Canadian Real Estate Forum Magazine - Fall Issue 2014

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FALL 2014 / ISSUE 66

20

40

Gatineau aspires to Stockholm-like status

Build it and Yes they will come

Bold overhaul to Ottawa landmark began as CFL bid

Making it in a hot market Have a vision and go for it

Lansdowne revival breathes new life into the Glebe WWW.REALESTATEFORUMS.COM

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WE’VE BUILT THESE CITIES FOR….GROWTH

George Przybylowski Vice President, Informa Canada

Mark Stephenson Vice President, Informa Canada

Today’s workplace is undergoing a transformation, evolving from the punch-card mentality of a rigid business model to that of the flexible telecommuting environment with little or no actual office space required. And so, no wonder a hot discussion topic at this year’s 16th annual Real Estate Forum in Calgary and the 20th annual Real Estate Forum in Ottawa.

Whether you are developing, investing, owning, leasing, financing or marketing, this shift will touch every aspect of our country’s real estate sector. And what better way to find out how others are riding this wave than at conferences such as these. In Western Canada, the 2013 Southern Alberta flood taught the market many lessons, not the least of which was that to have a productive workforce during a natural disaster means having one that can be productive off-site.

This has led to the shift toward mixed-use

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developments that morph residential and office spaces and the changing downtown and suburban office markets, as well as the increasing trend to transit-oriented neighbourhoods to get more cars off the roads.

Mirrored in the National Capital Region, these new directions are gaining momentum across Canada. With other presentations focusing on the pull of the Alberta economy, how the West is building effective leadership campaigns, the state of the current REIT market debt market and the impact of the energy and financial markets, the Western forum is sure to educate and enlighten.

Ottawa Real Estate Forum touches on the federal government’s real estate strategy for the office-space market and development activity, as well how the retail, apartment and condominium markets are performing. East End buildings are competing with West End counterparts, as the city’s office market grows, and an ever-growing demand for housing has added to the cache of sector influencers. Combined with keynote presentations to determine future strategies, both forums will put you in the driving seat with a map at the wheel.

George Przybylowski Vice President Informa Canada

Mark Stephenson Vice President Informa Canada 3

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CONTENTS

3 We’ve Built These Cities for….Growth

6 The Altus Report: Occupier Strategies, Manager Performance and Building Attributes Diverge

14 Spotlight on Dubai Real Estate

30 REALNET Top 10 YTD Apartment Transactions in the GTA, GCA and GVA

56 Integrity Clauses with…Integrity 57 Alberta’s Municipal Government Act Review: A Chance to ‘Get it Right’ 58 Property Tax Fairness in Canada About Informa BRINGING KNOWLEDGE TO LIFE Businesses, professionals and academics worldwide turn to Informa for unparalleled knowledge, up-to-the-minute information and highly specialized skills and services. Our ability to deliver high quality knowledge and services through multiple channels, in dynamic and rapidly changing environments, makes our offer unique and extremely valuable to individuals and organizations. www.informacanada.com

©2014 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

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Canadian Real Estate Forum / FALL 2014

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OTTAWA

CALGARY

20 Thank you to our sponsors

40 Thank you to our sponsors

22 Reinventing downtown Ottawa

42 Calgary: A magnet of growing attraction

24 Gatineau aspires to Stockholm-like status

44 REITs riding on rising reputation

26 Feds limit flux in Ottawa market

46 Investing in the US: A word to the wise Canadian

As office tenants relocate, growth is still the bottom line

Making it in a hot market

28 The forces of change

48 Mixed-use ramps up complexity

Balancing government and business in the capital

Build it (yes, they will come)

32 Bold overhaul to Ottawa landmark began as CFL bid

49 ‘Have a vision and go for it’

Lansdowne revival breathes new life into the Glebe

50 Calgary Industrial Market Remains Steady

34 Region could reap rewards of federal surplus in 2016 36 Urban intensification to put residential atop retail Home grown: Farm Boy expands outside Ottawa 38 Uncertainty looms over development landscape

51 Global economy slowly strengthens Oil sands attenuate commodity swings 52 Will apartments overshadow condos?

In with the new: growing Ottawa

53 Community connections

39 Eco buildings, both public and private

Advertisement Inquiries

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Informa Canada Inc.

Frank Scalisi Director of Sponsorship and Advertising Sales T: 416-512-3815 E: Frank.Scalisi@informacanada.com See our ad on page 55

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

Will Morris, President George Przybylowski, Vice President Mark Stephenson, Vice President

Spring: Montreal • Vancouver • Edmonton Fall: Ottawa • Calgary Winter: Canada-wide • Global

Editor & Associate Editor

Conferences For more information on our Conferences visit www.realestateforums.com

E-magazines are available at www.realestateforums.com

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THE ALTUS REPORT

OCCUPIER STRATEGIES, MANAGER PERFORMANCE AND BUILDING ATTRIBUTES DIVERGE

Sandy McNair President, Altus InSite

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One Approach Will No Longer Result in Success for Occupiers, Managers or Investors For more than a decade declining capitalization rates have enhanced values and returns for virtually all commercial real estate investors. The opportunity to continue to ride the wave appears highly unlikely as cap rates in most markets and for most asset classes plateau. For more than 60 quarters Altus InSite has interviewed opinion leading investors, lenders and advisors. The expectation of most real estate investors, lenders and advisors is that cap rates are more likely to increase than decline.

Operational Excellence Key to Future Returns With the era of riding the wave of cap rate compression drawing to a close, future returns and out performance will require operational excellence. Traditionally the industry has taken a relatively homogeneous or commoditized approach to manager characteristics / performance and to building attributes / positioning. This tendency to take one approach to all occupiers and tenants has been most evident in the ofďŹ ce and industrial asset classes. Within the retail asset class most managers and investors have understood the different approaches required for success in each of the major retail formats, including: regional centres, power centre, community centres, grocery anchored, neighbourhood strips, high street and so on.

Furthermore the extent of engagement between retailers and retail managers has Canadian Real Estate Forum / FALL 2014

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Office Inventory by Year Built in millions of sq. ft. • Source: Altus InSite Sept 26, 2014

200

Built pre-2000

175

Built since 2000

150

Currently Under Construction/ % of Existing Inventory

4.5% 16.7% 1.3% 7.5%

125 100 75

9.2% 6.8%

33.4%

5.2%

22.9%

50

21.0%

6.0%

25 0

13.3% Vancouver

Edmonton

Toronto

Calgary

Ottawa

Montreal

Downtown Office Inventory by Year Built in millions of sq. ft. • Source: Altus InSite Sept 26, 2014

80 70 60

7.1%

Built pre-2000 Built since 2000

50

20

1.3% 7.5%

9.9% 35.2%

40 30

11.0%

Currently Under Construction/ % of Existing Inventory

9.1% 11.8%

3.8%

7.6%

19.4%

7.1%

10 0 Vancouver

Edmonton

Calgary

been higher due to merchants’ associations, joint marketing campaigns, percentage rents and multiple leasing opportunities.

However, the traditional bias taken by many that one size and one approach to manager performance and building attributes fits most all office occupiers is now dangerously outof-date.

Battle for Talent The ability to recruit, retain and grow high performance people – the battle for talent – is a top priority for most all office occupiers and their senior management teams. The choices made in the selection of work places and work spaces, given the escalating intensity and impact of the battle for talent, have become mission critical for many office occupiers.

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Toronto

Ottawa

Montreal

Many seasoned office leasing experts have enjoyed success guiding occupiers from a long list of alternatives to a short list based upon building attributes such as location, image, age and others. Once a short list of options was identified, these seasoned office leasing experts have often been able to guide the occupiers to view all of the short list options as equivalent with their building attributes and managers’ performance being treated as a commodity – a homogeneous commodity. Historically, this treatment of the short list as commodities has resulted in the final selection being made based primarily upon price. While it is faster and easier to measure differences in price, the occupier fails to benefit from a deeper understanding of the quality of fit between their strategies and culture and the more detailed characteristics of the shortlisted buildings and their management teams.

Beginning about five years ago and on an accelerating basis, office occupiers have identified and committed themselves to

increasingly intense and divergent strategies to win the battle for talent. Some of these occupier strategies have material impacts on the buildings. Some occupier strategies are bumping up against the buildings’ outer design limits in terms of total number of people per floor. A few occupiers are increasing or retaining workspace sizes, but many are decreasing the size of each workspace and increasing the overall density of their offices. There are significant variances by market, by industry, by specific firms and by function. The segment of office occupiers that are committed to very high densities (100 to 120 square feet per person) has grown from nothing to significant within only the past five years. Most all of the existing office buildings built prior to 2008 are designed (fire stairs, elevators, washrooms, electrical, mechanical) to a maximum occupant density of 150 square feet per person.

Spike in New and Different Supply Driven by a combination of occupiers seeking new and different work places and real estate investors wishing to place capital, each major office market has experienced a material spike in new supply. The chart above provides an overview of the proportion of each major market that is currently under construction and the proportion that is nearly new, that is built since 2000. In these markets there are currently a total of 97 office buildings under construction containing 21.1 million square feet with 42.6% of it available for lease. The second chart focuses on just the downtown portion of each major market.

The differences between these new buildings and the existing buildings are material and go well beyond just increased occupant density and the related impacts on fire stairs, elevators, washrooms, electrical and mechanical. Their designs often place heightened emphasis on worker comfort and productivity – more daylight, better and more personalized control of temperature, flexible layouts, and better technology as well as a focus on environmental leadership and lower operating costs. For a segment of the market, the attributes of these new buildings are directly aligned with their strategy to win the battle for talent. The specifics vary by office occupier. Some are choosing high density and an approach to sharing workstations that result in 1.3 workers per workstation generating an overall reduction in their footprint of

Canadian Real Estate Forum / FALL 2014

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35% and higher. In a nutshell, a segment of the occupier market is choosing to move to better space, but use much less of it.

Multiple Occupier Segments Perhaps like rarely before the averages and the stereotypes are especially dangerous. The specifics matter and vary widely.

With that cautionary note, here are a few examples of the divergent outcomes being employed by office occupiers: • Three major energy firms in Calgary moving from 300 square feet per person to 250, 350 and 400 square feet per person in new and existing office buildings, • Major Canadian bank moving to a combination of 80 square feet per person and 140 square feet person for a net average of 120 square feet person in a new Toronto building, with 120 square feet per person being their global target for density, • An accounting firm moving from multiple locations to better, smaller premises based upon 1.4 workers per workstation, • An existing office occupier in Toronto that will retain their traditional approach and retain their current density of 400 square feet per person, • A major Canadian Telco moving from multiple locations to new premises at an average density of 100 square feet per person, • PWGSC is committed to their Workplace 2.0 strategy which includes moving to better more intensely occupied premises in Ottawa and elsewhere.

The key issue for investors and managers is how many occupier segments are there, what will they pay for and how big will each segment eventually become?

These answers are fundamental to developing winning strategies for most all existing office buildings,

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especially the vast majority of the market that was built prior to 2000.

The key point here is that one approach or one size will not fit all occupiers and their increasingly divergent strategies.

Building Positioning and Manager Branding Each building owner will now want to make a deliberate choice on the positioning of their building – to which occupier segments are you focusing this building? Which occupiers will be most likely to succeed in this building? In what ways is this building and building management team best able to help your occupiers win the battle for talent and succeed? How well do the occupiers’ strategies align with yours for this building?

As if this isn’t enough already, there is more.

The branding of the management firm includes performance attributes such as environmental leadership, communication channels, responsiveness, issue resolution rates, satisfaction, momentum and referral – recommendation for the building and referral – recommendation for another building managed by the same firm.

Over the past 15 years great progress has been made on managers’ brand attributes by many of the industry leaders, but not all firms. The delta between the few at the top and the industry norms or benchmarks continues to be material. As an example, perceived issue resolution rates at the best firms are in the area of 80+%, whereas the industry benchmarks or norms are, depending upon which major market, currently in the 23% to 38% range. The industry norms or benchmarks have been improving over the past 15 years, but there is still huge opportunity for improvement.

Each of these and other performance metrics are key leading indicators to achieving sufficiently high levels of office building tenant success, satisfaction, referral and recommendation that they will be willing to pay a premium over market rents to stay in either this building or another managed by your firm.

Big Winners and Big Losers It will be very difficult for any management firm to be sufficiently skilled to be all things for all people. More likely, breakthrough results will require focus on the objectives of one or two occupier segments and their strategies.

Some investors and their managers will have become lulled by the strong performance they have enjoyed over the past decade by doing little more than riding the wave of cap rate compression. These investors, their managers and their properties are most at risk of sharply increasing vacancy and plunging rental rates. In most markets the backfill space in the existing buildings will be significant as the new buildings are completed and filled. The occupiers moving into the 21.1 million square feet of buildings that are currently under construction will likely be moving out of more than 21.1 million square feet in existing buildings, buildings that were built prior to 2000. Some existing buildings will initially fail in the battle with obsolescence due to poor or no strategy, no to low investment and management that is flawed or not focused on the strategies of their targeted occupiers.

For some industry watchers we are about to enter a very confusing time with performance of neighbouring buildings that had been viewed as peers seeing their performance diverge widely – perhaps $13 rents and painfully high vacancy in one and $33 rents and low to no vacancy in another.

Much like Retail, the Office market will soon see big winners and big losers at the same moment in the same locations.

Understanding and contributing to your tenants’ strategy, choosing to focus your building attributes on specific occupier segments, building and enhancing the value of the brand of your management team are the keys to delivering operational excellence. Measure, proactively listen and continuously improve.

A superior rate of tenant retention at above market rents is the objective of most every investor, asset manager, property manager and leasing expert. That is the best, if not only path, to superior returns in 2015 and beyond.

■ 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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Dubai Marina

SPOTLIGHT ON DUBAI REAL ESTATE

Dubai’s economic recovery is well entrenched and gaining pace with 2014-15 GDP growth expected to accelerate towards 5 percent, according to research released by the Bank of America-Merrill Lynch in July.

Not surprisingly, both the real estate investment and development markets are benefitting from the emirate’s robust economic growth and rising business confidence.

By Anna Amin

On the back of positive economic performance, its regional ‘safe haven’ status and maturing market conditions, Dubai once again cements its place as the region’s preferred real estate investment market.

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“In addition, the city offers safety and security that is unmatched elsewhere in the wider Middle East, and investors clearly take comfort in this. Furthermore, the attractiveness of the real estate market in terms of the returns available also made it highly attractive. The third most significant draw for Dubai is the lifestyle offered through second home ownership, which is again unrivalled across the region, Durrani added.

Cluttons’ 2013/14 International Private Capital Survey last year positioned Dubai just behind London as the world’s second most sought after real estate investment destination by High Net-Worth Individuals (HNWI).

Dubai is also a regional leader in transparency; the emirate is ranked 1st in the MENA region in JLL’s 2014 Transparency Index Survey, a key factor that makes Dubai stand out as a preferred investment market, commented Dana Salbak, Senior Research Analyst, JLL MENA.

“The survey revealed that the intentions of HNWI in selecting Dubai as an investment destination were underpinned by the emirate’s ability to provide a safe haven for ‘refugee capital’ from the rest of the region,” commented Faisal Durrani, International Research and Business Development Manager at Cluttons.

Real estate in 2014 With the rapid price recovery, especially in the residential sector, concerns have emerged that the Dubai real estate market might be heading towards another overheating scenario, similar to the pre-crash conditions of 2008.

Canadian Real Estate Forum / FALL 2014

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Market driver Expo 2020 Dubai’s successful bid to host the World Expo 2020 certainly helped boost confidence in the real estate market in the immediate term. In the longer term, the main sectors to be impacted are retail and hospitality, experts say.

“The Expo 2020 announcement has undoubtedly had a positive impact on the overall sentiment and confidence in the real estate market, as witnessed by the increased level of project announcements,” commented JLL’s Dana Salbak.

Palm Jumeirah

However, experts mainly agree that today’s real estate market climate in the emirate differs from the previous boom time, both in terms of its regulatory environment and market fundamentals.

“Dubai’s residential market landscape today is worlds apart from the days of the 2008 boom.

For a start, the market fundamentals are very different,” commented Cluttons’ Faisal Durrani.

He explained that instead of being driven by the fly-by dealers of the past who were lured to the market by the rapid acceleration in residential values and a regulatory environment that was striving to keep pace with the tremendous growth in the market, now the market has matured significantly.

“The memories of the 2008 market correction are still fresh in people’s minds and the authorities have had the opportunity to further regulations and implement measures that will assist in the creation of a much more sustainable residential market over the long term,” Durrani said.

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The analyst explained that governmental moves such as the doubling of the Property Registration Fee to 4% and the introduction of the Federal Mortgage Caps have helped to significantly reign in growth.

“Furthermore, we have seen some developers embark on a path of self-regulation, with many putting measures in place to curb the resale of off-plan properties, either by linking the right to re-sell to construction milestones, or in some cases until handover,” Durrani added.

According to John Stevens, Managing Director, Asteco, many investors today can only re-sell the property at a time after a 10 to 50% payment of the purchase price has been made.

“Most of the leading Dubai developers have increased their requirement to 40% before they will allow a resale; thus slowing down rampant speculation. All these measures are contributing towards a more structured market with a sustainable long-term outlook,” Stevens said.

According to Cluttons’ Durrani, it was crucial that these measures were put in place before the market had a chance to surpass its 2008 peak. “In fact, at the end of Q1 2014, values stood 19% below the Q3 2008 peak,” he said.

John Stevens from Asteco added: “In any real estate market, ‘sentiment’ plays an integral part and confidence was almost palpable after the successful Expo 2020 bid.

It certainly reinforced the market’s perception that economic growth will be sustainable with the UAE population expected to grow by about 25% to hit ten million by 2020. So given that, the real estate sector will grow organically between now and then.”

Cluttons’ Faisal Durrani pointed out that since the event will be a key pillar in driving Dubai’s vision of being the most visited city in the world in the next six years, the biggest immediate beneficiary of the Expo 2020 announcement will be the tourism, leisure and hospitality sectors.

However, in order to facilitate and drive this growth, “we will need to see a significant boost to the hotel supply pipeline, particularly given that the emirate’s 80,000 or so hotel rooms and serviced apartments are operating at roughly 80%-90% occupancy at present, which translates into roughly 11 million tourist arrivals at the moment,” so Durrani.

And it won’t just be a case of boosting hotel room keys, the Cluttons analyst explained, but the supporting tourist infrastructure in the form of retail and leisure attractions will also have to be significantly expanded. He added that the residential market will also benefit over the short to medium term as with the exponential growth of the retail, leisure and hospitality sectors comes a significant boost to the level of jobs being created.

“The overall impact is significant in the short term, but one must remember that Expo is just a vessel to help drive Dubai’s vision and the city will continue to reinvent itself in an effort to deliver its vision of being the region’s premiere business and finance hub,” Durrani said.

Canadian Real Estate Forum / FALL 2014

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! CREF Fall 2014 2014-10-01 10:45 PM Page 18

Sheikh Zayed Road

The way forward Experts agree that the key factors necessary in order for the Dubai market to be able to achieve sustainable growth and greater maturity, are creating increased transparency, passing increased regulations as well as a commitment from all industry stakeholders to act responsibly and cautiously going forward in order to avoid another property asset bubble.

“Curbing speculative property purchases and limiting the volume and loan-to-value levels of mortgage credit granted to buyers are two simple, but effective solutions. In October 2013 the UAE Central bank announced a new mortgage law to regulate the sector and prevent a similar crisis from happening in the future with the proposed mortgage cap just one of these types of initiatives,” Asteco’s John Stevens said.

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However, Stevens also pointed out that curbing the number of speculators is a little more challenging; “the smaller the down payment and the more relaxed the payment schedule, the more attractive the project becomes – especially if market liquidity is restrained. Many Dubai-based developers are able to maximize their sales by offering extremely attractive payment plans.

“One such current market example is 20% deposit within 30 days of signature and the 80% balance on completion in 2016; and this type of flexible payment plan undoubtedly attracts a high volume of eager ‘flippers.’

“Time to completion is another key factor; a project that is 100% ready will not be as attractive to speculators as an off-plan project because of inability to gain significant capital growth and capital appreciation before flipping the unit,” Stevens explained.

The third factor, according to Asteco’s expert, is the re-sell criteria as set by the developer; developers such as Emaar have increased its requirement to 40% on some

projects before they will allow a resale; thus slowing down rampant speculation.

However, when speaking about sustainable growth in the real estate market, one cannot ignore to look at the sustainability of Dubai as a growing community.

“As the market continues to mature, it will be important to start thinking about the longevity of the communities that are being created across the city,” commented Cluttons’ Durrani.

“In order to create sustainable communities, this needs to be looked at more broadly and the benefits of an ‘investor visa’ or ‘retirement visa’ may help to sustain long term momentum in the real estate market.

“While some developers have in the past made attempts to offer renewable residency visas to property owners, such schemes faded shortly after the market completed its first property cycle; it would be good to see the re-emergence of this scheme at a Federal level,” Faisal Durrani concluded.

■ Anna Amin Canadian Real Estate Forum / FALL 2014

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! CREF Fall 2014 2014-10-01 10:45 PM Page 22

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Canadian Real Estate Forum / FALL 2014

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REINVENTING DOWNTOWN

OTTAWA

Martin Vandewouw President, KRP Development Group

These are interesting times for Ottawa. The office market is in flux with higher vacancy in the downtown core, driven mainly by federal government downsizing, and government also starting to occupy newer properties. Downtown vacancy rates are nearing those of the suburbs, which creates rate pressure.

Class A rates are down. “Because of the decrease in rents, many tenants that were in B space are taking the opportunity to seek value in class A space,” says Martin Vandewouw, President, KRP Development Group.

Also contributing to this state of flux is the Light Rail Transit system. While its full impact remains to be seen, people look forward to improved commute times and potential growth in the downtown condo market when the LRT is completed.

For tenants, downtown is increasingly appealing. “In the past it has always been ‘Here’s a great opportunity for typically downtown tenants to move to the suburbs.’ Now, for the first time, suburban tenants could be looking at moving all or part of their operations downtown, to take advantage of downtown amenities and lower downtown rents,” Vandewouw says.

As for the private sector, the Invest Ottawa initiative has begun to attract new business. Companies are setting up shop and, certainly in Kanata where KRP is based, Vandewouw is optimistic that large companies such as IBM, Cisco and Alcatel are doing fine and companies that came out of the Nortel campus, including Ericsson, Avia and Genband, also seem to be holding their own or growing. “The private sector is looking positive,” he says.

“I think people are feeling a lot more bullish that the economy has picked up.”

■ Michelle Morra-Carlisle

www.realestateforums.com

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Windmill Development Group concepts for Chaudière Falls, Gatineau.

GATINEAU ASPIRES TO STOCKHOLMLIKE STATUS

complement Gatineau’s strong federal government presence.

Capital Commission and Quebec and Ontario Hydro.

“I’m convinced that we can make it easier for people who have business ideas to achieve their goals here,” he asserted.

“It entails a lot of discussion and intense dialogue among all parties and is progressing remarkably well,” PedneaudJobin smiled.

“The city is already home to Cougar, North America’s second-largest recycler,” Pedneaud-Jobin observed, “and Brookfield is one of the world’s biggest green energy producers.”

The lynchpin of Gatineau’s Cinderella story is the long-overdue redevelopment of its downtown shoreline.

Maxime Pedneaud-Jobin Mayor, City of Gatineau With Swedish levels of fresh water, clean industry and passion for outdoor fitness – with Ottawa and the federal capital at its doorstep – Mayor Maxime Pedneaud-Jobin aims for Gatineau “to play a bigger role in Canada.”

“I want Gatineau to be the western doorway to Quebec,” said the newly elected mayor. “A model green city with four rivers, two lakes and an unbeatable strategic location.”

To achieve that growth, Pedneaud-Jobin intends to foster an entrepreneurial culture here to 24

“The Windmill development is extremely significant,” he emphasized. “It will transform the riverfront and bring more people to the city core.”

“We’ve been waiting 50 years for an opportunity to redevelop the Chaudière rapids site, where paper industry giants like Domtar helped to found this city,” Pedneaud-Jobin enthused. “It will help us to densify downtown.”

“It’s extremely green,” he said. “They want to go beyond LEED Platinum certification to achieve One Planet status.”

He added that the city has managed to transcend the potential minefield that planning a project which spans the QuebecOntario border 60:40 by forming a task force of planners from each province, the National

“Another project that is almost complete is the $255 million Rapibus project, which will redefine Eastern Gatineau during the next 25 years,” he added. “We hope that it will densify the corridor as more people opt to take the bus to downtown Gatineau or Ottawa.”

Pedneaud-Jobin said that Gatineau, like most Canadian cities, needs a funding overhaul. Cities lean mainly on overburdened property owners for their revenue— an unreliable measure of ability-to-pay.

“During the 19th century, we invested 90 per cent of our revenue into providing services to buildings,” he noted. “Today, that revenue is split 50:50 with services to people.”

“We want to help business, but each time we do, we have to tap property tax revenue,” Pedneaud-Jobin concluded.

“That’s a huge issue which cities struggle with. I intend to urge the Federation of Canadian Municipalities and the Union des municipalités du Québec to address the dire fiscal reality of the country’s cities.”

■ Robert Frank Canadian Real Estate Forum / FALL 2014

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! CREF Fall 2014 2014-10-01 10:46 PM Page 26

FEDS LIMIT FLUX IN OTTAWA MARKET

Sam Barbieri Senior Vice President, LaSalle Investment Management

point and will continue to be,” he said. “It’s going through some flux today, but we always look for opportunities in the market. We’re patient and very circumspect about what we underwrite and what we ultimately buy.”

“Ottawa has always been a stable core market,” he asserted. “It’s currently above 9% vacant right now and—relative to other markets across the country—that’s a very good number. It was previously 2-3% vacant, which was very tight.”

Although LaSalle is sitting tight on its office and comparatively small retail portfolio, Barbieri sees opportunity in the Ottawa industrial market in 2015.

“If the federal government starts spending some money ahead of the election, that might absorb some space from the market,” Barbieri suggested. “That would be good for capitalization rates and overall fundamentals. In the meantime, we won’t see much change to vacancy rates, so cap rates will likely remain steady.”

“We’re big on flexible, small-bay properties,” he declared. “We have a sizeable portfolio under contract that we’re about to go firm on.”

Construction of a new commuter train line also augurs well for the Ottawa market, Barbieri added.

“It has been on the drawing board for a decade, so it’s nice to see shovels in the ground at last,” he concluded.

“Ottawa has always been a strategic focal

■ Robert Frank

Office real estate is undergoing an identity shift in Ottawa. The downtown core, once dominated by the federal government, is being increasingly influenced by the private sector.

Other factors now affecting downtown include the development of residential highrise condos, and the construction of Ottawa’s light rail transit system. “These things are forcing some landlords to think differently about how they position their real estate,” Holmes says. “I’m not sure if this is just another cycle, or if this is really Ottawa redefining itself.”

Photo: Gensler

Despite federal cutbacks, Sam Barbieri believes that the government continues to insulate the market here from sharp swings.

“The market has to better understand what the federal government intends to do during the next 24-36 months, because that’s the wild card,” observed the LaSalle Investment Management Senior Vice President.

AS OFFICE TENANTS RELOCATE, GROWTH IS STILL THE BOTTOM LINE

Kelvin Holmes Managing Director, Ottawa Region, Colliers International

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The federal government is continuing its real estate strategy, reducing its overall footprint within the marketplace and moving several large departments from downtown to the suburbs, and thereby opening up large blocks of space.

Meanwhile in the private sector, Morguard’s construction of 150 Elgin Street is also having an impact. Kelvin Holmes, Managing Director of Colliers International for the Ottawa region, explains: “Because there’s limited organic growth in the Ottawa market,” he says, “in order for Morguard to lease their new building they basically have to go after occupants of A-class buildings in the downtown core, creating vacancies in the A-class market.”

Many landlords of older buildings might want to retrofit, which is easier for some buildings than for others. Holmes suggests the government could help building owners by lifting its height restriction for buildings. “It would allow for more green space in the downtown core,” he says. “Right now, office buildings in Ottawa are built right to the sidewalk. Every inch of available land is used to house a building.”

■ Michelle Morra-Carlisle

Canadian Real Estate Forum / FALL 2014

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THE FORCES OF CHANGE

Greg Rogers Executive Vice President, Minto Properties Inc.

Three forces are currently acting on the Ottawa market. The first, in the form of federal government cutbacks, has caused employment to fall, which in turn has reduced spending and home buying.

The next force is positive: capital spending on major projects, including transit, Lansdowne Park and the Bank of Canada renovations contract. “A lot of very major capital projects are offsetting some employment declines, and especially the chill through the government sector, with an abundance of construction related jobs,” says Greg Rogers, Executive Vice President of Minto Properties Inc. The third force, also positive, is Ottawa’s gradual transformation into a new kind of city. “The urbanization of Ottawa is gaining strength, as is its attractiveness as an alternative to big cities in a technology age,” Rogers says. Using Toronto as a leading indicator, he explains that while two-thirds of residential development was once in the

BALANCING GOVERNMENT AND BUSINESS IN THE CAPITAL

Todd Bechard Executive Vice President of Acquisitions, Cominar REIT

Investing in Ottawa, where the federal government occupies one-third of the office space, requires caution. Real estate investors must have a solid understanding of how the growth and decline of government office space affects the market.

According to Todd Bechard, Executive Vice President of Acquisitions for Cominar REIT, the way to obtain net rental rate increases in this climate is by controlling operating costs.

He explains that over the last 15 years Ottawa’s office market has seen little increase in the net rental rates, but it has seen an increase in gross rental rates, as operating costs and property taxes have continued to rise.

“Tenants always do their budgets based on gross rent analysis,” he says. “If you can keep control of operating costs, then there may be room to grow net rental rates.”

suburbs and one-third downtown, that ratio has almost completely reversed.

Minto has responded to the shift by focusing more on the urban environment, with an increasing number of condos and mixeduse developments. Today, those developments tend to be built “up” rather than spread out. “Whereas we’re used to building 500-2000 unit communities horizontally over 10 years,” Rogers says, “now we’re doing the same thing vertically over five years.” To build vertically, he adds, it’s important to build a true community that includes retail, schools and other amenities that people would expect in a traditional, suburban development.

“I think it’s smart growth because you don’t have to put out pipe and roads and disturb the environment for the sake of getting cars out to distant communities,” he says. “This, for us, is the future.”

■ Michelle Morra-Carlisle

On the industrial side, however, rents in the Ottawa market are already very high by Canadian standards (30% to 50% higher than in Toronto or Montreal) and unlikely to increase much more. The high rent is likely due to a scarcity and cost of available land for further industrial development.

Bechard believes the Ottawa market can only reach its full potential with less reliance on the federal government. He would like to see government’s share of the office market reduced from 35% to 25%, not by government downsizing but by increasing non-government demand through economic growth. “It can’t just happen by government downsizing and vacating space,” he says.

“You need to create private-sector economic activity that stimulates both the expansion of existing businesses and attracts new businesses to the market.”

■ Michelle Morra-Carlisle

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Canadian Real Estate Forum / FALL 2014

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! CREF Fall 2014 2014-10-01 10:46 PM Page 30

REALNET速 TOP 10 YTD* APARTMENT TRANSACTIONS IN THE GTA, GCA AND GVA Rank

Municipality

Address

Total Price

# of Units

Cap Rate

Purchaser

Broker(s)

1

Markham

7411 Yonge St.

$71,250,000

380

5.0%

Starlight Investments Ltd.

D Montressor, CBRE Limited

2

Toronto

295 Dufferin St.

$45,000,000

200

4.3%

Starlight Investments Ltd.

D Montressor, CBRE Limited

3

Milton

611 Farmstead Dr.

$38,500,000

104

4.3%

Regal Lifestyles

4

Toronto

230 Oak St.

$38,000,000

327

5

Aurora

145 Wellington St. W.

$34,750,000

204

6

Clarington

65 Clarington Blvd.

$26,575,000

112

7

York

230 Woolner Ave.

$21,850,000

260

8

Georgina

15 The Queensway S.

$19,127,323

97

9

Toronto

680 Roselawn Ave.

$17,250,000

64

10

Toronto

2663 Lake Shore Blvd. W.

$14,000,000

112

Rank

5.6%

Akelius Fastigheter AB

D Lieberman, J Hittner, Avison Young

Starlight Investments Ltd.

D Montressor, CBRE Limited

Seasons Retirement Communities 5.9%

An individual(s) acting in his/her own capacity

L Wallace, RE/MAX Unique Inc.

Housing York Inc. 3.3%

O'Shanter Development Company Ltd.

D Bloomstone, J Ziegel, I Saksznajder, TD Securities

Royal York Shores (2663) Inc.

Municipality

Address

Total Price

# of Units

1

Calgary

120 2nd Ave. S.W.

$17,642,545

129

2

Calgary

1505 23rd Ave. S.W.

$5,900,000

11

Paragon Capital Corporation Ltd.

3

Canmore

110 Montane Rd.

$4,600,000

20

110 Montane Capital Corp.

4

Calgary

516 18th Ave. S.W.

$3,500,000

11

W. Chan Investments Ltd.

5

Calgary

203 6th Ave. N.E.

$2,480,000

14

Avanti Housing Inc.

6

Calgary

318 14th Ave. S.W.

$2,250,000

18

Mainstreet Equity Corp.

M Fleming, Michael Fleming Realty Corporation; B Dhillon, RE/MAX

7

Calgary

810 Drury Ave. N.E.

$1,900,000

11

Rainbow Motor Inn Macklin Ltd.

L Scarcelli, N Libzo, Sutton Group Canwest Vista; C Zaharko, Royal LePage Foothills

8

Calgary

1737 26th Ave. S.W.

$1,900,000

12

1807964 Alberta Ltd.

9

Calgary

4503 73rd St. N.W.

$1,900,000

17

Vista Group Inc.

10

Calgary

1537 14th Ave. S.W.

$1,826,000

15

Alston Properties Ltd.

Municipality

Address

Total Price

# of Units

Cap Rate

1

North Vancouver

151 East Keith Rd.

$25,500,000

88

3.4%

2

Vancouver

6347 West Blvd.

$11,000,000

22

3

Vancouver

1009 West 10th Ave.

$11,000,000

41

4

Abbotsford

2929 Tims St.

$10,300,000

108

5

Vancouver

1075 Nelson St.

$9,000,000

24

6

Vancouver

555 East 6th Ave.

$8,880,000

7

Vancouver

2394 Cornwall Ave.

$8,500,000

20

8

Vancouver

1137 Bute St.

$8,100,000

33

9

North Vancouver

170 West 4th St.

$7,000,000

36

10

Vancouver

2182 West 39th Ave.

$6,873,500

21

Rank

* Year to Date (YTD) January 1, 2014 - August 25, 2014

Cap Rate

Purchaser

Broker(s)

1159646 Alberta Ltd.

4.0%

P Dave, Re/Max Complete Commercial

Purchaser

Broker(s)

Starlight Apartments

D Goodman, M Goodman, HQ Real Estate Services

West Boulevard Property Ltd.

C Anderson, A Fergusson, Cushman & Wakefield Ltd.

0992980 B.C. Ltd.

D Schulz, MacDonald Commercial

Mainstreet Equity Corp.

Wall Financial Corp.

D Taylor, Colliers International Property Consultants Inc.

G & M Enterprises Ltd. M.A. Cedar Place Properties Ltd.

J Tang, B Harding, T Harding, NAI Commercial

1004905 B.C. Ltd.

C Wieser, R Greer, M Hannah, Avison Young

4.2%

Eduardo Holdings Ltd.

P McEvay, B Goold, RE/MAX Bill Goold

3.7%

AP Yew Investment Ltd.

B Goold, P McEvay, J Blair, RE/MAX Bill Goold Realty

2.7%

! CREF Fall 2014 2014-10-01 10:46 PM Page 31

Top 10 GTA Apartment Transactions - YTD 2014

Top 10 GCA Apartment Transactions - YTD 2014

Source: RealNet Canada Inc.

Top 10 GVA Apartment Transactions - YTD 2014

Source: RealNet Canada Inc.

Source: RealNet Canada Inc.

Building a Better Canadian Property Market Together Looking to Buy, Build, Improve, Sell, or Finance in the Apartment sector? ï 0DNH better informed decisions—search and analyze the most comprehensive Apartment Sector property sale and listings research across Canada ï 8VH UHVHDUFK GHWDLOV WR PDNH better connections ZLWK TXDOLĆHG EURNHUV EX\HUV VHOOHUV DQG OHQGHUV ï ,GHQWLI\ DQG take advantage of emerging trends with our unique perspective on the interconnectedness RI WKH &RPPHUFLDO ,QYHVWPHQW DQG 5HVLGHQWLDO 'HYHORSPHQW 0DUNHWV With REALNETŽ \RXU UHVSRQVH WLPH GURSV WR PLQXWHV \RXU SURGXFWLYLW\ LQFUHDVHV WHQ IROG \RXU FRQĆGHQFH is strengthened and your competition is left further behind.

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! CREF Fall 2014 2014-10-01 10:46 PM Page 32

BOLD OVERHAUL TO OTTAWA LANDMARK BEGAN AS CFL BID

“It started simply enough,” recalled Minto Chairman Roger Greenberg. “John Ruddy, Jeff Hunt, Bill Shenkman and I simply wanted to acquire a Canadian Football League franchise and negotiate a lease with the City of Ottawa to play there.”

A half-billion dollars later, Ontario Sports and Entertainment Group (OSEG) is about to complete a bold foray into redevelopment.

OSEG has turned the once-decrepit 150year-old Lansdowne Park into a 21st-century live-work-play complex.

“There’s no community like it in Ottawa,” Greenberg smiled. “It’s a truly unique and vibrant facility.”

Roger Greenburg Chairman, Minto

LANSDOWNE REVIVAL BREATHES NEW LIFE INTO THE GLEBE

Bernie Ashe CEO, Ottawa Sports and Entertainment Group (OSEG)

He explained that soon after he and his partners landed the Ottawa Redblacks football franchise in 2007, the city

“People had no reason to come to Lansdowne Park for a decade and now, when they visit, you see their faces come to life,” enthused Bernie Ashe.

The Ottawa Sports and Entertainment Group (OSEG) CEO certainly has had his hands full during the past year.

The new Ottawa Redblacks Canadian Football League franchise, which played its first game, July 3, has already sold season tickets that will fill two-thirds of the rebuilt 24,000-seat TD Place Stadium – far exceeding expectations.

“We’re keeping our fingers crossed that we will be able to host the Gray Cup here before too long,” he shared.

“The stadium can also accommodate 30,000 spectators at blockbuster shows,” Ashe added. “That’s really exciting something that we haven’t been able to do in Ottawa until now.”

“The Ottawa 67’s Ontario junior hockey

32

discovered that the stadium stands were riddled with cracks.

“We had to come up with an alternate plan— or walk away,” he said. “It took years of working closely with the city to turn our vision into the reality that you see today.”

OSEG has a contract to maintain the park, stadium and arena, while Minto separately owns the condos and office buildings.

“It was a fairly controversial project,” Greenberg acknowledged. “It took patience and perspicacity, and we couldn’t risk being sidetracked by those who tried to lead us down the wrong path.”

“Ultimately, we knew that we had the support of city council and the majority of Ottawa residents,” he added. “Only a very

league team will play its home opener, October 10, in our 10,000-seat indoor arena,” he continued, “and the Ottawa Fury FC soccer team set its attendance record during its home opener this summer.”

In addition, the arena can also be cleverly curtained to accommodate smaller shows.

Ashe underscored that the new Lansdowne is about much more than professional sports.

“We plan to open the retail area during the next two months,” he said. “The biggest retail anchors will be Whole Foods, Sporting Life and Cineplex.”

“We are turning this place into a seven-day live-work-play venue,” Ashe enthused. “About 1,000 people will live in the two new condominium towers here. The first owners are expected to start moving in the Fall of 2014 and will continue to move into the ten- and twenty-storey towers through Spring 2015.”

By next spring, OSEG also expects to open a new seven-storey office tower on the site.

Canadian Real Estate Forum / FALL 2014

! CREF Fall 2014 2014-10-01 10:46 PM Page 33

small but vocal minority opposed the project.”

Entertainment is at the core of a redevelopment mix that fuses retail, residential offices with lots of green space in a strategic location where once only asphalt ruled.

The partners had to keep their pencils sharp in order to justify investing more than $500 million without any provincial or federal subsidies.

“The business model had to be sustainable so that OSEG and the city could afford the project,” Greenberg said. “We accomplished this by defining unique criteria for the site.”

“A minimum of 40 per cent of retail had to be either first-toOttawa or first-to-develop,” he continued. “We will exceed that.

Our 360,000 sq. ft. of retail space is now about 90 per cent leased, as are our condos.”

Greenberg hoped that, despite a softening market, office leasing will snowball as new residents arrive and retail takes off.

“Our office building is LEED Gold with a very attractive 20,000 sq. ft. floor plate,” he said.

“This is an entirely new process for us to be running football teams so everything with Lansdowne is new and exciting,” Greenberg concluded.

■ Robert Frank

“We implemented in phases, to ensure that each part of the puzzle works,” Ashe advised. “It required incredible cooperation among the various stakeholders.”

“Lansdowne has to be appealing to Glebe residents and retailers along Bank Street and across the bridge into Ottawa South, so we needed to communicate closely with the city to ensure that Lansdowne serves their needs,” he shared. “The result: An appealing park that brings together sports fans, office workers, residents and retailers.”

“Lansdowne is a magnet that draws people from throughout the city, so transportation was pivotal,” Ashe explained.

“People embraced public transit as the means to keep the neighbourhood free of congestion and cars.”

■ Robert Frank www.realestateforums.com

33

! CREF Fall 2014 2014-10-01 10:46 PM Page 34

REGION COULD REAP REWARDS OF FEDERAL SURPLUS IN 2016

Mario Lefebvre President & CEO, Quebec Urban Development Institute

‘’With the flurry of non-residential infrastructure construction projects, 2016 could be the year when the Ottawa-Gatineau economy rebounds.’’

“The economy has been very, very soft in the Ottawa-Gatineau area,” reported Quebec Urban Development Institute President & CEO Mario Lefebvre. “We’ve seen three straight years of growth in the neighbourhood of 0.5% from 2012-2014.”

“While it’s nothing like the declines of up to 4 per cent that manufacturing cities like Hamilton and Windsor lived through during the recession, the Ottawa-Gatineau nonetheless was at the tail end of the economic pack in 2013 and 2014, and will again be at the bottom of the list of Canadian cities in 2015,” the economist predicted.

Levebvre acknowledged the positive impact of ongoing big projects like the new light rail commuter transit line, the Queensway expansion and the Lansdowne Park redevelopment.

“These initiatives thankfully have offset significant cutbacks in public sector employment,” he said. “Federal government rationalization has spilled over everywhere.

Total employment in the Ottawa-Gatineau region fell in 2013, and only a modest rise is anticipated when we finalize the 2014 tally.

Unemployment, though not catastrophic, has moved slightly higher from 5.25% before the recession to 6.5% today.”

“Disposable income was growing by about 6% per year before the recession,” Lefebvre added. “Now we’re seeing 3% at most.

Once you strip out inflation, that’s barely 1% real growth in disposable income.”

Retail sales numbers have followed suit.

“Take out inflation, and real consumption is barely rising,” he said.

Housing starts are also down sharply, with fewer new federal government recruits.

“Before the recession we would always see 9,000-10,000 units started each year,” Lefebvre observed. “This year we are going to flirt with 7,500 units. That’s a steep reduction from pre-recession levels, which admittedly were fairly strong and probably unsustainable. Some decline was therefore expected but, when you combine it with the softer population growth numbers that we’re seeing, housing starts are likely to decline to barely 7,000 units in 2015.”

Recovery pending With the prospect of a federal budget surplus on the horizon, Ottawa-Gatineau is poised to recover during the next two years.

Lefebvre sees significant pent-up hiring demand at the federal level that could be unleashed in 2016.

“The Conference Board has already forecast that Ottawa-Gatineau GDP will rise almost 2% in 2015,” he concluded. “So it is already starting to happen. Together with the flurry of non-residential infrastructure construction projects, 2016 could be the year when the Ottawa-Gatineau economy rebounds, if the federal government succeeds in bringing its finances back into the black.”

■ Robert Frank

Real GDP Growth, Ottawa-Gatineau Source: The Conference Board of Canada

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2005 2006

2007 2008 2009 2010

2011 2012

2013 2014f 2015f

-0.5

34

Canadian Real Estate Forum / FALL 2014

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URBAN INTENSIFICATION TO PUT RESIDENTIAL ATOP RETAIL

Richard Getz Vice President, Retail, Colonnade Development The trend to intensify urban sites is becoming the new norm in Ottawa as it has in other major Canadian cities, with a somewhat new twist for this market being residential as opposed to office above ground floor and potentially second floor retail.

afford to pay over $40/sq. ft. downtown for single or double storey retail. So urban intensification is a necessity to allow developers to see suitable returns. Even suburban Ottawa intensification on sites where excess land would permit residential on top is in the realm of possibility.”

“The most active suburban growth areas are in Barhaven South and Riverside South, which are now joined by a long-awaited bridge that spans the Rideau Canal.

Integrating those two neighbourhoods has successfully attracted people and more retail to the area.”

With this trend is a reduction in square footage. “Retailers have learned to squeeze more productivity out of less space, which permits them to pay higher rents per sq. ft.

Grocers today take 25,000 sq. ft or less., where they once might have wanted 35,000 sq. ft. Banks have downsized from 8,000 sq. ft. and now average 4,000 sq. ft. Even Walmart is test marketing an urban 25,000 sf store in the US.

Intensification along the future Light Rail Transit route has already occurred , most notably up to 40 storeys of residential with ground floor retail at the future Bayswater stop. Future plans include the potential intensification of the nearby Tunneys Pasture Government campus.

“It is no secret that there is a shortage of big suburban sites,” explained Colonnade Development’s Vice President, Retail, Richard Getz. This coupled with the City’s urban intensification strategy has large format retailers looking at the downtown streets perhaps unlike ever before. “The math does not work for single or double storey retail without something above. A retailer can’t

Recent examples of Res/Retail in Ottawa are the Gladstone to McLeod corridor on the East side of Bank, the soon to open Sobeys at Nepean and Metcalfe and most significantly Lansdowne with multi-floor retail, office and residential intensification. More can be expected on the Rideau and Chapel site as well.

HOME GROWN: FARM BOY EXPANDS OUTSIDE OTTAWA

Farm Boy Inc. is neither a grocery store, nor a supermarket, but rather a “fresh food experience.” Headquartered in Ottawa, the company has 12 stores in the city today, with perhaps room for a couple more. But President and CEO Jeff York says that most of Farm Boy’s growth going forward will be outside of Ottawa. His current focus is southwestern Ontario, where he aims to open 8 to 10 stores.

Ottawa’s prospects are good, as its population continues to grow steadily at an annual rate of up to 3%.

York headed the Giant Tiger chain for 20 years and grew the company across Canada. That is his intention for Farm Boy, starting in Ontario. Even as the company grows, for York the strategy is ‘one location at a time.’

Jeff York President and CEO Farm Boy Inc.

36

“That’s up to 30,000 more people each year who will need places to live and shop, both downtown and in the suburbs” Getz observed.

“You find neighbourhoods where there’s an under-served customer base, and you give them what they need. That’s how retail works,” he says. And he is personally

Another trend to watch for is ethnic oriented retail and this population base grows in Ottawa and surrounds. The Asian T&T Grocer at Riverside and Hunt Club is the first example of what could be many in Ottawa in the coming years. Finally, portions of the much anticipated Tanger Outlet Mall are scheduled to open October 17 in Kanata, bringing a whole new form of volume retailing to the greater Ottawa area.

One might say the Ottawa Retail market is getting ‘intense’!

■ Robert Frank

involved in each location. “You live and die with the strength of your locations. We use agents in the areas for their expertise of the area and he market, then I tour every site and work the deals on every location.”

Meanwhile back at home base, York is optimistic about recent development in Ottawa, particularly that the city has turned a parking lot into Lansdowne, a 40-acre urban park. “It’s something good for the city, and the football stadium is spectacular,” he explains. Incidentally, York is also glad that Whole Foods will set up shop there. While that food retailer is largely a grocery store and focuses on organic, like Farm Boy it offers a healthier alternative to traditional supermarkets. “They’ll bring something to the city that Ottawa doesn’t have - and they’ll make us look inexpensive,” York says.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2014

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! CREF Fall 2014 2014-10-01 10:46 PM Page 37

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! CREF Fall 2014 2014-10-01 10:46 PM Page 38

UNCERTAINTY LOOMS OVER DEVELOPMENT LANDSCAPE

imminent departure at the end of this month of Ottawa’s so-called Minister of Planning.

Peter Hume -who played a prominent role in shaping Ottawa’s landscape as city planning committee chairman for the past decade, has decided not to run in the October 27 municipal election.

The source of the uncertainty, he explained, is partly that the city isn’t as upfront about its expectations as it could be, at the outset.

Polowin anticipated that Hume’s exit will leave a policy void that will render real estate development here more unpredictable, no matter who succeeds him.

“The city tends to do a dance of the seven veils when dealing with development applications,” he said. “Requirements don’t all come out at once. Instead, we get an initial set, followed by another set, followed by an additional set. The city seems not to impose a reasonable degree of self-discipline when it conveys its demands to developers.”

“He was a very strong Chair and played a big role in the development process,” Polowin acknowledged. “Peter immersed himself in policy and his viewpoint often carried the day.”

“I have seen cases where the city had approved a site plan, signed an agreement and then tried to impose additional requirements afterward—when it has no jurisdiction whatsoever to do so,” Polowin recalled.

Michael Polowin likens getting Ottawa development approval to wooden Russian matryoshka dolls that are placed one inside another.

Developers already face a level of control that makes it difficult if not impossible to adhere to urban planning demands, he emphasized.

He also expressed concern that development charges might have morphed into stealth taxes.

“You open up the first one and you find another, and another and so forth,” said the Gowlings Partner. “The layering of regulation and cost associated with development in Ottawa seems to grow by the day.”

“The city has a tendency to use initial and secondary plans to impose prescriptive regulation,” Polowin observed. “For example, a bylaw intended to convert single-family dwellings into multiple student dwellings has been extended. Likewise, a bylaw to regulate infill in a mature neighbourhood was extended to a level of the control that seems beyond the pale.”

Michael Polowin Partner, Gowlings

Adding to the disquiet is the

IN WITH THE NEW: GROWING OTTAWA

Bruce Lazenby President and CEO, Invest Ottawa

The timing for employment and real estate growth in Ottawa is critical. Following the government’s stimulus efforts in 2009 and beyond, the Capital has experienced cutbacks. Fortunately, new industries are more than picking up the slack.

Communications Technology is a key driver.

For example, the Ontario government has received a commitment from networking leader Cisco to create 1700 jobs in the next few years. “Because of Ottawa’s deep, rich telecommunications history, we expect a lot of those jobs to come here,” says Bruce Lazenby, President and CEO of Invest Ottawa.

Software, too, is booming. Two recent and very significant IPOs are Halogen and Canaxis. In addition, Ottawa is home to the email platform Shopify as well as QNX, which wrote all of the software for the new BlackBerry 10 and rated best mobile operating system in the world.

Further transforming itself from solely a government hub to an innovative city,

38

“The city has asked a number of developers to pay for specific infrastructure—like sewer and road modifications—that ought to have been covered already by the development charges,” Polowin asserted. “It is in some instances pocketing the development fees and then asking developers to pay for work that those fees should have covered.”

■ Robert Frank

Ottawa has myriad projects on the horizon.

In the area of medical devices, Invest Ottawa expects the city to become a national clearinghouse. “That is a trillion dollar industry and Ottawa is going to take the leading position in that,” Lazenby says.

Digital media is also thriving in Ottawa, with many animation companies experiencing a skills shortage.

While other Canadian cities offer employment in these sectors, the deep expertise of Ottawa companies keeps the Capital in the running. Also, studies show that Ottawa is the least expensive major city in which to live in Canada. It is the most sustainable, has very little gridlock, and boasts the best quality of life among cities with populations of over 200,000.

Competition aside, Ottawa enjoys a very collegial relationship with other Canadian cities. “Any high tech jobs in Canada is a win for Canada,” Lazenby says.

■ Michelle Morra-Carlisle

Canadian Real Estate Forum / FALL 2014

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Michael Church Managing Director, Principal, Ottawa, Avison Young

For many private sector tenants today, sustainability is a priority when it comes to buildings.

Michael Church, Managing Director and Principal at Avison Young in Ottawa, says that one key client told him during a pitch, ‘If your company and the landlords you represent don’t have a concerted sustainability program in place, we will not www.realestateforums.com

“Things sure have changed since I entered the market in the late 80s,” Church says.

“Young workers coming out of school are increasingly concerned about the environment, and it’s going to work its way through the system.”

He says that one major catalyst for change was the federal government’s Workplace 2.0 strategy, part of which was to shrink the per sq. ft. being used per person. “That sent out an entire new message to people that we should be using less,” he says.

To comply with legislative requirements and to meet the demands of an increasingly ecoconscious clientele, major building design teams are all focusing on sustainability. On that front, Church is noticing parallels between new buildings in the private and public sectors. He describes the Export

405 Terminal Ave., Ottawa ON Federal office at Ottawa’s Train Yards.

Development Canada building, for example, as a “remarkable design” that’s quite similar to KPMG’s new space at 150 Elgin Street, with “lots of glass, lots of light.” And he points out another example, a federal office at Ottawa’s Train Yards that is also modern and bright and would appeal to any private sector tenant.

“I think Crown corporations are a lot more similar now to private sector than they have been in the past,” Church says. “Everyone’s coming around to the same mindset.”

■ Michelle Morra-Carlisle 39

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Canadian Real Estate Forum / FALL 2014

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CALGARY A MAGNET OF GROWING ATTRACTION Roberto Geremia President, Boardwalk REIT

With more people and businesses arriving in Calgary every month, the city has managed a balance of development and infrastructure to meet the tremendous demand for real estate that growth has triggered.

“People need places to work and live,” said Roberto Geremia. “The Calgary market remains strong and city hall has clearly grasped the need for more development, despite the challenges that it faces to provide more infrastructure to support it.”

Since oil prices stabilized, natural resource demand has perked up again, explained the Boardwalk REIT President. Real estate executives therefore must assess whether past economic swings will recur—and to what extent.

“The obvious questions that we need to ask are how long will this demand last?” Geremia cautioned. “Will we be able to meet this demand or will our development exceed the eventual demand?”

“During the past eight years, Calgary has gone full cycle,” he advised. “We went from being completely full in all asset classes to alarm over yawning vacancy in commercial to—within just a year—being completely full again.”

Supply chain paradise Calgary continues to consolidate its position as North America’s northwestern hub, he said, which is reshaping its economic equation. www.realestateforums.com

“Across the board, industrial is doing extremely well,” Geremia stated. “We’re witnessing a lot of new development of large warehouses for storage, shipping and distribution.”

“Calgary has also moved beyond simply being a trucking hub,” he noted. “The new airport runway has doubled international flights. That has makes the city more attractive to supply chain managers: We can get goods in an out of Calgary much faster than we could, just a year ago.”

“On the commercial side we still see a lot of demand, with many projects underway,” Geremia added.

“Leasing is also going quite well.”

“On the retail side, were doing exceedingly well,” he continued. “Extremely high-end retailers are flocking to Calgary for example the new Rolls-Royce dealership.

That’s an auspicious bellwether for the underlying economy.”

Geremia acknowledged that the real estate industry’s chief dilemma remains how to reconcile responsiveness and risk. Historically, commercial buildings here haven’t been built until leased, but recently a number of projects have been built on spec.

“The Calgary market is quite strong and moves briskly, it often outpaces the major investment, capital and regulatory approval that the real estate industry requires, if it is to move in lockstep.” he concluded. “Nonetheless, things do look very good right now.

■ Robert Frank

43

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REITS RIDING ON RISING REPUTATION

Neil Downey Managing Director, Real Estate Analyst at RBC Capital Markets “In many ways, the untold real estate story of 2014 is the credit market,” reported Neil Downey, Managing Director and Real Estate Analyst at RBC Capital Markets.

“Real Estate Investment Trusts have matured during the past 20 years,” he advised. “Their larger scope and scale means that there are a lot more investment grade

issuers today. The industry’s much stronger credit profile is reflected in its improved ability to tap the unsecured debt market”.

the same percentage growth in total listed assets over the next ten years that we’ve seen during the past decade.”

“REITs were born in Canada in 1993 and by 1997 the sector really began to take-off,” Downey recalled. “The mid- to late-90’s was therefore the beginnings of a near-20-year period of raising equity from the public markets in order to bulk-up the size of their businesses.”

Playing skill-set Tetris One consequence is that REITs have, of late, increasingly tried to add value to their portfolio through development and redevelopment, he said. Accomplishing that necessitates weaving together a diverse array of talent.

For large firms, the age of asset aggregation has probably ended, and new era of active management and value-add via development, re-development and intensification has dawned, said RBC Capital Markets’ Managing Director.

“The word of the day is collaboration,” he suggested. “From the perspective of the larger REIT, private developer and even pension funds, there is becoming an element of everyone playing in everyone else’s sandbox.”

“Larger companies are increasingly fighting the law of large numbers,” Downey explained. “Their scale is such that simply adding the next $250 million of assets by acquisitions no longer means what it used to. Instead, the drive is to squeeze higher returns from existing assets and equity.”

“It’s all about bringing together the right skills,” Downey said. “Mixed-use projects are complex and by their very nature take longer to complete. The values per sq. ft. are often high. To mitigate risk and maximize value, you often need to assemble strong and complementary expertise around the table.”

“Growth by acquisition won’t go away,” he conceded, “but I can’t imagine that we’ll see

Historical Number of TSX / TSX-V REIT IPOs Source: RBC Capital Markets, Thomson One and Company reports

15

# of TSX IPOs

13

# of TSX-V IPOs

11

10

“The Canadian market has a disproportionate number of diversified companies,” he continued. “You have to lever diversity to achieve multi-billion dollar portfolios in a country that, from a real estate investor’s perspective is 3,000 miles wide but only 100 miles high, with a population roughly equal to California.”

The financial landscape was certainly kind to Canada during 2014, Downey added.

9 7 7 5 5

4 3

3

4

3 2 1

1

1

-

-1

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-

-

Total Returns: TSX REIT, TSX Composite and Bond* *Total returns since Dec 31, 2000; Data points represent CAGRs since Dec 31, 2000 Source: RBC Capital Markets, Thomson One and Company reports

600% 500%

TSX REIT Index

12.9%

DEX Universe Bond Index TSX Composite Index

“We started the year worrying about higher bond yields and instead they fell,” he said.

“Credit spreads also narrowed, making access to debt capital a very positive influence.”

That confluence of favourable credit conditions stirred a whirlwind of investment grade lending.

“The total velocity of debt issuance was five times the order of magnitude of the longterm average. That’s pretty incredible,” Downey marveled.

400%

300%

6.7%

200% 100%

5.8%

“The decade-long average issuance by publicly traded companies was maybe $1 billion a year in unsecured real estate debt,” he concluded. “This year we might hit $6 billion.”

■ Robert Frank

0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

44

Canadian Real Estate Forum / FALL 2014

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INVESTING IN THE US: A WORD TO THE WISE CANADIAN

Gary Linhart Co-Founder and Principal, ViaWest Group

“The idea that you can go to the US and buy distressed properties is very 2010.”

MAKING IT IN A HOT MARKET

Eric Carlson CEO, Anthem Properties and United Communities

“You’ve got to have boots on the ground because you’re competing with a lot of existing, strong players.”

46

Canadian investors who reach a plateau here at home are often drawn to the United States, where the population is so much greater and real estate opportunities abound. Places like Texas, Arizona and Florida are especially attractive to Canadians because of their high transaction volume and general accessibility to outsiders.

Yet investing in the US is becoming more difficult. “The idea that you can go to the US and buy distressed properties is very 2010,” says Gary Linhart, Co-Founder and Principal, ViaWest Group in Phoenix, Arizona. Linhart is originally from Winnipeg, moved to the States as a teenager, and has seen investment from both sides of the border through his father’s real estate business. What makes sense now, he says, is different from when the market was in turmoil.

was strong. “At that time, Canadians felt really flush relative to the US and I think those who invested have done very well,” Linhart says. “But now we are starting to see new construction. It has since become more competitive and difficult to find good deals.”

Where are the US opportunities for Canadian investors in the coming year? It depends on the type of investor. Linhart cautions that developments are much riskier in the US than in Canada. “Canada slow and steady whereas in the US, when it’s time to develop, a lot of places get overdeveloped.

You have to be careful,” he says. For healthy returns, ViaWest Group sees secondary and tertiary markets as offering better opportunities today...“whereas in the major markets where the money is very very hot right now, it seems like a lot of the very smart people are sellers rather than buyers,” Linhart says.

■ Michelle Morra-Carlisle

Four years ago, the US was down but Canada wasn’t; and the Canadian dollar

Calgary has become a homebuilder’s haven. Job growth, population growth and household formation are all steadily good here. In fact Eric Carlson, CEO of Anthem Properties and United Communities, intends to have a solid presence in Calgary forever.

“We’re never going to leave it,” he says.

He can’t help but enjoy working in Calgary, a sunny place both literally and figuratively.

Prosperity gives the city a unique business culture where people want to get the job done. “In other markets there’s just more trepidation than in Calgary, and I can understand why,” he claims. “There’s a sense of prosperity here, more jobs, more money. The people are positive.”

That said, prosperous times bring higher costs as demand increases for human resources, sub trades, raw materials and more. Carlson also describes another challenge: “market confusion.”

In Calgary, where 25,000 to 30,000 are moving every year, infrastructure must keep up. “The confusion is, ‘We can’t just keep extending the sewer pipes and roads, which would lead to urban sprawl and create too much air pollution. We have to get people out of cars and onto bikes - out of houses and into condos,’” Carlson says.

If asked to give advice to someone new to the market, his main message would be research the data. “You’ve got to have boots on the ground because you’re competing with a lot of existing, strong players,” he says. “Getting the right team and getting a position here is difficult. The locals are really good, and they all know each other. To have a sustainable business you’ve got to be here, in all respects.”

■ Michelle Morra-Carlisle

Canadian Real Estate Forum / FALL 2014

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MIXED-USE RAMPS UP COMPLEXITY

Stuart Craig Vice President of Planning and Development, RioCan REIT “The economics of embarking on multi-purpose projects is very different from single-purpose retail developments, ” RioCan REIT, vice-president of Planning and Development, Stuart Craig attested. “We have close to 400 retail centres in Canada and the United States. We had become so adept at building large powercentre shopping centres that they had become cookie cutters for us, ” he said. “We knew what our large tenants wanted and how to design a centre to address the

BUILD IT (YES, THEY WILL COME)

retailers’ requirements. Typically we had a large Greenfield property to work with so there were little or no design constraints.

RioCan’s focus has recently shifted to urban scale development within large City centres on considerably smaller property footprints, where large commercial and residential towers are incorporated into a retail podium necessitating site design that allows for the complex interaction of multiple uses. “We’re talking about building huge, mixed-use projects with large retail podiums combined with residential or office towers on top, ” Craig explained.

“The upfront capital cost is staggering. Plus you have to ensure that you can attract the tenants, fill the developments and lock in the right revenue streams, once it’s built. ” “We have learned to pay close attention to how everything interacts, ” he continued. “How does the retail grade work with the residences above? Where are the corridors?

The elevators? The loading dock? Where does the garbage go? What do you put under- and above-ground and what do you place on the roof. ” “It entails working much harder to incorporate all these design and technical elements within a very small space, ” he added. “Municipalities are typically more supportive of these comprehensive developments as they tend to align with their

Even in a shiny, relatively new city such as Calgary, some 80 to 85 office buildings are starting to get old. Built in the 80s and 90s, these buildings have smaller floor plates and inefficiencies that, no matter how well the buildings are managed, will make it difficult for 48

“In contrast, however, winning community support is not always as easy, ” he said.

“Sometimes we experience community pushback, ” Craig acknowledged, “but generally it can be addressed, through the engagement process that we undertake with the community. ” “We strive to remain as nonconfrontational as possible and meet community stakeholders at the earliest possible opportunity, ” he explained. “Our approach is to keep the dialogue professional and have intelligent conversations that hopefully will help the community see the benefits of our project. If we reach an impasse, we thank them for their time and willingness to discuss the initiative with us, and then move the application forward to Council for the ultimate decision. ” Craig recognized that municipal urban planning departments are often constrained by political pressure and don’t always have sufficient resources to respond to the growing development demand. “It’s not necessarily the planning department or engineering department’s fault or even the council’s fault when things go awry, ” he conceded. “Sometimes a combination of factors can produce the bottlenecks. ” ■ Robert Frank

“The reality is that as companies get bigger—and they are bigger—they need larger floor plates, better efficiencies, better air handling, more modernization, and that’s just from a leasing perspective of costs.” them to compete with today’s newer designs and larger floor plates, better elevators and amenities.

Alex Wong Executive Vice President, Avison Young

community building planning goals. ”

“The reality is that as companies get bigger—and they are bigger—they need larger floor plates, better efficiencies, better air handling, more modernization, and that’s just from a leasing perspective of costs,” says Alex Wong, Executive Vice President of Avison Young. “It also helps with staff retention, a happy workforce, the human element of having to go to work 8 to 5 and living in a better environment.”

What to do with those older office buildings taking up significant space in the core?

Wong says that the owners of those buildings, assuming they are mortgage-free, would be wise to invest in modernizing. He

adds, however, that only smaller companies would occupy those buildings. “You’re not going to get major corporations going into those,” he says. “The larger heavy oil companies and pipeline companies will be the ones looking to occupy the bigger, newer buildings.”

He says that Eighth Avenue Place, an AA Class, LEED Platinum office complex downtown has proven that, If you build it, they will come. In fact, Avison Young has moved into Eighth Avenue Place. “We want to get top executives and give them a proper fitness facility, access to parking, and more,” Wong says. “The air conditioning and heating are that much better… all of that falls into place.”

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2014

! CREF Fall 2014 2014-10-01 10:47 PM Page 49

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John Furlong CEO, Vancouver Olympic and Paralympic Winter Games

“Look around you and find ways to contribute and make your life about something important.”

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The man responsible for overseeing the Vancouver Olympic and Paralympic Winter Games considers leadership a responsibility and a privilege. From the Olympic Games and his own experiences, John Furlong has learned simple lessons he believes could apply to everyone’s life.

One example is that of Lasse Virén, the Finnish runner who was the favourite in the 10,000 meter race at the 1972 Olympic Games in Munich. “The gun goes off, and the worst possible thing happens to Lasse Virén,” Furlong recalls. “He gets tripped up by someone. Down he goes, smashing onto the track.” Runners who had fallen in the past had rolled over onto the grass, with the crowd’s sympathy with the knowledge that next time might be better.

So what did Lasse Virén do? “He got up and went after them all,” Furlong says, “but not to catch the last guy or to just finish. He didn’t come to Munich for that. He came there to

become Olympic champion, and he went home Olympic champion.”

John learned another memorable lesson from his father, who had been a senior official in Ireland’s prison system. He wrote in his will: For all of those times in my life that I might have taken home pens, paper, erasers, anything from the office, I leave 500 pounds to the Irish government.

John is pretty sure that his father never took a thing. Not from anyone, not ever. “This he came to believe was his father’s last lesson to his children,” he says. “What he was saying to us was this: If it’s not yours, don’t take it, and if you break it, fix it. Don’t be saying bad things about other people. Be an inspiration in the community and try hard and show courage. And be a good person every single day. Look around you and find ways to contribute and make your life about something important. Live your belief" ■ Michelle Morra-Carlisle

49

Photos: Beedie Industrial

! CREF Fall 2014 2014-10-01 10:47 PM Page 50

CALGARY INDUSTRIAL MARKET REMAINS STEADY

Calgary has been absorbing some 50,000 people every year and will likely continue growing at that level, says Bill Bird, Senior Vice President Industrial for WAM Development Group.

“The overall size of the market increases as developers continue to build buildings at a pretty decent pace,” he says. Occupancy improved dramatically in early 2014, when several large deals came to market.

Todd Yuen President, Beedie Industrial

Bill Bird Senior Vice President Industrial, WAM Development Group

Todd Yuen, President of Beedie Industrial, likes the fundamentals of the Calgary market. Beyond the ebb and flow of the oil and gas industry, he says, Calgary is proving a stable industrial market and a destination point for many companies looking for large spaces.

market, its access to capital and its general boldness; my only question mark is whether we become oversupplied because so many developers put product into the market,” he says.

He says the future looks bright, with just one caveat. “Given the depth of Calgary’s developer 50

Beedie Industrial is also active in Calgary’s neighbouring cities. Yuen finds that as housing costs increase downtown, some people are compelled to move outward.

Also, because land is scarce and therefore more costly in Calgary proper, he says an outward flow is to be expected.

His company has almost finished building more than 700,000 square feet at their Great Plains Industrial Park in the south part of the city. Two new buildings are also underway in StoneGate Landing, and a third is planned.

Bird says his major challenge has been dealing with higher costs due to scarcity of land, labour shortages and an increased cost of materials, but a general reduction in cap rates has kept the market moving.

Calgary has built an enviable reputation as a distribution hub for Western Canada attracting major retailers. Bird says that everyone in his industry is focused on ensuring that growth continues.

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2014

! CREF Fall 2014 2014-10-01 10:47 PM Page 51

GLOBAL ECONOMY SLOWLY STRENGTHENS

opments abroad,” says Gulati. “If you think about commodity prices, if you think about concerns with the European Union, if you think about what’s going on with Russia and Ukraine, there’s certainly an impact from a consumer and business confidence perspective. The biggest concern from a Canadian perspective would be anything that impacts the commodity channel.”

provinces and abroad. So much so that Calgary and Edmonton have joined Toronto, Montreal and Vancouver as key destinations for international immigrants. Gulati worries that this will slow down, given the cyclical nature of the regional economy and the fact that these immigrants usually settle in areas where they can depend on friend and family ties.

Even without these pressures, economic recovery has regional implications because it changes how people migrate.

“Alberta’s lead relative to other provinces is narrowing as Canada’s economy recovers,” she said. “Some of the people who were previously flocking to Alberta might not necessarily flock to Alberta at the same pace as they have in previous years.”

At the same time, geopolitical and a lack of consumer and business confidence is keeping growth at slight to moderate levels.

Winnipeg, Saskatoon and Regina, for example, have made year-on-year gains in the last few years, due to government programs in Manitoba and a buoyant economy in Saskatchewan. Gulati says these changes are too small for her to be sure whether they’re the beginning of a trend or temporary anomalies.

“Canada is a small open economy so we are very sensitive to devel-

Alberta, however, has definitely been attracting more migrants from other

OIL SANDS ATTENUATE COMMODITY SWINGS

fallen to 30 per cent of the total,” he said.

Sonya Gulati Senior Economist, TD Bank

Chris Fowler CEO, Canadian Western Bank “We have witnessed a fundamental change in what resources are extracted in Alberta,” observed Chris Fowler.

“Historically, gas was Alberta’s main commodity product,” the Canadian Western Bank CEO noted. “Until 2008, the province derived 70 per cent of its royalty revenue from natural gas.”

“The United States’ shale gas revolution completely upended the natural gas market, which has now www.realestateforums.com

Such concerns make the Canadian economy less stable and may help to explain why the Bank of Canada hasn’t yet raised interest rates. Higher rates could hurt highly-indebted households and new construction and resale markets, thereby risking the recovery now underway.

■ Tracey Arial

“Oil has made up the difference,” Fowler declared, “with the oil sands being a big part of that. It has dramatically transformed how this province operates.”

The biggest shift has been to dampen the sharp swings hitherto triggered by sudden shifts in commodity prices, he said.

“Previously, price drops slowed the economy considerably, with a domino effect on asset prices,” Fowler explained.

“However, despite the economic slowdown and concurrent oil price drop in 2009, the underlying economic activity associated with oil sand development kept a great deal of economic activity going.”

“It has put the Alberta economy on a more solid foundation,” he continued. “Certainly a lot of phase two or three projects were postponed or cancelled in 2009-2010, but the ongoing investment in oil sand development continued to drive the core economy.”

“That was very advantageous for Alberta, which remains highly dependent on oil for the lion’s share of its GDP,” Fowler said. “It was remarkable how the oil sands muted the economic downturn.”

“That, in turn, has supported the second-tier of Alberta’s economy: firms that serve the oil industry majors and support the accompanying job growth,” he added. “They provide the housing that is needed to accommodate the strong immigration that we continue to witness. They provide services. Retail shopping centres. Light industrial development. All of the elements that are needed to sustain economic growth. Companies in Alberta and throughout Canada also provide infrastructure to support new resource extraction techniques such as horizontal drilling and fracking.”

Lending to the mid-market firms that serve the oil majors remains robust, Fowler affirmed.

“We hire experts to assess the budget proposal to ensure that we understand all its components,” he said. “Then we conduct a market test.”

“If it’s a condo project, you have to know that there are people who will buy the condos. If it’s apartments, you need people who will rent them. If it’s a commercial development for a tenancy project, you need to know the vacancy rates. At the end of the day, it’s always the source of repayment that you have to consider,” Fowler concluded.

■ Robert Frank 51

Photos: Grosvenor Americas

! CREF Fall 2014 2014-10-01 10:47 PM Page 52

WILL APARTMENTS OVERSHADOW CONDOS?

Per Hvidsten Development Manager, Grosvenor

“Condo absorptions are steady, and we feel comfortable that they will remain steady going forward.”

52

Sales are steady in Calgary’s condo market.

And partly because of a healthy rental market, the sector is seeing increased interest from investors according to Per Hvidsten, Development Manager for international property development and investment company Grosvenor.

“An investor can buy a condo in one of our projects, rent it out and make a good yield on it, depending on the size and type that they purchase,” Hvidsten says. He adds that the shadow rental market—investor owned condos that are competing with apartments to be filled by renters—is also growing in Calgary.

For either type of housing, the core costs more. Pricier downtown land means more expensive condos. Similarly, new apartment buildings are tending toward the upper end of the spectrum, targeting higher end or executive rental. An influx of young professionals has created a large demand for such high-end units.

For now, Grosvenor only develops condos in the Calgary market. Hvidsten feels that future competitive supply of apartments is uncertain which means revenue and absorption uncertainty. “Whereas condo absorptions are steady,” he says, “and we feel comfortable that they will remain steady going forward.”

As infrastructure works to keep pace with development, sustainability is top-of-mind in Calgary. “The City incentivizes downtown development, with the goal of building denser housing options in the core,” Hvidsten says. “Sure, the City has to maintain roads and sewer lines downtown as well but it’s more of a financial burden to do that in the suburbs, on really large swaths of land.”

■ Michelle Morra-Carlisle Canadian Real Estate Forum / FALL 2014

! CREF Fall 2014 2014-10-01 10:47 PM Page 53

COMMUNITY CONNECTIONS

David Down Coordinator of Urban Design and Heritage for the City of Calgary

The City of Calgary is taking an innovative approach to future development that will see city centre policies being consolidated for clarity and commercial policies updated to make large-scale power centres more connected to their surrounding communities.

Together, these two approaches strive to provide more concise, clear and unified direction on future city planning, says David Down, Coordinator of Urban Design and Heritage for the City of Calgary.

The policies are contained within city-centre or urban-specific guidelines, which are all part of the Municipal Development Plan.

The more controversial of the two, the Large Commercial Development Guideline, pertains to sites that contain more than 100,000 square feet of retail space, he says.

“In the past, power-centre sites operated independently from their surrounding communities, creating little or no connectivity with easy access for pedestrians,” says Down. “I think the innovation is to consider those large sites as more of a connected piece of adjacent neighbourhoods, with a connected street pattern — often more grid like — so that we can have that pedestrian realm, which connects all of the store fronts and connects to the adjacent communities, as well.”

This approach will give people the option to use other modes of access in addition to cars, such as by foot or bicycle, he adds, noting this shift is prevalent throughout North America.

Expanding access is also key to the new City Centre Urban Design Guideline, www.realestateforums.com

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which, in addition to consolidating policies and into one document, will incorporate the existing Plus-15 walkway system to make it more effective.

consistent approach to application responses helps not only the City’s planners but the “building owners, landowners and applicants, as well.”

Initially criticized as being too prescriptive by industry stakeholders, the Large Commercial Development Guideline polices have since changed to address these concerns and are now being incorporated into development applications, says Down, noting a more

While the Centre City Urban Guideline is still in the development stage, the Large Commercial Development Guideline is complete and is already being implemented.

■ Karen Petkau 53

! CREF Fall 2014 2014-10-01 10:47 PM Page 54

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FALL 2014 / ISSUE 66

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! CREF Fall 2014 2014-10-01 10:47 PM Page 56

INTEGRITY CLAUSES WITH… INTEGRITY

Michael Brooks CEO, REALpac

It's been over two years now since the announcement of the Strengthening Accountability in Procurement and Real Property policy (the “Integrity Provisions”).

Public Services and Government Services Canada (PWGSC) had quite noble intentions with the provisions: to constrain the ability of businesses convicted of certain federal offences such as fraud, bribery or corruption, to seek contract opportunities with PWGSC. The Real Property Association of Canada (REALpac), and its member companies, support the legislation in its intent and believe that stronger integrity provisions will lead to better governance in public procurement and higher standards in the Canadian business community. Having said that, it's also clear that the creators of the Integrity Provisions didn't fully consider the impact of these rules on long-term contracts such as commercial leases.

Specifically, the continuing unilateral right of lease termination now required by PWGSC in new and renewing leases will give pause to many landlords who have other tenant options, and make PWGSC a less desirable tenant in most markets. The existence of the lease termination right will likely lower the value of a building containing a significant PWGSC tenancy where the clause is present and, where the leased area forms a significant part of a building, may make the building difficult to conventionally finance up to normal levels through a mortgage. The due diligence now required of PWGSC landlords to ensure anyone associated with the investment up and down the ownership chain is clear of conviction or threat of same, is substantial. The need to build in termination rights with partners, employees and other related parties in case they are convicted, will add significant time and cost to lease deals with PWGSC. Leases are different than a one-time procurement of a new building, a frigate, a fighter jet, or a bridge. Should long term contracts be treated the same as short term ones?

Accountability in procurement practices in Quebec is notably different than its treatment federally. In 2012, the Government

56

of Quebec adopted Bill 1, otherwise known as the Integrity in Public Contracts Act (the “Integrity Act”). The law amends several integrity provisions contained in other provincial statutes. Under Bill 1, every enterprise seeking to enter into a contract or subcontract with the government, and where public funds are involved, must obtain a prior authorization from the Autorité des Marchés Financiers (AMF). The authorization is either awarded or denied following a lengthy disclosure process. Only after obtaining an ‘authorization’, are enterprises able to bid on or enter into contracts with the government.

The federal government’s Integrity Provisions need to be amended for longterm contracts to provide for formal notice of a breach (i.e., someone in the ownership hierarchy has been found to have been convicted of a breach of one of the listed federal acts) and a cure right over a reasonable period of time to allow remediation by the landlord. Much more definition needs to occur around contractors and subcontractors, also now apparently caught by the rules.

Unless PWGSC’s Integrity Clauses are significantly revised, certain negative impacts on PWGSC can reasonably be expected. Lenders have already determined that in cases where PWGSC is a tenant in a lease containing the Integrity Provisions, it is possible that lenders may decide not to lend, lend at higher rates to mitigate the risk associated with an abrupt termination of the agreement, or require additional security that may be cumbersome to the parties involved. The provisions may also cause elevated rents for PWGSC due to increased financing costs. Furthermore, there is a considerable risk that PWGSC may be regarded as an unattractive tenant, given that strict certification criteria will motivate excessive due diligence.

Adding a notice and cure period will be a good start to give the Integrity Provisions...integrity.

■ Michael Brooks mbrooks@realpac.ca 416-642-2700 x225

Canadian Real Estate Forum / FALL 2014

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and responsibilities that cities and towns have in planning and development, assessment and taxation, and governance.

Modernizing the Act will help make it responsive to the changing dynamics of cities and the needs of their residents. It may mean changes to the way real estate and development is governed in Alberta. As the province contemplates changes to these ‘rules of the game’, the Real Property Association of Canada (REALpac) is working to ensure the game remains fair for its Members. The new version of the Act should include certain policy considerations which will guide the province toward greater prosperity.

The province should balance the goals of each municipality with a regional approach to development and planning. Municipalities should be empowered to create policies that will encourage municipal and regional growth. After all, cities seldom experience the advantages or consequences of planning and development decisions individually. Suburbs and smaller communities are often the second-hand recipients of major policy in areas like transit or capital plans.

ALBERTA’S MUNICIPAL GOVERNMENT ACT REVIEW: A CHANCE TO ‘GET IT RIGHT’

Brooks Barnett Manager, Government Relations & Policy, REALpac

Over the next two years, the government of Alberta will have an opportunity to chart a new course for the province’s municipalities; one that could guide them toward better governance. Over 2014 and 2015, Alberta’s Ministry of Municipal Affairs will be updating the Municipal Government Act; the legislative framework which governs all municipalities and municipal entities in Alberta.

Undertaking the review is nothing short of a herculean task. With 18 parts and more than 650 sections, the Act lays out the powers

www.realestateforums.com

Alberta should strive to ensure that the separation of property classes, as well as their respective land uses, do not contribute to a situation where commercial properties are treated unfairly or subject to unnecessarily harsh financial pressures. Alberta municipalities should maintain a commercial to residential property tax rate of 2 to 1 as a maximum threshold to ensure Alberta remains attractive to investment and capital formation.

This is Alberta’s chance to ‘get it right’.

Codifying smarter planning, development, and taxation policy into the Act can help alleviate some of the everyday headaches that cities suffer as they interpret their powers and responsibilities.

■ Brooks Barnett bbarnett@realpac.ca 416-642-2700 x224 57

! CREF Fall 2014 2014-10-01 10:48 PM Page 58

PROPERTY TAX FAIRNESS IN CANADA

the residents will find of value, is to increasingly burden the commercial sector. It may drive away jobs and investment, but it may get someone elected by local ratepayers.

REALpac has been monitoring property tax fairness in Canada since the mid-1990s, and has published commercial to residential property tax ratios for major cities in Canada since 2002. The point of doing this is to find out what the averages are and identify outliers.

Michael Brooks CEO, REALpac Property tax has been an effective funding tool for municipalities for over a century, likely inherited from the British. While the U.K. has toyed in the past with a ‘poll tax’, and Australia is apparently currently toying with allowing commercial owners to vote, Canada’s system has remained largely unchanged since Confederation.

The recent Australian debate of course is of interest to a commercial real estate Association like the Real Property Association of Canada (REALpac), as commercial real estate is an easy target for a two tier tax in any municipality. After all, commercial property owners don't vote and an easy way of keeping property taxes down for the residents, while maintaining or increasing spending on amenities

Significant efforts were expended in the City of Toronto, under Mayor David Miller, as the commercial to residential ratio approached 5 to 1. At that time, many businesses were migrating out of the core of the City of Toronto to Mississauga where commercial property taxes were half of what they were in the City.

While Toronto claimed it was open for business publicly, it was saying the opposite with its property tax policy. Mayor Miller, much to his credit, recognized the problem and began to reduce over a period of time, to reduce that tax ratio to 2.5 to 1, a policy still being followed in the City of Toronto today.

On the other hand, they have doubled land transfer tax in the city, giving with one hand, and taking away with the other.

Vancouver and Montréal have for many years been going in the opposite direction, lumping more taxes on the commercial sector. Montréal's current ratio at 4.49 to 1 is now the highest in the country followed by Vancouver at 4.33 to 1. Toronto is now down to 4 to 1. The national average for 10 Canadian cities is 2.79 to 1 for 2014. The lowest commercial to residential ratios are in two new cities to the survey, Saskatoon at

1.4 to 1 and Regina at 1.56 to 1. Wow. Outside of Saskatoon and Regina, Ottawa and Calgary have a more balanced and business friendly property tax regime on a relative basis than Toronto, Montreal and Vancouver. Ottawa’s 2014 ratio is 2.7 to 1, Calgary's is 2.31 to 1 and Edmonton’s is 2.25 to 1. The national 10 city average for 2014 is 2.79 to 1. REALpac believes 2 to 1 should be a national maximum ratio.

When absolute costs are taken into account – the estimated commercial property taxes per thousand dollars of assessment (i.e., per $1,000 of assessed value), the story changes somewhat.

Montréal is still the most expensive city in the country to own commercial real estate in annually, at $37.12 per thousand dollars of assessed value. Ottawa at $30.41 is the third most expensive city in which to own commercial property. Not good.

In absolute dollars, Calgary and Edmonton look very attractive to business with 2014 estimated commercial property taxes of $14.11 per thousand dollars of assessment for Calgary and $18 per thousand dollars assessment for Edmonton. Surprisingly, Vancouver scores much better on an absolute basis at $15.91 per thousand dollars of assessment. The average for all cities is $24.25. So Calgary and Edmonton, Saskatoon and Regina look good for investment on both a relative and absolute basis.

■ Michael Brooks mbrooks@realpac.ca 416-642-2700 x225

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