Canadian Property Management

F O R B U I L D I N G O W N E R S , A S S E T A N D P R O P E RT Y M A N A G E R S

VOL. 31 NO. 4 • AUGUST 2016

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editor’snote ON THE ROSTER of legendary real estate players, actuaries don't necessarily spring to mind. Daring developers who have made, lost and remade fortunes tend to be the industry archetype, but, really, that's so 20th century. Today's market kingpins are a more risk-adverse bunch.

These days, occasional visitors to major Canadian cities are frequently asking: "When did they build that?" as they catch sight of a spate of new towers that have sprung up since their previous pass through. (Or sometimes residents ask that about their own cities.) It could be simpler to keep track of who is doing the building.

"Almost all the new downtown office buildings and [regional] mall expansions have been by pension funds," Scott Chandler, Senior Vice President with Colliers Canada, observes in our lead feature story. The reasons are explored in this issue's focus on investment, which charts the increasing capital flow to real estate in Canada and globally.

Real estate has historically been a good fit with requirements for stable, long-term returns and portfolio diversification. It also comes with its own revenue-generating capacity, which can be used to fund further investment and hedge against inflation. So pension funds' seeming surge in the Canadian market doesn't reflect any dramatic change in the performance of the asset class, but rather that they've seized an opportunity as other types of entrepreneurs have stepped, or been pushed, out of the game.

This is now something of a defining characteristic. "Canada has long been viewed as a safe haven by foreign investors, but, at the same time, many are aware of the strong depth of institutional ownership here that tends to dominate and hold the best assets for the long term. They know it is hard to break into the market or they really have to pay up to get a foothold," Chris Langstaff, Senior Vice President with LaSalle Investment Management, recently told the REMI Network.

Among other implications, The Boston Consulting Group's 2015 survey of Canada's 10 largest pension funds pointed to the nearly 5,000 employees in their subsidiary real estate companies. Institutional clout can likewise be seen in the Global Real Estate Sustainability Benchmark survey, in which 11 Canadian organizations represented just 1.5% of participants in 2015, but accounted for 4.2% of the value of the overall database. They also posted commendable results with a collective average score of 67 compared to the global average of 56 and North American average of 54.

Canadians reap the flow-through benefits of dynamic downtowns with healthy property tax bases and modern, productive workplaces. And, of course, we are all stakeholders of Canada Pension Plan Investment Board and, thus, wish it many happy returns.

Barbara Carss barbc@mediaedge.ca @BarbaraCarss

VOL. 31 NO. 4

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contents

Focus: Financing, Value Enhancement & Returns 10 Pension Funds Positioning for Action: bcIMC takes real estate function in-house, while Ontario launches asset pooling vehicle.

14 Stabilizing Cycles: A real estate economist reflects on the industry's ability to ride out adverse shocks to financial systems.

18 Globalization: Information is empowering investors, while economic factors drive growing capital flow to real estate.

21 Maximizing Rental Income: Long-term outcome of leasing heightens the importance of dealmaking finesse.

26 Trophy Tower Trends: New competition and economic calamity pressure traditional icons of downtowns east to west.

Articles: 34 Transparency & Oversight: Investor and regulatory demands underpin new reporting standards.

38 BOMEX 2016: Host chapter, Regina, plans a celebration of Crowning Achievements.

Department 4 Editor’s note

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PENSION FUNDS Real Estate Figures in B.C. and Ontario Initiatives

By Barbara Carss PROMINENT ASSET MANAGERS for Canadian pension funds appear poised to take an even bigger position in the commercial real estate market. A meteoric entry into next year's Who's Who in Canadian Real Estate sur vey is foreordained with British Columbia Investment Management Corporation's (bcIMC) recent move to launch an independent real estate arm, QuadReal Property Group, while newly adopted legislation in Ontario opens the way for

another national player on the scale of bcIMC or Caisse de dĂŠpot et placement du QuĂŠbec (Caisse).

Both new entities are slated for action in 2017 as approximately $18 billion in assets will be transferred to QuadReal from bcIMC's current third-party property managers, and the newly established Investment Management Corporation of Ontario (IMCO) begins operations. The latter brings the Ontario Pension Board's (OPB) $23-billion investment portfolio

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and the Workplace Safety and Insurance Board's (WSIB) $26.3-billion kitty into a shared asset management framework along with an invitation for other Ontario-based broader public sector (bps) organizations to join the pool.

"This will increase efficiency when providing pension support and income for injured workers," submits Ontario Minister of Finance Charles Sousa.

"OPB and WSIB, and public sector pension plans that may join in the future,

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MAKING MOVES will benefit from IMCO's ability to deliver enhanced services."

Similar to other major pension funds – OMERS, Caisse, Ontario Teachers' – that already have their own real estate subsidiaries, QuadReal's mandate has been clearly stated. An executive structure with two presidents to oversee domestic and international operations has been tasked with managing bcIMC's already sizeable portfolio and augmenting it with new acquisitions inside and outside Canada.

"We are creating a company that has a global perspective and is entrepreneurial and ambitious," affirms Remco Daal, QuadReal's President of Canadian operations.

At a more nascent stage with the naming of its Board of Directors just occurring in early July, IMCO's real estate related goals are less enunciated.

Howeve r, r e p r e s e nt a t ive s of it s founding partners have dropped some fairly strong hints.

"In a global investment environment, scale can be an important contributor to consistently strong investment returns.

We believe asset pooling will enhance our ability to invest directly in a broader array of high-quality opportunities," says Mark Fuller, OPB's President and Chief Executive Officer.

BENEFITS OF SCALE Real estate's record of producing stable, long-term returns makes it a favoured asset

www.REMInetwork.com | August 2016 11

investment&returns for portfolio diversification and hedging risk, especially for fund managers that must generate steady income to pay out to pension plan members. The emergence of new investment vehicles and capital market dynamics have also motivated investors big and small to expand their direct and indirect real estate exposure.

"Over the last 10 to 20 years there has been a massive allocation to real estate.

The REIT market is only 21 years old in Canada. Real estate is a direct standalone investment class now; it wasn't 20 years ago," observes Scott Chandler, Senior Vice President, Advisory and Investment Sales, with Colliers Canada.

"When you look at the equity market recently, there's a lot of volatility year-toyear. At the same time, bond yields are at historic lows. Real estate generates the risk-adjusted returns that pension funds, in particular, need."

Globally, JLL projects annual direct investment in commercial real estate will surpass US $1 trillion within the next 10 years. In Canada, 46 institutional portfolios represented in the REALpac/ IPD Canada Property Index have a collective value of more than CAD $138 billion, while seven open-ended property funds participating in the REALpac/IPD Canada Property Fund Index hold assets valued at nearly CAD $25 billion.

Even so, direct investment in real estate can be intimidating for investors with shallower resources since it typically ties up large amounts of capital in illiquid holdings that can't be quickly converted back to cash. Informed industry expertise at the acquisition st age a nd ongoi ng professiona l ma nagement a re also cr itical to maximize returns – requirements deemed challenging for many smaller pension plans with assets in the $100 million to $150 million range.

"In the broader public sector there are a lot of pots of money that are very small," explains an advisor on pension administration. "There are a lot of public sector plans where essentially it's the organization's CFO who is investing the money in the plan. They have to pay high fees to fund managers to get access to expert management, or they might not even be big enough to qualify."

These are the entities now tagged as potential joiners of IMCO's asset pool, thus gaining access to dedicated professional investment management

“There are a lot of public sector plans where essentially it's the organization's CFO who is investing the money in the plan.” services and contributing to its overall scale. Meanwhile, bcIMC's QuadReal is an outcome of scale, which underpins a business case for in-house asset and property management.

"Historically, most institutions and pension plans have increased their real estate allocations over time, but the internalization of the real estate function is also about having more direct control and lowering costs," says Chris Langstaff, Senior Vice President, Research & Strategy, with LaSalle Canada.

GAME CHANGERS A 2015 study from The Boston Consulting Group identifies internal management and proportionally higher allocations to alternative asset classes – real estate, infrastructure and private equity – among the defining characteristics of Canada's 10 largest public pension funds. On average, the 10 funds – ranging from Canada Pension Plan Investment Board (CPPIB) with $265 billion worth of assets under management to OPTrust at $18 billion – report a 32% allocation to alternative asset classes with 14% specifically to real estate. In contrast, pension funds with portfolio values ranging from $25 million to $10 billion allocate 4 to 11% to alternative asset classes, while sample ETF retail funds topped out at 5%.

Looking at IMCO, formational partner OPB was already pegged Canada's ninth largest public pension plan – a ranking that IMCO will initially retain despite more than doubling the value of assets under management. OPB reported a 15.4% allocation to real estate and 3.4% allocation to infrastr ucture as of December 31, 2014, while WSIB's most recent breakdown in its Q1 2016 report to stakeholders shows 8.5% of its net asset value is in real estate with 5.3% in infrastructure.

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Ultimately, though, direct real estate investment is predicated on availability of institutional-grade buildings. In Canadian cities, institutional investors already own much of what they'd be willing to buy.

"It's the best-in-class assets: Class A and AAA office, regional malls and new functional industrial. So, if you can't buy it, you build it," Chandler says. "Almost all the new downtown office buildings and mall expansions have been by pension funds."

In doing so, they've effectively squeezed out the entrepreneurial developers who have long propelled building booms. Today's spec builders, were such creatures to exist, would be competing against pension funds that can finance new development with their own on-hand reserves and have extensive networks to recruit anchor tenants.

This new generation of developer has even upended traditional expectations about occasional market crashes, as currently witnessed in Calgary. With vacancies climbing, ask ing rents dropping and 2.4 million square feet of new downtown office space still under construction, there's little sign owners are restless.

"The very nature of these pension funds is they have lots of patience. They have deep pockets and they can take a long-term view," Chandler advises.

"There is no fire sale." zz

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BUBBLES BEGONE Real Estate Stability Tied to Counter-cyclical Mechanisms

By Jeffrey Matsu ALTHOUGH REAL ESTATE and p r op e r t y fa c t o r p r om i n e nt ly i n d iscussions relat e d to f i na ncia l stability and the management of economic cycles, little consensus has emerged as to how better to detect, prevent or treat the fallout from i r rat iona l ma rket exub era nce.

Undoubtedly, the economic, social and political dimensions that the industry straddles add to the policy dilemma.

In a sustained low-growth, low-inflation environment, central banks in the industrialized world have adopted extraordinarily accommodative monetary policy positions with zero interest rates, quantitative easing and negative interest rates now becoming the norm. Despite substantial fiscal stimulus in the years immediately following the global financial crisis, the recovery has been anaemic and fallen significantly short of expectations.

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Persistently sluggish aggregate demand coupled with the lack of traction gained through highly stimulative credit supply has left policymakers puzzled. Central banks in industrialized countries are low on ammunition and reliant on hitherto untested, unconventional policy tools.

CAPITAL FLOWS & GLOBALIZATION IMPACTS Investment in commercial real estate (CRE) has grown exponentially over the past thirty

years, transforming the industry into an institutional asset class that will be recognized as part of a stand-alone sector within the MSCI and Standard & Poor’s Global Industry Classification Standard (GICS) in August 2016. According to the Conference Board, institutional fund managers now allocate about 10% of their portfolio to real estate investments compared to just 2% in 1980.

Sovereign wealth funds such as Norway’s $850 billion Government Pension Fund have raised asset allocation targets into real estate from zero to 5% in just five years; the Abu Dhabi and Qatar Investment Authorities currently have a combined $70 billion exposure. The acceleration of institutional capital to the sector is formidable, considering that institutional investors control about $70 trillion of assets under management globally, according to data from the Boston Consulting Group.

Moreover, easier access to investment vehicles, such as real estate investment trusts (REITs) and greater market transparency through enhanced industry regulation and supervision have facilitated capital flows into CRE. With its low correlation to other asset classes, real estate can provide impor tant por tfolio diversification benefits while serving as a hedge against inflation.

If CRE has and is to play an increasingly prominent role in financial market activity, then it is equally important to understand its relative past and how that might inform decision-making for a more stable and secure future. Unlike other asset classes such as equities, bonds or even commodities, real estate has both a functional and financial dimension that complicates its understanding as a cyclical investment.

Long-term rental contracts do not align well with the short-term planning horizon of many tenants and capital valuations of properties depend on large variations in investor discount and borrowing rates.

Whereas debt and equity investment was once sourced locally, globalization has expanded the investor base thereby accentuating volatile swings in capital availability and occupier demand.

Geopolitical and socioeconomic risks, such as the spectre of Brexit in the United Kingdom, have the potential to shift the market prioritization and business planning of multinationals in unexpected ways.

Sudden market illiquidity or value cyclicality could produce sizeable asset price distortions that, if left unattended, could result in a market crash.

Surpassed only by the Great Depression of the 1930s, the global financial crisis of 2008 was associated with steep declines in economic output, higher unemployment and lost paper wealth. If a 20% average peak-to-trough price fall is used as conservative estimate for a bubble burst, then the nearly $5 trillion U.S. CRE market could trigger a sizeable economic downturn with the potential for financial contagion elsewhere.

Given that real estate is a fixed asset, the frequency and chronology of CRE market bubbles will inevitably vary across countries. Wherever the next crash may fall, reducing the risk of damage to the financial system and the long-lasting destabilization caused requires a more developed understanding of asset price dynamics.

LENDING LAXITY The composition of equity and debt flows into CRE markets is a key driver of cycles. During the ten-year period from 2001 to 2010, equity investment into the European real estate sector remained fairly stable whereas debt flows exhibited noticeable volatility.

In the run-up to the financial crisis, the average equity to debt ratio fell from 45% to 28% before returning to 50% post- cr isis. P ro - cycl ica l lend ing behaviour accentuates the boom and bust phases through distorted valuations of cash flow and perceived risk of loss.

Market euphoria drives competition among lenders to misprice risk as risk exposure and value at risk intensifies. These negative feedback loops become selffulfilling, compressing loan margins unsustainably while accompanied by inadequate capital reserve accumulation by lenders to offset potential losses.

Lending volumes rise disproportionately to underlying property valuations until a tipping point is reached. By current definition, systemically important financial institutions (SIFIs) then require a rapid infusion of funding through a government bailout. The moral hazard of this model is that the benefits of the cyclical upswing are privatized while the subsequent costs of a crash are socialized.

One of the key risks is that low interest rates, when sustained, can encourage excessive leverage and risk taking, thereby promoting the formation of bubbles. While this may be true, higher rates alone may not be the appropriate response if the amount required to manage asset prices in one sector has a disproportionately negative

> SOCIAL MEDIA COLUMN Sponsored by MediaEdge

Six dos and don’ts for your social media execution

By Steven Chester Now that we’ve discussed finding the right platform, audience acquisition and content strategy, it’s finally time to join the party. Here are some dos and don’ts for your social media execution and brand promotion.

• Do join topical groups on LinkedIn, and spread your message across other platforms with hashtags – this is how you expand your reach outside of your followership.

• Don’t automate. If you’re automating your messages, you’re speaking without listening. This has been cleverly referred to as “mannequin marketing” – would you send a mannequin of yourself to a networking event, with a bunch of post-it note messages stuck to its head?

• Do ask your audience questions! This is a perfect opportunity to be engaging by creating that essential two-way conversation. Also take note during this time of what your audience is interested in – more food for your next content post.

• Do share, share, share. Looking to get your posts noticed? Surprise, so is everyone else. Share and credit others for their great work, and they just might one day reciprocate.

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Steven Chester is the Digital Media Director of MediaEdge Communications. With 15 years’ experience in cross-platform communications, Steven helps companies expand their reach through social media and other digital initiatives. To contact him directly, email gosocial@mediaedge.ca.

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investment&returns influence on the rest of the economy.

A more targeted approach that utilizes counter-cyclical regulations and supervision is more likely to address excesses as they materialize while promoting a less procyclical industry response in the event of a downturn. Strengthening the resilience of the financial system through such a macroprudential framework thereby informs monetary policy, enhancing its overall effectiveness.

Financial stability can be enhanced by decoupling the lending and regulatory cycles from the real estate market cycle. A through-the-cycle approach to macroprudential regulation and supervision should help to balance the pro-cyclical tendencies of both lender activities and regulatory oversight, thereby reducing the range of peak-to-trough outcomes.

TOOLS FOR RESILIENCY Tools that can increase the resilience of the financial system to adverse shocks include requirements for SIFIs and other financial institutions to hold sufficient liquidity buffers and levels of loss-absorbing capital to offset unexpected losses, particularly in

the case of a bank run. In the event of the latter, an effective resolution regime needs to be in place to prevent contagion to other market participants. Meanwhile, minimum margin and central clearing requirements for derivative transactions could serve to better address the linkages between financial firms.

Given the relative size of the real estate market and the diversity of its stakeholders, promoting greater stability and countercyclical mechanisms that reduce excessive volatility and risk are of paramount importance. Historically, the causes of booms and busts within CRE have varied based on factors such as comparative economic and market conditions, the perception of risk adjusted returns, and investor myopia. Rather than assessing the likelihood of a market collapse, the effectiveness of macro-prudential regulations stems from its calibration with different phases of the cycle.

The lack of data, transparency and consistency in real estate markets has challenged the ability of regulators to regulate effectively. A centralized database containing granular and timely information

on loan characteristics could inform discussions on market performance and risk, as could access to the expertise and analyses from a range of market participants.

To promote stability and resilience, appropriate incentives need to be in place for both individuals and institutions. This includes the adoption of long-term value measures that are insensitive to the investment cycle as well as greater differentiation of risk in regulatory capital requirements.

Moreover, the regulator can encourage a better balance of CRE debt supply, which should lead to greater diversity in lender response to market signals. Rather than rely on abrupt interventions such as outright bans or caps, a regulatory structure based on automatic and incremental counter-cyclical measures can embed consistency across the cycle. zz Jeffrey Matsu is Senior Economist with the Royal Institution of Chartered Surveyors (RICS).

The preceding article is excerpted from his paper, Safeguarding growth and stability in real estate and beyond. For more information, see the website at www.rics.org.

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FIXED ASSETS BOAST WIDE DRAW Global Investors Increasingly Turning to Commercial Real Estate

REAL ESTATE'S track record of delivering stable returns over the long term makes it a favoured asset class for portfolio diversification and as hedge against greater volatility in capital markets. A three-part series of discussion papers from CBRE, Leading Global Capital in a Time of Uncertainty, looks at real estate investment strategies in the context of that volatility, exploring the forces driving global capital flows, cyclical challenges and major social trends affecting the demand for space and the way it used. The following excerpt focuses on globalization – Editor.

The globa lization of rea l estate information, services and know-how is increasing market scale and facilitating the flow of capital. Given the fixed nature of commercial real estate, globalization represents opportunity, but it does not substitute for strong local knowledge.

After an expansion of almost 600% since 1980, globalization, in terms of the movement of goods, appears to have stalled since 2008. However, capital flows into commercial real estate is the exception. Global real estate investment is at historic levels and is expected to reach more than USD $1.1 trillion in 2016 – an increase of 3% to 6% in local currency terms over 2015.

London epitomizes the globalization of commercial real estate. As the top

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destination for global capital, foreign investors have purchased more than 60% of commercial buildings over the past ten years. Thanks to the rise of global capital from sovereign wealth funds, REITs and insurance companies, there is a reduced amount of tradable stock in core gateway markets worldwide, as the hold period of these groups is often indefinite.

Concerns around the falling price of oil, a potential “hard landing” in China, and uncertainty over central bank policy direction negatively affected global markets in early 2016. As a result, global issuers saw their bond spreads expand and global securities owners saw their portfolios diminish in value.

Spencer Levy, CBRE’s Americas Head of Research, notes that “hyperconnectivity”

investment&returns

REAL ESTATE CAPTURES NEW WEALTH Advanced economies of North America, Europe and Asia are set to receive 80% of global real estate investment capital in 2016, with a focus on key gateway cities, according to CBRE’s Global Investor Intentions Survey. This tells a story about the distribution of investible assets and the safe haven nature of these markets, but it should not cloud what demographics are demonstrating about the long-term potential of emerging markets.

The Organization for Economic Cooperation and Development (OECD) projects that 63% of global GDP will be centred in emerging markets by 2030, with half of the global middle class expected to reside in Asia-Pacific. The middle class in Asia, estimated to be at around 500 million in 2009, is expected to grow sixfold to 3.3 billion by 2030.

China’s working-age population will account for 12% of all urban spending worldwide by 2030. Further, the excess savings generated by these newly wealthy classes has been a major impetus that is driving capital overseas in commercial real estate.

Wealth creation on this scale will produce enormous opportunities for commercial real estate development across all asset classes. By 2025, 60% of all construction activity will be in emerging markets. The global stock of institutional-grade real estate, according to modeling estimates by PwC, will expand from $29 trillion in 2012, to $45.3 trillion in 2020, with over 40% of 2020 total stock located in emerging economies.

Emerging market growth rates have been falling and their currencies and asset prices have been beaten down. Given the long-term potential of these markets, significant opportunities to be an early mover exist.

“This is the market for the savvy investor,” asserts Ali Fareed, CBRE Global Investors’ Managing Director of Investor Services in the Middle East. “This is the time to use buying power and hunt.”

INTERNATIONAL COST COMPETITIVENESS FACTORS

on the global level can accentuate these market swings. Chris Ludeman, Global President of CBRE Capital Markets, adds that hyperconnectivity can also overwhelm investors with information.

CONNECTEDNESS COMPLEMENTS DIVERSIFICATION Still, globalization of real estate in for mat ion is a lso empower ing investors. The information base on global commercial real estate that’s available to investors is much deeper and more accurate than ever before, and this information is accessible in real time.

This applies especially to properties in North America, northern Europe, Aust ra l ia a nd Japa n, but bet ter information access is coming to all parts

Mexico and Canada offer the most competitive combination of costs for facilities, utilities, tax, transportation and labour among 10 countries recently surveyed for their amenability to international business. Meanwhile, their NAFTA partner, the United States, is ranked 10th in KPMG's 2016 Competitive Alternatives study as the surging U.S. dollar drives costs upward.

The biennial analysis pegs the five categories of business costs against a baseline derived from average costs in the four largest U.S. metropolises of New York, Los Angeles, Chicago and Dallas-Fort Worth. Nine countries now record wider gaps from the baseline than in 2014, with Germany moving from least competitive in 2014 to eighth this year.

Mexico, Canada and the Netherlands retain their 2014 status, ranked first, second and third for competitiveness. Italy, Australia, France, the United Kingdom, Germany, Japan and the U.S. follow in sequence.

While Mexico has the lowest costs for labour, natural gas, downtown office space and industrial land and construction, it does not rank in the top four for effective corporate tax rates. In contrast, Canada cracks the top four in 12 of 14 categories — with property tax and industrial land the only outliers.

Canada also ranks first in three categories with the lowest costs for industrial lease space, electricity and the corporate taxes on digital services. Canadian labour costs are the second lowest after Mexico's, as is the cost of downtown office space.

Montreal, Toronto and Vancouver similarly reflect Canadian business cost competitiveness, ranking third, fourth and fifth among 29 international cities. The Mexican cities of Monterrey and Mexico top the list. Manchester, U.K. is the highest ranked European city at sixth, while Atlanta is the highest ranked U.S. city at 18th.

Although Los Angeles and New York factor into the survey's baseline, their individual business costs exceed the baseline. New York takes the title as most expensive city.

The complete text of the study can be found at www.competitivealternatives.com.

–REMI Network

www.REMInetwork.com | August 2016 19

investment&returns GLOBAL INVESTORS GAIN WINDOW ON CANADIAN PROPERTY FUNDS Canadian property funds have been added to the IPD Global Property Fund Index following two quarters of consultative performance tracking. Recently released 2016 second quarter results show a 1.4% total return for the seven open-ended funds participating in the now formally launched REALpac/IPD Canada Quarterly Property Fund Index.

Designed as a benchmark tool to inform small and medium-sized real estate investors, the new index provides data on real estate assets, cash and debt leverage. Collectively, the participating funds encompass 870 individual assets valued at approximately CAD $24.8 billion.

"We believe the REALpac/IPD Canada Quarterly Property Fund Index brings a new level of transparency to the real estate sector in Canada, which will make our market even more attractive to global investors," says Michael Brooks, REALpac's Chief Executive Officer.

In the Canadian market, the property fund index augments the REALpac/IPD Quarterly Property Index, representing 46 portfolios and more than 2,440 directly held assets valued at more than CAD $138 billion, and the Green Property Index, which measures performance of assets with LEED and/or BOMA BEST certification against the broader index.

As part of the IPD Global Property Fund, the Canadian funds will be benchmarked with 90 other funds from North America, the United Kingdom, continental Europe and AsiaPacific, valued at USD $353.6 billion as of March 2016.

– REMI Network

Historically, global capital investment flowed to core office assets, but the dominance of the office sector has been gradually eroding. of the globe – enhancing market research and transactions due diligence, and building investor knowledge of and confidence in overseas markets.

Greater connectedness supports expertise as investors become more familiar with foreign locations and their geographical preferences broaden. Global road shows are now proliferating for large transactions, increasing the depth and diversity of bid pools. To capitalize on oppor tun ities a round the world, experienced global investors are staffing up and opening offices in key markets abroad to get physically closer to opportunities and operations.

Enhanced diversification is one noticeable outcome. Today, many Asian investors are seeking to diversify their portfolios away from local markets due to concerns over slowing growth, reports Chris Brett, CBRE’s Head of International

Investment, U.K. Meanwhile, Peter Senst, President, CBRE Capital Markets, Canada, notes that despite their weaker currency, Canadian institutional investors are still significant buyers abroad for reasons of diversification, as there is a shortage of quality domestic assets available. The result is larger pools of capital on the move.

Strategies related to real estate asset types are also changing. Historically, global capital investment flowed to core office assets, but the dominance of the office sector has been gradually eroding – from 46% of the market in 2007 to just 35% in the first half of 2015 – as other asset classes such as hotels and industrial gain investor interest.

For example, in 2015 Asian investors opted for industrial properties in some of their largest transactions in the U.S.. This reflects the domestic comfort level in this asset class by large industrial-focused

20 Canadian Property Management | Part of the REMI Network

REITs and the increasing attractiveness of industrial/logistics assets globally.

TRADE AGREEMENT IMPACT Globalization of capital markets and commercial real estate is a trend that will continue in the coming years. A recent study from McKinsey Global Institute found that the flow of information is projected to grow by nine times in the next five years in terms of “used cross-border bandwidth.”

A spate of bilateral and regional trade and investment agreements are also being implemented or are in negotiation around the world. If ratified, the TransPacific Partnership (TPP), would cover countries accounting for 40% of global GDP and could have significant positive impact on industrial and logistics real estate as trade flows increase, especially in Canada, Japan, Malaysia, Mexico, the U.S. and Vietnam.

Vietnam will likely reap the most overall gain, with a projected 10% increase in its GDP, giving a significant boost to local retail markets. In Japan, the TPP is expected to increase Tokyo office demand by more than 39.8 million square feet (3.7 million square metres), with U.S. west coast cities likely to see notable gains as well.

Nevertheless, despite the tremendous flow of capital and information globally, local market knowledge is still the key differentiator for successful global commercial real estate investors. According to Dr. Henry Chin, CBRE’s Asia Head of Research, the preference for direct versus joint venture investing is different depending on country of origin and the type of investor from that country.

For example, Taiwanese investors almost always go direct in part because of domestic regulations, while investors from Singapore and South Korea are more open to joint venture investing in order to leverage local expertise. Because of this, many cross-border investors are expected to continue to pursue joint ventures with local market operators to decrease the costs of building a team in a foreign country, ease relationships with local market makers, obtain access to more deal flow and gain more credibility when a buyer is selected. zz The complete text of Leading Global Capital in a Time of Uncertainty can be found at www. cbre.com/about/global-capital. Spencer Levy is CBRE's Americas Head of Research.

investment&returns

MAXIMIZING RENTAL RATES

Leasing Presents Opportunity to Increase Property Values and Cash Flows

By Peter D. Willmott

EVER SINCE the capital market crash in 2008, fund managers, property managers and owners have been working to restore their property values and increase cash flows. Although they can’t control cap rate fluctuations, they can control through a solid leasing program the property income.

Since leases are generally five to 10 years, they are initially insulated from market turns. Pre-2008 contract lease

rates were maintained until renewal time, when they were adjusted to post market-collapse rates.

As a n exa mple, 20 0 6 was c o n sid e r e d a l a n d lo r d s' m a r k e t meaning that demand was higher than supply of space. For this example let’s assume that a market rate for a lease signed in 20 06 is $35 per square foot (psf). That rate will be locked in for five years.

In 2008, the market shifted to a tenants' market with rates falling from $35 psf to $22 psf. That said, the tenant isn’t able to take advantage of the drop in rates as the lease is locked in at $35 through to 2011. By the time the lease was ready to be renewed in 2011 the demand profile for space and resulting rates may have increased again.

Recognizing that building space is t h e p r i m a r y sou r c e of i nc om e, www.REMInetwork.com | August 2016 21

investment&returns maximizing rental rates is paramount. When leasing space, key elements of a solid leasing program include: • An approved budget that meets owners' goals and objectives, but also meets the financing requirements for the property.

• A solid “expert” leasing team that includes an experienced leasing ma nager, real estate or ientated at tor ney a nd reput able leasi ng agents.

• Sound f ina ncia l tools t hat ca n quickly calculate the deal NER (Net Effective Rental rate) and be modified to account for any deal terms.

• Lease-ready space that shows in the best possible light.

The leases that were negotiated in down-market years (2008 to 2013) have either come up for renewal or will soon. While it was predominately a tenants' market back then, there are areas where it is now becoming a landlords' market.

Overall, the industry objective is that the next deal should be better than the last. Be wary of loss leaders as the market may not allow the make-up for a bad deal later on.

As the success of the property is tied directly to the success of the lease program, there is a lot of pressure to perform from the owners and potentially the finance company to meet or exceed budget projections. Prior to launching the leasing program, all parties should agree upon the budget.

W hen prepa r i ng a budget , t he following are key points that need to be considered and decided upon prior to launching the program. W hile adjustments may be required to the program during the leasing negotiations, major decisions on these should be made well in advance and not in the heat of a negotiation.

Lease Rates These are market driven and should be derived from the overall market and four to five comparables. Overall, the industry objective is that the next deal should be better than the last. Be wary of loss leaders as the market may not allow the make-up for a bad deal later on.

Concessions Depending on what has been negotiated, these can have a financial cost or an opportunity cost. When considering these, be sure to know exactly what the cost is going to be, estimate conservatively and ensure it fits within the budget guidelines.

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investment&returns Financial Concessions cost financially, and landlords, ideally, don't want to offer more than they can afford or what the competition is offering. Above-market tenant improvement allowances, free rent, tenant improvements and other lease incentives could negatively affect profitability. Doing the NER calculations on all deals will keep costs in line and within budget/pro forma. In the heat of negotiations and desire to get the deal done, don’t fall into the trap of trying to make a bad deal look good.

Opportunity Costs Non-financial concessions include: expansion and contraction rights; first r ight of refusals; and options to purchase, etc. These are generally categorized as opportunity costs as they are to the tenant's benefit and inhibit the landlord's ability to lease or release the space in the future. If they are deemed unavoidable, landlords ca n l i m it exp osu r e by en su r i ng expansion and first right of refusal agreements are at then-current market rates and have short timeframes to accept (five to 10 business days).

Surrender, contraction or other lease

termination rights should include a clawback of all unamortized leasing costs and provide a penalty to allow for remarketing and leasing the space.

Carrying Costs One cost that landlords don’t always consider when calculating the NER on dea ls is t he vaca ncy costs incurred while the space is vacant.

These can be significant and are tied directly to the operating costs. As an example, on a 10,000 -square-foot space with $30 psf operating costs, ca r r ying costs a re approximately $825 per day, $26,000 per month or $316,000 per year.

NOI (net operating income) is a finance partner's primary consideration in real estate so it is imperative that all efforts are made to make the best deal possible and attain budget. Once the deal is made, it is the reality for five to 10 years, if not longer.

Once again considering a 10,000-square-foot space using a 6% cap, if the budgeted NOI rate is $24 psf, the added value to the property would be $4 million. By negotiating a deal for $22 psf, the increased value wou ld on ly b e $3.66 m i l l ion or $333,333 below budget.

It is paramount for the success of the building that the leasing program be well planned and implemented by experienced experts. Due to the longt er m nat u r e of t he ag r e ement s, mistakes will have a lingering effect.

Bad deals are done deals until the lease expires. zz Peter D. Willmott, BAS, CPM, LEED AP EB+OM, is an instructor for BOMI Canada. Among several courses he teaches are Real Estate Investment and Finance and Leasing & Marketing for Property Managers for the RPA and FMA designation programs. For more information, see the website at www.bomicanada.com.

Keeping it realty at

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The ABCs of Building Cond

Capital planning is a balancing act; especially when it comes to earmarking funds for a Building Condition Assessments (BCAs). That’s why taking the right approach and understanding today’s options are key to protecting one’s bottom line.

“Whether you’re conducting a BCA on a building you own or one you’re thinking of buying, you want to know its real condition. That means taking a very detailed look at everything from the building’s envelope to its mechanical systems and its structure,” says Bill Gladu, a Principal with Read Jones Christoffersen (RJC) Engineers.

Vancouver

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Certainly, it’s the details that count.

And getting those right means making a few considerations: The Right Season Planning a BCA? Take a look outside.

Snow and ice coverage can make it difficult to determine the conditions of roofs, pavements, landscapes, and other

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Creative Thinking Practical Results

important systems. Likewise, leaks can be hard to detect in severe weather.

“Many items cannot be reviewed visually if covered over, and improper timing or scope of repairs can have a significant impact on budgets,” says Gladu.

In short: consider waiting until a full and unobstructed BCA can be carried out.

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ition Assessments Define Your BCA Goal BCA’s are conducted for multiple reasons, and each require varying levels of skill and work.

“Those who are buying a building may want to work with specific industry experts who can tell them, and by extension their lending partner, the real condition of the property,” offers Gladu, noting, “However, if you’re refinancing a loan from a building you already own, you probably already know what the building condition is, so you may instead be in the marketplace for a more general, and lower-priced, review.”

Specialist or Non-Specialist Depending on the BCA motivation, you’ll either want a specialist or non-specialist review. The main differences between the two come down to the level of specific expertise and thoroughness required.

For example, specialist reviews are conducted by a team of service providers who already work and practice daily on the building components they are assessing. They each examine property elements specifically related to their field of expertise. In so doing, specialist reviews bring a high level of expertise and detail to the final report.

Non-specialists review, by comparison, are commonly conducted by a single industry professional who complete a more generalized assessment of all aspects of the building. Non-specialist reviews are often sought by clients who already know the condition of their property or have higher risk tolerances.

Understand the Price Gap Specialist reviews cost more than non-

Edmonton

Lethbridge

specialist reviews. That gap doesn’t indicate a difference in professionalism, but simply a difference in the level of detail and specialization required.

“You can have a big price difference from two very reputable companies, and that difference is going to come down to what you need,” says Gladu. “Specialist reviews are always going to cost more

exposure/liability to their fees, while others may have higher limits. Be sure to read the small print regarding liabilities, and compare it to industry norms.

because you’re paying for a team who provide a higher level of accuracy and bring experience when conducting the assessment. In the end, it all depends on what you need from a BCA.”

research, define your objective, and partner with the appropriate BCA provider.

Offers Gladu: “There are many different levels of service and expertise provided within this community, so the most important thing is to know what you are buying.”

Bill Gladu is a Principal at RJC in the Building Science Group for Central and Eastern Canada. For more, visit www.rjc.ca.

Identify Liability Whatever route you take, ensure your service provider is willing to put themselves on the line for the work they are doing. Some may limit their

Toronto

A Little Homework Goes a Long Way BCAs are not a one-size-fits-all service.

Therefore, when approaching your capital planning, it pays to do the market

Kitchener

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rjc.ca

markettrends

SCOPING OUT THE SKYLINE Trophy Towers Difficult to Dislodge from Institutional Owners A SELECT GROUP of largely Class AAA and A office towers in the downtown cores of major Canadian cities falls into JLL's definition of skyline buildings. The following overview examines market trends and the 2016 status of these 116 trophy properties located in Vancouver, Calgary, Edmonton, Toronto and Montreal – Editor.

DESPITE CHALLENGING conditions in certain Canadian markets, direct asking rents for the office buildings identified as skyline towers have seen a slight increase in 2016 – an average of $28.13 per square foot for net rental rates is more than 0.7% higher than the first quarter of 2015. However, rent growth has been moderating, especially in markets with a large concentration of tenants affiliated with the energy sector.

“Despite the negative impact we’ve seen in energy dependent markets, there has been strong growth in Toronto, which has maintained the national Canadian rent rates in 2016 since the previous year.

Although the overall Calgary market has seen a sharp decline in rental rates, the Calgary skyline market has performed better and only seen a decrease of 8.3% in

direct rental rates since 2015,” observes Thomas Forr, National Research Manager with JLL. “Due to the sharp decline in global oil prices and its effect on Alberta, we do not expect the average national direct rent rate to drastically change in 2017, even with the expected rent rate growth in Vancouver and Toronto.”

COMPETITIVE IMPROVEMENTS Most major Canadian office markets are in the midst or at the end of strong development cycles. Since 2013, 11 towers have been added to the skyline inventory with the largest being The Bow, a twomillion-square-foot tower owned by H&R REIT in Calgary.

2014 marked the peak in the cycle, when 22 buildings (23.2% of the total sk yl i n e i nve nt o r y) we r e u n d e r

26 Canadian Property Management | Part of the REMI Network

construction. Today that number has returned to historic norms, with 13 towers or 12.2% of the total inventory under construction – largely concentrated in Calgary, Edmonton and Toronto.

Although the new inventory has been well received, evidenced by an average pre-leasing rate above 70% as of Q1 2016, developers are gearing down and the focus has shifted to investing in capital improvements in existing, older stock.

Facing fierce competition from new, modern and highly efficient inventory, many landlords have been compelled to make substantial capital investments in their aging inventory.

Typically, older buildings need to be made more energy-efficient to reduce additional rent costs and maintain their competitiveness on a gross rental basis.

markettrends

RECORD LOW CAP RATES

Landlords are likewise improving mechanical building systems and amenities to make their office space a more desired work environment for employees.

For example, Dream Office REIT is investing CAD $42 million to modernize Toronto’s Scotia Plaza; Polaris Realty has recently renovated elevators and common lobbies on all floors at 999 West Hastings in Vancouver; and, in Edmonton, Morguard has plans to re-glaze Scotia Place, which was built in 1982, to completely update its exterior.

CAPITAL SEEKING PRODUCT The flow of foreign capital into Canada is growing, and represented 28.5% of overall sales activity in the skyline over the past five quarters. Foreign capital continues to view Canada as a relatively safe haven for investment dollars. In addition, the weak loonie, which has depreciated 9% against the U.S. dollar in the last 12 months, continues to give foreign buyers a currency advantage.

The markets with strong fundamentals (non-energy markets) are seeing the biggest boost in foreign capital inflows. Notably,

Record low cap rates still look good from a yield spread perspective, Canadian real estate analysts advise. CBRE's newly released snapshot of second quarter cap rates and investment trends highlights the growing gap between average national cap rates and 10-year bond yields, which is now 493 basis points (bps) in real estate's favour.

"Canadian real estate should be the beneficiary of continued capital flight from China and increasingly, Europe, in light of the turmoil surrounding Brexit and the perception of the U.S. being late in the cycle," observes Paul Morassutti, CBRE Executive Vice President, Valuation and Advisory Services.

"Defensive Canadian multifamily and industrial assets have seen cap rates compress, while core office and retail remain sought after, but overall bidding pools may be thinning."

Multifamily cap rates continued to move downward in the second quarter. CBRE pegs the national average in the 4.2 to 4.9 per cent range for high-rise property and at 4.7 to 5.4 for low-rise buildings, but there is wider variation across the 10 urban markets analyzed. Vancouver, Toronto and Ottawa properties were below the national average, with Class A highrise product in Vancouver in the 2.5 to 3 per cent range.

However, Vancouver cap rates were lower than the national average in all 19 surveyed property categories — for example, in the 4 to 4.5 per cent range for downtown Class AA office space versus the national average of 5.08 per cent.

"Both foreign and domestic investors are showing a continued willingness to pursue significant investments at record level cap rates. Strong demand and compression of multifamily cap rates reflect investor confidence in the B.C. economy and commercial property fundamentals," says Tony Quattrin, Vice Chairman of CBRE's national investment team.

The outlook is not so rosy next door in Alberta, but, with the exception of Class B office product in downtown Calgary and Edmonton, values are holding. Cap rates even dropped from the previous quarter for Calgary industrial and Edmonton multifamily properties.

"Investors are also motivated to reconsider Calgary as commercial property in Vancouver and Toronto becomes increasingly expensive and difficult to attain," notes Garry Beres, Executive Vice President with CBRE's national investment team.

Office properties are particularly capturing investors' interest in Toronto, with cap rates below the national average in all five downtown and suburban categories. Rates declined for downtown Class A and B and suburban Class B properties from the previous quarter. Downtown Class B rates also illustrate the east-west divergence: in the range of 4.75 to 5.25 per cent in Toronto versus 7.75 to 8.5 per cent in Calgary and Edmonton.

"Capital flows from domestic and global capital sources continue to show their conviction for quality assets with the market increasingly fixating on core and urban property," says Peter Senst, President, Canadian Capital Markets, with CBRE. "Brexit is the latest question for investors to consider. However, the impact on Canada should be manageable and Toronto could actually benefit as a leading financial centre."

For more information, see www.cbre.ca/EN/research/Pages/ research-centre.aspx – REMI Network

www.REMInetwork.com | August 2016 27

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28 Canadian Property Management | Part of the REMI Network

JLL analysts forecast a landlords' market for the next 30 months in Toronto, while Calgary tenants' are expected to hold the upper hand over the same time period. As Calgary landlords await a recovery in oil and gas prices, Toronto's skyline tenants appear to be playing musical chairs.

New construction underpins Toronto's 4.7% direct vacancy rate despite continued employment growth and office space absorption. JLL pegs the direct average gross asking rent at $65.59 per square foot across 23 skyline buildings.

The four towers boasting 100% occupancy into the longer term have all been added to the market since 2009, while late '80s and '90s vintage stock hosts the bulk of directly vacant, sublease or available space. Notably, multi-floor tenants have already moved or are slated to move from existing bank towers to new or soon-to-be-completed arrivals to the marketplace. Of the 1.67 million square feet slated to augment the skyline in 2016-17, nearly 90% was pre-leased as of March 31, 2016.

"Despite upward pressure on vacancy, landlords and investors remain aggressive," the 2016 Skyline report surmises. "Average skyline net asking rents increased 6.8% quarter-over-quarter, while downtown Class A capitalization rates continue to experience compression."

Consisting of the 19 towers that command 90th percentile rents, direct vacancy remains low in Calgary's skyline buildings – at 2.3% – but sublease space and space to be vacated in the nearing future translates into looser occupancy. In particular, nearly 3 million square feet of space is under construction in four new towers tagged to joined the skyline stock, which was nearly 63% pre-leased at the end to the first quarter of 2016.

"Net asking rental rates for the skyline have followed the same declining trend as the rest of the Calgary Class A office market, but not as drastically," the 2016 Skyline report notes, citing a 4.2% drop over the past year for a direct average gross asking rent of $46.20 per square foot.

Klaus-Michael Kuehne from Germany acquired Vancouver's Royal Centre for $425 million.

“Across Canada, we’ve seen cap rate compression continue for downtown office in Vancouver, Montreal and Toronto, while Calgary and Edmonton remain ‘no fly zones’ for the time being,” maintains Matt Picken, JLL's Executive Vice President, Capital Markets. “The challenge facing investors is how to unlock assets from institutions that are increasingly reluctant to sell. While there is no denying the presence of foreign capital in Canada, particularly from Asia and Germany, many U.S. based investors remain discouraged by the lack of bargains, notwithstanding the discounted Canadian currency. Over the short term, we expect to see declines in transaction volumes, which, when combined with low Government of Canada bond yields and relatively sound leasing fundamentals, will likely push office cap rates even lower. However, macro-economic concerns and the potential of over-building across the Canadian skyline has caused some groups to pause and re-evaluate their underwriting metrics.”

Canadian institutional investors are also increasingly looking elsewhere. At approximately 62 million square feet, domestic skyline inventory represents only one tenth of the United States’ skyline inventory of 607 million square feet. With a dearth of

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office buildings being offered for sale in Canada, Canadian investors with an appetite for quality office product are turning to other markets.

Canadian investment in skyline buildings in the U.S. was significantly greater than in Canada in 2014 and 2015. Only $1.06 billion was invested in domestic skyline towers in 2015 versus more than $3.4 billion in investment in U.S. skyline office towers during the same period.

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VACANCY VARIABLES The overall skyline vacancy hit 10.9%, which is an increase of 645 basis points from its cyclical trough, marked only three years ago. Two key factors are impacting the Canadian skyline: an active construction cycle in some markets; and severe lack of demand in others.

Alberta is suffering from the lack of demand, caused by the pain in the energy sector as continued low oil prices weigh on f unda ment a ls in E dmonton a nd Calgary. The skyline vacancy rates for the two cities currently sit at 11.7% and 12.9%, respectively. However, it’s not all bad news for Calgary landlords, as direct space vacancies (leased directly from the landlord) stand at a healthy 2.3%.

Meanwhile, Toronto, Montreal and Vancouver record a vacancy rate at or above the 10% mark for a different reason – the robust construction cycles in these markets. As the construction cycles wrap up and the supply is absorbed in these cities, tightening is expected to ensue.

“With an increase in vacancy, rental rates have decreased. Tenants with leases rolling over in the next 24 months have an opportunity to capitalize on reduced overall occupancy costs,” advises Damien Mills, Executive Vice President & Managing Director of Western Canada, JLL. “The reduced occupancy cost burden parallels efforts to reduce G&A, allowing companies to stabilize in the soft commodity market and better position themselves for the future.” zz Y

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MY

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CMY

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WE KNOW: Phase I & II Site Assessment

The preceding article was provided by JLL. For more information about the 2016 Skyline report, see http://jllcampaigns.com/skyline/

Property Condition Assessments

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Remediation & Risk Assessment Asbestos & Mould Surveys www.REMInetwork.com | August 2016 29

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We can’t thank them enough for their efforts toward reaching this milestone.”

Domenic founded Forest Contractors in 1994 before completing his civil engineering education at George Brown College. Soon after, he hired additional staff to begin the expansion of the company. Only two years later, Domenic acquired enough machinery to allow his company to complete all of its projects in-house.

One major cornerstone of Forest’s business has always been excellent customer service. The company places an emphasis on it, and founder Domenic Gurreri operates his company with the goal to have Forest Contractors be defined by its strong team and the high level of customer satisfaction it delivers.

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“Earning the title of one of Canada’s Best Managed Companies is an immense honour and a great achievement for our employees,” says Domenic. “It’s the commitment and hard work of our team that’s elevated our company to this level.

Forest’s track record of high-quality work has led to partnerships with some major clients, including the municipalities of Vaughan, Pickering, Stouffville and Milton, big retail operations such as Vaughan Mills, Canadian Tire and

OUP IS ONE OF MANAGED COMPANIES excellence garners recognition McDonald’s Canada and other retail centres, developers and property owners.

According to Andrea Caruso, Forest Contractors’ head of business development, the award signifies that the company’s focus on superior quality and hard work will lead to continued success.

“We’re driven to provide the best service in the industry so our customers can find the results they need,” he says.

“It’s on these pillars of quality, integrity and service that we’ve been able to establish such long-standing relationships with our clients, and they’re principles we’ll continue to use to take our company into the future.”

Forest Contractors and other honourees were celebrated at the annual Canada’s Best Managed Companies gala, which took place in Toronto on April 12, 2016.

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reporting&compliance

TRANSPARENT DEVICES

Audit Boards Take On Compulsory and Voluntary Oversight THE AUDIT TRENDS 2016 REPORT from KPMG and the Institute of Corporate Directors examines today's creeping risk landscape stemming from emerging disruptive forces and increasingly complex demands to compete and limit exposure in the marketplace. The following excerpt looks at reporting and compliance – Editor

32 Canadian Property Management | Part of the REMI Network

reporting&compliance

A LENGTHENING SLATE of risk issues is impacting today’s corporate boards with risk oversight – financial and otherwise – increasingly filtering down to the audit committee. While the audit committee must, of course, remain steadfastly independent of management, it can still enhance its historical role by asking the tough, necessary questions and ensuring the extent of its oversight expectations are fully understood.

Managing inevitable change will be both an audit com m ittee pr ior ity and challenge, and one that all audit stakeholders – C-Suite, management, auditors, regulators, shareholders and even the public – have an interest in facilitating.

REPORTING Recent developments in corporate reporting underscore that a lot more is expected around reporting – from regulators, from shareholders and from companies themselves. There is growing recognition that the range of issues and oppor tunities affecting long-ter m business value is much broader than can be reflected in a set of current-year financial measures. Companies’ reports need to reflect this if they are to support investors’ capital-allocation decisions effectively.

Initiatives such as Integrated Reporting (IR) are intended to provide a basis to address this by refocusing reporting around an organization’s business model and strategic priorities. The aim is to reflect the critical opportunities and challenges that affect the business – the same issues that management is dealing with on a daily basis within the organization.

This trend toward integrating various statutory and voluntary forms of corporate reporting – for example, reporting on areas such as long-term va lue creat ion a nd cor porate responsibility – becomes challenging to achieve while still creating an annual report that is lean and manageable.

Importantly, this push towards improved disclosure of non-financial information beyond the traditional annual report is becoming critical to the audit committee’s reporting oversight mandate Compa n ies a re increasingly distributing operating metrics that relate to volumes, capacity, growth or other indicators of performance that are of interest to the market. This information is often provided on a quarterly – or even monthly – basis. Audit committees should understand the nature of the information being provided, as well as the underlying processes, to ensure that the information is accurate, complete and prepared on a consistent basis.

There is no question that the massive ongoing increase in global regulatory complexity has had a disruptive effect on Canadian companies and their audit committees. Indeed, that was done with the intention of preventing a recurrence of the last decade’s global financial crisis.

GLOBAL ASSET REQUIRES CONSISTENT PERFORMANCE METRICS A new standardized approach for collecting, measuring and interpreting real estate investment performance data responds to the ever widening scope of global portfolios and institutional investors' need for transparency and cross-border consistency. MSCI – the producer of property and property fund indices worldwide, including the REALpac/IPD Canada Property Index and Canada Property Fund Index – recently introduced global data and methodology standards to fill a recognized gap in comparing real estate to other asset classes.

"The potential advantages of commercial real estate may be constrained by information inconsistencies and hampered by slow, costly and error-prone data collection and transfer processes," acknowledges Sebstastien Lieblich, Managing Director of MSCI. "The Global Data Standards aims to provide efficient and consistent data that would give property investments the same level of insight and uniformity that is evident in equities and bonds."

MSCI began applying the standards, which were developed through extensive industry consultation, in the preparation of second quarter 2016 index results. The methodology standards define procedure methods and rules for computation of indexes and benchmarks.

The data standards drill down to performance measurement inputs at the vehicle, asset and tenancy levels.

"Today, performance information about private real estate investments often remains relatively opaque, and the timely measurement requires multiple layers of private data to be passed between owners, managing agents, accountants, valuers and analysts on an increasingly frequent basis," states MSCI's guidance document for the new standards. "The data standards have been developed to provide the real estate industry with improved comparability across markets and asset classes, and overcome information exchange challenges."

–REMI Network

www.REMInetwork.com | August 2016 33

reporting&compliance REGULATORY DEVELOPMENTS Audit committees need to keep a close eye on global regulatory developments, not only those being enacted in Canada, but those that, due to strong support in the United States or Europe, may or are likely to be adopted in Canada at some point.

The release of International Financial Reporting Standard (IFRS) 9 completes a project launched by the International Accounting Standards Board (IASB) in 2008 in response to the financial crisis.

The new standard includes revised guidance on the classification and measurement of financial assets, including a new expected credit loss model for calculating impairment and introduces a more principles-based approach to hedge accounting that is closely aligned with risk management.

The mandatory effective date is January 1, 2018, however, the standard can be adopted earlier.

In addition, IFRS 16, Leases, will fundamentally change the accounting treatment of leases for lessees establishing a single, on-balance sheet accounting model that is similar to current finance lease accounting. This standard will

require companies to bring most leases on-balance sheet from 2019.

IFRS 15, Revenue from Contracts with Customers, also comes into play. It recognizes the need for more consistency around revenue recognition. A converged standard to take effect in 2018 will replace much of existing IFRS and US GAAP (generally accepted accounting principles) guidance.

Ensuring third-party adherence to regulatory mandates is becoming more important as organizations outsource more of their audit processes, particularly internal audit. Anti-Money Laundering (AML) legislation is changing both globally and in Canada, with the financial and reputational consequences of noncompliance being significant. With regulators raising stringency around financial institutions’ obligation to better “know their customers,” audit committees should pay increased attention in this area.

The United Kingdom recently passed a privacy law holding that when a privacy breach or breach of consent happens to an organization with operations in the U.K., it can be fined 2% of global revenues.

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34 Canadian Property Management | Part of the REMI Network

Audit committees for organizations with U.K. operations should understand this rule and prioritize oversight to ensure compliance, while also being vigilant of generally increasing privacy legislation globally.

Still, audit committees struggle with how to really measure the quality of the audits they are getting. Going forward, there is a great oppor tunity for organizations, regulators and auditors to work together on these issues and create a more direct line between regulatory feedback and the actions organizations can take to ensure it’s implemented. zz The complete text of Audit Trends 2016 can be found at https://assets.kpmg.com/content/dam/ kpmg/pdf/2016/05/Audit-Trends-2016.pdf.

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BRINGING TECH TO EMERGENCY PREP

It takes communication, coordination, and cooler heads to carry out an effective emergency procedure. Yet as anyone who has experienced an emergency or disaster event first-hand will agree, these can sometimes be in short supply. This is where technologies like WPS Disaster Management Solutions’ Building eVac mobile app are helping to bridge the gap between emergency planning and onthe-scene success.

Developed for WPS’s ePlan Advantage suite of property management software, Building eVac was designed from the ground-up to give users at all levels of a building an all-in-one and easily accessible tool for use in an emergency event.

happens, so we’re confident this app will provide evacuation team members with a resource that will give them the information and the confidence to carry out those procedures effectively, whether they’re experts on the plans or not,” says Doug Araki, President of WPS.

“There’s always been a huge gap in terms of reading emergency plans and being properly prepared once something

Backed by WPS’s 35-plus years in the building fire and life safety planning industry, Building eVac was designed on one simple premise: that

no two buildings are ever the same. That’s why the team built its app to be easily customizable for every user and building in which it is used.

“Every property has a different structure and group of people, so it was important from the onset to make sure the app could adapt to specific buildings based on their fire and life safety equipment, who is working or living there, their evacuation plans, and a host of other factors,” explains Araki.

That level of customization also extends to Building eVac’s users. Once registered with the software, the app will remember each user’s role and building the moment they sign in, after which it will present relevant features and information to match.

For example, tenant floor wardens who use Building eVac during an event will have instant access to building personnel contacts and evacuation details; whereas building managers, engineers, and security personnel will also have access to detailed floor plans and connections with their suppliers and other essential contacts.

Additionally, the app automatically downloads vital building emergency information to one’s phone as soon as they log in. This ensures life-saving data is not compromised by lack of internet or wi-fi problems in a crunch.

Surely, this level of access poses security questions when it comes to sharing information on the building and its occupants. However, says Araki, the app comes with the ability for building

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management to restrict its usage amongst staff or tenants who leave the building, thereby ensuring confidential information isn’t literally walking out of the door. “You don’t want everyone to have access to your building app, so we’ve made sure that if an individual leaves the building, the management can deactivate that person from the software so they won’t be able to get into the app next time they go to use it.”

The app may still be new to the market, but its development has taken nearly three years to perfect. Now on its ninth version, it includes features that have been added at the request of users – such as more detailed information and resources for occupants with mobility issues – and extra touches that have made it more user-friendly.

More than a standalone product, Building eVac was designed to leverage WPS’s ePlan Advantage family of property management applications, including its online eTraining which helps to provide emergency response training at the user’s convenience.

All combined, it’s WPS’s hope that Building eVac will make a key difference in the lives of emergency personnel and the people they are protecting.

“We’ve been in the emergency planning business for a long time, so we’ve seen the challenges of not only developing emergency plans, but implementing them,” says Araki, adding, “Now, we’re excited about Building eVac’s potential to address that, giving people the ability to access reliable information when they need it most and, ultimately, saving lives.”

For more information on Building eVac and WPS Disaster Management Solutions ePlan Advantage, visit www.wpsevac.com or call us at 1.800.545.9028.

FEATURES • Custom app developed specifically for your building • Custom app developed for Building Emergency Personnel and Floor Wardens (not generic) • Direct navigation to Emergency Procedures or Main Menu • Easy to follow step by step emergency procedures • Offline accessibility (some features may be disabled without WiFi or data) • Building specific information updates automatically every time you log-in to the app • Fire evacuation map directing you to your recommended assembly area • Assembly area ‘Streetview’ (may not be supported by some cellular phones) • On-demand video training available at your convenience (requires WiFi or data).

• Quick access to your building’s critical emergency contact list (updated real time each time you log-in) • Quick and simple evacuation report-in status • Built-in SMS/Voice notification system (for Building Emergency Personnel)

Download eVac to your mobile phone.

events

CROWNING ACHIEVEMENTS

BOMEX 2016 in Regina, September 20-22

BOMA REGINA TRACES its origins to the inaugural BOMEX conference and exhibition 26 years ago. Real estate industry professionals who travelled to Calgary for the first national gathering of the Building Owners and Managers Association (BOMA) decided to form their own local chapter when they got back home. Today, a new generation of BOMA Regina members is preparing to host BOMEX, September 20-22, 2016, marking the first time the annual event will be held in Saskatchewan.

"Our theme, Crowning Achievements, reflects our desire to showcase the region’s positive and energetic economic growth and to give delegates a taste of the diversity Regina has to offer including local entrepreneurs, venues and cuisine," says Agatha Potapinski, BOMEX 2016 Chair.

A play on Regina's nickname, the Queen City, this year's theme is also in keeping with three days of advancing knowledge, building peer networks and recognizing exemplary building and management performance. BOMEX will present its usual wide scope of learning opportunities, yet ensure there is time and places for fun.

The annual BOMEX Golf Classic and associated convivial activities kick off the proceedings on Tuesday, September 20. The Deer Valley Golf Club in the scenic Qu'Appelle Valley is the venue for this year's tournament, while non-golfers can enjoy an outing and lunch at Wascana Park, a 2,300-acre green space with its own manmade lake, in the heart of the city. After a day outdoors, the evening opening reception at the RCMP Heritage Centre gives all delegates a chance to mingle before the next day's start at BOMEX's host venue, the Delta Regina.

Beginning with the opening breakfast, Wednesday, September 21, plenary sessions promise thoughtful perspectives on team building, change management, the state of the industry and the world at large.

This year's keynote speakers are a trio of strong, influential women from western Canada – Amanda Lindhout, Joan McCusker and Kellie Garrett – who will share the insight they've gleaned as a 38 Canadian Property Management | Part of the REMI Network

resilient survivor, a world class athlete and a high-level business strategist, and explain how they apply the critical skills of compassion, forgiveness, cooperation and trust for business and life success.

With a Saskatchewan-based moderator to lead the questioning, a senior executives' panel will tackle current industry issues from varying regional (Toronto to Calgary) and professional (investment, property management and leasing) viewpoints as part of Wednesday's opening session. Delegates will then have to make some choices as three concurrent streams of educational seminars, over two days, address both management and operations, including human resources, technology, safety and security, energy performance, certification and looming regulatory compliance requirements.

BOMEX's exhibition component is set for September 21, giving conference delegates opportunity to talk to suppliers of building technologies, products and services. After the day's educational sessions are complete the tradeshow floor will also transform into a reception space. A follow-up social night invites BOMEX attendees to Drink in the History of Regina via a walking tour of downtown heritage buildings – each offering tasting and sipping opportunities.

The BOMA Canada National Awards Gala is a fitting conclusion for the celebration of Crowning Achievements on September 22. The 2016 winners of BOMA Canada's TOBY, Earth, Pinnacle and Chairman's awards will be recognized as Adam Growe, host of the TV trivia test, Cash Cab Canada, officiates.

"BOMA Regina has waited years to host BOMEX in the Queen City," says its President, Victoria Gabel. "Let us treat you to a royal experience." zz For more information about BOMEX 2016, see the website at www.bomex.ca.

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