Canadian Real Estate Forum Magazine - Winter Issue 2013 by Real Estate Forums

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WINTER 2013

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THE REAL ESTATE FORUM TEAM: Emma Cimolini Maria Encarnacion Christina Marie Jager Xiao Shu Lan Vivian Lin Jessica Petrucci Jean Pickering Katherine Radziszewski Frank Scalisi Sarah Segal Petra Srdic Informa Canada Inc. Will Morris President George Przybylowski Vice President About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-tothe minute information and highly specialist skills and services. Our ability to deliver high quality knowledge and services through multiple channels, in dynamic and rapidly changing environments, makes our offer unique and extremely valuable to individuals and organisations.

4 IPD: Global city performance through Q2 2013

GLOBAL CHAIRMEN: Being Local but on a Global Scale 10 Global Property Markets

Welcome to America, open for business

www.informacanada.com REAL ESTATE FORUM MAGAZINE The magazine is published three times a year to coincide with the following conferences: SPRING Edmonton/Montreal/Vancouver FALL Calgary/Ottawa WINTER Toronto EDITOR Michel Rémy Michel Rémy is the editor of TheSquareFoot.ca, a commercial real estate publication that specializes in timely market information, news and networking.

CANADA’S LEADING

Real Estate Forum THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

FORUM CHAIRMEN: Canadians Well-Positioned to Take Advantage of Growth

The Altus Report: Retaining Tenants: Always Important, Now Critical

DESIGN gbc-design.com

The Economics

©2013 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

Urbanization & Development

Retail...more Retail

Trends in Real Estate

Investing in Canada

Capital & Debt

The Grass is Always Greener...

Words of Wisdom

Confidence Sinks to 2009 Levels

Michael Brooks’ Second Debut

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10 26

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Canadian Real Estate Forum / WINTER 2013

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CANADA’S LEADING

Real Estate Forum THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

Strongly Going Beyond our Borders Amid political bungling, natural disasters and growing concern over logistics in oil and gas markets, this country’s real estate sector has weathered the past few months with guarded optimism.

here we see growth in one province, we see unemployment and the potential for future downturns in another. Whether this yo-yoing will end, or continue on into another year, will depend largely on the domestic economy and the economic engines fueling each province’s housing and condo market. We may not know the outcome, but at this forum, we will gain insights from experts in their fields and have a better understanding on where our country, and our industry, is headed. Close to home, productivity and a keen interest in densification has led many Canadian cities to embrace urbanization, shifting from suburban thinking to that of concentrated downtown cores. This shift is largely out of necessity, as councils realize sprawl means more infrastructure, transit links and strains on a city’s resources. Instead, city planners are looking to innovative options and multi-purpose designs as a way to keep city centres vibrant. And what better way to find out how this is being accomplished than from our presenters here this week. Urban planning isn’t the only challenge facing municipalities in Canada. The driving engines of our economies are changing. Gone are the days when natural resources held the key to our provincial growth. Today, finance, telecommunications,

Canadian Real Estate Forum / WINTER 2013

technology and transportation are major players in demand fundamentals. Whether it is local or global, identifying where the investment opportunities lie comes down to fielding the information given by insiders, and there will be plenty at this week’s forum and conference. From upcoming trends, investment and capital growth to identifying investment opportunities in our neighbours to the south and across the Atlantic, our speakers will touch on where our sector is heading. When we leave here, we will have a greater understanding of investor logic and how competition and political environments can factor into real estate portfolios. We will learn why and how Canadian pension funds other institutions REIT’s and private equity funds are becoming significant global investors in property. We will hone in on where the secrets of success in our market lie, and pinpoint which have the greatest potential. And, more importantly, we will have a longer string to bounce that yo-yo.

George Przybylowski Vice President Informa Canada George.Przybylowski@informacanada.com

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Global city performance through Q2 2013 Real estate investors were hesitant in 2012, but 2013 has been a year to make a plan and stick to it. By Greg Mansell

Canadian Real Estate Forum / WINTER 2013

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Greg Mansell

he setback to the European economic recovery in 2012 caused real estate investors to pause and assess their options. Twelve of the 34 OECD members saw their economies contract last year, compared to only three â&#x20AC;&#x201C; Japan, Portugal, and Greece â&#x20AC;&#x201C; in 2011. The dozen had reduced to eight by the second quarter of 2013, with larger economies, such as the US, Japan, and Germany, moving in the right direction. Meanwhile, the influential BRICS economies started to slow and stutter. With improving growth in larger developed economies offset by slowing growth in emerging economies, investors now have to decide whether it is the time to take on more risk. IPD has collected investment performance data on 34 cities, as at Q2 2013, which shows that varying economic news has produced a wide range of global real estate performance. Over the first half of 2013, 16 cities saw an increase in annual returns while 18 saw a reduction. That said, some familiar names still occupied the top and bottom ends of the city rankings.

Canadian Real Estate Forum / WINTER 2013

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Q2 2013: All property annual returns by city RETURN (% Y/Y) Source: IPD

Income Return

Capital Growth

Total Return

25 20 15 10 5 0 -5 Houston Calgary San Diego Auckland Perth Denver Toronto Montreal Boston Sea le San Francisco Vancouver Miami Dallas Portland Chicago New York Los Angeles Melbourne Brisbane London Minneapolis Sydney Atlanta Wellington Dublin Paris Philadelphia Washington DC Manchester Birmingham Edinburgh Amsterdam Ro erdam

-10

Q2 2013: All property yield by city YIELD (%) Source: IPD

Dublin Wellington Birmingham Manchester Perth Brisbane Melbourne Edinburgh Auckland Sydney Ro erdam Atlanta Amsterdam London Minneapolis Chicago Toronto Dallas Montreal Portland Calgary Vancouver Philadelphia Washington DC Houston Paris Miami Los Angeles San Francisco Sea le Boston Denver San Diego New York

10 9 8 7 6 5 4 3 2 1 0

Q2 2013: Top Cities Top Five: Houston, Calgary, San Diego, Auckland, and Perth. North American cities dominated the top 10 list at the end of 2012. Calgary led the way, with Toronto and Montreal also making the cut. By the second quarter of 2013, Calgary had slipped to second to make way for Houston, which, in turn, surpassed San Diego as the top US performer. The energybased city economies, such as Calgary, Houston, and sixth-

Canadian Real Estate Forum / WINTER 2013

placed Denver continued to achieve a high level of return. Yet, many US and Canadian cities finally slowed after a run of strong performance. Auckland and Perth continued their steady rise, as value growth supplemented healthy income returns. Conversely, San Diegoâ&#x20AC;&#x2122;s pace slackened, despite continued yield compression under the weight of positive investment flows.

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2012: Yield spread between lowest and second-lowest city yield YIELD SPREAD (%) Source: IPD

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 US

Canada

Belgium

Netherlands

Canadian Real Estate Forum / WINTER 2013

Australia

Spain

IPD’s coverage extends to 60 cities in the annual database, and the weakest cities in the full list for 2012 included Madrid, Barcelona, and Porto. Rotterdam and Amsterdam still await their recovery, as the Dutch economy continues to shrink, albeit at a reducing rate. The UK’s secondary cities, Edinburgh, Birmingham, and Manchester, saw a notable improvement in performance in the first half of 2013, although they remained in the bottom five rankings. Economic growth and highincome returns have finally ensured that the real estate recovery has spread beyond London into the regions, even if the revival is in its infancy. Peripheral Europe is also starting to generate interest among more risk-tolerant investors. The risks are still high, but as in the UK regions, yields are finally at a level where such investors feel compensated.

Germany

Switzerland

Italy

South Africa

Portugal

New Zealand

Q2 2013: Bottom Cities Bottom Five: Rotterdam, Amsterdam, Edinburgh, Birmingham, and Manchester.

Overall The differing fortunes of local economies have left cities priced at a wide range of yields. Some investors continue to shelter in core markets given the mixed economic climate, while others are being tempted to switch to high-income markets in a bid to boost returns. Where does this search for income lead? At the extreme, it leads investors away from lowyielding core markets and into peripheral Europe, Australia, and South Africa. However, most income-focused investors are more likely to plan a gradual shift away from familiar toptier cities toward their second-tier counterparts, looking to benefit from higher income returns without drastically altering their macro-economic exposures. ■ For more information on IPD, please contact: enquiries@ipd.com Greg Mansell: greg.mansell@ipd.com ; @GregMansell_IPD • www.ipd.com

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Being Local but on a Global Scale

Canadian Real Estate Forum / WINTER 2013

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Eric Plesman

Louis Voizard

Eric Plesman, the Oxford Property Group’s senior vice-president Investments will be sharing the Global Property Market conference chair with Louis Voizard, senior vice-president, Growth Markets at Ivanhoé Cambridge.

he two men, already known as major talent within the global property development community, will be leading a number of discussions during which private equity fund managers and assorted investors will get the opportunity to hear about their own experience in the world’s emerging property markets. According to Plesman, Canadian institutional investors are looking at possible international markets because of the tight control that’s maintained over quality real estate in Canada’s domestic commercial real estate market. As a result of the growing interest in emerging property markets, Plesman said that his group tends to concentrate on key markets such as London and Paris after which they make an effort to truly understand the local business environment. As far as Louis Voizard is concerned, he considers Ivanhoé Cambridge’s Ancar project in Brazil as the working model which will serve as the company’s template for future development projects in the emerging global property sector. Aside from naming specific (and obvious) Asian and Latin-American markets that quickly come to mind, Voizard believes that several American cities such as New York, Chicago, Seattle and assorted locations in California’s Silicon Valley show lots of development potential. Furthermore, Voizard adds that European logistics is taking more importance amongst institutional investors, both Ivanhoé Cambridge and CPPIB have recently taken interest in logistics companies. While both men believe that the business requires equal measures of creativity and intellectual rigor, Plesman also believes that the competition has definitely raised the bar in the global property markets “… because it’s a smaller world.” ■ P.A.Sévigny Canadian Real Estate Forum / WINTER 2013

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GLOBAL PROPERTY MARKETS JÉRÔME FOULON

Investment branches out worldwide for maximum returns As growth is anticipated at a slower rate than before, PSP Investment is exercising caution when improving the quality of their portfolio.

“W

e believe by adding quality assets, we can increase the value of the entire portfolio,” says Jérôme Foulon, vice president of real estate investments. Such cautious strategies include continuing with small residential developments in tier one cities, where the risk and timing of the construction phase are limited, leasing is not an issue, and yields are good. It also includes taking advantages of opportunities abroad, in Europe, Latin America, Africa and Australia. “Australia is a market we’ve been present in for three years. It’s easy to understand and very transparent, and for that reason, you know exactly what you’re going to get,” says Foulon. “The yields are similar to Canada, except they’re leveraged to China. So it’s really about how you forecast China’s economy. “There’s a slowdown in Australia which you need to underwrite correctly. Cap rates are still seven and a half for good assets. If you forecast a cap rate compression, you can get a very good return for your investments.”

In Europe, PSP is maximizing opportunities to be aggressive in markets such as France, where conglomerates are feeling pressure from their bondholders. Currently PSP is focusing more on Latin American and Mexico, where yields are getting more aggressive on existing product and growth is seen on a yearly “Australia is a market basis. “It’s very rare that you see we’ve been present in for a market where fundamentals three years. It’s easy to and capital are going in the same direction, but there’s a understand and very lot of product. You can transparent, and for that develop very good properties in retail, mixed use, and indusreason, you know exactly trial, while being able to what you’re going to get. leverage the potential US recovery,” says Foulon. The yields are similar to “The market in Mexico is Canada, except they’re more mature than a lot of Latin American countries, so leveraged to China. So it’s it’s easier for Canadians to do really about how you forebusiness there. It’s also tax friendly so you can make cast China’s economy.” deals that make sense.” Jérôme Foulon, PSP Investments Barbara Balfour

SONNY KALSI

Pursuing growth in gateway cities In the next few years, Sonny Kalsi is staying away from emerging markets. Instead, his team will continue to focus on select gateway cities around the world where they have an established, hands-on presence.

“W

While secondary markets are always an option – e’ve been very focused on the US, in areas Philadelphia or Atlanta instead of New York, or Manchester or of developed Asia such as Japan, and in Birmingham instead of London – Kalsi isn’t a fan. London,” says the founder and partner of “Ultimately I don’t think people make GreenOak Real Estate. “There are high quality stabilized “Real estate is driven by the a lot of money there. Real estate is driven by the broader macro economy – that comes assets in gateway cities, with a lot of broader macro economy – that down to where the employment and GDP capital chasing them, and the yields are growth is. In most countries around the very low. We find that secondary assets in comes down to where the world, employment and GDP are highly those gateway cities are still trading at a employment and GDP growth concentrated in a few gateway cities.” pretty attractive discount to where the Kasli also has mixed feelings about completed stabilized assets are trading. is. In most countries around getting into development. That’s one way to generate alpha. the world, employment and “I never say never but I’m not entirely “One area we’re not interested in is emerging markets. They were not repriced GDP are highly concentrated in sure you always get paid for the risk you take. Real estate cycles are getting shorter during this last recession, therefore their a few gateway cities” and more volatile and a lot of things can valuations are at an all time high. I’ve got go wrong. We’re much more likely to do a some concerns about growth, whether it’s Sonny Kalsi, GreenOak Real Estate redevelopment of an existing asset than to China or India or Brazil. I just don’t think do a ground up development.” people are going to get the growth rates they thought they Barbara Balfour would.”

Canadian Real Estate Forum / WINTER 2013

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BRAD OLSEN EDUARDO GÜÉMEZ

Investors Reconsider Mexico

The ABC’s of CrossBorder Investments Advice for Canadian funds investing in the US

Growing Middle Class and Public Liquidity Give Mexico Strength; Brazil, Peru and Columbia still have potential.

“T

he ghost pasts of hyperinflation that used to be a constant theme within the region has been controlled for the most part in these major markets,” says Eduardo Güémez, Managing Director & CEO of Mexico for LaSalle Investment Management. “That has allowed for a lot of growth and for a growing middle class that requires real estate.” Other experts have written off Brazil, but Güémez still sees opportunities for investment there. He also likes Peru and Columbia for some investors. Mexico is currently the most active country, however, primarily due to the introduction of REIT-like structures to the market. “What we’re seeing now is “We’re having a that we’re having a lot of interest lot of interest from domestic capital that could not invest in real estate before,” from domestic says Güémez. “That’s been a capital that could huge change.” The international commu- not invest in real nity has also renewed interest in estate before. the region, but capital isn’t That’s been a moving yet. “Mexico was out of favour huge change.” for a while. When people look back after a couple of years, they Eduardo Güémez, see that the economy is continue LaSalle Investment to progress. Some of the reforms Management that were talked a lot about are starting to happen.” When they’re ready, Güémez recommends that investors look at the numbers for the Central Mexico region, particularly cities like Querétaro and Guanajuato, as well as Mexico City. He says that’s the region where much of the recent industrial development has taken place. Tracey Arial

Canadian Real Estate Forum / WINTER 2013

here is a new wave of Canadian investors venturing across the border. While traditionally it was mainly the big players – including La Caisse, CPPIB, HOOPP and Oxford Properties Group – that invested in the US, over the past 12 to 18 months others have followed suit. Brad Olsen, President of Atlantic Partners, has seen several “next tier” Canadian pension funds and REITS becoming more global in their investment strategies.

“The easiest place for a Canadian pension fund to go is the US, and it is possible for the Canadian pension fund to invest in US real estate on a tax efficient basis.” Brad Olsen, Atlantic Partners Asked if he has any pointers to for those newer to the US market, Olsen stresses that despite some negative perception of US taxation, in his experience it hasn’t been a problem. “The easiest place for a Canadian pension fund to go is the US,” he says. “And it is possible for the Canadian pension fund to invest in US real estate on a tax efficient basis.” For the mid-sized Canadian pension fund he recommends investing indirectly, ie. through a fund vehicle. “Pick a strategy and fund manager who meets your requirements,” he says. “You can do your due diligence to find out their track record and so on, but at the end of the day you need to pick somebody you like. You’re essentially entering a partnership. I think the ventures that work best are those based on trust and mutual respect, and that happens only when you really get to know somebody.” How to know for sure? Olsen recommends picking up the phone and calling someone who has experience with that fund manager to get their opinion. “The big players have been doing it long enough that they’ve developed relationships,” he says. “They know those people, and they can and will provide intelligence to the mid-tier funds.” Michelle Morra-Carlisle

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ANDREW THOMAS

Dwindling supply could validate London investments Property prices in London, now nearing another high-water mark, won’t rise as rapidly in value as they have during the past few years, predicted Andrew Thomas, but prudent investors can still realize substantial returns in some areas during the next 12 months – if they target their purchases wisely.

“P

rime London residential properties have enjoyed the greatest returns during the past 24 months,” the Cushman & Wakefield equity partner observed. “In some parts of London, the residential values are so high that we have seen a shift from office to residential use.” “We’re starting to see tenant and leasing activity create a shortage of premises for the occupier,” he reported. “That opens the door to a wonderful thing called rental growth. If that growth materializes, it could validate some investments that currently yield low returns. We will undoubtedly see more development, as well.” Thomas expects residential demand to have a knock-on effect for office values. “It ought to push office rents up even more in some key locations,” he

Canadian Real Estate Forum / WINTER 2013

forecast. “We’ve also seen quite a dramatic surge in prime luxury retail rents in London.” “Industrial has seen some improve-

“We’re starting to see tenant and leasing activity create a shortage of premises for the occupier. That opens the door to a wonderful thing called rental growth.” Andrew Thomas, Cushman & Wakefield LLP ment, but mostly on the periphery of London,” Thomas added. “Investors are not looking at logistics projects yet. They’re starting to, but have yet to direct

much capital toward that area.” A diverse cocktail of capital has infused the London market during the past 36 months, he said. “There has never been such variety of investors looking at London,” Thomas remarked. “It’s an easy market to buy into.” “Commercial investment has come from Korea, China, Malaysia, Singapore plus North American money – primarily from Canada – supplanted by opportunistic capital from the US, plus Russia and Kuwait.” “On the residential side,” he added, “we’ve seen capital arrive from areas like Thailand and Taiwan, looking to take advantage of a relatively cheap currency in a market that the investors sense is less volatile than their own.” Robert Frank

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Source: INREV/ANREV Fund Manager Survey, July 2012. 2 June 30, 2013. This information is not intended as an offer, recommendation or advice with respect to the purchase or sale of any security, and is for informational purposes only. Investments in property segregated mandates and property pooled funds may carry additional risk of loss due to the nature and volatility of the underlying investments. Property segregated mandates and property pooled funds may not be available for investment by Canadian investors unless the investor meets certain regulatory requirements. There is no recognized market for property and there can be delays in realising the value of property assets. Aberdeen Asset Management (“AAM”) is the marketing name in Canada for Aberdeen Asset Management Inc., Aberdeen Fund Distributors, LLC, and Aberdeen Asset Management Asia Ltd and Aberdeen Asset Management Canada Limited. Aberdeen Asset Management Inc. is registered as a Portfolio Manager in the Canadian provinces of Ontario, Nova Scotia and New Brunswick. Aberdeen Asset Management Asia Limited and Aberdeen Asset Management Canada Limited are registered as Portfolio Managers in Ontario. Aberdeen Fund Distributors, LLC operates as an Exempt Market Dealer in all provinces and territories of Canada. Aberdeen Fund Distributors, LLC and Aberdeen Asset Management Canada Limited are wholly owned subsidiaries of Aberdeen Asset Management Inc. Both Aberdeen Asset Management Inc. and Aberdeen Asset Management Asia Ltd. are wholly owned by Aberdeen Asset Management PLC.

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KEAN HIRD

Trolling the Eurozone Real estate investors seeking distressed markets are finding them in Europe. As to exactly which countries to explore, that depends on where the investor falls on the risk scale.

“I

because we didn’t need to … the rest of Europe does,’ and that’s f you’re looking at core or core plus, you’re going to probably right,” Hird says. “And that favours the Germans be looking at northern Europe,” says Kean Hird, a rather than the English. In the UK, according to statistics, every Partner with Catalyst Capital. “If you’re looking for man, woman and child is in debt to the tune of £30,000 pounds real distress and real opportunity, you’re looking at southern or more.” Europe. In Rome and Madrid in particular “Truth be known, these Today, it’s payback time for the rest of you’d be bottom trolling because prime Europe and that comes with conditions. rents have dropped by half, you can’t build countries could be in a Because the peripheral countries, including for the kind of rents that you’re getting and malaise for the next 7 or Greece and Spain, are now governed by an the net absorption of offices in the CBD is external financial source, they have been below zero. Truth be known, these coun8 years if not longer.” forced to become disciplined. As a consetries could be in a malaise for the next 7 or Kean Hird, Catalyst Capital quence, Hird says, “Things are stabilizing a 8 years if not longer.” lot faster than people give them credit for.” Germany, in contrast, has by far the For international investors, there are distressed assets to be most stable economy in Europe. While other countries faltered, had virtually anywhere in Europe. Some markets are far riskier Germany were the direct beneficiary of growth due to reasons than others and will appeal to investors for different reasons. As ranging from its wage restraints to its low interest rates and safe Hird says, “It’s that fine line between greed and fear.” haven status as a creditor. Michelle Morra-Carlisle “The Germans will say, ‘We’ve never done an austerity plan

ANDREW ALLEN

Should You Fear the Second Tier? Non-domestic buyers in global-focussed markets like London, Zurich, Stockholm, Paris and Frankfurt, raise the prices beyond what domestic investors are willing to pay, says Andrew Allen, the Director of Global Property Research for Aberdeen Asset Management PLC.

“W

e don’t believe that the global key office markets are as low risk as people have generally portrayed them to be,” he says. “We also generally believe that people overpay for the liquidity of those markets. We would generally argue that whilst people describe being familiar with those markets because they look like the markets they’re coming out of – whether Australia, or Japan or Korea or Singapore – familiarity is not the same as understanding.” Allen advises clients to consider second tier cities where there are high quality office markets, as long as they can rely on a big platform of local people. He says the idea works in most countries around Europe.

Canadian Real Estate Forum / WINTER 2013

“We like to get into markets that are less volatile. They’re seeing less competition from international capital so the investor pool is smaller. There’s a significant discount against the price.” On the retail side, investors face a variety of opportunities, depending on the country, says Allen. “We see are cyclical and structural issues colliding at the same time. The European economy has just been hit very hard through the global financial crisis and arguably coming out of it in some parts quite well. The Nordic countries – Norway, Sweden, Finland, Denmark – haven’t really had much of an economic downturn compared to the rest. Germany has done very well

“Whilst people describe being familiar with those markets because they look like the markets they’re coming out of – whether Australia, Japan, Korea or Singapore – familiarity is not the same as understanding.” Andrew Allen, Aberdeen Asset Management PLC because its manufacturing base has been strong. The UK got hit very hard but it has recovered reasonably well…Ireland has stabilized, and their first REIT was listed this year.” Tracey Arial

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By Catherine Ann Marshall

Catherine Ann Marshall

What are the chances that – right after a knock-down, drag-out fight over balancing its budget – the US will eliminate some real estate taxes on Canadians? Actually, surprisingly good, with the potential to spur a flood of Canadian capital south of the border as early as 2014.

Momentum is Building to Reduce US Real Estate Taxes The government shutdown and budget wrangling in Washington highlighted the need for comprehensive US tax reform, said Jim Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE) in a recent interview. “It would be logical for reform to include changes in antiquated laws that discourage foreign investment in US real estate,” added Mr. Fetgatter.

Canadian Real Estate Forum / WINTER 2013

“If it (changes to tax laws) doesn’t pass this year, it wouldn’t be for a lack of support” said Mr. Fetgatter. He added that it’s not just his assessment but also that of “Invest in America”, a larger coalition of organizations that includes AFIRE and other businesses, non-profits, and trade associations. “I’d say the chances of some proposed reforms getting passed this year are good.”

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Although Canadian investment in US real estate may be below its potential, it still has been sizable. According to Real Capital Analytics, Canadians have been the leading foreign investor group over the last three years. From January to August 2013, foreigners acquired $22.8 billion in US real estate, accounting for 13 per cent of total real estate transactions in the US compared to just over 9 per cent in 2012. Catherine Ann Marshall, CFA, investment consultant and strategist

The Real Estate Round Table, another Invest in America member, also reports momentum to change the Foreign Investment in Real Property Tax Act (also known by the tongue-twister FIRPTA) as early as this year in order to jumpstart credit markets and create jobs. The Round Table’s website points to $1.1 trillion in maturing US commercial loans as an example of the kind of problems that a new infusion of foreign investment would help to solve. "Stocks and bonds have long enjoyed tax treaty protection, but real estate has been singled out for unnecessarily complicated tax treatment", said Amy Erixon, an American who leads Avison Young’s investment management group in Toronto after a long history as a US-based executive. "With the stock markets so fully valued and the bond markets jittery about possible reduction in central bank stimulus, reforming FIRPTA is an important step to keep inflows of direct foreign investment coming into the US" Although Canadian investment in US real estate may be below its potential, it still has been sizable. According to Real Capital Analytics, Canadians have been the leading foreign investor group over the last three years. From January to August 2013, foreigners acquired $22.8 billion in US real estate, accounting for 13% of total real estate transactions in the US compared to just over 9 per cent in 2012.

What is FIRPTA and What May Change? FIRPTA taxes capital gains by foreign investors unless they are part of foreign governments. Key irritants include: • Capital gains: profits on property sales are taxed at the rate for similar US investors; • Withholding taxes: buyers of property owned by foreigners must withhold 10 per cent of the sales price from the seller to ensure the tax is collected. To recover these withheld taxes, the seller must file a US tax form and wait (possibly years) until the IRS determines the tax payable; and • Taxing REITS: applying FIRPTA taxes to public REIT investors who own more than 5 per cent of the stock.

Canadian Real Estate Forum / WINTER 2013

The proposed changes to FIRPTA doesn’t eliminate all taxes for foreign investors, but address several features that foreign investors particularly dislike. For example: • Capital gains: foreign investors in a private REIT would not be subject to FIRPTA taxes on distributions of the proceeds from property sales so long as the REIT is majority owned by Americans; • Withholding taxes: Canadian investors in a majority American-owned private REIT won’t be subject to withholding taxes; and • Taxing REITS: a foreigner’s ownership interest can increase to 10 per cent before FIRPTA taxes would apply; In addition to these proposed legislative changes, the Obama administration’s proposed budget for 2014 would eliminate FIRPTA taxes on all non-US pension funds. It’s expected that this would also effectively eliminate the withholding tax issue for these funds.

Potential Changes as Early as 2014 Commentators say there is momentum to get the FIRPTA changed this time: A similar bill passed the House in 2010 with a vote of 410-11, and this time the Senate is on board with the bill. “I have never heard so much chatter about reforming FIRPTA in all the years that I have been in this job and I have been here for 23 years,” said Mr. Fetgatter. He said that even if the changes are not passed in 2013, the chance that the tax rules will be relaxed in the next two years “are pretty good.” The potential obstacle to relaxing the impact of FIRPTA will come from political problems explaining the optics to American voters, commented Ms. Erixon. "Passage is not a slam dunk. The optics of lowering taxes for foreigners is difficult in a strained budget environment.” ■ Catherine Ann Marshall, CFA is an investment consultant and strategist working in global real estate.

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CANADA’S LEADING

Real Estate Forum THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE

Canadians Well-Positioned to Take Advantage of Growth 26

Canadian Real Estate Forum / WINTER 2013

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Tom Farley

Blair Welch

This year Toronto Real Estate Forum co-chairs Tom Farley, president & global COO, Brookfield Office Properties and Blair Welch, partner, Slate Properties believe that the quality of speakers and the breadth of topics at the Forum, will provide participants with the knowledge to walk away with a greater understanding of where we are with real estate today, and the relative strength of global markets.

oth will be very pleased to hear about opportunities in a US economy that they are sure is turning around, about Europe which has finally bottomed out and the BRIC countries that are well-positioned moving forward. As countries emerge from the global financial crisis, Canadians are in a super position to compete with global investors on growth opportunities, liquidity and transparency. Some 100 recognized experts have been invited to provide us all with information about which markets are strongest in the short term, which markets might produce in the medium term and where you want to be for long-term growth. In between, we’ll have an opportunity to network and strategize about how to continue Canada’s leadership in the global economy. We all recognize that Canada is a good investment because we’re resource rich, we don’t have a large population, and most of us live in urban locations. But how can we leverage these strengths to ensure that our industry grows and prospers in a fast paced changing world? Whether you’ll be bullish on North America, Europe, Asia or Latin America, this tribune should provide you with the knowledge and confidence to play on our country’s natural strengths and avoid potential pitfalls. ■ Michel Rémy Canadian Real Estate Forum / WINTER 2013

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THE ALTUS REPORT Sandy McNair

RETAINING TENANTS: Always Important, Now Critical 2

By Sandy McNair

As a wave of new office buildings are completed over the next few years tenants in Calgary, Vancouver, Ottawa, Toronto and elsewhere will have more leasing options and a much wider variety of locations, building designs, profiles and managers to choose from. For everyone in the Commercial Real Estate Industry success will require everyone on their teams being at the very top of their game.

ew Supply accelerates leasing activity and generates pressure on the existing inventory to replace (backfill) those tenants who have chosen to move to the new buildings. Depending upon the specific dynamics of each market and node the pressure on pricing and leasing can become intense.

New Supply Spikes Put Pressure on Existing Office Buildings Expressed as a percentage of existing inventories Calgary, Vancouver and Ottawa have the highest level of office space under construction with Toronto, Montreal and Edmonton trailing as confirmed by the chart below.

% of Total Existing Office Inventory Vancouver Under Construction 7.9%

Edmonton 1.1%

Calgary 11.9%

1: 1 York Street, Toronto, Q2 2016 – 800,000 sq. ft. 2: 130 Adelaide Street W., Toronto, Q2 2017 – 899,064 sq. ft. 3: Metrotower III, Burnaby, Q2 2014 – 477,406 sq. ft. 4: Deloitte Tower, Montreal, Q3 2015 – 495,067 sq. ft. 5: 225 6th Avenue SW, Calgary, Q1 2018 – 1,399,600 sq. ft.

Canadian Real Estate Forum / WINTER 2013

Toronto 4.6%

Ottawa 5.7%

Montreal 2.9%

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The best building managers and their leasing teams achieve superior results relative to their peers throughout the business cycle. As the marketplace experiences some or all of the following; soft demand, increased vacancy, declining leasing velocity, increased supply of new and backfill space from landlords and sub-landlords and reduced rent expectations, not all office buildings and portfolios will experience the same success or pain. Sandy McNair, Altus InSite

If there had been a new supply drought in Calgary, Vancouver and Ottawa the current spike in new supply may be viewed as a catch up response to pent up demand and that may be the case in downtown Vancouver, but when looked at on a citywide level, there has been significant growth in office inventory since 2000 in all three of these markets as confirmed by the chart below.

% of Total Existing Office Inventory Vancouver Pre 1960 16.2% 1960 thru 1999 61.9% Since 2000 21.9%

Edmonton 9.8% 78.4% 11.8%

Calgary 3.1% 66.3% 30.6%

Toronto 13.0% 71.0% 16.0%

Ottawa 3.1% 77.3% 19.6%

Montreal 18.7% 68.0% 13.3%

To anticipate what will happen in Ottawa one must first determine how successfully and quickly the Federal Government (PWGSC) will be in achieving their stated goals of putting more people in less but higher quality space. This shift in demand is being twinned with a material amount of new supply in Gatineau, in Downtown and elsewhere as well as a significant spike in PWGSC lease expiries during the next few years. The timing and magnitude of the backfill associated with populating the former Nortel Campus is yet another key variable. The net outcome will be painful for some office buildings. If we dive deeper into the Calgary Office Market there are currently under construction 25 office buildings containing 7.94 million square feet of office space. Even though 61.1 per cent of that new supply has been pre-leased there is significant pressure on the existing office inventory due to disclosed and undisclosed backfill pressure. Offsetting this pressure are the facts that it will take several years to complete the new supply and a positive outlook for economic activity, energy prices and demand, growth in population and office jobs may all result in incremental demand for space. However, increasing the downward pressure on rents on the existing office buildings are factors including tenants’ increased density (the use of less space to accommodate more workers), a soft, unclear or even flat outlook for energy demand and pricing, a more stratified and less homogenous view of the existing office inventory based upon image, age,

Canadian Real Estate Forum / WINTER 2013

commute times, tenant-specific quality of fit with each of their best leasing options. When leasing velocity is low the backfill is typically an issue for a small number of buildings and their owners, managers and leasing teams. If a market does not rebound promptly, then the pain becomes more distributed across a larger number of existing buildings. This is especially true as some tenants are induced by those buildings experiencing the most pain to move out of their existing space. Large occupiers of office space in Downtown Toronto have shown a greater willingness to put more people into less but better space than in other markets across Canada. Many existing office buildings do not have the capacity (fire exits, elevators, washrooms, power and HVAC) to accommodate the desired densities of some of these large occupiers. Fortunately the office market consists of many segments and the backfill opportunities created by tenants moving into new buildings will have appeal to other tenants. The key issues are will there be enough of them, willing to move soon enough, willing to pay an economic rent and if not which buildings will be viewed as least desirable and therefore feel the most vacancy and rental rate pressure?

Forecasting in a Low Growth Environment When generating forecasts it is always wise to explore multiple scenarios. Given the constraints of this article we shall only look at a no growth scenario and at just the Downtown Markets. This scenario assumes the net demand for space is zero, the buildings under construction are completed and that there are no additional starts. Please reach out for us if you wish to explore more specific and additional scenarios.

Downtown Office Markets Vacancy Rate Q4 2013 Vacancy Rate Q4 2015 Vacancy Rate Q4 2018

Vancouver Edmonton Calgary 4.7% 6.3% 4.9%

Toronto 5.9%

Ottawa 4.8%

Montreal 6.8%

11.7%

6.3%

9.8%

8.3%

9.2%

8.8%

11.7%

6.3%

15.7%

12.2%

9.2%

8.8%

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During a market peak it is easy to be lulled into complacency and actively listen to your tenants less often or with less interest and passion for action. If you haven’t already, now is the time to step up your listening, communication and actions plans. It is clear that tenant retention, referral and recommendation of your buildings and your management services are the key to superior performance. Sandy McNair, Altus InSite

What is the roadmap to superior relative performance? During a market peak it is easy to be lulled into complacency and actively listen to your tenants less often or with less interest and passion for action. If you haven’t already, now is the time to step up your listening, communication and actions plans. It is clear that tenant retention, referral and recommendation of your buildings and your management services are the key to superior performance. Do you have formal processes to identify and communicate your strengths as well as recognize and address your weaknesses, as perceived by your tenants? What combination of improvements, if any, to your communication channels, your service offerings and your capital plans will have optimum impact on tenant retention while achieving superior rental rates? To do this well, requires much more than a periodic lunch or a review of the dispatch log as a lease expiry approaches. In 2014 and for the next several years the key to success will be retaining and stealing tenants. It would be unwise and risky to wait for incremental demand to fill or keep your building(s) full. The winners will be those teams and firms that are proactively listening to their tenants and are able to identify, communicate and implement the optimum bundle of services and physical experience to retain their current tenants and recruit new ones at desirable relative rents.

A Decade of Progress Ten years ago fully one third of all office building occupants in Ottawa, Calgary and across Canada did not report their building and property management related concerns or problems to anyone. Today that figure has been cut in half. Significantly, awareness, use, satisfaction and referral of centralized customer service and dispatch functions have climbed across the industry. However the gains are not evenly shared across the industry – the design and implementation of these programs varies widely from one

Canadian Real Estate Forum / WINTER 2013

manager to another with the result that some managers have experienced huge gains compared to others and the industry benchmarks. Communication Channels is the first of a family of performance metrics that address Tenant Retention. The full family includes a series of performance measurement and industry benchmarks focused on each of: • Communication Channels, • Issue Resolution Rates, • Overall Satisfaction, Momentum, • Refer and Recommend this Building and • Refer and Recommend this Manager – that is, interest in moving to another building managed by the same management company. The result is that building owners and building managers now have the ability to measure the intention of tenants to stay and their willingness to pay a premium to do so. Also identified are the key property-specific actions needed to increase the tenants’ intention to say and willingness to pay a premium.

Performance Measurement and Industry Benchmarks The Industry Benchmarks vary from city to city and from year to year based upon market dynamics – the office market in Vancouver is very different from Calgary’s or Ottawa’s in terms of tenant mix, service requirements, manager capabilities, leasing conditions and so on, resulting in very different expectations and levels of perceived performance. Very rare is the firm or team that has the people and money to do everything they can think of, let alone at a very high level of performance. So the key has been and will continue to be focus. Focusing your communication initiatives, service refinements and capital budgets on the two or three key items and programs where they will have optimum impact on your tenants’ intention to stay and pay a premium to do so, is essential to success. As you enter the 2014 and 2015 planning cycles for your properties and portfolios, choose your Tenant Retention Initiatives well. For some, that may mean boosting your performance measurement and benchmarking capabilities. ■ Sandy McNair is the President of Altus InSite, a division of Altus Group. Since 1997 Altus InSite has conducted more than 1.7 million tenant satisfaction surveys for many of Canada’s leading office building owners and managers. sandy.mcnair@altusinsite.com www.altusinsite.com

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THE ECONOMICS DAVID ROSENBERG

Global growth to increase in 2014 “We’ll probably see global economic activity increase mildly by 3.5 per cent next year,” predicted Gluskin Sheff chief economist David Rosenberg. He projected the United States economy to grow by roughly 3 per cent in 2014.

MARIO LEFEBVRE

Which Canadian cities will lead economic growth?

“T

he Fed is running the mother of all let’em’rip monetary policies and Janet Yelland might even increase monetary easing,” he suggested. “Coupled with a less constrained fiscal policy, that might really open the economic performance floodgates next year.” “There will be shifts,” Rosenberg acknowledged. “Housing might plateau, which could be offset by consumer and business spending. Tighter labour markets might also spur wage increases. Productivity growth slowing to zero could give companies incentive to spend more organically to protect their margin.” “The clear risk,” he added, “is whether policymakers in Washington will get their act together. In January or February, we could relive the shenanigans that we saw in the fall. Virtually all the decline in US GDP growth from 2.8 per cent to 1.4 per cent reflected tax hikes and sequestering – which put a spending stranglehold on GDP through the second half of 2013.” “Around the world, market and social reforms in China are very good news and 2014 will be fractionally better – which should breathe some life into commodities and Canada’s profit picture - but the years of 10-12 per cent growth are past, with the government opting for a more stable 7 per cent,” Rosenberg observed. “In Japan, Abenomics is working. Japan has turned around, and the market is saying that it is sustainable.” “I’m not looking for much of a recovery in Europe,” he contrasted. “The best that you can say is that the contraction phase there is over.” “The UK will remain the strongest-growing component of Europe next year,” Rosenberg forecast. “Ireland, which is poised to break away from its international bailout package, is sending out very good signals for the rest of the region,” he added. “The free trade agreement that we just inked with the European Union was perfectly timed. Coupled with improvements in the United States and Asia, we ought to see a lift in Canada’s economy in 2014 not far from the 3 per cent that I expect in the US.” “If we see fiscal uncertainty subside there, it will give companies an incentive to spend more of their cash in 2014,” he said. “The biggest headwind has been the lack of a coached and cohesive fiscal plan. If that changes – and my sense is that that will change – it will give some impetus at the margin to capital spending next year.” Robert Frank

Canadian Real Estate Forum / WINTER 2013

Investors are calling it déjà vu: the top four Canadian economies are again in the prairies.

askatoon and Regina are poised to post spectacular growth in 2013 (above 5 per cent). Edmonton and Calgary might have surprising results in 2013 says Mario Lefebvre, Director of the Conference Board of Canada’s Centre for Municipal Studies. Despite Alberta’s devastating floods earlier this year, he says, “this economy is so strong, so resilient, it will still turn out a performance of about 3.3 per cent... Edmonton will be above 4 per cent.” Also out west is Vancouver at 2.2 per cent. Every other large Canadian city is below the national average of 1.7 per cent, with Halifax at a close 1.6 per cent. In Toronto, Montreal and Hamilton, Lefebvre says, “it’s again a case of a manufacturing sector trying to find its footing.” The good news is that manufacturing firms are investing in machinery and equipment to prepare for a US economic rebound, which is imminent according to the Conference Board of Canada.

“Regina and Saskatoon are not used to seeing their populations increase so rapidly… It’s time for long term planning.” Mario Lefebvre, Conference Board of Canada’s Centre for Municipal Studies Last of the top 13 are Canada’s public administration cities. Ottawa is in restructuring mode as the government strives to eliminate the deficit by 2014. Victoria feels a similar pinch, as British Columbia aggressively reduces spending. Québec City will be in 10th position, a low ranking that’s new for this economy that nearly avoided the 2009 recession. But Québec, too, is in belt-tightening mode. Meanwhile in the land of prosperity, Lefebvre advises Saskatchewan officials to prepare for unprecedented growth. Analysts predict that Saskatoon’s current population of 246,000 could grow to 400,000 over the next 15 years. “Regina and Saskatoon are not used to seeing their populations increase so rapidly,” he says. “They have to rethink urban planning to make sure they are fully controlling the landscape, and that development is really a ‘desired’ kind of development. It’s time for long term planning.” Michelle Morra-Carlisle

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BENJAMIN TAL

Canadians to Rely on Global Economy in 2014 “We’re in a very familiar spot in which the global economy will really determine the shape and the fate of the Canadian economy in 2014,” says Benjamin Tal, Deputy Chief Economist with CIBC World Markets Inc.

C “We do need the global economy to be a force and I think it’s going to be the case.” Benjamin Tal, CIBC World Markets Inc.

anadian consumers are too deeply in debt to carry the economy through the coming year. “Even the housing market, although I suggest that is still very healthy, probably won’t be in a position to lift the economy, and it might actually be a slight negative for the economy in 2014,” says Tal. “So we do need the global economy to be a force and I think it’s going to be the case.” Tal sees initial signs that the Eurozone, China and the US are beginning to recover from the global recession. He doesn’t see the global economy performing well, but it will improve.

“That would be a positive for the Canadian economy, given that we’re a small open economy,” he says. He’s also encouraged that the shale oil revolution in the US has forced Canada to urgently look for new markets for our energy. He believes that this sense of urgency will force us to consider alternatives to the status quo, including new pipelines and rail lines. “Corporate Canada is in a very good position to start investing. They are more ready than ever to start investing. To me, that’s another positive issue.” Tracey Arial

URBANIZATION & DEVELOPMENT JAN SUCHARDA

Will Downtowns Continue to Grow? Migration to downtown continues. Not just in Canada but globally, people want to live, work and play in one neighbourhood.

“I

t’s part of the next generation coming in 2017. The city’s vacancy level stands at just below 5 and living in an urban location,” says Jan per cent. “Overall things look like they’re in order,” Sucharda, President and CEO of Canadian Sucharda says, “but we have to monitor how the Commercial Operations for Brookfield Office growth of the city looks going forward.” Properties. “The best way to do that While Calgary’s market grew by is set up your office to make it most “Overall things look like 4.5 million sq. ft. from 2009 to 2012, attractive to draw from that universe it grew by an impressive 7.2 million they’re in order, but we sq. ft. and was able to absorb it all. of potential employees.” New developers aren’t the only have to monitor how the Like Toronto, Calgary is seeing ones observing the trend. Many another development wave and landlords of major office towers are growth of the city looks expects another 4.5 to 5 million sq. investing capital dollars to take ft. in 2014-2017. However, because going forward.” advantage of improving trends, Calgary has exhibited some Jan Sucharda, modernize their facilities, green their volatility, Brookfield has taken measBrookfield Office Properties buildings and upgrade them accordures to protect itself from any downingly. Those that haven’t could find side risk there. it difficult to attract new tenants or retain existing “Our average lease term in Calgary is 11 years and ones. we have modest rollover exposure in our portfolio Toronto is experiencing another wave of develover the next 5 years,” Sucharda says. “So it’s a combiopment. The market absorbed about 4.5 million sq. nation of respecting the market and trying to protect ft. between 2009 and 2012, and another 4.5 million the portfolio through proactive leasing measures.” or so will come to the market between 2014 and Michelle Morra-Carlisle

Canadian Real Estate Forum / WINTER 2013

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“W BLAKE HUTCHESON

Oxford aims to hit $10 billion mark Downtown Toronto development has the potential to be a star in the crown of Oxford Properties Group’s global expansion, according to its president and CEO.

e formerly held 90 per Canada Center to our new RBC Tower. cent of our assets in They moved quickly and transparently, Canada,” said Blake and rapidly elicited overwhelming Hutcheson. “Our goal is to have 45 per public support.” “We got it [approved] within three cent of our assets elsewhere by 2017. We aim to hold a $10 billion portfolio months,” he added. “It was the right thing to do for the whole within the next few years.” “Businesses have region. Their support was “We’re betting on London, not the UK,” he woken up to how a impressive. Tick mark.” Hutcheson also explained. “New York City, quality workplace remains hopeful of evennot New York State. Toronto, but not suburban translates directly tually reviving Toronto’s aging convention centre. Toronto.” into greater “There’s great oppor“There is great opportutunity there, but it’s going nity in the Toronto core,” productivity.” to require some public Hutcheson declared, “where Blake Hutcheson, Oxford capital,” he explained. there is great demand for Properties Group “We’re unlikely to new real estate products.” “Businesses have woken up to how a proceed until there’s enough capital and quality workplace translates directly into interest to unlock something truly specgreater productivity,” he said, “so every- tacular there.” “We did the math. Building a casino thing we’re building today is LEED platinum or gold certified and linked to there would entail significant benefits,” Hutcheson continued. “Our ambition other structures.” “We have found Toronto’s urban was to channel the casino revenue planning department staff, by any world stream so as to benefit our city.” “For the time being, it’s on the backstandard, to be effective,” Hutcheson extolled. “For example, we had to route burner, but we’re not putting down our a pedestrian tunnel over the Gardner pens.” Expressway and Front Street from the Air Robert Frank

DORI SEGAL

The Right Way to Urbanize While urbanization can lead to a high and steady return for property owners, getting to that point takes time. “Few if any properties trade at a reasonable cap rate in the urban market,” says President & CEO of First Capital Realty Inc. “It’s a developer’s game as opposed to an owner’s game.”

ime-to-market is another challenge. Land assembly and the municipal process, particularly in complicated mixed use projects in dense neighbourhoods, mean that dollars can take years to materialize. “I think that if you’re in this business you’d better have a few projects going on at the same time,” Segal says. “It has to be an organized business. It’s tougher to do it project by project.” First Capital has several mixed use projects underway in the Greater Toronto Area, Calgary, Montreal, and the Greater Vancouver Area. While the

Canadian Real Estate Forum / WINTER 2013

company is retail driven, Segal refers to residential as “a nice addition.” For retailers, having hundreds of residential units above their establishment has clear benefits. Having customers walk instead of drive to their stores also gives them a sales edge over traditional shopping centres. While the municipal process is often seen as bureaucratic, Segal has come to appreciate the professionalism of city staff. In the eyes of those who assess the viability of a project, he says a great plan and proven track record go a long way. “If your plan is really “If your plan is really well well designed, well thought out, and takes designed, well thought out, and into consideration the takes into consideration the city’s intention in terms of the future zoning city’s intention in terms of the bylaw, and if they trust future zoning bylaw, and if they you are a developer that will actually deliver, you’ll trust you are a developer that get support from the will actually deliver, you’ll get city,” he says. “But if you come in and try to maxi- support from the city.” mize the economic beneDori Segal, First Capital Realty Inc. fits of the city without trying to give something back to the community, it’s an uphill battle.” Michelle Morra-Carlisle

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Left: Bloor One, Toronto, ON

DAVID GEROFSKY

Mixed-Use Projects in Toronto Showcase Innovation The Toronto developer and builder behind Coca Cola’s head office, Charlie, the new Globe and Mail Centre and Bloor One specializes in transit-oriented development that combines residential, retail and office space into single projects.

“I

t’s really extremely important for the success of a project that we not create ghettos of office or residential, but that we have liveable cities and developments that reflect what human beings are actually wanting,” says First Gulf Corporation CEO David Gerofsky.

“They want to work, they want to live, and they want to shop, all in the same area.” It’s not easy to do. Building safely in the confined spaces typical of busy urban centres can be complicated. Mixed-use projects multiply complexities. First Gulf projects require even more flexibility. To ensure that neighbourhoods function as communities as quickly as possible, they combine technology with construction expertise to enable commercial retail tenants to move in and begin operating before adjacent office/residential towers are “They want to work, finished. “We want to be able get they want to live, and our retail completed and getting our tenants in and they want to shop, all open for business,” said in the same area.” Gerofsky. “We don’t want to David Gerofsky, have to wait.” First Gulf Corporation To make this possible, they use innovations like an unusually long-necked crane or steel umbrellas over pedestrian walkways. So far, the approach has worked well, but Gerofsky says that things are getting more challenging for future projects as construction costs rise. “In terms of carrying out business in a way that makes sense, the numbers are getting more difficult, for sure.” Tracey Arial

Canada’s energy sector has significant regional impacts on all asset classes, not only out west but across the country. It creates employment, as well as the need for office, residential, retail, industrial and distribution space. Technology, financial services, and advanced manufacturing are also driving the new economy and impacting all major asset classes in all regions.

GARY WHITELAW

Sustaining fundamentals in a recovered economy 42

Canadian Real Estate Forum / WINTER 2013

esides these key sectors, Gary Whitelaw, chief executive officer, Bentall Kennedy LP points out others that are advancing real estate in Canada. “We’re seeing healthcare and education become increasing sectors to the economy and therefore to real estate,” he says. “And we’re seeing growth in the services sector overall.” Demographics are propelling change, as the boomer population gets older and millenials enter the household formation stage and become the new drivers for the household economy. “There are positive tailwinds that are creating employment and real estate opportunities in each of those sectors and in every region of the country,” Whitelaw says. “Interesting signs are emerging that we need to be mindful of and factor into our plans.”

He points out that Canada had a swifter rebound from the economic crisis than the rest of the world. Rental rates and occupancy levels in this country have recovered. The challenge will be to sustain fundamentals. “We’re not in early recovery phase; we’re in a more mature part of the cycle,” Whitelaw says. “So I think real estate skills, tenant retention, tenant satisfaction, operational excellence at the property level – whatever the asset class is – is the biggest theme for us at Bentall Kennedy and across the industry. “It’s not like you can rely on continued cap rate compression to bail out mediocre performance. It’s now all about the fundamentals and who really distinguishes themselves as a real estate operator as opposed to just a capital allocator.” Michelle Morra-Carlisle

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PETER SENST

Canadian Global Investors Choose Core Markets Three quarters of Canadian investors choose core markets when they invest globally, with 95 per cent of them looking at London first, New York second, says Peter Senst, Executive Vice President & Director, CBRE Limited.

“F

rom a Canadian perspective, it’s almost exclusively London, New York, 95 per cent. And there’s some South American. Paris is coming onto the radar now because London is so expensive. There’s almost no Asia or India.” Communication difficulties, cultural differences, governance, corruption – the challenges in international markets have become too steep for most investors. “The emerging market strategy, it’s not over, but the risks have become a little more inhibiting,” says Senst. “Once upon a time, I would say that the investors were equally split between core global investment strategies and emerging market strate-

“All the CIOs and all the major funds are increasing allocation into real estate and infrastructure now.” Peter Senst, CBRE Limited. gies and now I’d say its 75 per cent core and maybe 25 per cent emerging.” Most Canadians who do invest in other markets are doing so as part of a strategic partnership. “You might have a pre-conceived notion about some of the markets, but at the end of the day, you’re going to follow the right partner’s lead,” says Senst.

Despite investing in fewer markets, Canadians are investing in more real estate than ever before. “All the CIOs and all the major funds are increasing allocation into real estate and infrastructure now. This is a time where fixed income, equities and bonds are being sold down. The positions are coming down. Senst, who leads CBRE’s office, retail, industrial and urban real estate experts, says that the current climate of growth offers many exciting opportunities for his team. “The biggest players now are almost at 25 per cent. That’s been one of the most exciting things about real estate for us, just seeing how much everything is growing.” Tracey Arial

NEIL CUNNINGHAM

Global Safe Havens Begin to Grow The global financial crisis had investors transferring more of their portfolios into hard assets that are less volatile, says Neil Cunningham, a senior vice-president at the Public Sector Pension Investment Board (PSP Investments).

n the last six months to a year, some of those safe havens began growing.

“People see that the UShas come off the bottom and there are actually some growth opportunities now,” says Cunningham. “If you bought in the USa few years ago, you did well.” The trend has investors looking beyond the major gateway cities like New York, Seattle, London and Paris to off-centre locations and second tier properties. In Europe, for example, major players are moving into the logistics sector because they believe that older buildings will have to be replaced with more efficient operations. “As consumer behaviours change and evolve, it requires change in how goods are delivered,” says Cunningham. “One of the reasons you look at cities is because of this local urbanization trend. That creates growth in any cities where you have a population growth.” An emerging middle class, young educated new consumers, and aging populations also drive investment. Cunningham says tracking the many possibilities feels like an “unstoppable tide. It doesn’t make a whole lot of sense to fight against that tide; it’s a question of finding your place on the wave because a lot of those waves are pretty crowded.”

Canadian Real Estate Forum / WINTER 2013

Natural resource wealth normally indicates above-average growth, but Canada isn’t benefitting in the current conditions. Cunningham says “real estate here is fairly priced, but is simply attracting less attention because other places are under-priced.” Potential interest rate and cap rate increases are also worries, particularly in the short term. “If you’re a market to market investor, how do you position yourself as not to get cut by a thousand cuts as interest rates increase?” Variations in real GDP cause investors to turn away from some countries, as occurred in China and Brazil in the last year. “In the emerging markets, everyone got a little bit nervous because China’s growth rate had slowed below the 7 and 9 range and emerging markets stopped growing.” Despite his concerns now, Cunningham believes Asia will eventually generate more wealth than anywhere else. He also expects growth from emerging markets over the long term. PSP Investments have holdings in Africa too, but Cunningham views that market as a new frontier to try many things without short-term expectations. “I view it as planting acorns. It’s an opportunity to learn the markets, meet the people and learn how things are happening.” He says twenty years from now, people will wonder how PSP ended up with the best retail assets in the area. Tracey Arial

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“I

JASON CASTELLAN

Low cap rates spell opportunity for major market players In the secondary and tertiary markets from which Skyline Apartment REIT mainly operates, building new stock simply isn’t feasible.

so much development happen,” says Castellan. n the markets we’re in, we focus on Market players in major cities from coast to recapitalizing the buildings – to not quite a brand new status, because we’re coast are exploring development opportunities limited by the physical structure of the property – and building new rental stock to update and complement the older stock but by updating the amenities “In the markets they currently have in their and the systems that exist within the building. That’s where we’re in, we focus on portfolios. Some are focusing on our niche play is,” says chief recapitalizing the student rentals, which are accomexecutive officer Jason Castellan. “We can add $20,000, buildings. We can add panied by services and amenities that cater to this specific market. $30,000, or even $40,000 a unit $20,000, $30,000, or “With this social media phase to a building and still be well below replacement cost or new even $40,000 a unit we’re in right now, a lot of people like to hang out in social areas development cost. to a building and still with Wi-Fi, to be in more group“The rents you get simply like settings,” says Castellan. “The don’t justify the building costs in be well below focus is to have a lot more of secondary and tertiary markets.” replacement or new those areas where people socially In major markets, the compression of CAP rates have development cost.” hang out, whether it’s jazzed up laundry areas, landscaped compressed to the extent that Jason Castellan, grounds, or park like settings. it’s more worthwhile to build Skyline Apartment REIT We’re seeing a lot of those being new developments, rather than incorporated into the buildings compete for the limited rental they’re doing nowadays, as opposed to the big boxes stock currently available. “They can build buildings that were being built in the ‘60s and ‘70s.” for a five or six CAP as opposed to buying existing rental stock for a four CAP. That’s why we’re seeing Barbara Balfour

“Technology can be a huge win for businesses, landlords and developers because suddenly you’ve got to retool your work environment.” Sheila Botting, Deloitte Real Estate

SHEILA BOTTING

Set a new bar for office space As Senior Practice Partner and Client Cabinet and National Leader for Deloitte Real Estate, Sheila Botting has travelled the world to look at office spaces. Her journeys have taught her the great extent to which Canadians can enhance the workspace.

ffice space is critical to productivity. Investing in one’s business, Botting says, is “an opportunity to significantly reengineer how you do business, from processes to workplace design, for more highly desired outcomes.” That means rethinking traditional environments – offices with windows, and cube farm in the middle. “As a large tenant or user in the market you can really influence change to create an office campus,” Botting says. Considerations include how best to foster productivity, collaboration, communication, as well as knowledge transfer between different generations of workers.

Canadian Real Estate Forum / WINTER 2013

Technology drives change, allowing people to work anytime, anyplace and on any project. “With technology, suddenly you’ve given employees tremendous flexibility, and that can be a competitive advantage,” Botting says. “You’re empowering them to work and be accountable toward the results.” Utilization studies in Canada show that office seats are vacant 60-70 per cent of the time – clearly an ineffective use of space. With key change management processes and technology strategies in place, Botting says, companies can create “phenomenal new workplaces that are designed for the future of work.” Employee-owned devices; company-supplied devices and the necessary sophisticated security systems; document printing and storage (evolving from paper to paperless); followme-anywhere printing; and cloud computing are all key to this transformation. When Alberta had its catastrophic flood earlier this year, Deloitte’s Calgary office, like much of downtown, shut down. But staff were still highly effective, having technological solutions in place long before the disaster. “Technology can be a huge win for businesses, landlords and developers,” Botting says, “because suddenly you’ve got to retool your work environment.”

Michelle Morra-Carlisle

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EARLE ARNEY

Getting Real – A move towards activity based work environments Canada might not know it yet with its insulated economy, but a shift is occurring in workplaces around the world. Rather than focusing on efficiency – doing more with less space – employers are rekindling their awareness that effectiveness, too, is important.

reating a high performance workplace means looking at a space not as an asset on its own, but concurrently with the technology that enables workers to be agile and mobile. Management and HR processes must be aligned with the ways of working. According to Earle Arney, Managing Director of FKA Architecture + Interiors, progressive companies are discarding the notion that every employee needs a desk. New workspaces range from traditional settings for quiet work, to two-person meeting rooms, to spaces that promote team collaboration.

FKA has a rigorous process of analyzing an organization well before putting pen to paper, to understand how and where its people work most effectively and productively. Planning a building accordingly brings considerable savings and, more importantly, aligns the space with the functions to be performed within it. “We call it ‘unlocking the potentiality of work and the art of work,’ Arney says. In an age where we check our smartphone before pouring our morning coffee, workers of all ages see considerable crossover between work and home. “How do you make it really

comfortable?” Arney says. “How do we create an environment that is not only supportive for the task but nurturing, like a home environment?” What will the new, activity based workplace look like? Arney expects a more real, cluttered work environment to return. In contrast to the stereotypically pristine design firm with an empty white desk and ample space between workstations, he says, “We’re coming to a conclusion that for highly rich collaborative spaces there’s a messiness, an authenticity of work and collaboration that suggests a different picture.” Michelle Morra-Carlisle

RETAIL...MORE RETAIL FRED WAK

Urban Retail Growth Win Win for Tenants and Landlords

“People look at a shopping node, not necessarily a shopping centre when it comes to urban centres.” Fred Wak, RioCan Real Estate Investment Trust

With 72 per cent of its shopping centres in Canada’s six major cities, Canada’s largest REIT is proving that imaginative infilling leads to increased productivity and higher rents.

ioCan Real Estate Investment Trust has made waves in the last few years by bringing in traditional suburban big boxes as anchor tenants on downtown urban developments. Right now, they’re in the midst of developing Walmart-anchored projects on Bathurst in Toronto and in Sage Hill and East Hills in Calgary. “Where the population is growing is where the tenants want to be,” says Fred Wak, president and COO of RioCan. “People look at a shopping node, not necessarily a shopping centre when it comes to urban centres. For critical mass, they’re going to have to look at a quadrant rather than a location. For example, if you’re looking at someplace like the Yonge and Eglinton Centre, we have the largest square footage in one place but radically around the other corners, there’s new

Canadian Real Estate Forum / WINTER 2013

retail opening up and succeeding.” The condo trend in urban locations has also led to greater productivity for grocery stores. The Sage Hill project includes a Loblaws anchor, as does the Calgary Police Association development in downtown Calgary. Traditionally, food stores used to stick to locations where they only had to pay 10 or 15 dollars a sq. ft., says Waks. Now, they’re beginning to accept rents in the 20s and low 30s per sq. ft. foot, something that radically changed how downtown development works. “We’re seeing productivity in our food stores of over $1,000 a ft. – that equates as a percentage of affordability for the rent factor. How many people are going in and buying food; that equates to higher rents.” Tracey Arial

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TIM SANDERSON

Canadian Retailers Face International Competition International retailers are moving into Canada and shopping via the internet is increasing; trends that mean that traditional retailers must perform well or risk losing locations.

dining, with dining comes an increased length of stay at the ome mall owners have even refused to renew leases property. The typical power centre here is that someone gets in for struggling retailers, says Tim Sanderson, the their car, drives there and leaves. owner and broker of Northwest Atlantic Canada There’s nothing to keep them at the Inc. Sanderson negotiates tenancy for “There’s got to be a greater property. There’s got to be a greater some sixty different retailers. on length of stay and giving “A landlord has to have a shopping emphasis on length of stay and emphasis people a reason to linger. When they centre that is tenanted and occupied by giving people a reason to linger. linger, they shop.” aspirational and inspirational retailers,” He also sees an increase in the need he says. “Landlords must create an When they linger, they shop.” for flexibility on the part of retailers so atmosphere and a space that gives a Tim Sanderson, that they regularly service all the people consumer a reason to get in her car and Northwest Atlantic Canada Inc. living car-free in downtown city cores. drive to a shopping centre.” “Retailers need to be able to func“We’re in our infancy in this tion in a format that allows them to penetrate these markets.” country in terms of seeing quality entertainment uses in shopTracey Arial ping centres, says Sanderson. “With entertainment comes

MARK SILVESTRI

Premium Outlets Come to Canada

Simon and Calloway opened their first premium outlet centre in Halton Hills last August. Mark Silvestri, who’s in charge of premium outlets for the Simon Property Group says results are “more wildly successful than our largest dreams.”

imilar premium outlet centres are brands like Polo Ralph Lauren, Michael now underway in Montreal and Kors, Tommy Hilfiger and Calvin Klein. Vancouver. The Montreal centre “Twenty years ago, it was really kind is under construction in the town of of a backwater of retail, now it’s at the foreMirabel, north of Montreal via Highway front. People are demanding a higher level 15. The Vancouver Centre of amenities and services and will go near the airport. “People don’t locations and brands.” By building on cheaper Silvestri describes his pop into an land at some distance from a new premium outlet centres city’s core, outlet centres can outlet shop. They as fashion-focussed destinaoffer discounts ranging from stops as opposed to go to spend three tion 25 to 60 per cent. neighbourhood-serving “Outlet shopping is hours there. They general malls and necessity more focussed on apparel,” retailers like a almost always service says Silvestri. “People don’t Walmart or Target-anchored pop into an outlet shop. They buy something.” community centre. go to spend three hours there. Catchment areas for Mark Silvestri, They almost always buy outlet centres are signifiSimon Property Group something. It’s much more of cantly larger than traditional a goal-oriented type of shopretail too. Sylvestri says the ping trip.” entire Toronto area could be served by In recent years, the model has gone one, maybe two centres. upmarket. Premium outlets now include Tracey Arial

Canadian Real Estate Forum / WINTER 2013

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TRENDS IN REAL ESTATE TOM SCHWARTZ

Stability a common trend in multiple rental markets While stability is the common trend in multiple rental markets right now, any generality between them ends there, says CAPREIT’s president and CEO, Tom Schwartz.

“E

ach building has to be purpose built for its market,” says Schwartz. “In an urban singles market, for young people starting out in the work force, we’re looking at units that are probably a little smaller, with more amenities. In a building where they’re renters by choice, or for family rentals where children will be living, you’ll need bigger suites with slightly different amenities.” Whether located in the suburbs or in the centre of major Canadian cities, the strong need for multi-housing rental units is everywhere – and it’s not going away anytime soon. “We’re in a business where demand outstrips supply, and in virtually all Canadian cities, our buildings are full,” says Schwartz. “Going forward, we have a very positive outlook on multi-family business in all the major cities in Canada. “It’s a very, very stable business.” The biggest risk currently faced by CAPREIT, says Schwartz, is

interest rate volatility; they’ve mitigated this by taking all their mortgages out for 10 years, and are taking full advantage of extremely low interest rates in the interim. In the meantime, they’re also investigating the possibility of building new rental housing. “Right now you don’t have many purpose-built rentals in the city. The rental market is currently being served by condominiums owned by individuals and investors,” says Schwartz. “Probably for the first time in many years, it may be possible to build new rental housing, because the economics of rental housing may start to work. Many people are looking at it, including ourselves; we’re in the very early stages right now. But there are no generalities – when you’re building, you’ve got to understand the market you’re building for." Barbara Balfour

PAUL FINKBEINER

Diversification key to cash flow and asset growth As a national investor in multiple markets and asset classes, GWL Realty Advisors practices diversification – so their clients never rely on the growth of any one specific market.

“W

e buy office, retail, industrial – for the most part there’s decent deals to be found in all asset classes,” says president Paul Finkbeiner. “Overall, the Canadian market is doing great and there’s lots to buy. We have been buying $500 million a year in real estate for 15 years, and we plan to spend $500 million next year.” These investments span from buildings on the Atlantic coast and the nation’s capital to further west, where

Canadian Real Estate Forum / WINTER 2013

between 25 to 30 per cent of their portfolio is located in Alberta. Some clients ask whether investing in Alberta can really be seen as diversification, when all asset classes are linked to the oil and gas industry.

“Overall, the Canadian market is doing great and there’s lots to buy. We have been buying $500 million a year in real estate for 15 years, and we plan to spend $500 million next year.” Paul Finkbeiner, GWL Realty Advisors “As pension funds, they’re asking, ‘How can I diversify myself geographically and within asset class?’ Alberta is a growth market, but it is also probably one of the more volatile markets in

Canada. In 2008, when the markets went down, you couldn’t sell anything in Calgary.” As markets and user preferences continue to shift, Finkbeiner stresses putting thought into the long term lifespan of mixed-use developments. For instance, retail outlets with an online presence may require half the space they needed previously. And building renovations are more easily completed when dealing with landlords, rather than condominium boards. “Retail outlets may be a restaurant or fitness centre, places people have to come to versus being able to frequent online,” he says. “Ask yourself, will those smaller condo units be resold in five years? Is the market coming up in 10 years made up of 30-something’s or 50-something’s? From an asset diversification perspective, it’s still going to be all about cash flow and asset growth.” Barbara Balfour

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ED SONSHINE

Follow the leader? More like follow the population One of the two major trends affecting retail operations in North America is also a worldwide phenomenon. As populations increasingly move into bigger cities, suburban-oriented retailers are forced to take notice.

“I

noticed this trend almost 10 years ago when we saw 80 per cent of growth in the country coming from the six biggest cities in Canada,” says Ed Sonshine, chief executive officer at RioCan REIT. “Retailers have been traditionally underrepresented in urban areas, where you might see the odd department store or street retail. Now they’ll have to follow the population.”

While this trend is seen as positive by creating opportunities for new development, the rise of internet sales has been a threat to certain sectors such as music, video rentals and bookstores. However, it’s not as bad as it sounds, he says. “It just means the nature of tenancies in retail facilities is changing.” Big box stores like Staples and Best Buy are shrinking in size as they no longer need to carry as much stock, and use their Internet presence to bring in “There’s been an customers. At the same time, explosion of demand merchants such as restaurants, spas and gyms are picking up for restaurant space in the slack. “There’s been an urban and suburban explosion of demand for restaurant space in urban and areas. The average size suburban areas,” says of apartments today is Sonshine. “The average size of apartments today is 600 to 600 to 700 square feet. 700 square feet. Unless you’re Unless you’re having a having a pizza in front of the pizza in front of the TV by yourself, you’ll want to go out.” TV by yourself, you’ll RioCan REIT is hoping to want to go out.” take advantage of the urbanization trend through its Ed Sonshine, RioCan REIT recent acquisition of a mixed use development in Toronto, the Sheppard Centre, with plans to add retail space and a residential tower. “We’ll likely keep it as rental real estate,” says Sonshine. “This is office, residential and retail at the intersection of two subway lines. As a REIT, I’m more interested in creating cash flow than profits on sale.” Barbara Balfour

LORI-ANN BEAUSOLEIL

Emerging Trends in Real Estate 2014 Stable. Healthy. Generally positive. These are some of the adjectives used to describe Canada’s real estate market as forecast over the next year, according to the 2014 Emerging Trends in Real Estate report, PwC this November.

oth domestic and international investors continue to be drawn to the market, whether in the form of sovereign wealth funds or local market investors. However, investors should avoid drawing general conclusions and take care to evaluate each individual opportunity – or submarkets within the market – on its own merits. Several challenges are expected. “Despite the interest rates, we still have some warnings and we’re pretty bullish,” says Lori-Ann Beausoleil, partner and national leader of Canadian real estate practice at PwC. Some of the challenges include a projected slow down in the growth in employment and of the Canadian economy, compared to previous years. Not all providers of capital will be available to all users, and thus they are expected to be conservative in their deployment approach and keep their focus on stronger users. While capital will be available, its costs may vary and some projects may need to seek out alternative sources Supply/demand mismatches may occur in 2014 as retailers add more loca-

Canadian Real Estate Forum / WINTER 2013

tions and urbanization continues to “Despite the interest be a dominant trend, leading to rates, we still have opportunities for redevelopment and mixed use projects in urban some warnings and locations. Affordable housing will we’re pretty bullish.” continue to be a hot topic as prices continue to rise and immigration Lori-Ann Beausoleil, PwC numbers remain high. Improvement in the US economy could bolster the Canadian market further, but signs generally point towards a plateau in the real estate market in 2014. Investors are advised to look towards pure yield in the form of cash flow, rather than relying on capital markets, as there will be increased competition for both capital as well as good assets. Barbara Balfour

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INVESTING IN CANADA PAUL ZEMLA

Quality assets could defy rising interest rates Core, quality properties will likely continue to attract strong bids, even if interest rates move modestly upward in the coming months, according to Paul Zemla.

“T

hat’s for the best of core,” clarified Bentall Kennedy’s chief investment officer. “It’s unlikely to be the same for lesser quality properties. And obviously a more significant interest rate shock will most certainly drive up cap rates.” “Rising interest rates pushed cap rates up somewhat over the summer, and lessened bid depth, particularly from the REIT sector,” Zemla observed, “but the higher quality, core properties did not experience the same effect. So while it is likely that cap rates will edge upward, it’s not impossible that particularly strong demand on the capital side could hold fast or even lower capitalization rates slightly for some the better offerings, even in a scenario of moderately increasing interest rates. The key is NOI growth.” “Though that defies conventional wisdom, it is what we have already seen over the past six months,” he declared. “We have, however, witnessed

a bit of a shift in secondary and lower-quality offerings, as expected. Call it a return to a more normal spread between the good and the not-so-good.”

“Rising interest rates pushed cap rates up somewhat over the summer, and lessened bid depth, particularly from the REIT sector, but the higher quality, core properties did not experience the same effect.” Paul Zemla, Bentall Kennedy Zemla noted that transaction velocity is at or near its high-water mark. “We’re not at all-time records yet, but we certainly have been seeing volume in the $20

AVTAR BAINS

Liquidity Combines with Value to Drive Real Estate Investment Canada’s real estate market will remain strong over the next six to nine months, says Avtar Bains, a broker with thirty years of commercial experience.

“I

n Canada today, we’re enjoying both liquidity and value simultaneously,” says the founder and president of Vancouver-based Premise Properties. “People are seeing that they can exit properties and get a high price with a high degree of certainty that the deal is going to close in a reasonable period of time.” Bains says that all three core asset classes are doing well,

Canadian Real Estate Forum / WINTER 2013

billion plus range per year for most of the last 7-8 years, other than during the downturn,” he said. Zemla also defied the conventional wisdom that pension funds buy but never sell assets. “They’re actually one of the largest suppliers of property for sale,” he countered, “because their investment strategies and mandates vary, and their portfolios evolve over time.” “An asset at the bottom of one pension fund portfolio that is ripe to cull, might be the top objective of one of the small to mid-sized funds or REITs,” he explained. “We wouldn’t be surprised to see continued strong activity over the coming year.” Zemla underscored that the characteristics of different property classes attract different prospective purchasers. “People are drawn to retail for its stability and net operating income growth potential,” he said. “They’re drawn to office for the quality of covenants and the larger lot size. Some will chose to invest in industrial because they believe rents are on the rebound. Others will opt for multifamily residential for its stability of income qualities, particularly as homes become less and less affordable, driving people to rent.” “In a world that continues to search for yield, the common thread is likely to be a heightened appetite for higher quality, institutional core properties,” he concluded. Robert Frank

although there’s bias towards the industrial asset class, due to a limited supply of quality retail and office. REITs have not been as active in the past quarter as they were in the preceding several years, but Bains says they’ll still buy when opportunities arise. In the meantime, private equity investors and institutional players, like pension funds and life insurance companies, will pick up the slack. Among them are international and offshore investors attracted by financial stability, strong governance, quality of life and a level playing field. “When they look at Canada, “Stability on the our governance is fantastic, whether that governance is from a legal financial side is perspective, a process perspective or important, but on an accounting perspective,” says Bains. “All our service industry the governance people – whether the appraisal side, it’s critical.” community, the survey community or the real estate agent community – Avtar Bains, they all provide wonderful service.” Premise Properties Bains says that “Stability on the financial side is important, but on the governance side, it’s critical. That’s what separates Canada from the rest of the playing field.” Tracey Arial

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PETER BALLON

Size matters, for pension giant With the Canadian office and retail real estate market awash in liquidity, Peter Ballon says that the Canada Pension Plan Investment Board â&#x20AC;&#x201C; which currently owns a large portfolio of office and retail assets in Canada â&#x20AC;&#x201C; continues to explore investment opportunities outside Canada, in order to optimize return.

â&#x20AC;&#x153;T

here is a high percentage of institutional ownership in Canada,â&#x20AC;? noted the Investment Boardâ&#x20AC;&#x2122;s vice-president, Americas, â&#x20AC;&#x153;so premium assets trade with less frequency.â&#x20AC;? Smaller markets like Canada present another challenge for Ballon since it is harder to achieve scale. â&#x20AC;&#x153;Given the size of the Canada Pension Plan, we want to ensure that we invest in a scalable segment of the market so that we can achieve a sizeable portfolio. In the industrial sector, for example, itâ&#x20AC;&#x2122;s more challenging for us to gain the scale that we need.â&#x20AC;?

â&#x20AC;&#x153;Given the size of the Canada Pension Plan, we want to ensure that we invest in a scalable segment of the market so that we can achieve a sizeable portfolio. In the industrial sector, for example, itâ&#x20AC;&#x2122;s more challenging for us to gain the scale that we need.â&#x20AC;? Peter Ballon, CPPIB â&#x20AC;&#x153;We invest in office and retail assets in all markets, industrial in most markets and multi-family in the US,â&#x20AC;? Ballon continued. â&#x20AC;&#x153;We currently prefer multifamily in the US, as the sector has benefited from the lingering effects of the housing bubble. Nonetheless, we do keep our eye out for similar opportunities in Canada, if suitable ones should arise.â&#x20AC;? He explained that the national pension giant prefers to use total return during the whole life of its investments as its yardstick, rather than capitalization rates.â&#x20AC;&#x153;We expect returns here in Canada to remain stable for the foreseeable future,â&#x20AC;? Ballon predicted. He anticipated that interest rate volatility could pose a significant risk to commercial real estate markets. â&#x20AC;&#x153;In general, real estate is very heavily influenced by interest rates, therefore an increase in rates which is not accompanied by economic growth would have a negative effect on real estate,â&#x20AC;? he concluded. Robert Frank

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CAPITAL & DEBT MORAY TAWSE

Decline in market transactions attributed to uncertain CAP rates In his outlook on the marketplace like next year, Moray Tawse factors in three important elements: supply, demand and interest rates.

he vice president of mortgage investments at First National Financial LP believes there will be adequate amounts of funds in the marketplace. “I can see spreads remaining pretty much the same, somewhere between 180 and 225 basis point for the full year,” says Tawse. However, it will be a more difficult market for Class B and Class C types of real estate, and especially so for REITS. “Raising equity for a REIT by anything other than a debenture will be tough. We won’t see as many transactions with the types of real estate REITS typically buy,” says Tawse,

who is also expecting to see a general decline in all real estate deals in the upcoming year. One reason for this is the adjustment in the market of where CAP rates should be – which affects values - and the growing disconnect on this issue between buyers and sellers “We saw bond yields jump up to 100 basis points over the last year, and then come back down a little bit. When the bond yields go up, it affects CAP rates,” he explains, noting this is also true when long “Over the next 12 term interest rates start to rise in the bond market. months, it will be hard The dilemma lies in to get new product at identifying where CAP rates are, when there have what I call fair or not been a lot of sales to date. “Institutional owners reasonable CAP rates will be pushing appraisers, for a purchase. I would saying the market has not changed because there are say the real estate no examples of it. But the market next year will be feeling in the market is CAP rates have risen, cautious and steady.” though we’re not seeing it Moray Tawse, on the sale side,” he says. First National Financial LP “Over the next 12 months, it will be hard to get new product at what I call fair or reasonable CAP rates for a purchase. I would say the real estate market next year will be cautious and steady.” Barbara Balfour

STEPHEN SENDER

Holding onto the Status Quo In Canada, capital is clearly available to the real estate sector and to the capital market, yet recently it has started to feel an impact from the bond market. As bond yields have been rising in 2013, the cost of capital for real estate companies has risen accordingly.

One thing has changed in Canada: “The composition of the buying hether or not this trend continues in 2014, and whether it’s just universe seems to be shifting away from REIT’s, and more toward pension “a bump in the road” or the start of longer-term rising interest funds,” Sender says. “The pension funds have rates, remains to be seen. “Clearly this is a change relative to the “The composition of the buying been taking advantage of the situation and assets well, but with less competition circumstances enjoyed for many years up until universe seems to be shifting away bidding from REIT’s.” the spring of this year where we had multi-year In the long term, Sender has a positive reductions in bond market yields, cap rates and from REIT’s, and more toward perspective of Canada’s future and says he borrowing rates and rising equity stock prices,” pension funds.” personally has no worries about Canadian REIT’s. says Stephen Sender, Scotiabank’s managing “We’ve seen corrections in the past,” he says. director industry head, real estate. Yet while Stephen Sender, Scotiabank “They sometimes can go on for 6 months to logic dictates that as bond market yields rise, two years, and it looks a little different every time, but that’s okay. The real estate values should decline accordingly, Sender has seen no evidence of market always comes back.” this. He admits, however, that recent months have been a relatively quiet Michelle Morra-Carlisle period in terms of transactional activity, offering fewer data points to look at.

Canadian Real Estate Forum / WINTER 2013

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ARMIN MARTENS

Investment heads south A strong American economy and a tight Canadian market is diverting commercial real estate investment to the US, according to Armin Martens.

“W

e’re even more bullish on the US economy “We’re barely seeing any movement right now,” he said. and real estate fundamentals than when “we ought to have seen capitalization rates increase by 50we went in, 2010,” enthused the Artis 100 basis points by now.” Real Estate Investment Trust CEO. “In three years, our “Lack of product has and increased capital cost has American holdings have gone from zero to 22 per cent of our increased the cost of equity for real estate investment trusts,” portfolio, by income.” he continued. “Without a corresponding increase in capital“In the long run, economic fundamentals drive real ization rates, our units are trading low.” estate fundamentals. The US economy “I expect downtown office properis outperforming all the G7 countries, “We still want to grow more in ties in Vancouver, Toronto and Calgary including Canada, so we see signifibe out of favour right now, though Minneapolis, Denver and Phoenix to cant value there,” Martens observed. not necessarily suburban” Martens “The U.S will soon be self-sufficient in ...adding a fourth market, we’d cautioned. “Industrial and multinatural gas and will be self-sufficient family will perform best in the years have to look at Texas.” in oil within 5-10 years. That will spur ahead, followed by retail and office.” manufacturing, job creation and the He still sees opportunity in Class Armin Martens, overall economy.” A properties and all in major and Artis Real Estate Investment Trust “We still want to grow more in secondary Western Canada markets, Minneapolis, Denver and Phoenix,” he added. “If we were such as Red Deer, Fort McMurray and Kelowna. He is particconsidering adding a fourth market, we’d have to look at ularly bullish on Saskatchewan. Texas. There’s tremendous growth potential there, especially “Saskatoon is a major market,” Martens asserted, “even once the Panama Canal expansion is completed in 2014.” though in terms of population it would conventionally be Marten contrasted that tight supply that is depressing considered mid-market.” Canadian capitalization rates. Robert Frank

Canadian Real Estate Forum / WINTER 2013

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ERIC PLESMAN

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pecific to Canadian institutional capital, given the tight existing control of high quality real estate domestically the Canadian institutional investors are increasingly looking to diversify outside Canada,â&#x20AC;? says Eric Plesman Senior Vice President, Investments, Oxford Properties Group Inc. He says that institutional investors continue to focus on specific cities, primarily for reasons of liquidity. And while some of those cities might be in emerging markets, there are currency, law and taxation considerations for investing in these emerging markets. In addition, quantitative easing in developed economies have clearly impacted how capital flows into the emerging markets. â&#x20AC;&#x153;As we saw at the middle part of this year,â&#x20AC;? Plesman says, â&#x20AC;&#x153;once you start to see the effects of potential quantitative easing tapering off, thatâ&#x20AC;&#x2122;s where you started to have a mad rush of capital back into the â&#x20AC;&#x153;We prefer being local safe havens.â&#x20AC;? Despite that within the market, as being the greatest risk facing emerging markets today, he opposed to flying in expects a few to rank among from time to time to the top 75 major cities in the world for investors. do deals.â&#x20AC;? Oxford Properties Group is heavily invested in London Eric Plesman, and is also exploring Paris as a Oxford Properties Group Inc. major focus. According to Plesman, concentrating on a few key markets and truly understanding them tends to be Oxfordâ&#x20AC;&#x2122;s approach. â&#x20AC;&#x153;We prefer being able to be local within the market, as opposed to flying in from time to time to do dealsâ&#x20AC;? he says. Success in real estate requires an increasing degree of both creativity and smarts. â&#x20AC;&#x153;The competition has definitely elevated everyoneâ&#x20AC;&#x2122;s game,â&#x20AC;? Plesman says. â&#x20AC;&#x153;And it is a smaller world. As a result of a focus on a smaller number of cities that people know have liquidity, transparency, and a track record of generating returns, I think youâ&#x20AC;&#x2122;ll continue to see capital fleeing to those markets.â&#x20AC;? Michelle Morra-Carlisle

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Canadian Real Estate Forum / WINTER 2013

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WORDS OF WISDOM STEPHEN TAYLOR

Cash is king, when risk resides on the capital side “Interest rates will inevitably go up, and when that happens, there will be downward pressure on real estate investment trust unit prices,” predicted Stephen Taylor.

“T

hat would be the risk,” cautioned the Morguard Investments CEO. “It’s all on the capital side, rather than on the income side.” “We’ve almost seen a reversal of the position of pension funds vis à vis REITs during the last few years,” he noted. “REITs gobbled up the lion’s share of the properties on sale. The REIT price adjustment this spring made pension funds more dynamic. They are buying more income properties, whilst the REITs are trying their hand at development in order to create new value and product.” Though Taylor is circumspect about the downside risk of an interest rate spike, he also sees the prospect as an opportunity for canny investors. “We’re nearing the end of a fairly long bull run in real estate,” he observed, “after three decades of declining interest rates.”

JON LOVE

Interest rate rises good news – but not for everyone The next 20 years will probably be very different from the last 20 years of falling interest rates that put wind in the sails of the real estate sector. However, canny real estate investors have nothing to fear from upward pressure on interest rates, said Jon Love.

“T

hey usually increase because the economy is growing robustly,” explained Kingsett Capital’s managing partner. “That’s good for the real estate business, as well as every other business – so interest rate rises are a good thing.” “That will influence capitalization rates, but not all assets will be affected evenly,” he predicted, “Best of class assets will remain highly coveted – hence highly valued – so their capitalization rates probably won’t budge, though secondary and tertiary assets likely will.”

Canadian Real Estate Forum / WINTER 2013

“If interest rates rise and cap rates fall, you would want to be cautious,” Taylor counselled. “Timing when to buy and sell can make a huge difference to your portfolio. If things do turn bad, though, players with capital at their disposal and the management skills to run their buildings well will be poised to gain.” “In this environment, the focus is on cash flow, rather than value creation,” he said. “The objective is to collect a steady stream of cash generated by an asset where the leasing fundamentals are still pretty strong, with high occupancy rates, solid rents and fairly solid cash flows. The accent is on keeping buildings full to maximize the income stream.”

“In this environment, the focus is on cash flow, rather than value creation.” Stephen Taylor, Morguard Investments Limited Taylor still finds multi-unit residential property in the US attractive, and is doing a fair bit of investment in resource-rich Saskatchewan and Alberta, though, he said, “new development there is getting a bit late in the cycle, particularly on the office side in Calgary. While he sees plenty of opportunity for Morguard in North America, he acknowledged that favourable markets can also be found further abroad. “I know a lot of other major pension plans being very active in Europe, Brazil and some in the Far East,” Taylor said. “We’re not.” Robert Frank

“Quality rules, so discriminating asset selection will be key during the growth cycle that we anticipate,” Love continued. “Secondly, operators matter. Organizations that can make their real estate attractive to their customers will distinguish themselves from those who can’t. Finally, the cost of capital matters. Those who can raise debt and equity efficiently will have an advantage over those who must pay more for capital.” He noted that real estate investment trusts might have peaked last year. “They had attractive cost accounting “Quality rules, so metrics, but only for a very short period,” Love suggested. “They have to pay fees to discriminating brokers to raise their money, they have to pay asset selection will public companies and are expensive to run and that really is their cost of capital.” be key during the “In contrast, pension and private syndication funds that are efficient at what they do growth cycle that have always had cost-effective capital. They we anticipate.” were favoured in the past and will be in years to come.” he continued. “REITs are primarily Jon Love, the securitization of non-institutional quality Kingsett Capital real estate.” “There are some exceptions,” he acknowledged, “but to a large degree there are many real estate assets in the REIT universe that would not be the ones that would be targeted by pension funds.” Robert Frank

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Pacific Centre, Vancouver, B.C.

JOHN SULLIVAN

A ‘Fair View’ of Canada’s office and retail markets Canada’s retail market has enjoyed ample investment in recent years with interest rates being so low. After a great run from 2009 to 2012 in terms of sales growth and consumer spending, over the last 18 months that growth has flat lined, meanwhile accelerating in the US almost to pre-recession levels. But that’s of little concern to US retailers in Canada.

t one-tenth the population and roughly 40 per cent less retail square footage per capita than across the border, Canada isn’t a significant part of a US retailer’s growth plan. “Yet because we have less retail per capita, sales per square foot in our malls generally are higher,” says John Sullivan, President & CEO, The Cadillac Fairview Corporation Ltd. On the office front, Canadian cities rank in the top five North American markets in terms of occupancy. A new Cadillac

Canadian Real Estate Forum / WINTER 2013

Fairview building under construction in Montreal is already 70 per cent leased, and another in Calgary is 40 per cent leased. The firm is also converting the Sears store at Vancouver’s Pacific Centre into retail and approximately 280,000 ft. of office space. Asked what has a greater impact on profitability – “We can’t control strategic management or cap what happens in the rate fluctuation – Sullivan replies, “We can’t control capital markets, but what happens in the capital we can control how markets, but we can control how we manage our assets. To we manage our the extent we manage them assets. To the extent better, that will ultimately be reflected in the value and in we manage them the cap rate for that asset.” better, that will ultiDespite massive cap rate compression over the last 30 mately be reflected years, Cadillac Fairview has in the value and in distinguished itself through continual improvement in its the cap rate for that malls and office buildings in asset.” terms of quality, physical state and merchandise mix. “I John Sullivan, The Cadillac believe that if you do that Fairview Corporation Ltd. really well, you will get the lowest possible cap rate at that moment in time that you can get,” Sullivan says. “And that’s our goal.” Michelle Morra-Carlisle

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BLAIR WELCH

Expect More of the Same in 2014 Interest rates are unlikely to go up, inflation will likely stay steady and Canada’s commercial market will remain strong. So says Blair Welch, a founding partner in Slate Properties, a commercial real estate investment and asset management company based in Toronto.

“T

pretty strong occupancy across all asset classes, not a crazy here are two things that can make interest amount of development, and you can borrow money cheap; rates rise,” he says. “One is inflation and the means things are pretty good for other is market forces or “In Canada, you have pretty that landlords.” the pressure which buyers or holders of According to Welch, Canadian the bonds demand for holding the risk.” strong occupancy across all investors have only two worries: infraHe doesn’t see government or asset classes, a reasonable structure needs and low yields. He feels private bond owners willing to increase the rates of bonds, because so many of amount of development, and powerless to fix roadways, railways, services and sewers, but he’s increased Slate’s hold a high percentage themselves. Nor you can borrow money business in the US to 40 per cent overall does he believe inflation will spike in the coming year. cheap; that means things are to achieve a higher yield. “We are big believers in North Welch considers the problems pretty good for landlords.” America and we’re big believers in the caused by an increase in treasury last US. We will look to other markets, but I May as a small fluctuation in an otherBlair Welch, Slate Properties think you want to be in a market that is wise fantastic market. “If you can borrow resilient and has growth prospects.” money under 5 per cent in commercial real estate, that’s Tracey Arial pretty amazing,” he says. “In addition, in Canada, you have

Canadian Real Estate Forum / WINTER 2013

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Forecasting next seasonâ&#x20AC;&#x2122;s biggest trends What are the best bets for investment and development in 2014? 7KH UHDO HVWDWH LQGXVWU\Ĺ&#x201A;V PRVW LQÄ XHQWLDO OHDGHUV SUHGLFW WKH ELJJHVW WUHQGV LQ 3Z&Ĺ&#x201A;V DQQXDO IRUHFDVW UHSRUW Emerging Trends in Real Estate 2014. To get your copy, visit: www.pwc.com/ca/emergingtrends For more information: Lori-Ann Beausoleil Canadian Real Estate Leader 416 687 8617 ORUL DQQ EHDXVROHLO#FD SZF FRP

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BILL TRESHAM

Pension funds eclipse REITs as economy rebounds Better economic conditions are creating a virtuous circle for pension funds, according to Bill Tresham.

â&#x20AC;&#x153;I

f interest rates are rising, thatâ&#x20AC;&#x2122;s because the economy is doing better,â&#x20AC;? he observed. â&#x20AC;&#x153;Real estate investment trusts took all the important hits once their financing became more expensive.â&#x20AC;? â&#x20AC;&#x153;A lot of the capital that was invested in REITs was for the dividend,â&#x20AC;? Tresham explained. â&#x20AC;&#x153;Once treasury bills moved upward, investors contrasted REIT risks with the similar returns they could now derive from less-risky bonds. So thereâ&#x20AC;&#x2122;s a clear correlation between bond rates and the price of the stock.â&#x20AC;? â&#x20AC;&#x153;Now that their share prices a little lower, you wonâ&#x20AC;&#x2122;t see buildings like the Scotia Tower bought at their previous [record] prices,â&#x20AC;? Tresham predicted.

â&#x20AC;&#x153;Good leverage and high stock price permitted REITs to issue equity. That game is over.â&#x20AC;? In their place, the pension funds calculate that the rising economy will bolster their positions, even as interest rates tack upward. â&#x20AC;&#x153;We run the numbers all the time,â&#x20AC;? declared an upbeat Tresham. â&#x20AC;&#x153;A 3-4 per cent increase in rentals would offset the next 100 basis point rise in interest rates. â&#x20AC;&#x153;You can be as mathematical as you can about it, but bottom line is that itâ&#x20AC;&#x2122;s all about improved economic conditions: Your properties fill and move your rents.â&#x20AC;? While he acknowledged that the wild card is the impact that rate increases will have on public compa-

nies, he observed that boatloads of cash are still coming to North America. â&#x20AC;&#x153;Chinese conglomerates and insurance companies are just beginning to move their capital offshore,â&#x20AC;? Tresham reported. â&#x20AC;&#x153;Insurance companies are also aggressively lending. In Europe, thereâ&#x20AC;&#x2122;s quite a bit of competition to lend to good borrowers with good assets.â&#x20AC;? The elephant in the room, he admitted, is the risk of a big interest rate shock. â&#x20AC;&#x153;Huge jump: What happens?â&#x20AC;? he asked. â&#x20AC;&#x153;Technically, you would assume a linear relationship between interest rates and capitalization rates â&#x20AC;&#x201C; but there isnâ&#x20AC;&#x2122;t.â&#x20AC;? â&#x20AC;&#x153;The real question is: Will the improvement in the economy let you do enough to drive income â&#x20AC;&#x201C; either through increased occupancy or rents â&#x20AC;&#x201C; so that it will offset a decrease in capitalization rates?â&#x20AC;? â&#x20AC;&#x153;That might lead capital to flow out of REITs and into pension funds,â&#x20AC;? Tresham mused. Robert Frank Canadian Real Estate Forum / WINTER 2013

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“T

MICHAEL COOPER

Saskatchewan offers reward, central provinces risky Michael Cooper is optimistic about real estate investment trust prospects, despite the spectre of an interest rate spike.

Cooper expressed concern about the risk hey might lag but, overall, REITs posed by Canada’s profligate central provinces. are in fine shape, particularly “Ontario and Quebec will have to get their from where they are trading finances in order, or it will drag the rest of Canada now,” reassured Dundee’s chief executive officer. down, ” he warned. “There is so little wiggle room.” “More growth will, in general, offset higher Europe poses a significant opportunity for real interest rates. It’s nowhere near the concern that estate investors, Cooper added. most people have been dwelling upon.” “Germany’s economy “Industrial ought to is growing, with low-cost do well, though office “I hold Saskatchewan’s debt and attractive prices has a bit of headwind prospects among my most in an economy three time ahead. There’s value in the size of Canada’ s , ” he office buildings, but firmly held beliefs.” observed. “Countries like industrial will do better,” Michael Cooper, Dundee REIT Spain that have been Cooper predicted. “In the buffeted recently also meantime, the will be offer openings for opporlots of opportunity to tunistic investors though, in Dundee’s case, we enhance the income from office operations, with prefer not to undertake that degree of risk.” the degree of downtown intensification that we’re “Likewise, the US – with lots of capital and witnessing. lots of people – can offer some good opportuniAlthough Cooper acknowledged that Alberta’s ties, though that doesn’t mean that it’s good for resource juggernaut is driving demand in Calgary, us to do, ” Cooper added. “that market is not for the faint of heart.” “A lot of areas like Europe and the US are “Since 2007, we’ve reduced our exposure there growing faster than Canada, Cooper noted. “They from 63 per cent to about 18 per cent,” he had previously lagged, so now they might do disclosed, adding, in contrast, “I hold better. ” Saskatchewan’s prospects among my most firmly Robert Frank held beliefs.”

TOM FARLEY

Global economy emerging at last from the downturn “The worst is over,” said an upbeat Tom Farley, Brookfield Office Property’s chief operating officer

“C

anada’s position as the envy of most other countries,” he continued. “Most Canadian’s remain wary of the impact rising interest rates might have on Canada, the US and elsewhere. However, when that dissipates, our interdependence with the US will begin to be seen as positive, rather than the drag it has been during the past few years.” Although, like most observers, Farley expects interest rates to rise, he doesn’t foresee much – if any increase during the next year. “Government has an interest in the well being of the economy, and ought therefore to continue its strategy of low interest rates during 2014,” he anticipated. “The last thing any of our markets need is a significant increase.” “We’re in an exciting phase in Canada, with high

Canadian Real Estate Forum / WINTER 2013

occupancy, creditworthy tenants and a development cycle underway,” Farley noted, “though it will limit acquisitions, there remains opportunity for organic growth in occupancy and by capitalizing on development.” “Economists see the US as poised for a rebound,” he added, “so we will see solid growth there in occupancy and rental rates.” Farley zeroed in on softer occupancy in the American market. “It’s close to 86 per cent,” he said, “compared with 91 per cent in Canada in all sectors of office. In residential, low interest rates and growing employment are making homes more affordable.” “While Europe remains very soft,” Farley continued, “stability usually returns at this point in the cycle, so expect to see more asset sales. So Europe could offer some fine opportunities during the next few years.” “Looking at the BRIC countries,” he said, “each has faced challenges as their GDP growth rate has ebbed of late. If you take the long term view – as Brookfield does – that spells opportune timing to establish a toehold, get to know those markets better and identify opportunities to add value incrementally.” “Firms that have kept their powder dry and have good access to capital ought to be able to capitalize on these positions.” Robert Frank

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Confidence Sinks to 2009 Levels REALpac survey reveals deepening concern about economic growth and the impact of higher interest rates, but optimism is still in the picture By Carolyn Lane

Carolyn Lane

onfidence among Canada's commercial real estate leaders sunk to the lowest level since 2009, dragged down by continuing concerns about the economy’s outlook, according our Fourth Quarter 2013 Canadian Real Estate Sentiment Survey, published by the Real Property Association and FPL Advisory Group. While this sounds like gloom and doom, I’m relieved to note that respondents also found room for optimism. By way of background, our quarterly survey measures the current and future outlook of Canada's top commercial real estate executives – REALpac members – on overall real estate conditions, values and availability of capital.

Canadian Real Estate Forum / WINTER 2013

Respondents are senior executives and board members, including owners, asset managers and financial services providers covering a wide range of asset classes. With so many unknowns still clouding Canada’s economic picture, including the slower-to-expected recovery in US, it’s no surprise that a mixed bag of sentiments exist among property leaders right now. All eyes are on economic growth and the direction of interest rates, but at the same time investor demand remains strong and sources of equity capital are plentiful, expect where REITs are concerned. We may see some shortterm bumps, but there seems to be a general consensus that the long-term outlook is positive.

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“A ground-breaking study released by REALpac and the NAIOP Research Foundation this year found that the property industry accounts for more than $63.3 billion in economic activity annually. It supports 340,000 jobs, generates $18.1 billion in personal income, contributes $7.2 billion in personal and corporate income tax revenues for federal and provincial governments, and accounts for $32.4 billion in total net contribution to Canada’s GDP.” Carolyn Lane, Real Property Association of Canada.

Key survey findings included: • Many market participants see higher interest rates, decreased transactional activity and cap rate decompression on the horizon, while others see reason for longerterm optimism • Without meaningful improvements in the economy, currently high asset values are expected to ease up over the coming year • Debt is still readily available for most assets, though some expect pricing to become more expensive in the near term • Equity capital from private sources remains plentiful, although REITs continue to face weakened pricing power due to market conditions As is always the case, survey respondents shared many interesting observations and opinions. Ronald Findley, Regional Director, The Great West Life Assurance Company, said he expects bond yields to continue rising slowly over the next year or so, ending cap rate compression and causing “small increases” in the long haul. “I don't think the economy can support dramatic increases in rental income, so as cap rates rise, values will see some easing,” he said. François Goudreau, Senior Portfolio Manager, Caisse de retraite d'Hydro-Québec, added, “Going forward, we may see cap rates increase with interest rate movements. Real estate values could stay the same if NOI increases in tandem with interest rates.” Underscoring the range of views, Dr. Kevin Miyauchi, President, MIYA Consulting Inc., expressed optimism: “The market remains strong across most sectors of real estate. This last quarter we had expected to see a softening in the residential and office marketplaces, but they still remain surprisingly high. Each quarter I expect to see a leveling off, or a mild correction, but it has yet to materialize in the numbers.” For the near term, concerns about Canada's economy are widespread. Recently, the Royal Bank cut its forecast to 1.8 per cent for this year, down from 1.9 per cent. RBC sees growth picking up to 2.8 per cent in 2014, and gaining speed in the first half of 2015, driven primarily by increased exports.

Canadian Real Estate Forum / WINTER 2013

When REALpac members sneeze you could say major markets and the entire economy can get a cold. Collectively, they own in excess of $200 billion in real estate assets in the major markets across the country and are leading job creators. You just have to look at the cranes in downtown Toronto and Calgary to get a sense of the employment numbers generated by our members, who include major developers. But there are still many more jobs behind the scenes. Members include real estate investment trusts, publicly traded and large private companies, banks, brokerages, crown corporations, investment dealers, life companies, lenders and pension funds. A ground-breaking study released by REALpac and the NAIOP Research Foundation this year found that the property industry accounts for more than $63.3 billion in economic activity annually. It supports 340,000 jobs, generates $18.1 billion in personal income, contributes $7.2 billion in personal and corporate income tax revenues for federal and provincial governments, and accounts for $32.4 billion in total net contribution to Canada’s GDP. Notwithstanding the growing concerns, real estate investment markets continued to see strong activity through 2013, and though our members realize that historically low interest rates cannot last forever, there are positive factors that could lead to sustained growth. Though a long time coming, it now appears that global economic activity is strengthening. The US is finally due to outperform expectations driven by a revitalized consumer with an improved balance sheet, and increased housing activity is generating income and employment gains. At home, our economy stands to benefit from US growth, a lower priced dollar and government spending initiatives. As property leaders know only too well, there will continue to be many surprises in our “new normal” world, and they are more strategically prepared than ever to ride the risk curve. ■ Carolyn Lane is Vice President of the Real Property Association of Canada. For more information and to download a copy of the Canadian Real Estate Sentiment Survey, go to www.realpac.ca.

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! REF WINTER 2013_! REF Win08 Toronto 2013-11-20 10:28 AM Page 74

Michael Brooks’ Second Debut REALpac welcomes back one of the industry’s best-known executives to serve as CEO Michael Brooks

ichael Brooks is back. The well-known real estate lawyer and industry force who served as CEO of the Real Property Association from 1997 to 2012 will officially return to the same position on January 1, 2014. REALpac is widely viewed as Canada’s most influential voice in the real property investment industry. Its members, who own in excess of $200 billion in real estate assets located in major centres, include real estate investment trusts, publicly traded and large private companies, banks, brokerages, crown corporations, investment dealers, life companies, lenders and pension funds. When the search for a new CEO began last October, the REALpac Board of Directors was unanimous in its decision to approach Brooks to gauge his interest in returning to the helm. “REALpac has a critical role to play in the Canadian commercial real estate industry and I am excited to be returning”, said Brooks. “Being away from the Association for almost two years has provided me with a fresh perspective and I am returning with new ideas and a renewed focus to move the industry forward,” he added. Brooks’ first foray with the industry group goes back to 1997. Under his leadership, REALpac grew its membership three-fold, expanded its lobbying efforts, added research, standards, conferences, publications, professional development and member-only events to its offerings, and grew the staff from two to eight. Among numerous legislative accom-

Canadian Real Estate Forum / WINTER 2013

plishments, Brooks brought REIT limited liability to most Canadian provinces and managed the REIT exemption to the October 2006 SIFT rules. Brooks was also the driving force behind the development of the REALpac sustainability platform, including its Green Lease, Green Lease Tenant Guide, Corporate Social Responsibility guidelines and industry outreach programs with various national and international organizations. "REALpac has been a leader in that green space, and that agenda will continue to grow," said Brooks. Next year, the Association plans to introduce a waterbenchmarking normalization program and expand its energy-normalization benchmarking program beyond the office sector. Perhaps its most ambitious effort is its program with IPD to link valuation data to green building status. “We should be able to tell you for Canada that a LEED Gold building in the Toronto, Vancouver, Calgary, Edmonton market is worth ‘x’ per cent more than a non-LEED building,” Brooks explained. “That would be the holy grail and we are starting to get there with the data that we have been collecting over the last couple of years.” There is no shortage of legislative issues to address at all levels of government in the investment property space – and Brooks is ideally suited to lead the effort. “There’s also a lot happening in capital markets that needs to be monitored and in advocacy positions,” he

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“Being away from the Association for almost two years has provided me with a fresh perspective and I am returning with new ideas and a renewed focus to move the industry forward.” Partner, Aird & Berlis LLP; CEO, Real Property Association of Canada (as of January 1, 2014)

commented. “We have this issue of the parking lot tax to fund Metrolinx, which we have been fighting against. We’re advocating for a 1031-like Kind Exchange similar to what they have in the US. “We also need to keep on top of property tax and other kind of peripheral taxes that creep on the development side and make sure those are reasonable and manageable,” added Brooks. In his first go around, Brooks led the Association through two name changes: the Canadian Institute of Public Real Estate Companies (CIPREC), established in the 1970’s, was renamed the Canadian Institute of Public and Private Real Estate Companies (CIPPREC) in 2000. In early 2005, the Association assumed its present name. After almost 15 years as CEO, Brooks left REALpac in March 2012 to return to his commercial real estate law practice as Real Estate Practice Group Leader at Aird & Berlis, Toronto. In this capacity, Brooks has acted on some of the largest purchase, sale, financing and leasing transactions in the GTA. His expertise is in mixed-use projects, leasing and transactions. During the past two years, Brooks has also served as an adjunct professor at Ryerson University where he teaches real estate development, finance and sustainability at the Ted Rogers School of Management, has acted as an advisor to the United Nations Environment Program Finance Initiative,

served as a member of the Ontario Power Authority’s Advisory Committee on Conservation, and is writing a textbook on Canadian Real Estate for REALpac. Adding to his impressive credentials, Brooks is also the former Treasurer and Executive Committee and Board member of the Canada Green Building Council. A current member of CaGBC’s Governance Committee, he was one of 20 global participants in the Global Reporting Initiative’s new Construction and Real Estate Sector Study group, released in 2011. In announcing the appointment, the REALpac Board of Directors extended its “gratitude and thanks to Carolyn Lane, VP, and Nancy Anderson, CFO, for doing an outstanding job of shepherding the Association through a difficult year. “Carolyn and Nancy didn’t miss a beat and kept the Association focused and on track with existing and new initiatives. “REALpac is well positioned for the future due to the leadership and commitment shown by these two executives and they are both looking forward to working with Michael again,” said Stephen Taylor, Chair of REALpac, 2013 & 2014, President & COO, Morguard Investments Limited. Added Brooks, “I kept in touch with staff and I think you can probably thank staff for brokering the deal, so to speak. They are great people there and I am really looking forward to re-engaging with them.” ■ Canadian Real Estate Forum / WINTER 2013

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! REF WINTER 2013_! REF Win08 Toronto 2013-11-20 10:29 AM Page 80

EIGHT YEARS AGO: Construct Canada • PMExpo • HomeBuilder & Renovator Expo • Design Trends • Concrete Canada • The Real Estate Forum Became the first major exposition and conference in Canada to be a Zero Waste Event. In 2012 the joint cooperation of attendees, exhibitors and convention centre staff resulted in a 94% diversion rate achievement for all waste associated with the Show. By recycling 11.89 MT of paper fibres alone, we were able to save 238 trees, 29.24 cubic yards of landfill space, 4280 gallons of water, 1189 gallons of gasoline, 713 lbs of air pollutants, and 123,668 kwts of electricity. Our goal this year is to once again dramatically reduce the amount of materials and waste that enters our landfill sites.

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RBC Mortgage Regent Mall & McAllister Place )UHGHULFWRQ 6DLQW -RKQ

$173,250,000

$151,200,000

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$69,950,000

$303,025,000

$122,500,000

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$450,000,000

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$200,000,000

RioCan â&#x20AC;&#x201C; CREIT Portfolio Quebec City & Moncton

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Joint Bookrunner, Lead Arranger

$78,000,000

$421,609,613

$400,000,000

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Globe and Mail Lands Phase I & II Toronto

Frank J. Motter Portfolio /RQJXHXLO

SMART Technologies Building Calgary

Joint Bookrunner

$75,900,000

$54,100,000

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$325,096,000

$91,300,000

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Redbourne OfďŹ ce / Industrial Portfolio MontrĂŠal

Whitby Shores & Centennial Parkway :KLWE\ 6WRQH\ &UHHN

Place Ville Marie MontrĂŠal

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3URSHUW\ %URNHUDJH | Mortgage Brokerage | 3ULQFLSDO /HQGLQJ | 3XEOLF DQG 3ULYDWH (TXLW\ | 8QVHFXUHG 'HEW | M&A Advisory 2Ĺ? FH | Retail | Industrial | Hotels | Multi Residential | 6HQLRUV +RXVLQJ | /DQG | rbcrealestate.com RBC Capital Markets Real Estate Group Inc. RBC Capital Markets Real Estate Group Inc., Real Estate Agency. RBC Capital Markets Realty Inc., Brokerage. This advertisement is for informational purposes only. RBC Capital Markets is a registered mark of Royal Bank of Canada. RBC Capital Markets is the global brand name for the capital markets business of Royal Bank of Canada and its DĹ? OLDWHV LQFOXGLQJ 5%& &DSLWDO 0DUNHWV //& PHPEHU ),15$ 1<6( DQG 6,3& DQG 5%& 'RPLQLRQ 6HFXULWLHV ,QF PHPEHU ,,52& DQG &,3) p 5HJLVWHUHG WUDGHPDUN RI 5R\DO %DQN RI &DQDGD 8VHG under license.ÂŠ Royal Bank of Canada 2013. All rights reserved.

! REF WINTER 2013_! REF Win08 Toronto 2013-11-20 10:29 AM Page 83

WINTER 2013

Which Way Will the Market Go in 2014?

! REF WINTER 2013_! REF Win08 Toronto 2013-11-20 10:29 AM Page 84

Brian Kimmel Assistant Vice President Commercial Mortgages

Canada’s

Jonathan Philipps Senior Manager Commercial Mortgages

source for all your

Dru McAuley

real estate

Assistant Vice President Commercial Mortgages

Recent Financings: Equity take-out to fund capital upgrades with a CMHC renewal loan

Bridge loan to facilitate purchase and CMHC takeout

Maximum leverage on blended conventional 1st loan & mortgage fund 2nd loan

$6.5 million 48 units, multi-res Toronto, ON

$50 million 650 units, multi-res & retail British Columbia & Ontario

$8.0 million 71 units, multi-res Edmonton, AB

CMHC insured loan to facilitate a corporate restructure

Achieved maximum LTV on purchase price with a conventional loan

Interim bridge financing on a portfolio purchase prior to CMHC approval

$2.5 million 45 units, multi-res Ottawa , ON

$4.0 million 100 units, multi-res London, ON

$35 million 500 units, multi-res National

Thank you for 25 years of shared success. ﬁrstnational.ca

VANCOUVER CALGARY

TORONTO

MONTREAL

HALIFAX

604.681.5300 800.567.8711

416.593.1100 800.465.0039

514.499.8900 888.499.1733

902.452.0776

403.509.0900 888.923.9194

Ontario Mortgage Brokerage License No. 10514