Western Investor - Commercial Real Estate In Western Canada by Real Estate Weekly

COMMERCIAL REAL ESTATE IN WESTERN CANADA

2018

OFFICE | MULTI-FAMILY | INDUSTRIAL | RETAIL | LAND PUBLISHED BY WESTERN INVESTOR 2018

CAPITAL MARKETS

Commercial Sales & Leasing

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EDITOR’S LETTER

Investing in Commercial Real Estate in Western Canada

W Frank O’Brien Editor

elcome to the second annual issue of the Western Investor Commercial Real Estate in Western Canada guide. The last year has seen momentous changes in the western commercial and industrial markets. Vancouver has emerged with the hottest ofﬁce market in the country. Calgary and Edmonton are shaking off a four-year slump with recovery in retail and industrial sectors, though Calgary’s ofﬁce sector remains one of the

biggest challenges in the country. Winnipeg, Regina and Saskatoon are doing what they have always done best: deliver steady, stable returns with a consistency that many cities – and investors – strive to achieve. So where to invest? We have recruited 12 commercial real estate superstars to answer that question in Commercial Real Estate in Western Canada guide for 2018. ■

The experts Western Investor is proud to feature Western Canada’s leading real estate and investment experts to our second annual Commercial Real Estate in Western Canada.

Ted Cawkwell is an agriculture specialist with Re/

Rudy Nielsen is the founder and president of Niho

Max Saskatoon. Being a fourth-generation farmer Cawkwell has hands-on experience that helps his clients succeed. He is consistently ranked among the top 10 Re/Max Commercial agents in the world.

Land and Cattle Company, LandQuest Realty Corp. and Landcor Data Corporation, which operates the most extensive real estate property database in British Columbia.

Russ Bougie is a principal with Avison Young in Vancouver and specializes in the sale and leasing of industrial properties in Metro Vancouver and working with companies in an advisory role to acquire properties, lease space and negotiate lease renewals.

Dr. Harm Gross is a biologist, an approved

COMMERCIAL

professional of the Contaminated Sites Approved Professionals Society and president of Next Environmental of Burnaby, B.C.

Carrie Russell is a partner and the managing director at HVS Canada, a leading hotel consulting and appraisal ﬁrm with associates in Vancouver, Calgary, Toronto and Montreal.

Corrado Russo is a managing director and global head of securities for Timbercreek Asset Management, including the Timbercreek Global Real Estate Fund. Russo has an extensive background in investment management, portfolio management, equity research and direct real estate investments.

REAL ESTATE IN WESTERN CANADA

2018

Peter Kinch is a best-selling author, award-winning mortgage broker and investment adviser with Vine Wealth. Kinch, a featured guest on television and radio across Canada, is also a private equity specialist with Triview Capital Ltd.

Warren Smithies is senior vice-president of Martello Property Services Inc., Vancouver. He is responsible for the management of more than 500,000 square feet of multi-generational investment portfolios.

OFFICE | MULTI-FAMILY | INDUSTRIAL | RETAIL | LAND PUBLISHED BY WESTERN INVESTOR 2018

Publisher: Doug Foot Editor-in-Chief: Joannah Connolly Editor: Frank O’Brien Advertising Sales: Behrouz Habibi, Lorena MacDonald David Witherspoon Sales Coordinator: Angela Foster Production: Darko Isic Designers: Arslan Sultan 4

WESTERNINVESTOR

Arthur Klein is a merger and acquisition adviser with Paciﬁc M&A and Business Brokers Ltd. of Vancouver. He is perpetually motivated to solve problems and implement strategic solutions.

Norm Taylor is executive vice-president and managing director of CBRE’s Vancouver brokerage operation. He has been a member of the Vancouver real estate community for 22 years and specialized in ofﬁce leasing and sales before joining CBRE’s management team.

Michael Lee is an experienced B.C.-based

Cecilia Tse is a senior vice-president, Asia Paciﬁc,

commercial mortgage consultant with Alliance Mortgage. He specializes in working with real estate investors.

at Colliers International, Vancouver. Tse specializes in commercial real estate investments and project marketing.

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WHAT’S INSIDE

INVESTING IN THE

west

The specific commercial sectors that present the best real estate opportunities from Victoria to Lethbridge to Winnipeg

ALBERTA

rebound Provincial economy ramping up to “cruising speed”

SIX TOP

landlord CITIES Western Investor’s guide to the West’s multi-family action markets

“Following strong economic results in 2017, Western Canada remains on pace to lead growth in Canada again in 2018” - Bank of Montreal Blue Book

Columns Investing in the ofﬁce sector ........................ 12

Smart REIT investing ................................... 26

Investing in industrial real estate .................. 14

Financing multi-family real estate ................. 27

Better to buy than lease ............................... 16

Top hotel markets strategies ........................ 28

Invest like a pension fund ............................. 17

Buying a business......................................... 29

Property management: retail ........................ 22

Farmland investing ....................................... 32

Save on contamination cleanup .................... 24

Don’t wait to buy land .................................. 34

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Commercial Real Estate in Western Canada is published by Real Estate Weekly/ Western Investor, a division of Glacier Media Group, 303 West Fifth Avenue, Vancouver, B.C. V5Y 1J6. Copyright 2018 Real Estate Weekly/Western Investor. Copyright 2018 Real Estate Weekly. All rights reserved. No part of this book may be reproduced in any form or incorporated into any information retrieval system without permission of Real Estate Weekly. The publishers are not responsible in whole or in part for any errors or omissions in this publication.

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FEATURE

INVESTING IN

the West The commercial sectors that present the best real estate opportunities from Victoria to Lethbridge to Winnipeg.

Greater Victoria has 10 million square feet of industrial space and the overall industrial vacancy rate is 2.8 per cent, but falls below 1 per cent in the city

”

VICTORIA THE PICK: Multi-family, retail Victoria’s retail market is expanding, fueled by increased tourism and a growing tech sector that is drawing a lot of young consumers into the city. The giant Mayfair mall is undergoing a renovation as shopping centre vacancy rates have dipped to 4.3 per cent. The downtown retail vacancy rate is now 3.8 per cent, noted Colliers retail specialist and senior associate Matt Fraleigh. “The retail sector is on ﬁre,” he said.

VANCOUVER THE PICK: Office Vancouver’s office market is fit for through-the-roof profits – vacancy rates and supply are at a record low, while lease rates are skyrocketing. Tech industry demand has driven the downtown vacancy rate to 4.9 per cent, sparking up stacked strata developments along Vancouver’s Mount Pleasant and Broadway corridors. With slim to no new office supply expected until 2022, investors may be hardpressed to find affordable units, though the price of entry into the office market is offset by average lease rates well into the $30 per square foot range and rents increasing up to 20 per cent in the past year, according to Colliers International. Net asking rates in central business districts can exceed $50 per square foot for highend Class A space. Bosa Developments has presold more than 150,000 square

Victoria: B.C.’s capital city is attracting investors in the multi-family and retail sector, with industrial gaining strength. | VICTORIA AIR PHOTOS/ DAVID CARLOS

About 400,000 square feet of new Class A ofﬁce space is underway in downtown Victoria, added Colliers vice-president Tristan Spark, who noted the downtown ofﬁce vacancy rate is now around 7.1 per cent. The multi-family market continues red-hot in a city with a vacancy rate of 0.7 per cent. In 2017, sales volume for rental apartment buildings was $146 million, up from $127 million

feet of new tower strata ofﬁce space downtown at a record $2,000 per square foot. Oxford Properties has preleased a 147,000-square-foot building to tech giant Amazon. Vancouver Centre II, a 33-storey, Class AAA ground last year, becoming one of

a year earlier. The average per-door price for mostly older apartment buildings is $215,100, yet the average capitalization rate is just over 4 per cent, up slightly from a year ago. One sector often overlooked in Victoria is the industrial real estate market, said Ty Whittaker, senior vice-president of Colliers Victoria. But, he said, it is one of the strongest sectors in the capital region.

the first spec buildings to start after a three-year hiatus. Reliance Properties’ Burrard Place started this year with no confirmed tenants, but offering 146,000 square feet fit for large technology firms. Speculative construction is raising few fears in Canada’s top office market.

With industrial absorption hitting a ﬁ ve-year high of 281,000 square feet in 2017, “we are in an unbalanced market with demand strongly outweighing supply,” Whittaker warned. Greater Victoria has about 10 million square feet of industrial space and the overall industrial vacancy rate is now 2.8 per cent, but falls below 1 per cent in the city.

“Space to meet the growth projections of large companies currently doesn’t exist in Vancouver. This is an era when developers like Reliance can build ofﬁces without any prelease agreements,” said Jon Stovell, Reliance president and CEO.

Vancouver: Ofﬁce strata hit $2,000 per square foot and speculative developers are fearless. | SUBMITTED WESTERNINVESTOR

CALGARY THE PICK: Industrial After a long two years, Calgary is ﬁnally working its way up to a comeback. The city’s GDP grew 6.98 per cent in 2017 and is expected to continue it’s momentum throughout 2018. The unemployment rate has decreased from 9.4 per cent to 8.7 per cent, with job growth projected to increase 2 per cent in 2018. Calgary’s industrial market has posted four consecutive quarters of positive net absorption, making it the city’s strongest asset class, according to CBRE’s Canada Real estate Market Outlook 2018 report. “Net absorption totalling nearly 2.5-million square feet [has] generated optimism and conﬁdence in the future of the industrial market,” the report states. The city’s industrial vacancy rate is forecasted to decrease to 7.9 per cent in 2018, down 2 per cent from the start of the oil recession. The vacancy rate is far behind that of the

EDMONTON THE PICK: Retail and industrial New small to mid-sized commercial buildings are coming onto the Edmonton market this year, driving up the pace of investment purchases. As the region’s oil and energy sectors continue their journey to recovery, energy tenants are returning to or expanding in Edmonton. This is driving up demand for industrial space and leading to new projects, including the three-phase, $9.3-billion North West Reﬁning project north of

Calgary’s industrial market has posted four consecutive quarters of positive net absorption, making it the city’s strongest asset class for 2018. | SUBMITTED city’s ofﬁce sector, estimated to increase to 27.9 per cent this year. With nearly 2.3 million square feet of industrial space expected by the end of 2018, strong

Edmonton. The city’s $3.5-billion Inter Pipeline Ltd. gas plant just outside of Edmonton will also draw in increased energy sector demand. Industrial investment in the city is forecasted to hit $678 million in 2018 – up from $397 million in 2017. Edmonton’s retail market has also picked up in recent years, thanks to investment in the city’s downtown ICE District. The$ 2.5-billion Phase I of the project saw construction of the new Rogers Place and Edmonton Tower. The JW Marriott, Stantec Tower, The Legends and Sky

industrial investment will likely continue into 2019. Our Calgary investment pick from last year, retail, is facing headwinds following the closure of Sears Canada.

Residences are slated for completion by end of 2018 or early 2019. The entire 25-acre, mixed-use development will ultimately add 300,000 square feet of retail space and 1.3 million square feet of ofﬁce space. Block BG rental housing will add 560 purpose-built units to the downtown district by 2020. Expansion of the Valley Line LRT public transportation system into southeast Edmonton is expected to attract more labour and business industries from the outer suburbs to the downtown area.

The city’s retail vacancy has nearly doubled accordingly, as the department store’s closure has led to a glut of 650,000 square foot of vacant space.

Calgary’s GDP grew 6.98 per cent in 2017 and is expected to continue its upward momentum throughout 2018

” As the region’s oil and energy sectors continue to recovery, energy tenants are returning to or expanding in Edmonton. | MARRIOTT

WESTERNINVESTOR

Expansion of the Valley Line LRT into southeast Edmonton is expected to draw more labour and business industries from the suburbs to downtown

” Small-town prices, big-city action deﬁ nes Lethbridge, picked as one of the top commercial markets in Alberta. | SUBMITTED

LETHBRIDGE THE PICK: Retail and industrial Conﬁdence in Lethbridge’s commercial real estate market is strong, with the city recently ranked by Avison Young as Alberta’s strongest municipal economy for 2017. Lethbridge’s population is growing rapidly, increasing nearly 11 per cent between 2011 and

2016. The city has invested in major industrial and mixed-use commercial developments, including the Crossings in West Lethbridge, a 60-acre project hosting large retail footprints. The city also spent $41 million on construction of Phase 1 of the Crossings Leisure Complex, with the 110-million Phase 2 expected to be completed by 2019.

The amount of new industrial projects coupled with a declining industrial vacancy rate – currently at 4.4 per cent, down nearly 2 per cent from the year before – make industrial investment particularly desirable into 2018. Investors are also snapping up new retail space, making the retail trade among the top employment industries in the region.

Winnipeg has long maintained its reputation as the most stable Prairie commercial real estate market across all sectors

” Winnipeg investors are spoiled for choice, whether it’s retail, commercial, industrial or multi-family assets. They all look good. | SUBMITTED

WINNIPEG THE PICK: All sectors (office and industrial)

Winnipeg has long maintained its reputation as the most stable Prairie commercial real estate market across all sectors, far

less dependent on the boom and bust cycles of the oil and gas sectors than in neighbouring Alberta.

Confidence in Winnipeg’s office and industrial sectors have spurred a number of major developments in these sectors, including a trio of multi-tenant Quadreal buildings in the Inkster Industrial Park, the four-tower, 400,000-square-foot True North Square mixed-use project and major renovations and upgrades to retail strips across the city. Industrial construction over the last few years has remained slow, resulting in a five-year vacancy rate low of 3.6 per cent in 2017. The Bishop Grandin Crossing project will add 44 acres of industrial space to the market, which CBRE believes will help ease the industrial supply crunch.

WESTERNINVESTOR

THE OFFICE MARKET

Metro Vancouver ofﬁce market The top three areas to buy office properties in 2018 in Canada’s top office market

With no meaningful new supply expected until 2021, the market is starting to see recordhigh lease rates, with forecasts for this year expected to exceed $75 gross per square foot

”

n Vancouver’s increasingly hot office market, downtown office vacancy is now sitting at 5 per cent, the second lowest downtown office vacancy rate in North America and the lowest it has been locally since 2013. With no meaningful new supply expected until 2021, the market is starting to see record-high lease rates, with forecasts for this year expected to exceed $75 gross per square foot per annum in new, top-quality office towers. This is all spurring greater investor demand to acquire and develop office assets. But, with competition for assets and development sites high, the key question has become where in Metro Vancouver offers the best value? Here are CBRE Canada’s top three markets for office investment in Metro Vancouver:

Downtown: The downtown core

will always be top of the list for investors. People want to live and work downtown. With 1.2 million square feet of office space now under construction, the starting gun has been fired on the next wave of downtown development, meaning there is relief for tenants on the horizon. However, in the short term, businesses seeking office space will see upward pressure on rents, which will fuel the appetite of investors and developers for office properties. The gap in the delivery of new

WESTERNINVESTOR

supply will leave some tenants in no man’s land. Companies with leases coming up for renewal before 2021 may have little room for negotiation in what is currently a landlord’s market, meaning they will face rising rental rates and increased competition from other tenants. Today, a company looking to secure 50,000 square feet of ofﬁce space downtown only has only three options – all of which have active offers in play, with one dealing with multiple offers. This hyper-competitive environment will drive rental growth for owners of downtown ofﬁce properties.

Mt. Pleasant / False Creek Flats: Historically, businesses with large floor plates and lower rent requirements moved from downtown Vancouver to the suburbs, but increasingly, businesses are moving into the Mt. Pleasant and False Creek Flats area. The tech industry continues to drive job growth and fuel demand for office space in Vancouver. Of all the tenants in the market currently looking for office space, more than half are tech tenants. Many of those companies are flocking to Mt. Pleasant despite recent increases in rental rates. What used to lease at $32 to $35 gross per square foot is now $45 to $50 gross per square foot. With rising rents, some tenants are considering purchasing over renting. This has given rise to strata office sales in the area, which range

from $900 to $1,200 per square foot for new shell ofﬁce space. Mt. Pleasant and False Creek Flats currently have 450,000 square feet of new ofﬁce construction under way, which on the surface seems to provide some relief for tenants, but in reality, 52 per cent of this new supply is already spoken for by occupiers. This is a dynamic leasing environment that has attracted a sharp uptick in investment and development volumes.

Brentwood, Burnaby: The top concern for any organization today is attracting and retaining great talent. Many millennials are now beginning to start families and, as such, are moving from downtown condos to East Vancouver, Burnaby and other suburbs Brentwood is the perfect example. This is the next hub for offices in the suburbs. With most people still driving to work, the Brentwood area has easy access to Highway 1, but for those who take public transit, it has the Brentwood SkyTrain station and associated shopping amenities of the Amazing Brentwood mall. Since January 2017, Brentwood has seen over 5,853 residential condos developed, with another 6,658 planned for construction. With this influx of new residents comes demand for services and jobs in the area, making Brentwood a very popular location for future office development. ■

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WESTERNINVESTOR

INDUSTRIAL REAL ESTATE

Investing in industrial Evolving retail development highlights dramatic change in distribution centres

In core industrial markets, antiquated industrial buildings with lower ceiling heights are increasingly in high demand and vacancy has fallen below 1 per cent

”

ho is leasing and buying all this increasingly expensive industrial space in Western Canada? What is driving all this change in our market, particularly Metro Vancouver? And what does the future hold? The constant is change, including the rapid transformation of our core industrial real estate markets. Only 10 years ago if someone mentioned Amazon, most people would have thought of a jungle. If someone asked if they should build a three-level industrial building in East Vancouver, you would have said they were crazy. And who would’ve thought to buy a 10,000- square-foot or 20,000-square-foot warehouse strata unit and not have a loading and yard? Today Amazon is the largest occupier of industrial space in North America at more than 140 million square feet, and plans to add another 18 million square feet by the end of 2018. Our team is currently in the marketing stages of the fourth multi-level industrial building to be built in East Vancouver, with several more planned. The majority of recent land sales larger than three acres in Vancouver, Richmond and Burnaby during the past two years have been sold to developers intending to build strata warehouse projects because buyers are lined up. My team’s business is tenant representation, working with companies who occupy industrial

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space, and marketing buildings for sale and lease, mostly in the core markets of Metro Vancouver. But work takes us to other B.C. markets and other Canadian cities, including Calgary, Edmonton, Winnipeg and Toronto. The majority of demand in Vancouver continues to be driven by distribution of consumer goods, food and beverage, building supplies and a sprinkling of technology users and film production. In core locations increasing prices naturally force a transition to more specialized light manufacturing, tech, office and showroom-type uses. The change manifesting in Vancouver’s competitive and constrained industrial market is one step ahead of other Canadian markets and generating innovative building forms. What is driving the changes to the market in Vancouver? We have a limited supply of industrial land, and prices continue to skyrocket, forcing users to operate more efficiently. Distribution centres are bigger, ceiling heights are higher (often 36-40-foot clearance). Vancouver land prices are now more than $20 million per acre, so we will continue to see multi-storey industrial buildings proposed. However, I would also argue some of the changes now are the result of population growth, the densification of the downtown core and town centres as well as technology and our changing shopping habits, largely led by millennials.

E-commerce distribution E-commerce sales grew by a whopping 16 per cent in North America last year, compared with slightly more than a 3 per cent growth in retail spending overall. How does this impact the industrial real estate market? In early March 2018, I toured the new Amazon Prime Now and Amazon Fresh pick-up facility just south of downtown Seattle. This is where a consumer is able to place an order online and then simply drive through the facility and pick up their groceries in a turnaround time of less than three minutes. The model is inexpensive, convenient and fast, and is being closely watched by other retailers. In core industrial markets of Seattle, not unlike Vancouver, antiquated industrial buildings with lower ceiling heights are increasingly in high demand and vacancy has fallen below 1 per cent. Instead of a retailer having a large regional distribution centre, the forecast for retailers includes fewer and smaller stores but additional warehouse facilities for return centres and pick-up facilities close to downtown centres. This fundamental shift in distribution patterns will continue to push industrial development forms in Vancouver to new heights – and in other major Western Canadian cities as well. ■

Ron Rodgers has been involved within the real estate industry in north east British Columbia for over 32 years

Ron focuses his resources and time to the commercial real estate industry

NORTHEAST BC Realty Ltd. Investing Our Energy In The North

He created the offices of Northeast BC Realty to be the only brokerage in the area to focus on commercial real estate From sales and leasing to development and investing, Ron has assisted in a wide variety of commercial transactions over the years and is proud to have received the 2011 thru 2017 MLSÂŽ Top Commercial RealtorÂŽ as awarded by the Commercial Council of the BC Northern Real Estate Board

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Theresa Mucci-Rodgers ASCT, ASTTBC / OWNER In addition to being Ronâ&#x20AC;&#x2122;s wife, business partner and co-owner of NEBC, Theresa is also a Civil Engineering Technologist; a unique designation that provides her the ability to work effectively with property owners, buyers, regional districts and municipalities. Theresa provides services & knowledge regarding the technical and development aspect when it comes to municipal issues associated with many commercial properties. This allows Ron to offer his clients the benefit of understanding up front, the scope of work and potential concerns involved with some commercial properties prior to and after entering into the purchase or sale of a property...and when Theresa is not in the office, the golf course beckons!

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STRATA COMMERCIAL

Buy, don’t lease There are advantages to purchasing rather than leasing commercial real estate

In addition to being in control of the space, owning commercial real estate allows an investor to capitalize on equity gains and contribute to their overall bottom line

”

Cecilia Tse is a senior vice-president, Asia Paciﬁc, at Colliers International, Vancouver. Tse specializes in commercial real estate investments and project marketing while focusing on expansion and development. Visit www.collierscanada.com

ommercial real estate in Metro Vancouver is a very active segment of the market. After working in the industry for more than 25 years, I have seen the advantages of investing in this particular market. Over the course of my tenure, I have observed market trends, assisted clients looking to invest in commercial real estate for the financial gains, as well as working with tenants looking to lease commercial office and retail spaces. For those investors with an end goal to mature their personal wealth, I have observed that it can be advantageous for business owners to invest in commercial real estate as opposed to leasing commercial space. With commercial real estate investments, not only do property owners maintain absolute control over their property, they are presented with an opportunity to build their financial capital. According to the Metro Vancouver Office Market Report Fourth Quarter 2017, release by Colliers Canada, the overall vacancy rate for Metro Vancouver edged down to 5.9 per cent in the last quarter of 2017. Observing the vacancy rate, in conjunction with a low supply of commercial space, market trends indicate that it could be advantageous for long-term investors to make an investment. Furthermore,

WESTERNINVESTOR

market trends indicate prices will continue to rise, therefore investors purchasing now will be able to capitalize on further price increases. The long-term growth projected for a location signiﬁcantly impacts an investor’s decision-making process when evaluating purchasing in a certain area. Burnaby, for example, is a rapidly developing area and shows signiﬁcant promise due to its central location. The City of Burnaby’s Metrotown Downtown Plan projects that an additional 120,000 people will move into the area by 2041, which is equivalent to 52 per cent population growth. These projected numbers could showcase to a potential investor in Burnaby, for example, that they have selected a sound location to make an investment. Proximity to transit also plays a large role in a location’s value. Nodding to Metrotown again, the city’s location on the SkyTrain line, as well as central location in Metro Vancouver, show investors that the area is easily accessible by members of the greater business community. Commercial real estate prices in Greater Vancouver are forecasted to continue to surge, which will allow purchasers to take advantage of the projected asset appreciation. Monthly mortgage payments assist owners to build equity, as a portion of those monthly payments go toward paying

down the principal loan amount. When owners eventually decide to sell, or reﬁnance their properties, they can extract the difference between the remaining loan amount and the current fair market value as equity for their business. With leases, payments go to the landlord and zero principal is paid down.

Tax advantage The ﬁnal motive for investing in a commercial space is the tax beneﬁts. The following can be deducted when calculating tax payments: interest fees, depreciation expenses, and non-mortgage related expenditures. In addition, the 20 per cent foreign buyers tax does not apply to commercial properties, which allows commercial properties to generate a higher rate of return. Metro Vancouver is experiencing remarkable growth in the commercial real estate industry. In addition to location being among the top factors for making a commercial real estate investment, the chief reason I have analyzed for investing over leasing is a purchaser’s desire to build their personal wealth. In addition to being in control of your commercial space, and not having tenancy parameters laid out by a landlord, owning commercial real estate allows investors to capitalize on equity gains and contribute to their overall bottom line. ■

INSTITUTIONAL INVESTING

Invest like a pension fund Big pension funds carefully lean towards real estate – and private investors should too

Many don’t realize that Oxford (office buildings); Morguard (office, industrial and retail); and Ivanhoe Cambridge are all pension or institutional fund arms

” Peter Kinch is a best-selling author, award-winning mortgage broker and investment adviser with Vine Wealth. Kinch has been a regular featured guest on television and radio across Canada and is also a private equity specialist and exempt market dealer representative with Triview Capital Ltd. Any opinions are solely his own. Visit www.peterkinch.com

ith every registered retirement savings program (RRSP) season Canadians continue to invest billions into mutual funds or public market related products. According to the Investment Funds Institute of Canada, Canadians had a whopping $1.49 trillion invested into mutual funds as of January 31, 2018. That’s trillion with a T! A random search of the top asset allocation mix for mutual funds will typically result in a mix of stocks vs. bonds. The”classic” mix is 60 per cent stocks and 40 per cent bonds during your growth stage and then reversing that in retirement. Regardless of the percentage allocated to stocks or bonds, 100 per cent of the typical portfolio for an RRSP is exposed to the public markets in one form or another. So how do the investing habits of the average Canadian compare to those of pension funds, endowment funds or high-net-worth individuals? When I looked at these three groups, I found one thing they all had in common. Beyond diversifying within the public markets, they also added two specific non-correlating asset classes: real estate and private equity. In doing so, they reduce the volatility of their holdings, effectively hedging against all their assets being exposed to the same market factors that may cause wild fluctuations. I like to refer to this as “compressing the volatility curve.” One of the first to do this was

David Swenson, who ran the Yale University Endowment fund. Swenson famously grew that fund to be worth over $20 billion largely through adding assets outside of the traditional stocks and bonds. He was so successful that other Ivy League schools soon followed suit. A quick look at any pension fund – including the Canada Pension Plan, will show solid investments in both real estate and private equity. You don’t have to look beyond the city of Vancouver to find multiple examples; pension funds are heavy into real estate. Many don’t realize that Oxford (office buildings); Morguard (office, industrial and retail); and Ivanhoe Cambridge are all pension or institutional fund arms, or that the biggest modular home park owner in British Columbia is an arm of the BC Public Pension Fund. When it comes to high-networth investors, a great example is to look at the “Tiger 21” group – a peer-to-peer group of wealthy individuals who collectively manage approximately $35 billion in investable assets. Statistics indicate that real estate has now become the No. 1 investment choice for members, with public equities and private equities tied in second place. So what’s the common theme? Pension funds, endowment funds, wealthy investors and institutional investors all diversify their investments into a mixture of public markets, real estate and private equity.

So that raises the question: if that’s the way these groups invest, why doesn’t the average Canadian invest their registered assets the same way? Evidence would suggest very few do. Why? Quite frankly, the average consumer looking to make a contribution into their registered funds will typically talk to their local bank or ﬁnancial adviser. Banks are not positioned to offer private equity options and you can’t use registered assets to buy direct ownership of real estate. So if that’s the case, how can you invest like a pension fund? The answer is to think outside the box. Private equity investments are widely available through exempt market dealers throughout Canada and can be RRSP or Tax Free Saving Account (TFSA) eligible, as long as you purchase them through a trust entity such as Olympia Trust Company or Computershare. You may not be able to be hold real estate as an investment within an RRSP, but you can purchase units that are RRSP/TFSA eligible in a Limited Partnership that buys or develops real estate. A wide variety of these investments are available for the average Canadian. All you need is a little research: education and awareness can change the way you retire for the better. Like the ad says, “it’s your money” and you owe it to yourself to learn about all your options. Happy investing. ■ WESTERNINVESTOR

Sponsored Content

Limited Partnerships deliver real returns Investing with an experienced real estate team results in a secure, steady return on investment

By Pat Johnson

From the rooftop decks in the penthouse suites of the Lauren, a recently sold-out development in Squamish, residents have a 360-degree view across to Howe Sound, up to Mount Murchison and east to the Chief, the deﬁning geographic feature of the town known as the outdoor recreation capital of Canada.

we certainly don’t believe it’s at the bottom of the cycle, but we also think if you’re acquiring today at the right price, you’re going to get the best return 20 years out.”

The building and location meet the copious criteria of Performing Equity, the real estate development and investment team, whose members created the Lauren and more than 100 other multi-family and resort properties across Canada, in the U.S. and in Mexico.

“We start with a broad mix of about 21 items and drill it down,” he says. “When we’re looking at an area, we consider a number of key factors.”

“The ﬁrst things we look at are long-term fundamentals,” says John Murphy, a real estate veteran who heads sales and marketing for Performing Equity. “One of the reasons we’re focused on B.C. right now is because we believe it has the best long-term potential. We are cautious, in that

In opting to move ahead with a project, the team analyzes a project’s potential using an array of criteria.

Top among these are the potential for long-term value increase, desirability and the area’s employment prospects. Not surprisingly, several of Performing Equity’s projects are in Squamish, where the population is growing faster than almost anywhere else in Canada, as well as in the similarly spiking Okanagan. Its team has created a particular niche having been active in more than $1 billion in acquisitions and developments across about 120 projects. “Affordability and value are our cornerstone”, Murphy says, whether it is an eight-unit multi-family or a master-plan for an 1,100-home community. In the Lauren, for example, noted Vancouver architect John Sproule designed “ultraefficient” floorplans, so that square footage that would typically accommodate one bedroom was designed to maximize space and accommodate a second bedroom. These sold from just under $300,000. Twelve penthouses retained a comparatively modest 1,000-square-foot floorplan and sold for less than $700,000. The Lauren actually hit the demographic mark for two kinds of typical Squamish buyers: the first-time homebuyers for

Add the power of real estate to your investment portfolio

“Limited partnerships aren’t that unusual, but our structure and the way Performing does it are,” he says. “We write our documents in favour of investors because our principals are also investors. They invest alongside our partners in addition to having a role as a general partner”. John Murphy Business Development

whom location, and affordability are key, and downsizers from the city for whom tight budgets are less of an issue than spectacular views and quality amenities. Another niche Performing Equity has found for itself is inviting people to enter the real estate market at what Murphy terms the wholesale level. “Limited partnerships aren’t that unusual, but our structure and the way Performing does it are,” he says. “We write our documents in favour of investors because our principals are also investors. They invest alongside our partners in addition to having a role as a general partner”. “Also, there is no markup. That’s fairly unusual because, in the business of limited partnerships, we’ve all seen a very substantial fee that’s charged on the way in, or an acquisition fee. We do it at cost so nothing is hidden under a shell”.

fully permitted, investors can get their returns in a relatively short time. The Lauren, for example, has projected returns of 40 percent in about 22 months. Despite extraordinary returns like these, Murphy insists the Performing Equity model is very conservative. “We get a great deal on the land and we’re also able to get that return because of short timelines. Lots of projects go years before they are actually into development. In our case, it’s months.” Vancouver-based Performing Equity Ltd. is a subsidiary of Drever Capital Canada, which is headed by Michael Drever, founder of CruiseShipCentres. Drever is a multiple Canadian Franchise Association Franchisor of the Year and an inductee in the Cruise Lines International Association Hall of Fame. Murphy credits Drever’s diverse background for the success of Performing Equity’s projects. “Mike gets really involved in the design of the project,” Murphy says. “His background in travel and hospitality ties right in with how the units are going to perform later and how the building feels, and its desirability.” The company has attracted a core group of repeat investors – many of whom are real estate professionals. “It’s basically a better way to invest in real estate,” says Murphy, noting the company’s “virtual apartment building” theory of diversifying a real estate portfolio across a range of projects. Another advantage, he says, is participating in a development with professional management rather than trying to master the ins and outs of being a landlord and manager. With investments in some projects beginning at $25,000, the entry point is not hugely onerous.

“At Performing Equity, the investors’ capital is preferred,” Murphy explains. “Investors get their money out ﬁrst. At an 8 percent return, no money goes to the general partner even though they didn’t take an acquisition fee at the start, or a disposition fee. After capital is returned, the next distribution is preferred interest to the investor. That’s a huge incentive for the general partner to make sure a deal performs. They’re only compensated if the investment performs as expected.”

One of the next projects will see a development on one of the most visible sites in Squamish – almost an entire block where August Jack’s motel and a community garden currently sit.

Time is also of the essence. By purchasing land that is often

Like everything Performing Equity does, he says, this new project will be imagined from the standpoint of the end user and investor.

“It’s probably the nicest site in Squamish, bar none, partly because it’s on the downtown Main Street. You can walk to everything and you enjoy unobstructed views of the ocean and the Chief,” says Murphy.

“If you had an investment unit in that building, how would it function?” he asks. “We start with the end in mind.”

Regarding B.C. multi-family opportunities

(604)620-3728

PerformingEquity.com info@performingequity.com Free Market Report Available

FEATURE

ALBERTA ECONOMY ACCELERATES IN APPROACH TO

“CRUISING SPEED” This year, commercial real estate professionals look toward a couple of other “R” words: rebound and recovery

Edmonton’s ICE District is seeing $5 billion in new developments, including the 54-storey JW Marriott hotel, the tallest building in the city until the 66-storey Stantec tower completes later this year. | ROGERS PLACE / MARRIOTT

By GEOFF KIRBYSON

hile many are hoping Alberta’s energy-related downturn will soon be a speck in the rearview mirror, few are shouting it from the mountain tops. Stakeholders in both Edmonton and Calgary are still smarting from having their retail, ofﬁce and industrial markets hammered to varying degrees over the past few years. But the hammering is over and the

Investments in Calgary Commercial Real Estate

Q4 2017: TOTAL $1.1 BILLION Residential land 20.4%

Multi-family 14.7%

Retail 14.6% ICI land 20.4%

Industrial 11% Hotel 1.5% Ofﬁce 17%

20 WESTERNINVESTOR

rebuilding has apparently begun. It is not the boom’s second coming, but “people are a lot more positive now. We’re seeing employment numbers get better and vacancy is stabilizing. The worst is over,” said Brian Gettel, president of Network Real Estate Intelligence, an Edmonton-based real estate research ﬁrm. Improving economic fundamentals have a growing number of real estate players whispering about optimism returning to the market, particularly since late last year. “We’ve seen a lot of activity and interest in the last three months,” said Casey Stuart, Calgary-based vice-president of industrial at Barclay Street Real Estate Ltd. “We’ve seen situations with multiple offers on properties, which are all good signs. The question is, can it be sustained?” It is certainly on pace. The last quarter of 2017 registered a total of 162 commercial real estate transactions in Calgary, worth $1.1 billion, according to Altus Group. That was up 52 per cent from the previous quarter. Residential and industrial land were the most active sectors, each at 20.4 per cent of activity. The Royal Bank of Canada (RBC), however, said the “easy” stage of Alberta’s economic recovery is

drawing to a close and the more difficult part lies ahead. RBC predicted the provincial economy will have grown by 4.1 per cent in 2017, but that says more about the low base the year before than when everything was firing on all cylinders. “We expect key economic sectors, such as energy and capital investment, to reach a more sustainable ‘cruising speed’ after their initial post-recession blast-off in 2017. The good news is we also expect the recovery to continue to broaden across economic sectors. This means that while the headline growth number is poised to be much smaller in 2018 – our forecast is 2.3 per cent – more Albertans should feel the improvement in the economy,” the bank said. RBC predicts employment growth will accelerate while the jobless rate will decline significantly in 2018 but Albertans aren’t likely to wave the all-clear flag any time soon. “It will take until 2019 for Alberta’s economy to recover fully from its severe recession in 2015 and 2016,” the bank said, calling for GDP growth of 2 per cent in 2019.

EDMONTON Depending on which statistic you look at, things bottomed out in Edmonton in either 2015 or 2016.

For example, the dollar value of land sold plummeted from $876.1 million in 2013 down to $310.9 million in 2016. Last year it inched up to $324.8 million. The dollar value of the buildings sold, meanwhile, fell from $1.7 billion in 2013 down to $1.0 billion in 2015 before recovering to $1.8 billion in 2016 and $1.9 billion last year. In its 2017 market overview for Edmonton, Network predicts 2018 will be a “growth year.” “A modest increase in activity is projected in both the building and land category and it is anticipated that there will be a stabilization in values,” the report said. Office space hasn’t been a sought-after product of late in either Calgary or Edmonton but Gettel said Edmonton, in particular, takes a long time to rebound. “We’ve got such a narrow office market in Edmonton. We had three new high rise office towers being built. We’ve got two completed and the third will be finished this year. We hit the downturn and had a big source of new supply coming in, which drove our vacancy rate up. Lease rates tumbled in a real hurry because the market is so narrow,” he said. The main beacon in the last couple of years has been retail, where vacancy rates remained low and lease rates didn’t change appreciably with the economic downturn, thanks largely to a strong influx of young people. Over the past two years, Alberta consumer spending has remained in the $6 billion per month bracket, second highest in Western Canada, according to Statistics Canada. “We haven’t had a lot of speculative property being built. A lot of the new retail built is suburban because we don’t have a lot of land left in the mature areas. We haven’t had a chance to build up any excess space,” Gettel said. Of course, it hasn’t all been days of wine and roses in the retail sector. Losing Sears in regional malls, just three years after Target pulled out of Canada, is leaving blocks of empty space that aren’t likely to be filled any time soon. “There are no more anchor tenants like that anymore. You’re going to have to divide it into smaller blocks,” Gettel said.

CALGARY Three hours to the south, Stuart believes the industrial sector will lead Calgary back to the promised land. The industrial vacancy rate

Calgary’s retail and industrial sectors will lead Alberta’s biggest city into a slow recovery this year that will accelerate into 2019, economists say. | CONCORD DEVELOPMENT

dropped to 6.5 per cent at the end of the fourth quarter of 2017, down from 7.9 per cent a year earlier, thanks largely to the transportation and warehousing industries, as well as food and health-care. “Without question, industrial will have the most growth in terms of employment and new business opportunities,” he said. Gettel doesn’t disagree. He said people tend to buy less land during a downturn but he’s expecting to see some increased activity this year, particularly in industrial. “If we see an uptick in land sales in 2018, that will be a clear sign that we’re on the right path,” he said. As if on cue, Vancouver developer PC Urban Properties Corp. bought a 5.4-acre industrial site in Calgary this February, where it will convert the 40-year-old business park into industrial condos. PC Urban expects to sell more than 100,000 square feet at $230 to $245 per square foot, said Sean Ferguson, associate vicepresident, industrial, for Cushman & Wakeﬁeld, the listing agent for the property. “We’ve had a lot of interest,” Ferguson said. Stuart believes Calgary’s geography is a big advantage from a logistics perspective and was largely

behind a large investment from CN Rail, which built an intermodal park just east of the city a few years ago. “We’ve seen some growth there. There are three companies distributing out of the park. We’ve created some infrastructure to support logistics throughout the Pacific Northwest, which includes the runway and international terminal upgrades at the Calgary airport, and rail and truck traffic,” he said. It also helps that Vancouver’s industrial market is “overheated” with a vacancy rate below 2 per cent. “There is extreme pressure on rental rates so we have seen a number of distribution companies relocating to Calgary or adding additional square footage here instead of in Vancouver,” he said. Calgary’s office market is still “subdued” with vacancy rates hovering in the 25 per cent range for both suburban and downtown but just how long the recovery will take is the real wildcard. Stuart said most estimates are around five years. “The office market is still in a lot of pain. Unless we see some new entrants, the existing companies that are here aren’t expected to have enough growth to absorb a lot of the square footage that’s vacant today,” he said. ■

We’ve seen a lot of activity and interest in the last three months CASEY STUART, VICEPRESIDENT, INDUSTRIAL, BARCLAY STREET REAL ESTATE LTD., CALGARY

”

WESTERNINVESTOR

BUSINESS BROKERAGE

Times are changing How property owners can protect themselves from the things they can’t control

Now is the ideal time for real estate investors to get back to basics and focus on the property’s net operating income

”

Warren Smithies is senior vice-president of Martello Property Services Inc., Vancouver. Phone: 604-681-6544 www.martello.group

n a region that is densifying and developing as quickly as Vancouver and its surrounding municipalities, it can be easy for property owners to become swept up in the breakneck appreciation of their properties over the short term. In the immortal words of Bob Dylan, “the times they are a changin”. New vacancy tax levies, increased property taxes, regulatory bottlenecks and rising interest rates all expose property owners to risk from numerous angles. Given this turbulence, today is the ideal time for real estate investors to get back to basics and focus on methods of mitigating risk for the primary driver of value that is often overlooked in today’s economic climate: the property’s net operating income. For investors in retail properties, at a fundamental level, lease wordings define the ability for property owners to recover costs from the tenants and in so doing defines the property’s net operating income. For investors in retail properties, here are some tips for mitigating risk in your lease wordings. First, ensure that what constitutes a recoverable and a non-recoverable expense are clearly defined. Of particular issue are cross-referencing and intentionally unclear definitions. In many cases the body of the lease wording can contradict the definitions exposing landlords to the risk of tenants challenging the annual

WESTERNINVESTOR

recoveries and going to arbitration. Leases from national tenants are notorious for these problems. Spending a few thousand dollars on a quality lease that doesn’t have these issues can potentially save tens of thousands in arbitration costs and penalties down the road. Secondly, don’t make the mistake of being painted into a corner when it comes to uncontrollable expenses. In addition to the big four (property taxes, utilities, insurance, and snow removal) any additional uncontrollable costs must be passed on to the tenant. Changes in minimum wage, safety authority regulations, dumping fees, recycling costs, and material costs are only some of the additional costs that are governed by authorities which are fully outside the control of the landlord and the tenant. Limiting the landlord’s ability to pass on these costs through caps on annual expense increases can severely impact the property’s net operating income. Imagine how owners of retail property in Ontario are feeling right now with the jump in minimum wage that just occurred. If expenses chargeable to their tenants are capped, they are likely feeling the pinch right now.

Redevelopment strategies Finally, if there are plans to redevelop the property over the medium term, a strategy must be devised to ensure that the landlord’s ﬂexibility

to do so is not restricted by longterm leases. For property owners with only a general eye for future redevelopment, the classic solution is including demolition clauses within the tenant’s leases and any renewal options. These are usually fought tooth and nail and so careful negotiation will be required for inclusion. On the other hand, if a timeline is in place for a redevelopment then the ideal solution is to strategically arrange the tenant’s leases to expire all in the same year. This can take many years of effort to achieve, but it can save tens if not hundreds of thousands of dollars in termination costs under demolition clause provisions. If the plan is to sell the property to a developer then the value of the cost savings through the arrangement of lease expiries will certainly play to the advantage of the vendor. Many seemingly small amendments to lease forms can result in signiﬁcant risk to the property’s net operating income and future resale value. Work in tandem with your expert legal counsel and property management team to ensure these risks are adequately controlled. Whether the rising tide of the market slows or a curve ball comes out of left ﬁeld, property owners who have controlled these risks will be able to rest easier knowing that the property’s income is well protected. ■

ENVIRONMENTAL CLEANUP

Controlling cleanup costs for contaminated land It takes 20,000 pages to explain regulations and can cost millions of dollars to meet them

Businesspeople frequently complain about unreliable cost estimates – nowhere is this more prevalent than in the environmental consulting industry

”

Dr. Harm Gross is a biologist, an approved professional of the Contaminated Sites Approved Professionals Society, and president of Next Environmental of Burnaby, B.C. Visit www. nextenvironmental.com

n British Columbia, the cost of contaminated site cleanup has grown steadily since the Contaminated Site Regulation (CSR) became law on April 1, 1997. There are several reasons for this change, some of which are under the control of “persons responsible” – chiefly landowners. An uncontrollable cost factor is the proliferation of regulations, which ballooned to an estimated 10,000 double-sided pages in British Columbia. On November 1, 2017, Stage 10 omnibus amendments to the CSR came into effect, changing concentrations deemed harmful for a broad range of contaminants and adding a significant number of new ones. This meant that work before that date would become non-compliant overnight, causing environmental consulting companies to rush more than 100 submissions for a Certificate of Compliance before this deadline to grandfather their work and avoid additional costs for their clients. Regulations pertaining to contaminated sites are not just evolving in British Columbia but across Canada in recent years. Saskatchewan’s updated Environmental Management and Protection Act came into effect in June 2015. This legislation thoroughly

24 WESTERNINVESTOR

overhauled the old act by introducing a new impacted sites registry and by providing the regulator with more power to order site assessments. New guidelines were also introduced in Alberta, where the regulator released a new Environmental Site Assessment Standard in March 2016. Manitoba enacted amendments to the province’s Contaminated Sites Remediation Regulation in April 2014. With regulations in flux and frequent changes in rules, the potential for lowering and accurately predicting costs for site remediation projects is thus of great interest. The potential savings by inviting an experienced review of proposed remediation plans can be significant. At one site the savings for a client was $15 million; more commonly, savings are in the six-figure or low seven-figure range. Incorrect investigative work is the most frequent source of error. This ranges from faulty field techniques when sampling groundwater wells, through unfamiliarity with laboratory methods for distinguishing man-made from naturally occurring substances, to inadequate comprehension of the myriad environmental regulations. Investigating contaminants requires great care when the difference

between contamination and no contamination is measured at the extremely low concentrations of parts per million in soil, or the even lower concentrations of parts per billion in water. We have seen numerous examples of such costly mistakes. The public sector is also prone to erroneous estimations of remediation cost. In April 2014, the parliamentary budget officer reported that the federal government has underestimated the cost of cleaning up contaminated sites under its jurisdiction by at least $2 billion, putting the total liability to almost $7 billion. Businesspeople frequently complain about the irritation of unreliable cost estimates, and rightfully so – nowhere is this more prevalent than in the environmental consulting industry. Next Environmental has taken the unprecedented step of providing fixed price quotes for a comprehensive scope of work at each step of investigation or remediation, thus entirely eliminating the cost uncertainties for clients. This service, unique in the contaminated sites business, is possible due to the skilled application of regulatory proficiency. Time will tell if this cost control measure spreads to other firms. ■

Our job? Save you money. Remediation is just a clean up . . . why spend more than necessary? CALL NOW ... Talk to the leaders in regulatory compliance. Ask about our fixed price investigations and remediation. Speed up your project ... keep your costs down!

GLOBAL REAL ESTATE

Smart REIT investing Real estate investment trusts remain a strong investment, despite rising interest rates

A number of REITs in Canada are rezoning urban properties in order to increase the density permitted on the site

”

Corrado Russo is senior managing director, investments and global head of securities at Timbercreek Asset Management. Torontobased Timbercreek is a global asset class management ﬁrm with more than $7.5 billion in assets under management. Visit www.timbercreek.com

n an environment where global equity markets are reaching all-time highs and fixed income faces increasing interest rate hikes, we believe real estate offers an attractive source of alternative yield with growth potential that is expected to exceed inflation. These characteristics coupled with the diversification benefits that real estate offers make Canadian and global real estate investment trusts (REITs) attractive assets this year. With the recent Bank of Canada interest rate hike to 1.25 per cent – the highest since 2009 – REIT investors may be concerned about the impact it could have on REITs. Contrary to conventional beliefs, today’s upward trend in interest rates is actually a good sign for REITs. Why? Rising rates typically mean the economy is experiencing growth, which means more jobs, higher consumer spending, more leisure travel to hotels and greater demand for commercial real estate space, all of which leads to higher revenue and greater cash flow growth, helping to partially offset the rise in borrowing costs. As a result, we continue to find compelling opportunities in REITs and believe that the sector offers investors numerous benefits, including a steady stream of reliable income with inflation protection. One of the most compelling REIT opportunities in Canada lies in office and retail assets concentrated in densely populated cities. Currently, Toronto, Montreal, Vancouver and Calgary, are experiencing a wave

WESTERNINVESTOR

of gentriﬁcation driven by people’s desire to live, work and play in the same place. This has spurred a large amount of real estate development that is driving the land values higher than many thought possible. A number of REITs in Canada are capitalizing on this trend by rezoning urban properties in order to increase the density permitted on the site. Not only are REITs creating outsized net asset value (NAV) growth through building an additional structure on an existing property, but they are also increasing the value of the existing property by creating a mixed-use asset where each use – retail, residential and ofﬁce – virtuously supports each other. Looking beyond Canada, we believe that Canadian small cap underfollowed REITs that own assets internationally, either in Europe or in the U.S., are fundamentally mispriced. We believe this group of REITs is poised to deliver better than average total returns for investors in 2018.

Four REITs that could outperform this year Allied REIT: In many of Canada’s largest cities, urbanization continues to be a major trend. Allied is in the middle of this urbanization. We believe that Allied’s position should lead to stronger land values for the residual and excess land they hold, as well as outsized growth in NAV as it expands by utilizing excess land to build new developments. Digital Realty: In the U.S., Digital

Realty effectively stores data for Amazon, Facebook and other large technology companies, and we believe this REIT is going to benefit from the continued growth and demand for more centres. In terms of valuations, the company is trading at strong levels not fully reflective of the growth expected in 2018. The shortage of data storage supply could potentially lead to outsized growth in cash flow, making Digital Realty particularly attractive to investors. Merlin Properties: In Spain we are closely following REITs involved in office logistics and retail. Office rents in Spain – in major markets like Barcelona – are slowly returning to more normal levels from a very low base. Spain was hit hard in the 2008 crisis but the recovery has materialized. Merlin has the potential and the assets in the right locations to benefit from growth in rents over the long term. Wereldhave: In the Netherlands, we are seeing opportunity across the retail sector. Wereldhave is an REIT with assets in a number of markets including France, Italy and the Netherlands. Wereldhave is a retailer, which continues to be a strong investment type in Europe. European retail comprises approximately one-fifth of the amount of retail per capita as the U.S. This is a compelling opportunity without the potential risks seen in the U.S. Wereldhave’s stock price and valuations are currently priced at deep discounts. ■

MORTGAGE FINANCING

Multi-family ﬁnancing Mortgage changes alter the strategies for financing multi-family properties

The area that is currently difficult to finance is raw land or land that is in need of a zoning change, where actual multi-family construction won’t happen for more than a year down the road

”

Multi-family projects Despite the myriad of rule changes on the residential side, financing for multi-family property has largely remained the same, except that rates have increased due to the three rate hikes we have had over the past year. For the longest time Canada Mortgage and Housing Corp. (CMHC) insured rates for a five-year term were hovering around the 2.25 per cent range, and now sit at around 3 per cent. A CMHC insured 10-year term is currently around 3.28 per cent. For conventional (non-CMHC insured) financing for multi-family properties, four- to five-year rates are currently in the range of 4 per cent to 4.25 per cent. One area of multi-family financing where the CMHC-insured criteria has changed is for mixed-use property. Previously, non-residential gross floor space was limited to 20 per cent, and the income from the non-residential space could not account for more than 20 per cent of the property’s income. Those have both been increased to 30 per cent.

Land and construction ﬁnancing Michael Lee is an experienced B.C.-based commercial mortgage consultant with Alliance Mortgage. Lee can be reached at 604.565.6370, or via email at mlee@ mortgagealliance.com

Institutional lenders still have a strong appetite for construction financing of all types of multi-family projects. The area that is currently difficult to finance is raw land or land that is in need of a zoning change, where actual construction won’t

happen for more than a year. In the current market, this type of ﬁnancing is essentially only available through “B” or private lenders. Rates and fees tend to be substantially higher (7.5 per cent to 8.5 per cent interest and a 2 per cent lender fee is common), but unless you are one of the very few large, established developers, it is realistically the only way that you are going to get any ﬁnancing on land these days.

Home financing Canada’s new mortgage underwriting standards (Guideline B-20), which came into effect on January 1, 2018, have certainly tighten lending standards that affect borrowers on the residential side. Now, even if a residential buyer is capable of putting down 20 per cent or more, they need to prove that they can afford payments based on the greater of the Bank of Canada’s fiveyear benchmark rate (currently 5.14 per cent) or their contract mortgage rate, plus two percentage points. The difference is pretty dramatic. Previously a family earning $100,000 putting down a 20 per cent down payment on a 3.09 per cent five-year fixed rate amortized over 25 years, could qualify for a house worth about $500,000, but under the new rules, that family would now only qualify for a house worth $400,000 based on a 5.14 per cent stress test lending rate. To make matters worse, most residential lenders don’t allow a

borrower to finance more than five properties with them. At that point they are capped out and have to look for alternate lenders. So what is an investor supposed to do? Fortunately, there are solutions on the commercial side for residential investors. Basically, as long as the net income from the properties shows that it can support the loan request, I can usually find a financing solution from my commercial lenders. This, of course, assumes decent credit and net worth, and depends on the location of the real estate. Generally, commercial lenders can consider the request if it is for five or more properties and the net income from the properties can service the loan request with a bit of a buffer (usually 1.2 times). Some lenders may also require that the properties are held in a company name (not under the personal name). Commercial rates are generally higher than residential, and lender and broker fees apply, but the main benefit here is that there is no ceiling to the amount of residential properties an investor can finance. When looking at financing a portfolio of properties on the commercial side, it is not based on the individual’s personal income, but the net income of the properties and what that net income is able to service in regard to a loan amount.■ WESTERNINVESTOR

HOTEL MARKET

Hotel strategies Checking into buy or build opportunities in the West as revenues flirt with record highs

The key to a successful hotel investment is knowing the conditions that best diminish risk in that particular market

”

Carrie Russell, AACI, MAI, RIBC, ISHC is a partner and the managing director at HVS Canada, a leading hotel consulting and appraisal ﬁrm with associates in Vancouver, Calgary, Toronto and Montreal. She has been active in the real estate and hotel industry for more than 20 years. At HVS, Carrie is involved with asset management, contract negotiation, due diligence, feasibility studies, and appraisals for hotels and resorts across Canada. Visit www.hvs.com

nvestors are taking note of the Canadian hotel market like never before because performance indicators are strong and have been steadily improving for some time. In 2017, Canada saw the highest prices per room for a single asset sale in its history and also stellar RevPAR (revenue per available room) performance. In this healthy environment, hotel investment opportunities are present throughout Canada and in particular Western Canada; however, this does not necessarily mean opportunities are everywhere or are easy to identify. Averages never tell the full story. The RevPAR for all of Canada grew a record-breaking 7.7 per cent in 2017, but the performance within Western Canada varied wildly. At one end, the Vancouver Airport market sustained a remarkable 14 per cent increase in RevPAR, while the Regina market suffered a severe 10.5 per cent decline. The key to a successful hotel investment is knowing the conditions that best diminish risk in that particular market. For those markets that merit an investment, the best option may be to acquire a site and build a new hotel, or it may be that acquiring an existing asset is the best route to success. Prior to entering a hotel market, an investor has to be in agreement with two foundational, non-negotiable principles:

WESTERNINVESTOR

1. Hotels live and die according to the number of heads in beds each night. Since this is a risky proposition, leveraged equity return expectations should be in the mid to high teens. 2. Hotel investments require a longterm time horizon to cope with low and high market cycles.

Build Many hotel investors find success in building new hotels when they have a superior site, a strong brand, and a product that has been tailored to meet the needs of the local market. Finding a site is easy, but finding a site that is actually conducive to a successful hotel development is hard. If you can easily find a site for a hotel development, then so can competitors. The Calgary Airport market is currently experiencing this situation, where the availability of easily acquirable sites has resulted in a glut of new hotel supply that is not easily being absorbed. Controlling an excellent site in a market with high barriers to entry is the best land scenario. At present, most of B.C.’s Lower Mainland would be categorized as having high barriers to entry. Consequently, the region has seen few new hotel developments in the last decade, but those that have all been strong performers. A prime example is the reinvented Rosewood Hotel Georgia, which netted the highest price per room ever paid for a

hotel property in Canada at $929,000 per room in 2017. Expertise in building is also an essential consideration.

Buy If you lack building expertise, buying your way into the hotel market may be the better option. Canada on the whole is now more of a seller’s market than a buyer’s market. Alberta and Saskatchewan have been running contrary to the trend; in these provinces, some buying opportunities may now exist. When looking at acquisitions, there are three essential considerations that must be taken to heart: 1. It is crucial to look at the potential new supply in the market and project how your purchase would fare against a brand-new hotel. 2. The additional costs associated with an acquisition must be quantiﬁed and included in the vision for how the investment will perform. 3. Professional management needs to be secured for the asset, as this is integral to the successful performance of a hotel investment. The hotel market deserves investor attention given the excellent returns that can be achieved for those willing to take the risk. With some digging and proper due diligence, these opportunities can be found in Western Canada. ■

BUSINESS BROKERAGE

Buy a business or real estate? Whether to invest in a business or commercial real estate comes down to balancing returns, risk and capital

Whether for commercial property or an operating business, it becomes a question of managing or qualifying risk and taking into account the scope of capital investment necessary to realize those returns

”

Arthur Klein is a merger and acquisition adviser with Vancouver-based Paciﬁc M&A Business Brokers Ltd. He can be reached at 778-329-9558, or through www.pmabb.com

n my capacity as a merger and acquisition adviser I often get asked by investors, “Should I invest in commercial real estate or that of an operating business?” As you can appreciate, that query comes with more questions than answers – but fundamentally, it will come down to operating returns, return on investment and risk.

Buying commercial real estate In commercial real estate, a common metric of return is the capitalization rate (cap rate), the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate of an investment can be calculated by the following formula: Capitalization rate = net operating income (NOI) / current market value And as per respected industry reports, the current nominal cap rate for industrial property revolves around 4 per cent to 5.25 per cent. This is a low number as measured by historical standards, indicating that relative to NOI, market values are high. The cap rate is a ratio that gauges proﬁtability. The proportion of NOI relative to the current market value must remain constant for the capitalization rate to remain the same. If NOI rises while the market value does not, the capitalization rate will rise and, if the opposite happens, the capitalization rate will decline. If the capitalization rate is declining, it may

be a wise to simply sell the property and reinvest elsewhere.

Buying a business In the matter of business performance, the key metric of return on invested capital (ROIC) is the percentage return that a company makes over its invested capital: ROIC = net operating income – dividends / total capital Most assessors will deﬁne total capital as total amount of long-term debt, plus the total amount of equity and excluding cash. While earnings of privately held corporations are not often reported, desired ROIC performance will be 10 per cent or greater. However, the invested capital is measured by the monetary value needed instead of the assets that were bought. Since value is the present value of future cash ﬂows, this factor is what makes businesses valuable – all else being equal. Another related key metric is the return on equity (ROE) as earnings before interest, taxes and depreciation (EBITDA), relative to the market value of the business. Therefore: ROE = EBITDA / business value The ROE is similar to the cap rate of real estate, as both are a measure of income (NOI for real estate and EBITDA for businesses) and the current value of either the real estate or the business. In business transactions, I routinely observe ROEs in business values in

excess of 22 per cent. So – whether for commercial property or an operating business – it becomes a question of managing or qualifying risk and taking into account the scope of capital investment necessary to realize those returns. Commercial property investors will look at cap rates as a useful tool when it comes to comparing similar properties. For example, a property with an 8 per cent cap rate compared to one performing at 4 per cent could both generate the same net operating income. Higher cap rate investments will have a higher net operating income but more risk; lowest cap rate properties are often those with the highest possibility of price appreciation and lowest risk of tenants leaving. The key assumption here is that the property is zoned in its highest and best use class. Windfall land appreciation due to rezoning is a further risk of speculation. Investors need to be wary that the potential windfall may not be realized. In an operating business, ROE rates of 10 per cent, or more (annualized) will obviously outperform the net operating return of land ownership. Whether buying a business or a real estate investment, always seek the guidance of professional advisers before committing. ■ WESTERNINVESTOR

FEATURE

SIX TOP

LANDLORD CITIES Western Investor’s guide to the best returns in the West’s multi-family markets Metro Vancouver rental property is expensive, but also offer high rental income and the best appreciation potential in Western Canada

By Tanya Commisso

ith an overall vacancy rate of 3 per cent nationally, Canada’s rental markets can present opportunities for investors in smaller B.C. regions and across the Prairies – with a few notable exceptions. In B.C., vacancy rates in urban

areas and suburbs in close proximity to downtown Vancouver tend to trend below 1 per cent. Metro Vancouver rental property is expensive but also offers high rental income and the best appreciation potential in Western Canada. Kelowna and New Westminster per-door prices are relatively cheaper than Burnaby and East Vancouver

and provide higher cap rates for midrange investors in B.C. Winnipeg, meanwhile, offers prospective landlords a chance to enter the Prairie’s most secure economy at relatively low property prices. Here are Western Investor’s six picks for the best landlord markets in Western Canadian in 2018.

1. VICTORIA Rental vacancy rate: 0.7 per cent Average one-bedroom rental: $1,070 Average price per door: $215,000 Victoria’s rental market vacancy is less than 1 per cent, and is forecast to remain tight throughout 2018. Though capitalization rates remain among the lowest in B.C., rents are slightly lower than that of most Vancouver neighbourhoods. Rental vacancy is even slighter in Vancouver Island’s most populous area of Saanich, just north of Victoria, at 0.5 per cent. Colliers International places the average Victoria’s rental market vacancy is less than 1 per cent, and is forecast to price per rental suite at $215,000, and rising. remain tight throughout 2018. | SUBMITTED

”

2. WINNIPEG Rental vacancy rate: 2.8 per cent Average one-bedroom rental: $845 Average price per door: $100,000

Winnipeg: a rush of new rental construction in 2017 added nearly 2,000 new units to the market. | SUBMITTED 30 WESTERNINVESTOR

Winnipeg’s rental vacancy rate remained unchanged at 2.8 per cent in 2017 – lowest on the Prairies – according to Canada Mortgage and Housing Corp. “Winnipeg’s vacancy rate holds steady as increasing supply was offset by growing demand,” CMHC noted. “Strong migration ﬁgures have put downward pressure on the vacancy rate.” Unlike other Prairie cities, Winnipeg’s labour market isn’t as affected by the oil recession. Positive labour market conditions and an increase in employment in 2017 have kept rental demand strong. With capitalization rates in a healthy 5.5 per cent range and the average city apartment building selling for just above $100,000 per door, Manitoba’s capital city remains the best landlord market on the Prairies, despite a rush of new rental construction in 2017 that added nearly 2,000 new units to the market.

3. KELOWNA Rental vacancy rate: 0.2 per cent Average one-bedroom rent: $1,150 Average price per door: $135,000 Kelowna is lauded as a top-tier real estate investment destination and the city’s multi-family market is no exception. The city’s tech sector now accounts for $1.3 billion in revenue and plays host to more than 200 companies, with many young workers renting. The region’s active tourism sector also drives short-term rentals. The rental vacancy, now at 0.2 per cent, may inch up slightly next year as new developments by JV Development Group and Mission Group add rental supply to the market. Approximately 1,150 new purpose-built rental apartments started in 2017, up almost 140 per cent compared to 2016. Kelowna’s Rental Housing Grants program provides up to $320,000 in annual grants for purpose-built rental housing projects. Based on recent Kelowna apartment building sales, prices vary widely from $105,000 to $166,000 per door, mostly based on location to the core. Landlords can expect capitalization rates in the 4.5 per cent to 6 per cent range.

Kelowna’s 0.2 per cent vacancy rate may inch up as new construction adds about 1,150 new units to the market. | SUBMITTED

4. NEW WESTMINSTER Rental vacancy rate: 1.1 per cent Average one-bedroom rental: $1,330 Average price per door: $288,474 With SkyTrain stations and its Evergreen line access to the Tri-Cities, the Royal City is gaining traction as Metro Vancouver’s “other” downtown north of the Fraser River. It also has a growing economy, ﬁred by a $1 billion expansion of medical facilities at Royal Columbian Hospital, a booming brewery district anchored by Translink headquarters and impropved riverfront access. The Real Estate Investment Network recently named New Westminster as one of the top 10 B.C. cities for multi-family investment, and ranked it No.18 out of 19 for lowest-priced real estate in the Metro Vancouver region. The average per-suite value based on recent sales is estimated at $288,474 by the Goodman Report team at HQ Commercial – the lowest of any municipality north of the Fraser River.

The Real Estate Investment Network named New Westminster as one of the top B.C. cities for multi-family investments.

5. EAST VANCOUVER Rental vacancy rate: 0.3 per cent Average one-bedroom rent: $1,460 Average price per door: $390,349

East Vancouver has the lowest rental vacancy rate in Metro Vancouver – but also high per-door prices. | SUBMITTED

East Vancouver is Metro Vancouver’s most in-demand rental market. A burgeoning tech scene, the new Emily Carr University of Art and Design campus and proximity to downtown Vancouver is continuing to drive demand at a pace that outpaces supply. The vacancy rate sits at 0.3 per cent, lowest in the Metro region. The per-suite price for East Vancouver apartment buildings is $390,349, according to HQ Commercial, which noted that this is well below the City of Vancouver average of $556,413.

6. BURNABY Rental vacancy rate: 0.6 per cent Average one-bedroom rent: $1,380 Average price per door: $551,227 Burnaby’s multi-family market is booming, with major development projects centred on The Amazing Brentwood and Lougheed Town Centre SkyTrain stations. CMHC places the city’s rental vacancy rate at 0.6 per cent – less than that of Vancouver’s. A breakneck development pace in the Metrotown area has driven up per-suite values by 66 per cent from $332,132 in 2016 to $551,227 in 2018. The steep price of entering the Burnaby market is partially offset by high returns, thanks to Burnaby having the third-highest rent in Canada, according to PadMapper. Total dollar volume from Burnaby apartment sales in 2017 exceeded $260 million, more than any other Lower Mainland municipality, according to HQ Commercial.

A breakneck development pace has driven average Burnaby per-door prices to $551,227. | SUBMITTED WESTERNINVESTOR

FARMLAND

Farmland investing in Western Canada Investors are nudging out farmers in Saskatchewan but foreign buyers restricted

Saskatchewan farmland values have doubled. The average price per acre in 2011 was $624 per acre: this rose to $1,159 per acre by 2016

”

Ted Cawkwell is an agriculture specialist with Re/Max Saskatoon. Being a fourth-generation farmer and an awardwinning business owner before entering real estate, Cawkwell has hands-on experience that helps his clients succeed. He has continually been ranked among the top 10 Re/Max Commercial agents in the world. Visit www.tedcawkwell.com

here has been a dramatic shift on the prairie landscape. If you live in a city you are likely not aware of this change. If you talk to farmers, or anyone in rural areas, it will be a topic of lively conversation. Prior to 2010 farmers owned and operated almost all of the land in the Prairies. In 2010 the beginning of a new paradigm began. Farmers were reporting the highest proﬁts in decades, interest rates were at historic lows, all while Western Canadian farmland was valued far less than almost any other land in the free world. The stars had aligned perfectly for investors. Investor buying became common and many of the farmland purchases between 2010 and present day have been investor purchases. As an agriculture specialist with Re/Max in Saskatchewan I see approximately 60 per cent of my buyers being investors. Although investors are buying at a fast pace, only 2 per cent of the farmland in the province is owned by investors today. Saskatchewan was the epicentre of this transformation due to land values that were often half to one-third of those in neighboring Manitoba and Alberta. Saskatchewan land values doubled between the years 2011 and 2015. The average

WESTERNINVESTOR

price per acre in 2011 was $624 per acre: this rose to $1,159 per acre by 2016. Land values continue to rise at a healthy pace today. Investors see opportunities in owning Saskatchewan farmland because they believe it is undervalued in the world market and that it will continue to appreciate at a steady pace. Investors tell me they are optimistic about owning farmland as the investment is safe and easy to manage when they have proper representation. The baby-boomer demographic has built a bubble where as much as 50 per cent of the farmland in North America could change hands over the next 15 years. This has created a lot of opportunity for farmers and investors who want to expand their portfolio in the agriculture sector. Non-Canadian investors and pension funds are not allowed to purchase land in Saskatchewan. If this regulation were ever to be relaxed, land values would climb at unprecedented rates as pension plans, Asian money and countless others would gobble the land base up quickly. The demand is there; it is government regulation that is holding this back. Human population growth plays a strong role in driving up land values. In 1975 the world had three billion

people. It is at a staggering 7.5 billion today. Some analysts predict 15 billion people will inhabit the earth by the year 2100. Not only is the world’s population climbing at an unprecedented rate, but a greater percentage of this population can now afford quality food. The rising middle classes in India and China are major players in this changing landscape. Biotechnology and other leadingedge technologies are helping keep food supply in line with demand today. Can technology keep production in alignment with supply? This question has played role in making Prairie farmland a precious resource. My role is to first educate the buyers about what they are buying and why. Once we find farmland that meets all our criteria, I value the land and guide the buyer through the process of making an offer. In the final stages I find a reputable tenant and help negotiate a lease that is favourable to my client. My goal is to provide the buyers with an educational, simple and fun process for purchasing a farmland investment. Western Canada will continue to play a major role in feeding the world in the future. I am excited to watch this high-tech, boisterous and vital industry evolve. ■

INVESTING IN FARMLAND IS EASY WHEN YOU HAVE AN EXPERT IN THE FIELD.

TED CAWKWELL YO U R E X P E RT IN T HE FI EL D Agriculture Specialist | www.tedcawkwell.com | ted@tedcawkwell.com | 1.306.327.7661

SASKATOON

RAW LAND

Don’t wait to buy land Buy land and wait is timely advice on the path to real estate prosperity

A hectare of land in Vancouver went from $200 in 1870 to $2,000 in 1882,and, in 1889, to $20,000. Today a hectare of land in Vancouver is valued in excess of $40 million

”

Rudy Nielsen is the founder and president of Niho Land and Cattle Company, LandQuest Realty Corp. and Landcor Data Corporation, which operates the most extensive real estate property database in British Columbia. Visit www.niho.com

on’t wait to buy land; buy land and wait. I first learned the importance of that saying in 1964 as the youngest realtor in Prince George. I still believe it today. My career as not only a realtor, but appraiser and investor, has taught me how profitable and rewarding real estate can be. Having a diverse portfolio in assembling land - such as large corporations (Woodward’s, Safeway), selling large subdivision, high rises, islands and the largest land company in British Columbia, I have even profited by selectively harvesting timber from many of my own properties. I couldn’t have done that without understanding the importance of three key questions: 1. What is your time horizon? 2. How much can you afford to lose? 3. What do you know about the investment? All three points should make you pause and think, but the last point is the most critical as it drives the first two. For more than 50 years I made a lot of money in rural or recreational land and resources from the land because I understand the value. I am often approached by people to invest in other opportunities – commercial developments, the stock market or even foreign rural lands. While they all promised good returns, I do not have a feel for the risk associated with these.

34 WESTERNINVESTOR

I was researching some historical insights on rural lands – as far back as the 1880’s when Vancouver was, in fact, rural. Almost 140 years ago folks were already saying that Vancouver was too expensive. I came across land prices leading up to and after Canadian Paciﬁc Railway announced that Vancouver – or at that time Granville – would be the western terminus for the rail line. Over a 10year period, land prices (hectare – not a city lot) went from $200 in 1870, to $2,000 in 1882 and seven years later in 1889 to $20,000. Today a hectare of land in Vancouver is valued in excess of $40 million. Don’t get me wrong: we have had our share of boom’s and busts with the following recovery period always leading to the next growth cycle. A recent bust was the 2007-08 credit freeze and resultant stalled housing and development markets. For a bit of time people were questioning the sustainability of investing in real estate. So, how much can you afford to lose? And what is your time horizon? Over the course of my investment career I have bought and sold in short cycles as opportunities presented themselves, but the majority of my current holdings were acquired 30 to 40 years ago. The shorter-term investments certainly help manage cash ﬂow and further secure a hold on my longer term portfolio by removing apressures to liquidate to meet short-term needs.

I have made money off my longer term holds by not selling these properties or refinancing them. You might be wondering how I did this. Well, I know recreational land. Some of my best long-term holds have contained fantastic timber yields and/or gravel. Not very sophisticated, perhaps, but if you know your investments you can see the potential beyond a simple land buy-and-hold strategy. I have many times created an effective cash flow, similar to the rents that a commercial real estate property investor may receive – but I don’t have to worry about fixing the plumbing. So now you know the three key questions I consider before investing, but I’ve saved the most important until the end to prove a point. The most important strategy you need to understand are these three simple, repetitive words: research, research, research. Do your homework. Get to know one thing better than anyone else in the world. You will undoubtedly reach a point where there are multiple excellent offers to consider, but you won’t have the cash flow to acquire them all. You going to determine the best option based on your answers to the earlier three questions and your commitment to research. If you’ve done your research, the answer becomes very clear. I still do my research, but years of dedication to this process has enabled me to come to a decision a lot quicker. ■

INVEST IN REAL ESTATE TODAY! Be a Savvy Investo Investor orr o

Research. R esearch. R Research. esearch. R Research. esearch. Sa e ttime Save me—LANDCOR CO DATA CORPORATION CO ORATION N provi provides r des real estate in iintelligence tellllig gence for f r your fo yo y ur research, r search re h, N NIHO IHO LAND & CATTLE CO CO. o offers esad diverse e se mix o of p properties ope t ess for o sale to help you build your investment portfolio! o!

—Tachick Lake Es Estates, Vanderhoof, BC

Rudy Nielsen,, RI, FR FRI RII R President & Founder er

niho.com

landcor.com

Don’t wait to buy land. Buy land and then wait.

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