69 per cent is not driven by one industry,” he says.

A downturn in the energy sector caused by the sinking price of oil and gas has led to together with business and an increase of government to create new jobs “What I think we need available spaces on to do this time is to the market, says – there’s nothing in our way take advantage of the Ferguson. It has except ourselves.” ready and growing, significantly eliminated young, educated the uptake of tower workforce. We have all the raw material space in Calgary – specifically, double A available to diversify our economy. This and triple A towers with 30,000 to 40,000 economic downturn is a golden opportunity square foot floor plates, largely configured to come together with business and on an open floor basis that has proven government to create new jobs – there’s difficult to subdivide for multiple tenants. nothing in our way except ourselves.”

■ Barbara Balfour

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LENDERS’ PERSPECTIVES ON ALBERTA: OFFICE MARKETS’ PAIN SHARED BY OTHER ASSET CLASSES

Doug Milne Managing Partner, Canada ICI As retail markets in Alberta continue to outperform the rest of the country in occupancy and vacancy rates, lenders’ views on that asset class have remained mostly unchanged.

Small bay industrial buildings have sustained strong occupancy and continue to be a favorite amongst lenders. Newer multi-family rental product has also maintained momentum in the face of more competition and stagnant rents. www.realestateforums.com

But when it comes to Calgary office space, it’s an entirely different landscape, says Doug Milne, managing partner at Canada ICI.

subordinated debt in the capital stack to replace the financing or tackle capital improvements.

“Double A buildings are not subject to the same cash flow pressures because the well capitalized institutions that own them don’t have a lot of debt to begin with and the assets still show strong cash flow in place based on longer lease commitments, irrespective of the actual occupancy. But the B-class landlords are seeing a dramatic shift in net operating income; rents have come down from the low 20s to low teens,” says Milne.

“It’s definitely been a challenge to find lenders willing to communicate what it will take for a loan approval. But in the last 18 months, we’ve done over half a billion dollars of office financing in Alberta so it is happening. It’s challenging but it’s possible.”

“Vacancy rates can vary from eight to 48 per cent. Existing lenders who have rolling debt are working with borrowers to determine ways to bridge them through these gaps. The challenge in this market is that securitized debt has no option to renew their mortgages.

“We’re dealing with a number of these cases with the servicing agencies, asking for shorter term extensions, and adding

What the office market does is shine a light on exposure to Alberta loans – and lenders lump their commitments to financing regionally, says Milne. “They might look at the construction of a retail power centre in south Calgary in terms of risk capital and say, ‘We have to pass on that deal because we’re nervous about the exposure to other asset classes.’

“So the office markets’ pain can be other asset classes’ pain, too.”

■ Barbara Balfour 37

SUBURBS CONTINUE TO SPARKLE

Randy Remington Chairman Remington Development “A lot of people from outside Calgary think that everything has tanked here,” observed Randy Remington. “If fact, that’s not the case. There are lots of thriving businesses that are making serious money.”

While the Remington Development chairman admitted that oil-and-gas dominated downtown office properties have been

WORST IS OVER FOR OIL

Pierre Cléroux Chief Economist, BDC

Firmer oil prices ought to help Alberta to turn the corner next year, forecast Pierre Cléroux.

“We’re definitely moving closer to seeing a stable oil market,” BDC’s Chief Economist predicted. “We expect to see oil prices lift a bit, which will help to attract more investment that will bolster the economy.”

Cléroux nonetheless cautioned against exuberance.

38

“If you look at the city core, there’s a flight to quality every time that we go through one of these recessions. hammered by the latest downturn, he suggested that the story is quite different in the suburbs.

“If you look at the city core, there’s a flight to quality every time that we go through one of these recessions. On two occasions in my four-decade real estate career, I’ve leased out warehouses that fetched more money than Class A office space. Older buildings were the first to empty and have had to offer drastic rent reductions to keep and attract tenants,” he reported. “There’s a big sublease market downtown as well.”

In contrast, opportunity beckons on the periphery, where Remington is currently casting his entrepreneurial eye.

“It’s not all gloom and doom,” he emphasized. “We don’t have the sky-high interest rates like we did during the big recession of the 1980s. We’re still doing deals today with five-year money in the high twos. In addition, the downturn has freed-up

“Although we anticipate some growth in 2017, it will take time to gain sufficient traction to turn it into a full recovery,” he said, underscoring that not all the news is bad, Alberta has diversified since its last downturn.

“The coming recovery ought to help improve the situation,” he reassured. “Calgary should expect to see more jobs created next year, but a return to previous employment levels will take some time.”

The province’s lumber industry remains buoyed by strong demand from a rebounding United States economy.

Likewise, tourism has also proved a strong performer, mainly thanks to a greater influx of American visitors attracted by a bargain basement Canadian dollar.

“Agriculture has also been doing quite well,” Cléroux added, “but all these sectors remain dwarfed by oil and gas.”

a huge pool of top-notch talent that wants to remain in Calgary.”

Remington asserted that entrepreneurial real estate firms which are well-versed, well-run and have the resolve to spot opportunities, will continue to thrive.

“We see this as a transitional time,” he declared. “We’re looking to buy land and aim to seize some unique opportunities.”

Remington already shrugged off a previous economic shock in 2008. Its determination to persevere with its Quarry Park project has paid off handsomely. The firm is now halfway through successfully transforming a former gravel pit into a thriving live, work, play development.

“We’re still active, we’re still doing deals and engaging in transactions – though not with the oil-and-gas sector – which is how it should be,” he concluded.

■ Robert Frank

Even energy has its bright lights, though, on the oil production side, he observed.

“We’re pumping as much oil as before,” Cléroux reported, “but we’re seeing much less investment because crude is fetching a much lower price. That hits infrastructure development hard. The ripple effect in turn hammers the construction, housing, manufacturing and service sectors, placing a considerable drag on the overall economy.”

The slowdown has also stanched the flow of migrants to Calgary, compared to the previous five years, softening the residential real estate market here.

“The coming recovery ought to help improve the situation,” he reassured. “Calgary should expect to see more jobs created next year, but a return to previous employment levels will take some time.”

Alberta’s economy will also get a boost from the massive reconstruction work currently underway to rebuild Fort McMurray after a devastating, two-month inferno razed much of the city.

■ Robert Frank Canadian Real Estate Forum / SPRING 2016

info@chicagotitle.ca www.chicagotitle.ca 1.888.868.4853

INTEGRITY KEY TO CANDEREL-TSUUT’INA PROJECT

Jonathan Wener Chairman and CEO, Canderel

It’s the kind of confidence that you can reliably bank on.

With some $10 billion worth of completed projects under his belt, Canderel’s Chairman and CEO has not merely prospered handsomely from his upbeat, long-term approach to business: His win-win, relationship-driven philosophy has also enriched scores of partners along the way and earned the steadfast loyalty of clients, tenants and employees alike.

Wener leads a tight core staff of a dozen-and-a-half well-heeled and highly respected real estate executives who have been with him for more than 25 years. To ensure continuity, he also insists on including younger real executives in planning his projects.

“We engage both senior and middle management to ensure that everyone learns along the way,” he said.

Tsuut’ina First Nation is the latest partner to trust in Wener’s magic touch. On July 11, it announced together with Canderel a nine-figure, three phase development adjacent to the soon-to-be-completed ring road in the city’s southwest.

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In the deal, Tsuut’ina will contribute its land and Canderel will invest equity in predevelopment to land development, to build the requisite infrastructure for the project.

Currie Barracks

Glamorgan Community Mt Royal University

GLENMORE TRAIL

A hub for cultural and entertainment uses

Canderel capitalized on Wener’s longstanding reputation as a canny, reliable ally to cultivate the close ties with Tsuut’ina which made possible its latest giga-project; by most accounts the largest such First Nation partnership in Canadian history.

“Good relationships like these are very important to nurture,” Wener underscored. “Trust takes time to earn. Once you achieve a reputation for reliability, you gain huge savings in time and energy that permits you to turn your attention to the market and channel those resources there, to the benefit of all.”

Westhills Shopping Centre

Lakeview Community

Elbow Valley

66 AVENUE SW

High visibility commercial

Rd

Weaselhead Park

lhead

Uses that protect and promote the natural features and view corridors

Wease

Major urban entertainment centre and hospitality uses

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Innovation and research park with a focus on institutional and private sector collaboration

AVE

Glenmore Reservoir NU ES W

Oakridge Community

Health & wellness zone

City proposed Primary Transit Hub

Bullhead

City proposed BRT

Established Neighborhoods Development areas

Rd

SOUTHLAND DRIVE SW

Cedarbrae Community

An administrative hub with existing and planned community assets

ANDERSON ROAD SW

Agency Rd

Calgary sparked Jonathan Wener’s ardor for commercial real estate at the very outset of his career. Tempered today by more than four decades of experience, his passion for the city burns as brightly as before, as does his confidence in its future.

Signal Hill Shopping Center

Sienna Hills Community

Signature Destinations

Existing destinations

Entertainment, Retail and Tourism Precinct High Visibility Commercial Precinct

Woodbine Community

Regional retail and commercial centre Hospitality and tourism uses that take advantage of natural heritage and view corridors

130 AVENUE SW

Cultural and Entertainment Precinct

Fish Creek Park

Innovation and Wellness Precinct

Evergreen Community

Administration and Commercial Precinct Urbanized retail street

Providence ASP

Multiuse recreational trail system

Proposed trail

“We will also get involved in various vertical developments,” Wener added. “The idea is to execute this as quickly as reasonably possible, with a completion horizon up to 15-years. Our 99-year lease ought to be more than adequate to fulfil our plan.”

“Good relationships like these are very important to nurture.

Trust takes time to earn.”

“Why do we want to add office assets in the Calgary market?” he asked rhetorically. “The highway will be complete in four years.

We’re hopeful that the economy will have recovered by then, even if not fully.”

“In the meantime, many retailers have expressed significant interest,” Wener added. “We will also end up with many more high technology and food technology tenants. Calgary is becoming quite a base for food. We’re finding that Calgary’s economy has become much more diversified than it was a decade or so ago.”

He acknowledged that the energy sector will continue to loom large in Calgary’s economy indefinitely.

DEVELOPMENTS @ TSUUT'INA Conceptual Plan

0

0.5

1

2km

“No question, there’s a fair bit of stress in the market,” Wener admitted. “Downtown vacancies have dipped to 1990s levels in the 20 percent range. The core office market will come back, albeit slowly, barring a quick recovery. Oil is expected to rebound to about $55/bbl. in 2017, which will give a light lift to the Alberta and Canadian economies.

It will take time.”

How do you build a real estate empire like Canderel, which started in a Montreal coffee shop basement 40 years ago and today manages nearly 21 million sq. ft. of property? Wener’s recipe for success boils down to three simple secrets which he agreed to share.

“You have to like the people whom you’re doing business with, you have to have fun and you have to make money,” he suggested. “If one and two aren’t there, you rarely get three.”

“You can’t achieve that without a solid team,” Wener advised. “Stay humble, learn everything you can and work like a dog. The business skills that you will develop are broad-ranging and applicable to many other business sectors.”

■ Robert Frank Canadian Real Estate Forum / SPRING 2016

RETAIL ‘SOFT’ BUT RESILIENT

Darryl Schmidt Vice President, National Leasing The Cadillac Fairview Corporation Ltd.

“It’s still a very strong, buoyant market. It’s just not frothy like we were used to for so long.”

As Calgary continues to experience low oil prices and resulting unemployment, retail sales have softened for the first time in years. That said, the current level of activity is far from disastrous.

“Alberta’s economy was flying high for a long time,” says Darryl Schmidt, Vice President of National Leasing for Cadillac Fairview. “If you look at our relative sales performance of key assets versus other markets, it’s still a very strong, buoyant market. It’s just not frothy like we were used to for so long.”

The price of oil is not the only factor affecting retail. Online shopping continues to change the landscape. Calgary shopping centres have had to lower rental rates due to a lack of demand for spaces that are 4,000 sq. ft. or larger. Meanwhile, a strong US dollar means American retailers are staying in their country for a better return-on-investment while European retailers – such as British fashion brand Ted

Baker, which opened three stores in Canada this year – are finding Canada more accessible than the US. With more real estate inventory available than before the oil slump, some retailers are moving to better sites. “There’s a flight to quality,” Schmidt says. “We’re seeing retailers relocate from B shopping centres to A shopping centres, or repositioning within the centres.”

Cadillac Fairview has new projects in the pipeline and recently announced that luxury retailer Saks Fifth Avenue will open a store at Chinook Centre in 2018. The developer has been proactive in re-leasing Target boxes to other big retailers, such as Sporting Life and HomeSense. Asked what’s in the immediate future for Calgary retail, Schmidt says he expects further softening but adds that many retailers will wait to see “what the US elections are going to hold, what that does to interest rates, and what that does to the US economy.”

■ Michelle Morra-Carlisle

SHORT-TERM DECREASE IN VALUE A LONG TERM OPPORTUNITY FOR INVESTORS

Philip Fraser President and CEO Killam Apartment REIT

“There are lots of indicators that people are still losing their jobs downtown and tenants are starting to double up and take on roommates.”

As an investor, Philip Fraser perceives the Calgary market as rife with opportunity, albeit juxtaposed with erosion in rental rates and increased vacancies in multi-family units.

“It’s a constant environment of change,” says the president and CEO of Killam Apartment REIT. “Just look at where pricing was 18 months ago, 24 months ago, and where pricing might be heading in the next six to 12 months before it does bottom out and there’s renewed interest from many buyers. The real key is what current owners are willing to sell for, especially among the ones who need to sell.”

Of the 45,000 rental units in Calgary, the majority are held by individual private or small owners – Boardwalk is the largest at more than 5,000 units, says Fraser.

“From talking to brokers and to other owners potentially looking to sell, it seems many landlords are giving incentives or reducing rates to maintain their existing tenant base.

There are lots of indicators that people are still losing their jobs downtown and tenants

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are starting to double up and take on roommates – we see that with the assets we own,” he says.

How soon it will turn around depends on oil pricing and when the industry starts rehiring again, says Fraser.

“Meanwhile, people have leveraged up – whether it’s merchant builders or owners who have purchased several buildings, they are seeing the erosion of that value to a certain extent and want to get off their position.

“Their cash flow is coming down because rental rates have plummeted and more people are having trouble paying the rent. But because the interest rates are so low right now, that’s not the stress factor - it’s more about the perceived loss of equity or value.”

Conversely, all their markets in Ontario and Atlantic Canada remain strong and stable, says Fraser, particularly in Nova Scotia and PEI. ■ Barbara Balfour Canadian Real Estate Forum / SPRING 2016

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POTENTIAL TO ACQUIRE: THE UPSIDE OF MARKET DISTRESS

Stephen Taylor Vice President, Real Estate Healthcare of Ontario Pension Plan (HOOPP)

Stephen Taylor says he has seen forecasts anticipating that vacancy rates in the Calgary office market will rise between 25 and 28 per cent, a very negative

SURVIVING THE SLUMP IN CALGARY

Rosanne Hill Blaisdell Managing Director & Vice President, Leasing Harvard Developments Inc.

“For pension plans whose objective is to actually make new investments in real estate, Calgary may offer some interesting long term opportunities if you can see through the short term or medium term pain.” situation for landlords. “We are seeing a combination of continued delivery of major amounts of supply at exactly the same time that many tenants are contracting their businesses, laying off staff and, frankly, looking to reduce their office space usage,” says the Vice President of Real Estate for the Healthcare of Ontario Pension Plan (HOOPP).

He explains that a number of owners are looking to reduce their holdings in Alberta because, particularly on the publicly traded side, some are being penalized because of their Alberta exposure. This “double whammy of distress,” as he calls it, is the bad news, but there is a more positive view: “For pension plans whose objective is to actually make new investments in real estate, Calgary may offer some interesting long term opportunities if you can see through the short term or medium term pain that’s there as a result of this dislocation of

It’s a trying time for Calgary real estate investors. According to Rosanne Hill Blaisdell, Managing Director and Vice President of Leasing for Harvard Developments Inc., office assets are distressed and, on the retail side, tenants are asking to renegotiate their rents. The company is working with them but, meanwhile, Hill Blaisdell expects “another year of very tough times.”

She expects to start seeing opportunities in six to eight months, however, and is on the lookout now. But because the Calgary office market is dominated by institutional owners, apart from B and even C type products that some REITs are considering selling, she hasn’t seen any value buys in that market.

“I like neglected retail – the type that perhaps needs some work, as long as it’s well located,” she says. “Our focus has tended to be taking on assets that perhaps are a little more difficult, a little more cumbersome for institutions.” Harvard is also looking at a couple of multi-res mixed use

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the leasing market,” Taylor says. “That’s certainly the perspective of HOOPP. While we see this as bad news, we see it as an opportunity to potentially acquire some excellent long term investment properties.”

It’s important to remember that the majority of Calgary office space is owned by long term holders that have the staying power to persist through the current downturn in the market. To limit the pain in the meantime, Taylor says, “It’s all about doing the best you can to retain your existing tenant base.”

He also has advice for investors that have a loan on a building but, because lenders now anticipate higher risk, are having trouble getting the loan renewed: “You have to be prepared to inject new equity in the building to effectively pay down the loan and keep your current financing in place.”

■ Michelle Morra-Carlisle

projects, an asset class Hill Blaisdell says tends to be financeable and stable even when depressed.

“I like neglected retail – the type that perhaps needs some work, as long as it’s well located.”

As a smaller organization, Harvard has a hands-on approach. “We recognize that turnaround isn’t just about a little paint and lipstick, it’s more than that and sometimes it takes a bit longer,” Hill Blaisdell says. “And because we’re not a merchant developer, we have the kind of time horizon that allows us to take a longer-term vision on some of these assets and work through them.”

The key to surviving the current downturn, she says, is to “work with our tenants, lock in our financing, take advantage of the low rates, and make sure we’ve got lots of cushion on the debt coverage so we’ve got margin to work with.”

■ Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2016

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OFFICE TENANTS MOVE UPMARKET

9.5 million square feet of empty space.

That’s today. Expect the woe to worsen, he warned, when three new office developments that are currently underway soon hit the market.

“Even with renewed growth in the energy sector, the oversupply of office space downtown will persist and take years to be re-occupied,” Fennessey forecast.

Randy Fennessey President Colliers International

Second and third tier office properties face serious challenges during the next 18 -24 months, cautioned Randy Fennessey, President of Colliers International’s Calgary brokerage business.

The energy squeeze has left the Calgary urban core with an eye-watering 22.64 percent vacancy rate, with approximately

That’s good news for tenants, who are enjoying very favourable market conditions, as property owners and sublessors compete for their customers at well below pro-forma rental rates.

“We anticipate that tenants will continue to take advantage of opportunities to move upmarket in building quality with little increase in rent or, in some cases, reduced rent,” he projected. That, he said, would have a positive impact on future absorption in the AA and A class downtown office submarkets.

As they decamp, though, the void left in their wake will trigger a domino effect that will see lesser quality office properties in the B and C subclasses struggling during the next two years.

“Lower-priced sublease options in better quality buildings are seeing the highest level of leasing activity and we expect this trend to continue for at least the next couple of years”

“Lower-priced sublease options in better quality buildings are seeing the highest level of leasing activity and we expect this trend to continue for at least the next couple of years,” Fennessey said.

Like most major players, he is cautiously optimistic for a return to better times.

“The timing of a broader recovery in the downtown office market is very much dependent on a recovery in the energy sector,” he affirmed. “While the prospects of improving fundamentals seem remote today, we believe that the energy sector’s cyclical nature will continue, with renewed growth in the years ahead, perhaps faster than many of us anticipate.”

■ Robert Frank

ENTREPRENEURIAL ALBERTA WEATHERS THE STORM Rather than wait around for a return of high commodity prices, laid-off oil and gas executives are starting new businesses in other sectors and gradually changing the office landscape in Calgary.

Greg Guatto President and CEO Aspen Properties The downtown Calgary office market is experiencing a lack of leasing activity. In fact, today’s market is at the most challenging that Greg Guatto, President and CEO of Aspen Properties, has seen it in his career. “It has the highest vacancy I can remember, and this has been the longest period of time to be in such a down cycle that I’ve experienced in my 26 years in this market,” he says.

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Yet while recovery seems out of immediate reach, one saving grace is that this particular downturn coincides with low interest rates. The stress level isn’t the same as it was in the past. Furthermore, real estate owners have become savvy from past downturns. “Owners are still well-heeled, buildings are still being conservatively financed, and real estate owners like Aspen Properties can withstand a tough market,” Guatto says.

Their strategy includes searching for new tenants, and new types of tenants unrelated to oil and gas. “It’s all hands on deck,” Guatto says. “Make sure your existing tenants are being serviced at the highest possible level at the lowest possible cost to them, knowing that some of them may be

having financial difficulty. It just means work harder, work smarter, and leverage the business relationships as best you can.”

Guatto is a strong believer in Alberta’s entrepreneurial spirit, which he says has not gone away. Rather than wait around for a return of high commodity prices, laid-off oil and gas executives are starting new businesses in other sectors and gradually changing the office landscape. Guatto hopes this diversification will continue. “If all of the white collar jobs that have been lost turn into new startup and growth companies that will help create jobs and bring growth to our economy, that is a great thing to happen,” he says.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / SPRING 2016

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“Retail and industrial have remained liquid and are transacting, albeit on modestly lower volumes” reported Bentall Kennedy’s Chief Investment Officer, “though office is clearly challenged, and much more difficult to transact upon.”

APPETITE FOR HIGH QUALITY CANADIAN REAL ESTATE ASSETS CONTINUES UNABATED

“Retail and industrial have remained liquid and are transacting, albeit on modestly lower volumes” reported Bentall Kennedy’s Chief Investment Officer, “though office is clearly challenged, and much more difficult to transact upon.”

Its geographic position, transportation infrastructure and availability of quality land sites have cemented Calgary’s strategic position as a logistics hub. This has permitted the industrial sector to remain relatively solid, Zemla observed.

“Calgary’s industrial base is largely logistics driven, and products continue to flow through the distribution chain,” he said.

Paul Zemla Chief Investment Officer Bentall Kennedy

Bentall Kennedy’s own experience delivering high-quality developments into a softening multiple-unit residential market has also challenged conventional wisdom.

No one quarrels that commercial real estate in Alberta is currently facing a crunch. With nearly a quarter of the office space in Calgary’s city core vacant, the office market has faced the brunt of the impact from the energy downturn – distress that will likely persist for some time. The good news, said Paul Zemla, is that to date the other real estate market segments have remained relatively stable.

“Driven by several rounds of layoffs in this energy dependent market, Alberta’s multi-family sector has exhibited the increased vacancies one might expect,” he said. “An interesting counterpoint is the two new buildings – a couple of hundred units each – that we just delivered to the Beltline market in Calgary. We’re leasing very quickly - well ahead of expectations - and in line with proforma rents, which for some will seem counterintuitive and clearly doesn’t mirror what is happening in the market more broadly.”

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“Why is that happening?” he mused. “Our view is that well designed product, well executed, will typically outperform existing stock in this sector”.

Meantime, the central business district office market has been abuzz of late with unconfirmed reports of a couple of large, pending transactions, one of which is rumoured to include some assets in Toronto’s central business district.

“Were these transactions to materialize, it will help provide clarity on the relative pricing and liquidity of this market,” Zemla concluded. “There remains considerable capital poised to move into Calgary, once price discovery becomes apparent.”

■ Robert Frank Canadian Real Estate Forum / SPRING 2016

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Canadian Real Estate Forum / FALL 2016

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FALL 2016 / ISSUE 72

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MANAGING RISK IN LEASING TO PUBLIC SERVICES AND PROCUREMENT CANADA

By Michael Brooks Chief Executive Officer REALPAC

On April 4th, 2016, Public Services and Procurement Canada (PSPC), formerly Public Works and Government Services Canada (PWGSC), updated its Ineligibility and Suspension Policy (the “Policy” or the “Integrity Regime”) applicable to leases with the Government of Canada (Canada). The updated Policy and applicable supplementary resources can be found on the Integrity Regime website: tpsgc-pwgsc.gc.ca.

Owners seeking PSPC as a tenant for their building, or renewing a lease with PSPC, will have to make sure that they, and any of their subcontractors, comply with Canada’s Integrity Regime. These rules reflect the policy of the Canadian federal government to only deal with ethical suppliers in Canada and abroad. The Integrity Provisions don’t have the force of law but are implemented by contract.

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In the case of a lease, Canada will require the inclusion in offers to lease and leases, at any point where a lease contract needs to be entered into or renewed, of a set of clauses giving them a right of termination for any breach of the Integrity Provisions prior to entering into the lease, or any breach of the Integrity Provisions during the lease term.

While that is not a remedy that PSPC is likely to exercise lightly, if not managed properly, it nevertheless can have a chilling potential

effect on investment, the ability to attract co-owners, and the ability to secure financing for any property where PSPC is a substantial tenant.

A supplier is required to remain compliant with the Policy throughout the life of the contract/agreement, and if they do not and are determined to be ineligible or suspended, Canada has a right of termination for default pursuant to Section 13 (e) of the Policy – which also sets out the process that Canada would follow in such an instance.

The latest set of lease clauses are more streamlined than before and incorporate the Policy by reference rather than replicating the Policy within specific clauses. The Integrity Provisions for real property agreements are now available online and can be found at: tpsgc-pwgsc.gc.ca/biens-property/dri-ip-eng.

Since the Integrity Provisions also apply to subcontractors, a certificate from the subcontractors (if different from the asset manager or property manager) should also be obtained. This could include a general contractor doing leasehold improvements for the owner, security and janitorial, HVAC and elevator repair, fire and life safety, and any other major subcontractor working for an owner directly.

Canadian Real Estate Forum / SPRING 2016

Owners interested in bidding on the right to secure a PSPC contract, or negotiating a lease with PSPC, will need to make sure that it, and any of its directors, officers, affiliates and subcontractors, have not been convicted of a listed offense within the time periods set out in the Policy. As at October 1st, 2016, there were only two names on the Policy list. That list does not include names of individuals due to privacy considerations. To verify the status of an individual, one must follow the process as set out in section 16 (b)(i) of the Policy. The corporate list, however, may not be exhaustive, particularly if the owner has foreign affiliates and if there may be a similar conviction in a foreign country which would make that owner ineligible. If in doubt, owners can make inquiries with PSPC.

For owners operating through a property or fund manager, the owner will have to make sure that its property or fund manager is in compliance with the Integrity Provisions at the time that the bid or negotiations for the Canada lease is underway. A check of the PSPC website should be undertaken. Also, a simple officer’s certificate, certifying compliance with the current Integrity Provisions, and representing that no claim is underway which could result in a conviction contrary to the Integrity Provisions, would be a useful tool for an owner to request of its asset or property manager around the time it is seeking to enter into a Canada lease.

Section 4.b.vii. of the Policy excludes “contracts and real property agreements that are ancillary or incidental to a main contract or real property agreement”, and would include agreements such as non-disturbance agreements or estoppel certificates.

During the term of the lease, task authorizations and subcontracts for less than $10,000 do not require further compliance with the Integrity Provisions. However, other

INCLUSIONARY ZONING: POLICYMAKERS NEED NOT REINVENT THE AFFORDABLE HOUSING WHEEL

By Brooks Barnett Manager, Government Relations & Policy REALPAC

For an industry already under considerable regulatory and policy burdens, Ontario’s proposed inclusionary zoning concept could prove to be problematic for residential and commercial developers in the province.

Industry advocates, including REALPAC, are carefully monitoring the Government of Ontario’s suggested amendment to the Province’s Long-Term Affordable Housing Strategy, which would allow municipalities to implement inclusionary zoning.

Inclusionary zoning is meant to leverage private sector involvement in affordable housing provisions. It reserves a percentage of affordable housing units in new residential developments that require rezoning, and in exchange, increased density is frequently required to offset the cost. The goal is to minimize public expense by providing density bonuses, and sometimes other municipal incentives to encourage the

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new contracts, even during that Canada tenancy, such as contracts for a midterm renovation, may still be subject to the Integrity Provisions.

The Corporate Ineligibility and Suspension List is at: http://www.tpsgc-pwgsc.gc.ca/ci-if/ four-inel-eng.html For real property specific inquiries contact: DGBIIntegrite.RPBIntegrity@tpsgc-pwgsc.gc.ca The federal government’s integrity provision framework has come a long way in three years. Senior PSPC officials have done an excellent job in reaching out to affected industry associations and developing revisions to the original framework in order to balance the need for governments to only do business with ethical suppliers, while at the same time being fair to Canadian companies who may do business with Canada. ■ The above does not constitute legal advice, and readers are cautioned to consult their own legal and business advisors for interpretation and application of the applicable Integrity Provisions in drafting and negotiating legal documents to which they are party, or in determining risks and remedies in connection therewith.

creation of affordable housing in diverse socioeconomic communities. Problems occur when those trade-offs aren’t made. A more cynical view would be to view the initiative as a tax on development, since density bonusing might be available anyway if, for example, the project is near transit or surrounded by similar dense developments, and is consistent with a city’s Official Plan. In municipalities where the city has under zoned land, such as the City of Toronto, many developers now have to ask for a rezoning, triggering a Section 37 payment under the Planning Act, and now possibly, the requirement to economically price into the development, affordable units. In that world, it’s yet another tax.

It is generally recognized that Ontario municipalities are under various financial constraints that affect their ability to provide vital housing for residents. In some cases, it could be argued that the city’s high development cost structure, and slow approvals process, actually contribute to that lack of affordability. These same municipal governments frequently point to a need for further powers to provide 55

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We do believe however that there are more effective, competitive, and fair ways to provide affordable housing. There are ways to incentivize the development and building of affordable housing units within the existing provincial policy tool kit, without having to establish new rules or policies. affordable housing and related supports. While it is commendable that the Province is interested in addressing the affordable housing issue, the suggested policy is an unnecessary and likely onerous standard for the province’s developers and housing providers.

The Province contends that “in many communities, affordability is eroding due to increased housing and rental prices, lagging household incomes and increased levels of household debt. Federal funding for social housing is scheduled to continue to decline in the province and municipalities are limited in their ability to fill the gap”. Enter inclusionary zoning, and private sector participation.

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Many members of the commercial real estate industry consider inclusionary zoning policies to be inherently unfair for residential developers as they would be expected to pay for the entire cost of affordable housing in those developments affected by the inclusionary zoning policy. It is unrealistic to expect that multi-residential housing providers will bear the cost of additional housing units without any concessions in return. The implementation of inclusionary zoning policies in Ontario without complimentary incentives may jeopardize the affordability of Ontario’s new housing in the near future, and work at cross-purposes B with the Province’s intended goal. Forcing w inclusionary zoning on developers drives up the cost of housing for market homebuyers and renters in the same project, perversely increasing the pool of residents who then may need affordable housing by making that o market housing even more unaffordable. f Indeed, it may further constrain supply by pushing up the breakeven cost of building residential, which in turn will either further

increase housing prices, or perhaps convince residential developers to turn their attention to more profitable development work in commercial uses.

In Massachusetts, inclusionary zoning has been relatively unproductive. One fifth of communities with inclusionary zoning programs have produced some quantity of affordable housing units under the policy.

Researchers at Harvard University found that inclusionary zoning acts as a tax on new housing development and is therefore likely to reduce the production of new housing and increase prices of both new and existing homes. In California, new house prices in cities with these policies increased 2-3% faster compared to cities where the policy was not implemented. In particular, houses that sold for above-average prices increased roughly 5% faster.

Often city residents will oppose affordable housing in their own neighbourhoods, fearing increased crime and drops in property values.

Canadian Real Estate Forum / FALL 2016

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We do believe however that there are more effective, competitive, and fair ways to provide affordable housing. There are ways to incentivize the development and building of affordable housing units within the existing provincial policy tool kit, without having to establish new rules or policies.

Provincial and municipal policy makers can spur further affordable housing in Ontario by improving the land use planning and development system. Ontario’s municipal and provincial development processes are onerous, time-consuming and costly. As they stand, they make building affordable housing both unprofitable and impractical. The system can be amended in such a way as to make the building of affordable housing practical and profitable for developers.

Development charges, Ontario’s Section 37 extractions, building permit fees, park levies, parking www.realestateforums.com

cash in lieu, and mandatory art contributions push up the cost and risk of development and as a result, housing prices and rents.

The old approval model needs a complete overhaul.

Discretionary or incentive-based programs are a more suitable alternative to a mandatory program. Incentive-based programs are preferable both for developers and municipalities as they infrequently lead to widespread opposition or legal challenges, as with inclusionary zoning policies.

For example, provinces and municipalities can consider: • Waving of density bonusing charges, Planning Act Section 37 extractions, when affordable housing units are built voluntarily • Providing exemptions or reductions in development charges • Deferring development application fees • Providing property tax offsets or exemptions • Providing a credit program that provides a rent voucher for residents who can continuously prove they fall below the income thresholds, both on an income and asset test basis

The Province of Ontario, and indeed all Ontario municipalities must recognize the fundamental economic condition of “supply” and how it relates to affordability. As such, the Government of Ontario should work to ensure a steady, and reliable supply of service land for all housing types. As much as possible, the government should increase supply and make it easy for those private interests to work in support of this goal. The Province of Ontario and the City of Toronto have both contributed to Ontario’s growing affordability issues by constraining supply, adding enormous tax costs to development, and imposing barriers to future supply of housing. These issues must also be addressed if the Province of Ontario is to provide more affordable housing to those who need it.

Ideally, improvement of Ontario’s affordable housing system should begin with regulatory reform of planning practices, and then lead to incentive-based mechanisms that will allow developers to build affordable housing while still contributing to a thriving commercial real estate industry. ■

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• How can the Province support improvement in the affordable housing supply in Alberta? Inclusionary Zoning?

• What should be the timelines for the review, decision, and approval of development permit applications according to the MGA? • Should a minimum or maximum ratio between residential and non-residential tax rates be legislated?

• Should municipalities be permitted to establish and set different property tax rates for subclasses of non-residential property?

• What municipal purposes and infrastructure should off-site levies be collected and used for? How should off-site levies be calculated?

• Should municipalities be granted authority to levy new and broader types of taxes?

• Should the Province continue to require municipalities to collect the education property tax?

• Should changes be made to the industrial property assessment definitions, timing, valuation or appeals?

UPDATE ON THE ALBERTA MUNICIPAL GOVERNMENT ACT (MGA)

By Brooks Barnett Manager, Government Relations & Policy REALPAC

On May 31st, 2016, Bill 21 – the modernized Alberta Municipal Government Act (MGA) was tabled in the Alberta Legislature. The MGA updates and amends several key land use planning and taxation policies that have a heavy impact on the commercial real estate industry. Modernization of legislation governing planning processes, taxation and finance and provincial governance structures is vital if Alberta is to remain prosperous, competitive and responsive to the needs of a constantly evolving economy.

Or so says the Alberta Government.

The modernized MGA responds to a number of questions of critical importance to Alberta’s real estate community, including: • Should the Province continue to have land use policies that apply province-wide?

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As many of these very important questions affect the strength of the commercial real estate industry, Alberta should be careful with any further amendments to provincial planning and taxation codes. The Province should strive to ensure that the separation of property classes, as well as their respective land uses and mill rates, do not contribute to a situation where commercial properties (including office, industrial and retail) are discriminated against financially, or subject to unnecessarily harsh financial pressures.

We have seen in Ontario the negative aspects of enhanced municipal powers: politicians seeking re-election promise residential voters an inflation only tax increase, and look at the commercial sector (which doesn’t vote ) to pay for everything else. Furthermore, to safeguard the industry’s competitiveness, the tax ratio between non-residential and residential property should be capped at or as close to 2.0 to 1.0 as possible. Municipalities should focus on providing services through funds generated by the property tax, and not consider any further funding mechanisms that could place a burden on the industry.

As Alberta policymakers consider the merits of Bill 21, industry advocates will continue to monitor its progress and advocate for policies that encourage the development of healthy real estate markets and a thriving real estate industry. ■ Canadian Real Estate Forum / FALL 2016

November 29, 2016 x Metro Toronto Convention Centre

Americans and Canadians are the two leading global investors - the 11th annual Global Property Market conference is your ideal opportunity to meet and network with key decision-makers from around the world.

Co-Chaired by Rita-Rose Gagné, Ivanhoé Cambridge & David Matheson, Oxford Properties Group, you can expect some 500 senior executives in attendance and 70 international speakers.

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November 30 – December 1, 2016 x Metro Toronto Convention Centre

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TURNING CLEAR AND PRESENT DANGER INTO CLEAR AND PRESENT OPPORTUNITY: COMMERCIAL REAL ESTATE A FOCUS FOR SUSTAINABILITY POLICYMAKERS

By Brooks Barnett Manager, Government Relations & Policy REALPAC

Earlier this year, Canada’s first ministers met to discuss and sign on to a sweeping declaration on clean growth and climate change. Formally known as the Vancouver Declaration on Clean Growth and Climate Change, the ministers outlined a vision and principles that will guide national and subnational government actions toward enhanced sustainability policy and complementary economic opportunity.

These ministers should be congratulated for their effort in addressing the growing threat of climate change, and the coinciding growing opportunity of economic development.

The Vancouver Declaration and the efforts surrounding it are only a microcosm of the total public policy effort being made nationally to identify ways of improving

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Canada’s sustainability practices. Every industry, including commercial real estate, is captured by some form of regulation or policy proposal that fundamentally seeks to improve sustainability practices within that industry. Since coming to power last year, and endorsing The Paris Agreement almost immediately, the federal government has clearly indicated its intention to make progress on Canada’s national climate change effort, and achieve mandated targets in greenhouse gas reduction. To complement this goal, most of Canada’s subnational governments, including both municipal and provincial, are actively designing and implementing policy which will affect myriad industrial groups. As owners, builders, and operators of commercial real estate, representing between 30 and 40% of energy consumption and carbon emissions, our industry is a major focal point.

Further to the Vancouver Declaration, the Government of Canada has also released the draft Federal Sustainable Development Plan, which details many of the proposals and actions meant to spur real change in many Canadian industries, including commercial real estate, consistent with the

Canadian Real Estate Forum / FALL 2016

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The Vancouver Declaration and the efforts surrounding it are only a microcosm of the total public policy effort being made nationally to identify ways of improving Canada’s sustainability practices.

Every industry, including commercial real estate, is captured by some form of regulation or policy proposal that fundamentally seeks to improve sustainability practices within that industry.

United Nations Sustainable Development Goals. Some of these goals include reducing greenhouse gas emissions, improving real property environmental performance, and improving indoor air quality. Many of the suggested policy areas have a tangible impact on the commercial real estate industry.

The discussion paper released earlier this year contains transformational concepts that will shape the nature of building sustainability in years to come.

Though some of the ideas in this discussion paper are ambitious, they are attainable and effective.

The Government of Canada can set a model example for provincial and municipal governments – one which could motivate productive counterpart policies that could strengthen Canada’s response to climate change.

In Ontario, the provincial government continues to move ahead with various policies that target greenhouse gas reductions province wide. Significantly, the province has signalled its intention to move forward with an energy and water reporting and disclosure program that will likely

take effect in 2018. Bill 135: The Energy Statute Law Amendment Act, was passed earlier this year and required that energy data be shared directly with consumers, including commercial real estate owners and landlords. Built to mirror existing systems already implemented in similar jurisdictions, the reporting and disclosure framework presents an opportunity for owners and landlords to accurately measure their energy consumption and take the necessary steps to improve use over time.

This is not only a bottom-line driver for the industry, but can mean progress on energy conservation for the Province of Ontario.

Indeed, this has been a major topic for provincial policy-makers, who are also near implementing Green Button Download My Data and Connect My Data applications which will greatly assist in the tracking and benchmarking of utility data.

In British Columbia, the province that has outshone its peers in terms of sustainability policy, government policymakers have recently introduced the Climate Leadership Plan, which sets the major goals and actions for the B.C government. The Province intends on encouraging the development of net zero buildings. Improved building envelopes and efficient technologies can make significant improvements to the Province’s building stock, and related greenhouse gas emissions. The Province will address this goal by accelerating

increased energy requirements in the British Columbia Building Code and create innovation opportunities and financial incentives for advanced energy efficient buildings, including an increase in funding for design and innovation. The Province supports the idea that energy efficient buildings can save owners and tenants’ money in the long run by lowering energy costs and avoiding carbon costs. This is a view already supported by industry leaders.

Municipally, there is a breadth of action plans and possible bylaws that will target greenhouse gas emission reductions, smarter transportation planning, enhanced land use regulations, and energy reporting.

Policymakers at this level view potential gains in the built form and real estate community in the next few years.

While the suggested regulations may seem onerous, they are only a version 2.0 of the national, provincial and municipal policies already implemented. There will be more to come as government determines the most effective way to address a clear threat in our time. The commercial real estate industry should recognize the immense opportunity that exists in the issue of climate change.

There gains to be made with respect to cutting inefficiency and waste while conserving capital, and moreover, the leadership shown on the policy files of today will greatly impact the achievability of the sustainability goals of tomorrow. ■

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