VOL. 38 NO. 2 SUMMER 2023
Editor-in-Chief Barbara Carss barbc@mediaedge.ca
Publisher Sean Foley seanf@mediaedge.ca
Art Director Annette Carlucci annettec@mediaedge.ca
Graphic Designer Thuy Huynh
Contributing Writers Jason Chiu, Cheryl Mah, Rebecca Melnyk
Production Coordinator Ines Louis Inesl@mediaedge.ca
National Sales Bryan Chong bryanc@mediaedge.ca
Ron Guerra rong@mediaedge.ca
Jason Krulicki jasonk@mediaedge.ca
Melissa Valentini melissav@mediaedge.ca
Digital Media Director Steven Chester stevenc@mediaedge.ca
Circulation circulation@mediaedge.ca
Alberta & B.C Sales Dan Gnocato dang@mediaedge.ca
HUMANS ROUTINELY gravitate to their favoured table at restaurants, favoured seating section in the cinema, favoured park benches in the sun or the shade, and even favoured pieces of furniture in their own living rooms. We are typically creatures of habit and claimers of personal territory. So it’s perhaps not surprising that many office workers aren’t big fans of unassigned desks.
A whopping 79% of Canadian respondents to a recent global survey on office attendance and environments indicated that they’d be willing to spend more time in a formal office setting if they had a workstation to call their own. Yet, that’s increasingly an impossibility as workplace configurations that prioritize interactive venues ahead of individual space take hold.
It’s becoming a building-scale riddle on par with the conundrum of motivating transit use. How do you justify investment in public transit without a certain level of ridership, but how do you build ridership without a certain level of service? How do you lure workers into the office if they don’t have a desk, but how do you justify allocating space for individual desks if workers aren’t coming into the office?
President Kevin Brown kevinb@mediaedge.ca
Group Publisher Sean Foley seanf@mediaedge.ca
Accounting Michele Therien michelet@ mediaedgepublishing.com
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Office landlords and employers’ facilities managers probably don’t need to be reminded that the design community has a business agenda of its own in actively pushing the message that pre-pandemic formats are obsolete and that it will be crucial to invest in dramatic makeovers in order to compete for tenants or staff. That may be true, and designers’ vision of workspace today is unlikely to be as socially or financially calamitous as some of their past assumptions about livability in what turned out to be reviled 20th century public housing projects. Still, it's worth remembering that they have been wrong before.
What’s clear is that the office sector is going through a rough patch. We examine it from a few different angles in this issue.
From the tenant space perspective, that includes findings from the Unispace global survey of employees and employers and JLL’s 2023 Canada/U.S. benchmark report on office fit-out costs. As well, we look at the Continental Automated Building Association’s recent research on technological applications to support healthy indoor environmental quality.
Turning to investment and asset management, we provide insight on office values, transaction and repositioning trends from prominent brokerage and advisory firms. Many of those market factors also align with growing demand to reduce greenhouse gas emissions and bolster climate resilience.
There is already strong evidence that buildings with low-carbon performance are better navigating the current office market upheaval. We also report on sustainable financing and regulatory mechanisms that are supporting decarbonization.
Barbara Carss barbc@mediaedge.ca
6 Retrofit Capital: Sustainable finance products gaining uptake for green upgrades.
8 Carbon Considerations: Emissions reduction targets driving the retrofit agenda in existing building stock.
12 Healthy Building Platform: Intelligent management of indoor environmental quality.
14 Workplace Divide: Employers and employees have differing perceptions of the office environment.
16 Office Angst: Pandemic upheaval persists for a sector with slipping asset values, sluggish tenant demand and a drop-off in transactions.
24 Smart Tech Integration: Open and adaptable applications can unlock the efficiencies of interoperable systems.
26 ESG Interpretations: Data management standards and strategies prioritized in quest to gather and consistently convey expanding troves of information.
30 Uncommon Amenities: Canderel facilitates new approach to workplace hospitality.
Articles:
20 Tax Shock: REITs unexpectedly included in the Canadian government’s planned 1% levy on the repurchase of equity.
22 Provincial Prompts: Quebec and Ontario roll out tax incentives with spinoff implications for land deals.
29 Electricity Cost Option: Ontario introduces ultra-low overnight rate.
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By Barbara Carss
GREEN BONDS HAVE already proved to be a good fit for commercial real estate and, along with other emergent sustainable finance products, are expected to increasingly come into play as owners/ managers pursue decarbonization and look to bolster the climate resilience of their properties. Beyond spurring reductions in greenhouse gas (GHG) emissions through the $2-billion Building Retrofits Initiative, the Canada Infrastructure Bank (CIB) also aims to foster that trend and attract more private capital to the possibilities of lowcarbon investment.
“Our primary mandate is to catalyze and help transform the market for building upgrades and decarbonization retrofits. We don’t intend, nor will we be allowed to stay in the market in perpetuity,” Aaron Berg, CIB’s Director of Energy Efficiency Investments, observed earlier this year during a webinar sponsored by REALPAC. “As we accelerate the volume of decarbonization and retrofits, we hope the
broader awareness of the dynamics for doing retrofits increases, and that increased awareness and knowledge enables the market to function better. Then we will begin to exit the market in terms of our level of participation.”
Also joining the conversation, two wellversed financiers charted the momentum of the labelled sustainable finance market and underscored its relatively strong performance in the current economic volatility. Fanny Doucet, Managing Director and Head of Sustainable Finance with Scotiabank, and Susan Thompson, Director of ESG Solutions with TD Securities, sketched out the two broad instruments available to investors and seekers of capital, both of which are tied to rigorous environmental and/or social criteria.
The most common of these is categorized as use-of-proceeds, in which funds raised through the instrument would be directed to specified types of eligible projects. In a real
estate application that could be green building development or acquisitions, energy efficiency upgrades or improvements related to climate change adaptation.
Sustainability-linked products are a newer arrival in the market, allowing for funds to be raised for general corporate purposes. However, borrowers are tied to a sustainability target with the loan rate adjusted upward if they fail to meet that target. For commercial real estate, those targets might be tied to energy performance or reductions in GHG emissions.
“Broadly, the sustainable finance market in Canada has been about $50 billion of issuance annually so it is quite a large market,” Doucet reported. “The use-of-proceeds part of that — whether it’s bonds or loans or other instruments — makes up a large portion of that market, about 80% of it.”
Real estate has been a prominent component of that activity. For example, use-of-proceed bonds are well matched to
the now waning development boom, which ushered a spate of buildings with top-level green certifications onto the office/retail/ mixed-use market.
“In terms of issuance, especially on the bond side, the real estate sector was out in front of the pack doing green buildings with the proceeds,” Thompson said.
There was also an increase in year-overyear uptake of sustainability-linked loans within the commercial real estate sector in 2022 despite what she typifies as “horrible” market conditions. Declining bond volume across the overall market has eroded what she terms the “greenium” on bonds — a savings to the issuer of up to 5 or 6 basis points attributable to the bond’s ESG credentials — while sustainability-linked products currently seem to come with more certainty.
“The 5 basis point adjustment, up or down, is fairly standard in the sustainabilitylinked loan side. If you hit your target, then you receive a pricing adjustment that benefits you. If you miss your target, then it’s a pricing penalty.” Thompson advised. “The bond side is really hit or miss these days. It’s very market dependent.”
What is clear is that the commercial real estate sector has much work to do if it is to line up with Canada’s interim target for a 35 to 40% reduction in GHG emissions relative to 2005 levels by 2030 and reach the ultimate goal of net-zero carbon output by 2050. Berg characterized it as an opportunity for owners/managers to both modernize and boost the value of their assets, making them more operationally efficient, more
resilient, more in demand for tenants and more attractive to investors.
“The risk, to just be quite frank, is that you get left behind,” he cautioned. “If you wait too long and don’t act then you end up behind the wave and have a hard time catching up because the supply side would be busy modernizing buildings for the early actors.”
Doucet tallied a number of potential advantages to seeking required capital in the labelled sustainable finance market, suggesting that it signals intent in a way that can enhance valuation and open up a larger pool of potential investors at a time when institutional investors and lenders have ESG targets of their own.
“It’s a way to tell your ESG stories. It’s very, very valuable in highlighting how the assets that you have may have stronger valuation than your peers because you are so focused on best-in-class buildings,” she said. “We’ve seen that transactions that have a label — if it’s a green bond; if it’s a sustainable bond — will get better market execution even through market volatility.”
“If you’re able to issue a labelled instrument, you might tap investors that you would normally not be able to in conventional financing,” Doucet maintained. “On the lending side, the same applies. At Scotiabank, for example, we have a $350 billion climate commitment for financing climaterelated activities. We are looking to partner with our clients, including in the real estate space, to find opportunities.”
Looking to CIB’s gameplan, Berg reports that about $900 million of the building retrofits fund has now been
committed. That includes: about $300 million in direct loans to large players that can bring the required 20% equity to attain a minimum $25 million in CIB funds; about $400 million to the aggregators tasked with coordinating groupings of smaller projects; and the remainder in bank participation agreements.
Representing one of the aggregators, Stuart Galloway, Executive Vice President with SOFIAC, outlined his company’s approach with its smaller contractees, in which it covers all project costs and takes its payment from their resulting savings. Notably, it has recently partnered with the Building Owners and Managers Association (BOMA) of British Columbia, targeting members with current annual energy costs of at least $500,000.
“If there are no savings, then the client pays nothing. If the savings are $100, they’d pay us $80 and keep $20,” Galloway explained. “Where the CIB backing came in was to help us de-risk it for our other investors and make it more accessible so that we could then pass that risk avoidance over to the client.”
“We can take certain risks, offer certain concessionalities and help make projects happen. There will be lots of choice in the market, capitalized by CIB,” Berg reiterated. “In current market conditions where we’re seeing tightening — there’s a battle against inflation, rising rates — there are a lot of things we can do that the private sector regulated financial institutions simply cannot do at the moment. However, we have a very important mandate to work with private capital.”
BMO has signed on as the first banking aggregator for Canada Infrastructure Bank’s (CIB) Building Retrofits Initiative, promising lowcost financing and potential waiving of administrative fees for borrowers achieving a 50% reduction in greenhouse gas (GHG) emissions. This targets small and medium-sized landlords that aren’t in the position to secure the minimum loan amount of $25 millions directly from the CIB.
The bank joins other CIB aggregators, such as SOFIAC, Johnson Controls and Efficiency Capital, which are facilitating building upgrades through the energy service company (ESCO) model. The new banking aggregator option would allow smaller proponents to work with other delivery agents, provided their upgrade projects meet the requirements of either the Canada Green Building Council’s investor-ready energy efficiency (IREE) certification or its zero carbon building standards.
Speaking during a webinar sponsored by REALPAC earlier this spring, Aaron Berg, the CIB’s Director of Energy Efficiency Investments, noted that banking participation agreements are considered an important “emerging product” to complement the nearly $400 million thus far deployed through ESCO-type aggregators.
“There will be lots of choice in the market, capitalized by CIB,” he said.
CIB’s $100 million contribution along with BMO’s equity share creates a $125-million fund for borrowers targeting a 30% reduction in GHG emissions. It’s expected that other Canadian banks and credit unions will follow suit.
“We’re proud to serve our clients at the leading edge of sustainable finance innovation in the real estate sector and to be the first financial institution in Canada to offer this unique financing program,” says Michael Beg, Senior Vice President and Head of Real Estate Finance at BMO Commercial Bank.
ACHIEVING ambitious decarbonization targets will require the construction industry to accelerate deep carbon retrofits on the existing building stock across Canada. Speaking during the Canada Green Building Council’s (CAGBC) recent annual conference in Vancouver, Aaron Knorr, a Senior Associate with the architecture/design firm, Perkins & Will, noted that embedded greenhouse gas (GHG) emissions in building materials and construction processes represent the largest share of emissions from new buildings.
“Retaining and improving existing buildings that we have really has to be a critical part of our strategy for decarbonizing our industry,” he stressed.
Citing one of the firm’s recent project’s — a 1940s concrete warehouse in Vancouver that had an owner mandate to prioritize carbon reduction along with achieving CAGBC’s Zero Carbon Building standard certification — Knorr explained that Perkins & Will prepares a lifecycle assessment on every project. This underpins decision-making about
whether to reuse an existing building or to undertake the more conventional approach of a teardown and rebuild.
“We were able to realize a significant potential carbon impact for the project just through this fundamental decision of preserving the building and the existing structure at the outset,” he reported.
Material selection was a critical focus on this project with mass timber used to add four new storeys on top of the existing structure and specification of low carbon concrete and XPS insulation. Through the firm’s reuse, reduce and specify strategy, the overall embodied carbon for the project sits at 339 kilograms of carbon dioxide equivalent per square metre (kg CO2e/m2).
That result is well below the threshold for CAGBC’s embodied carbon innovation credit, which is set at 350 kg CO2e/m2. Knorr acknowledged it was “a significant achievement” that involved commitment and input from the client, building trades and design team.
“Achieving low carbon buildings really requires a collaborative approach and
buy-in from everyone on the project team from project kick off to project completion,” he advised.
“Designing for low carbon requires a holistic approach to design. We need to build literacy and fluency with an understanding of the carbon impacts of design decisions we make into every aspect of our design,” he said.
Stephen Montgomery, Sustainability Specialist at PCL Constructors, agreed that collaboration is critical to reaching decarbonization goals.
“We need to find a way to put design, construction and operation silos together and find out how we’re going to make this work,” he said. “We need to infuse these carbon roadmaps with actionable budgets, schedule and logistical insights.”
Among the challenges, the International Energy Agency’s monitoring has found that the building sector is thus far “not on track” for reaching the 2050 climate targets. Meanwhile, new green building construction alone
won’t reach Canada’s 2030 greenhouse gas reduction targets.
“We have to decarbonize Canada’s 482,000 commercial and public buildings by 2050,” Montgomery tallied.
That also has to unfold in the face of labour shortages and attrition. “We’re handing over a more complex product to a shrinking industry of labour — a 30% reduction in trained building operators,” he added.
The CAGBC identifies low-rise multiunit residential buildings and offices as the largest opportunity for green retrofits, which could make a major contribution toward achieving the estimated potential for 51% reduction in emissions from the buildings sector. That would curb 21.2 million tonnes of CO2e.
“No one has a magic method but it’s time to get started — to push some of these first projects over the starting line,” Montgomery urged.
Cheryl Mah is the Managing Editor for British Columbia with MediaEdge Communications
The 2025 iteration of Canada’s model National Building Code will address operational carbon, while embodied carbon is to be addressed in the 2030 update. Speaking during the Canada Green Building Council’s recent annual conference in Vancouver, Iain MacDonald, Senior Research Officer with the National Research Council (NRC), described the ambitious undertaking.
“Not only does this involve developing the technical requirements that every single new building will have to meet but there’s also policy changes associated with that,” he reported.
Before any regulation changes, the NRC is making sure all supply chains are robust and that testing standards are in place to evaluate products. In an associated effort, it is supporting the development and deployment of low carbon construction solutions through the new Platform to Decarbonize the Construction Sector at Scale— i.e. expanding out from one-off projects to a more systemic approach.
“We have a massive challenge,” he said. “It’s so large that there’s more than enough work to go around and collaboration is key to achieving significant steps forward.”
“Our understanding of carbon is continuing to evolve and the metrics around that have to change,” reflected Mark Hutchinson, Vice President, Green Building Programs and Innovation. “If carbon reductions are what we want to get at, we need to come up with new ways of benchmarking our progress against that.”
Beyond Canada, the U.S. Green Building Council (USGBC) is focusing on the next iteration of LEED standards with the draft of LEED v5 expected to be ready late this year.
“Our top priority is scale for greatest impact: what can we do to mobilize greater adoption of building practices and actions towards decarbonization, on resilience, wellbeing, human health?” advised Peter Templeton, the USGBC’s President and Chief Executive Officer.
In terms of construction and renovations, GHG emissions reduction priorities will focus on areas such as energy and water efficiency, transit-oriented development, low-carbon construction materials and practices, refrigerant management and vehicle/fleet electrification.
“I want to make sure folks understand the scope — that we are looking at everything from construction practices to construction equipment all the way through to material selection,” Templeton confirmed. “ We have to make sure we’re digging in deep to find ways to improve performance over time…and to continue pushing for higher performance.”
The Canadian government is seeking candidates to demonstrate aggregated deep energy retrofits in a cluster of at least 100 units of low-rise social, community-based non-profit or cooperative housing. Prospective proponents have until September 14 to apply for the Greener Neighbourhoods Pilot Project, which will provide up to six chosen housing providers with $1 million to $10 million to cover 50% of their project costs.
Funding for the pilot was first announced in the 2022 federal budget. It is intended to test a group approach to residential energy retrofits that can leverage economies of scale to reduce per-unit costs for material and labour, speed up construction time and create possibilities for innovation across a broader base of homes. The concept, known as energiesprong, was developed in the Netherlands and has also been applied in retrofit projects in France, Germany the United Kingdom and the United States.
The pilot is open to not-for-profit groups, provincial/territorial and municipal governments and their associated agencies, and Indigenous organizations, including for-profit businesses in which Indigenous parties hold the controlling interest. They will be expected to undertake a whole-building retrofit involving, at minimum, envelope and mechanical upgrades that aim for a 50% annual energy use reduction and an 80% annual reduction in greenhouse gas (GHG) emissions in each dwelling unit.
Retrofits can be conducted in one or a combination of low-rise housing types, ranging from single detached homes to multifamily buildings of up to four storeys. Work must be completed by March 31, 2028.
Qualifying proponents will be required to supply one year of baseline data, drawn from utility bills prior to the retrofits, and one year of post-retrofit data. Planned upgrades must be based on whole-building energy modelling, while estimates of return on investment are to be derived based on analysis of the total cost of building ownership rather than a simple payback formula.
“Retrofitting Canada’s building stock provides us with the opportunity to make communities more resilient to climate-related impacts while reducing emissions and utility bills, increasing energy efficiency and creating good-paying jobs in construction and maintenance,” says Jonathan Wilkinson, Canada’s Minister of Natural Resources.
The government has designated a slate of expert advisors — chosen through a call for proposals earlier this year — who will be available to shepherd housing providers through planning, procurement, construction and required reporting processes. A parallel program for commercial, institutional and larger multifamily buildings, dubbed the Deep Retrofit Accelerator Initiative, is also in progress.
It may seem remarkable now, but the much-feared bedbug first hitched its way to North America onboard the ships of European settlers. The boats provided a haven for the bugs who thrived in the congested quarters below deck and then travelled inland with their hosts once reaching shore.
The psychological impact of a bedbug infestation plays havoc on those affected. Paranoia and social stigma around bedbug and cockroach infestations run as rampant as the insects themselves, creating an urgency to treat them immediately. But running out to the store to purchase DIY products only makes things worse, explains Shaw Haghgoo, CEO of Pest B Gone Canada Inc.
“The insects actually build an immunity to these products, which makes it more difficult for us to come in and treat the problem,” explains Haghgoo.
When compared to commercial-grade products, store-bought pest controls have a lower volume of the active ingredient. This can increase the resilience of the pests the user is trying to defeat, especially when products are applied incorrectly.
“Most people don’t read the label to see exactly how much they are supposed to apply,” he says. “If they apply too little the insects start building resistance and it makes it very difficult for us to control the infestation.”
Haghgoo says that the chemicals used by pest control companies are often expensive, tempting contractors to extend the life of the product by diluting it with water.
“We’re doing applications which are 99% effective, but they’re failing in certain places,” he explains. “We’re finding that these are areas where either people have used consumer products, or pest control companies are cutting back on the product.”
This results in a need for repeated treatments, and a more invasive experience for the building occupants.
“As we increase the type of treatments that we do, the cost increases. Treatments where we could have gone in with a bait treatment, we now have to fumigate which becomes costly. It’s much more invasive as now the homeowner or tenant has to be out of the premises for four, maybe eight hours.”
According to a 2008 report by Toronto Public Health (TPH), bedbugs weren’t considered a problem until 2003 when an upsurge in cases “began to trickle in.” TPH responds to bedbug issues where vulnerability is encountered by residents. Via email, TPH reported that since 2020, the number of requests for TPH services pertaining to bedbugs has declined by 16.9%. Haghgoo believes the recent introduction of an effective pesticide may have something to do with that.
AprehendTM is a non-repellent fungal spore insecticide that is now available to licensed pest control service providers, which he says is highly successful.
“We now have a product that if applied properly can eradicate the complete infestation of bedbugs within 30 days,” says Haghgoo.
The product needs no mixing but requires the exterminator to complete a time-intensive application, spraying the product onto the areas bedbugs commonly walk over such as the front of couches.
“The exterminator has to take their time,” explains Haghgoo. “The infected bedbug takes it back to the nest and infects everything. To do that, you’ve got to make sure you get everything covered.”
The new insecticide is also effective in treating hoarding units. “We will come in all weapons loaded and eradicate whatever we can,” he says, “even if there’s just a passage for us to walk down.”
Haghgoo is an MBA graduate of York University who has worked in the pest industry since 1982. He owns and operates Pest B Gone with his business partner, Iriene Baumgart, who is the President of the company, and an MSc Integrated Pest Management graduate of the University of Wageningen, Netherlands. Baumgart’s insight into entomology is an advantage Pest B Gone holds over its competitors when understanding the science of tackling pest removal.
“We’re going to resolve your issue,” asserts Haghgoo. “If we can sort through what you have dealt with in the past, we can definitely eradicate the problem.”
Establishing a monthly maintenance program with Pest B Gone provides an opportunity for managers to take advantage of a 30% discount on service call rates, and create a regular inspection routine for problem units.
Haghgoo explains that licensing policies for pest control services have stayed the same, but chemicals have changed. It’s when the chemicals are abused that they become less effective and more toxic to the environment. “When you abuse the product you start to affect the people,” he says. “You’re impacting the environment and that’s going to cause a problem.”
He cautions that the results of a fungal spore application may not be seen immediately, and at first, it may look like the bug infestation has even increased. He recalls treating a bedbug unit and receiving a call from a panicked property manager the next day saying there were twice as many bedbugs as there had been before.
“By the end of the week, he started to see dead bedbugs everywhere. From that point on he said, ‘Whatever you did in our building, please use it in all units!’”
For 2023, the Continental Automated Building Association’s (CABA) annual landmark research report focuses on healthy buildings and indoor environmental quality (HBIEQ). CABA members funded the comprehensive exploration of technological adoption, outcomes and challenges within the buildings and facilities sector, also considering HBIEQ in the context of evolving business, consumer and regulatory demands. The following is the report’s executive summary – Editor.
AS PEOPLE MOVE between their homes, workspaces, social settings and public venues, they are continually surrounded by thousands of different types of microorganisms. Microbes, such as pathogens and allergens, can be found in virtually any environment — in the air, on surfaces and in the water.
The wealth, composition and variety of microbial communities inhabiting the built environment are a direct result of interactions between outdoor air, indoor environmental quality, building strategies and systems, as well as the occupants and visitors of the building. The indoor environment can influence occupant health through
inhalation, ingestion and dermal contact. There are many documented cases of specific microbes in the indoor environment and acute infections — a recent and potent example being the COVID-19 virus.
Developing a concerted strategy to minimize the effects of the indoor microbiome on health and wellness is a key objective of indoor environmental quality management (IEQ). That said, the term IEQ encompasses various elements that contribute to a building’s indoor environment and health profile, including lighting, air quality, water quality, noise, temperature, space utilization and moisture.
From a technological perspective, indoor environmental quality is a strategy by which building operators examine environmental cues from sensors to enact positive, real-time changes to the settings of the various building systems. The adoption of intelligent IEQ management solutions is progressively helping buildings attract and retain tenants by creating healthier, safer and more comfortable indoor environments for all occupants.
By assuring a high standard of indoor environmental quality, especially regarding the factors that affect occupants’ physical and mental health and performance the most, commercial buildings can expect to
see a stronger return on investment (ROI) on upgrade and modernization projects than ever before. These projects will have an even greater impact given people’s heightened attention to and expectations of environmental quality resulting from the COVID-19 pandemic.
While healthy building indoor environmental quality (HBIEQ) technologies vary by building segment relative to their impact and value in use, the building systems to which they’re attached align with a horizontal set of functional use cases. The types of technologies range from sensors and filters to dashboards and reporting tools.
From an operating technology (OT) standpoint, the current scope of prevalent HBIEQ technologies leverage a combination of sensors, filters and UV light across HVAC and lighting systems. In addition to integration directly into these building systems, mobile platforms such as UV robotics or stand-alone air purifiers are prevalent for brownfield deployments.
Effective deployment of HBIEQ takes coordinated design and implementation of solutions across the technology stack, from sensor to cloud services. The complexity of implementation is contingent on the intended use or the objective of the HBIEQ systems.
For some deployments, simple reporting for compliance with regulatory standards combines sensing and visualization tools. The success of HBIEQ deployments and value creation is contingent on the coordination of four factors: 1) occupantcentric solution design and services orchestration; 2) frictionless integrated technology and building infrastructure; 3) clear solution messaging showing ROI; and 4) collaborative and unified protocol and evaluative standards.
These success factors necessitate collaboration across the HBIEQ and intelligent building value chain, with upstream solution design and delivery ensuring occupants and operators are at the core of solution value and user experience. While close collaboration across the value chain is required, distinct classes of market participants will play equally distinct and vital roles in contributing to and enabling the success factors outlined.
With the pace of technology innovation pushing forward at an accelerated rate, HBIEQ stakeholders have an opportunity to harness significant growth in the coming
three to five years. Regulatory pressures and net-zero initiatives have only created more potential in the staging area for mass market proliferation of digital technologies.
This future state will reflect a highly coordinated network of predictive systems wherein open data exchange and AI reinforcement learning will contribute to continuous operational improvement operations. The future intelligent building will look more and more like the complex, adaptive systems that make up human physiology, operationalizing the neural and anatomical systems that create reason from chaos, establish balance from disruptive agents and discover wisdom from experience. A key challenge for market development is the data collection process, methods and scope of collection, and the analytics strategies utilized to translate data into tangible proof of value.
Reduced exposure to pathogens and airborne particulates is vital for reducing the severity and continued spread of infection. Improved indoor environmental quality, specifically through ventilation, filtration, disinfection and thermal comfort,
has a proven positively-causal with performance-based metrics, such as improved cognitive function, alertness and a reduction in absenteeism. It has also been shown to reduce sick building symptoms, such as dryness and headache. These issues are particularly relevant to individuals who have public-facing jobs and therefore cannot isolate.
Despite clear evidence showing the effect of indoor environmental quality on health, to date, other building-related areas of research such as energy efficiency and maintenance management have received more attention. The adoption of HBIEQ in buildings would have far-reaching consequences for every player along the intelligent buildings value chain.
With change comes the opportunity for value creation. Strategic decisions, both immediate and long-term, will define the ultimate winners and losers in this transforming ecosystem.
For more information about CABA’s Healthy Buildings and Indoor Environmental Quality report, see the website at www.caba. org/research-reports.
Unispace, a global consultant specializing in design and project management of office build-outs, recently conducted its second postpandemic survey of employee and employer expectations for their workplaces. Approximately 9,500 employees and 6,650 employers across 17 countries contributed to the 2023 findings, which reflect a hardening of some the attitudes emanating from the 2021 survey and a reversal of others. The following excerpt from the Returning for Good report looks at fluctuating space demands, and drills down to insight gleaned from Canadian survey respondents – Editor.
DESPITE THE rise in hybrid working models, 75% of businesses have actually increased their real estate footprint in the last two years, while just 10% have decreased it. This is significantly different to the expectations outlined in the 2021 study, where 84% of employers saw the pandemic as an opportunity to decrease their real estate portfolio by an average of 25% of their total footprint.
Looking ahead, the majority (74%) plan to increase their footprint in the next two years, suggesting that the office is far from redundant. Among those where hybrid working is the predominant set up, the following sectors ranked the highest when revealing intentions to expand their workplaces in the next two years: Co-working (81%); Technology, Media &
Telecoms (80%); Legal (76%); and Property & Real Estate (75%).
When citing reasons behind office footprint increases, the need to adapt to the changing world of work and make offices more flexible is a top driver of this action, put forward by 44% of those planning to increase their workspace. Creating hospitality spaces to host more client and candidate events was a top reason to increase space for 44% of employers, while 41% of employers revealed they need more space for meeting and collaboration rooms as well as desk spaces.
Many firms have used the evolving real estate market to their advantage. More than a third (34%) revealed that they plan to increase their footprint by as soon as 2025 after securing good deals from landlords struggling to fill the space. Some firms are
clearly capitalizing on the changing property and real estate market to secure better leasing contracts. Businesses are still recognizing the value of the office and are making the most of the current climate to secure the best spaces that work for their people in the immediate and long-term.
Meanwhile, trends in Canada show a discordance in employees’ and employers’ perceptions. About 50% of Canadian workers who responded to the survey are currently in the office at least four days per week. Only 31% of respondents said they liked that arrangement and 37% indicated they would prefer to work from home three or more days per week.
Canadian workers are slightly above the global average in expressing reluctance to return to the office — 55% in Canada versus
Rising office fit-out costs reflect both inflationary dynamics in the construction sector and emerging design trends. JLL’s recently released benchmark report, drawing on data from 3,800 fit-out projects in 58 markets across Canada and the United States, pegs the average year-over-year cost increase at roughly 10% between 2021 and 2022.
That’s further calculated as a 14% jump in hard costs for construction materials and services, a 9% escalation in soft costs for design and other professional services, and a 5% increase for furniture, fixtures and equipment (FF&E). However, new office fit-outs are generally encompassing less area than in the pre-pandemic era. JLL cites an average 11% decrease in space covered since 2020, and acknowledges that cost escalation on a per-square-foot basis “may be more aggressive than increases in total project cost”.
Yet, while footprints shrink, office fit-outs are incorporating new configurations, amenities and ESG criteria that have other cost implications. The two most commonly requested add-ons arising from JLL’s data are: wellness rooms, coming in as a USD $11,000 to $15,000 (CAD $15,000 to $20,000) budgetary item; and genderneutral bathrooms, which typically equate to an expenditure of USD $18,000 to $22,000 (CAD $25,000 to $30,000). Meanwhile, fit-outs to comply with green lease commitments could involve higher upfront costs to help realize ongoing operational savings.
“Design trends played a major role in cost increases in 2022,” the report states. “The increasing prevalence of additional features is part of the broader reimagining of the post-pandemic office; minimally supportive workspaces are no longer standard.”
The benchmark is expressed as 9-point pricing matrix, including average fit-out prices for three different types of office formats at three levels of quality and complexity: base; medium; and high. The office formats are categorized as: Progressive, featuring a completely open plan with no enclosed offices or assigned seating and a 50/50 split between bench-style workstations and collaborative space;
51% globally — maintaining that it is unnecessary for their work (17%), costs more money than working from home (15%) or makes them anxious (14%). Employers perceive that much of their workers’ reluctance is related to the time, stress and cost of commuting, with nearly 50% identifying it as a main obstacle to employees’ return.
Nevertheless, 62% of employees foresee they will eventually spend four days per week in the office, with 31% predicting this will happen by 2025. Even more employers (88%) expect their staff will be in the office four days per week, and 51% believe this will be the case in the next two years.
Employers picked learning and development opportunities as one of the
Moderate, featuring a predominately open plan with workstations in the 6’x6’ to 6’x8’ range with about 20% of the space for enclosed offices and about 30% for collaborative use; and Traditional, featuring a higher ratio of enclosed offices of varying sizes, 8’x8’ assigned workstations and little open collaborative space.
Across JLL’s total project database, the average fit-out cost at the low end, for a base-level progressive format, is benchmarked at USD $220 per square foot (psf) (CAD $299 psf). At the upper end of the scale, fit-out costs for high-calibre traditional space are benchmarked at USD $320 psf (CAD $435 psf).
Drilling down, the report provides a comparison of average costs for a medium-level moderate office fit-out in all 58 surveyed markets. In this, the four Canadian markets — Vancouver, Calgary, Toronto and Montreal — record costs slightly to more significantly above the overall average of USD $257 psf (CAD $350 psf).
The highest fit-out costs were recorded in Calgary, with the average at USD $271 psf (CAD $371 psf), while Montreal came closest to the benchmark, with average costs of USD $258 psf (CAD $351 psf). Elsewhere, the average cost was USD $263 psf (CAD $359 psf) in Vancouver and USD $268 psf (CAD $367 psf) in Toronto.
“One of the largest factors in determining the ultimate cost of an office fit-out project is the cost of construction labour, which varies more widely by geography than the cost of materials,” the report advises.
The complete text of JLL’s 2023 U.S. and Canada Office Fit-out Guide can be found at www.jll.ca/en/trends-and-insights/ research/2023-us-and-canada-office-fit-out-guide.
top appeals of the office (27% ranked it first), while workers actually ranked this element 14th on their list of workplace likes. Social aspects of the office emerged as a top enticement for employees, ranked first by 36% of survey respondents.
Somewhat contradictorily, lack of privacy and a disruptive environment topped the list of employees’ dislikes. More than a third (34%) indicated that they miss being able to have the same privacy as they do at home, while 29% feel they are more productive away from the workplace and 28% believe they are more effective in a quiet space.
Canadian offices are somewhat behind the global average in eschewing assigned seating, as 41% of worker respondents
work in a “hot desk” milieu compared to 48% across the entire survey base. Meanwhile, 79% of Canadian respondents indicated they would be more inclined to go to the office if they had an assigned desk.
Businesses are still investing in their office footprint with 70% of employers indicating that they have increased their space in the last two years and 73% planning to do so by 2025. They may want to reevaluate how that space is allocated and retain more of the assigned desks that workers clearly prefer.
The complete findings of the Unispace 2023 survey can be found in the report, Returning for Good, at www.unispace.com/returning-for-good.
APPRAISERS GENERALLY expect office building values to keep slipping over the course of 2023. When Altus Group surveyed its Canadian valuation staff for their opinions earlier this spring, more than two-thirds of respondents projected a further 5 to 15% decrease, while just 1% judged that values have hit bottom and will remain flat in the coming months.
Presenting those findings during a recent webinar, a panel of the firm’s analysts tallied a range of factors that are undermining cash flow, pushing up cap rates and making investors skittish. That’s evidenced in an 11% decline in office values between the first quarters of 2022 and 2023 across 214 institutional-grade income properties contributing to the Altus benchmark.
“It’s more and more difficult all the time to see a situation where the appetite for office going forward matches what it was in the past,” said Jonas Locke, Vice President of Altus business advisory services in Canada.
Challenges arise both from the COVID19 pandemic’s destabilizing impact on user
demand and financing dynamics that investors are now confronting for the first time in several years. The spread between cap rates and the Bank of Canada 10-year bond rate has narrowed to a range last seen during the global financial crisis in 20072008. Concurrently, the conventional fiveyear mortgage rate has climbed to nearly on par with cap rates.
“It has virtually eliminated leverage as a tool to enhance your yield,” Locke observed. “If you’re buying real estate today and paying those types of interest rates, the idea of a leveraged deal being in excess of a cap rate is not there.”
Looking at the past year, Mike Helm, Altus Group’s Senior Director of national portfolio management, parsed some of the details in the benchmark data, which is drawn from clients that have adopted the firm’s valuation management software and have agreed to contribute. That enables quarter-over-quarter and year-over-year comparisons of the valuations of 693 real estate assets located Canada-wide, of which about
31% are office properties. (Industrial accounts for 39%, retail makes up 16% and multifamily represents 14%.)
“Unsurprisingly, we’ve seen the largest value declines, quarter-over-quarter and year-over-year, in the office sector,” Helm noted. “The direction we all know, but the magnitude amongst the different markets is interesting.”
The steepest drops typically occurred in Toronto and Montreal with less erosion registered in Vancouver and Calgary. In Calgary, that’s largely due to a lower starting point and less distance to slide, whereas Helm suggests Vancouver’s trajectory is still unclear. He attributes the fallout in Toronto and Montreal to a larger share of trophy assets.
“Our lowest yields and our highest values are typically in those major markets. For those large-scale, relatively low-yield assets, a 25-point move is going to be more significant in terms of impact to value, both dollar-wise and percentage-wise,” Helm affirmed. “Vancouver has been notably
lagging in terms of the value declines witnessed in Toronto and Montreal. So we can potentially argue the strength or uniqueness of the Vancouver market or, alternatively, the possibility of a higher downside and more significant relative value declines moving forward.”
Trends in the United States may offer a hint.
“We’ve seen debt markets significantly impact U.S. valuations,” Helm reported. “We’ve seen larger value declines on U.S. office assets so I think it’s reasonable to suggest that value declines are likely to continue in the Canadian office market.”
The well-documented surge of the hybrid working model (see story, page 14), which now sees many employees splitting their on-the-job hours between home and formal offices, increasingly causes strain for landlords as leases come up for renewal. As well, the tech sector, which emerged as an engine of jobs and office absorption in several Canadian markets in recent years, appears to be in a lull.
While all property types in the Altus valuation benchmark experienced a yearover-year negative impact on yield in the 12 months between Q1 2022 and 2023, office was alone in also recording a downtrend in cash flow projections.
The Canadian government is preparing to offload 10 of its properties in the national capital region, including four registered federal heritage buildings. Public Services and Procurement Canada (PSPC) recently released the list of properties “in various stages of the disposal process” as part of an invitation to select stakeholders to bring forward plans to productively reposition the space.
Under the government’s directive for managing its real property, sites deemed surplus to the government’s needs are first to be offered to Crown corporations, provincial/territorial and municipal governments or their agencies and Indigenous peoples. PSPC’s communique notes that it welcomes proposals for affordable housing, redesigned community or commercial space and projects that would meaningfully involve Indigenous participation and promote reconciliation.
The disposal list includes office properties in downtown Ottawa, the nearby enclave known as Tunney’s Pasture and on some of the city’s major arterial roads, as well as a campus of low-rise buildings on the Quebec side of the Ottawa River. Current federal offices within the buildings are to be moved to other locations in Ottawa or Gatineau.
“The Government of Canada’s shift to a hybrid work model will enable us to relocate these employees into modern accommodations,” the PSPC communique advises. “We will continue to assess and optimize the performance of our office portfolio as our clients’ longterm office plans evolve. While our current list only identifies buildings in the national capital region, buildings in other regions may be added in the future.”
The four registered heritage buildings were built in the 1950s and 1960s and include:
• The Brooke Claxton Building, a 19-storey office tower in the Modern International architecture style;
• 1500 Bronson Avenue, also known as the CBC Building, which is considered a leading Canadian example of the expressionist strain of modernism;
• The Asticou Centre, which offers a blending of several architectural styles of the 1960s, with notable elements of the International style; and
• The Sir Charles Tupper Building, which boasts International architectural style and a parklike hillside setting.
None of the properties are yet for sale on the open market.
Nick Axford, Chief Economist with Avison Young, suggests trophy assets are already emerging as winners from the unfolding upheaval in the office sector.
“Now, more than ever, this is a real estate market that is hugely differentiated, not along conventional geographic or sector boundaries, but along quality lines,” he asserted during a recent webinar. “I can absolutely see rents continuing to push ahead pretty strongly at the top end of the market, but, below that, vacancy rates moving up more significantly with potentially some quite significant rental declines.”
Axford and his colleague, Richard Chilcott, a Toronto-based principal and sales representative with Avison Young, sketched out a second-quarter Canadian market picture that’s showing signs of a pickup in transactions after several months of lull. However, they noted that vendors and purchasers are still coming to an understanding of asset pricing in an environment with rising cap rates, aloof lenders and general nervousness about trends in office demand.
That’s in contrast to the momentum of 2021 and into the early part of 2022. Chilcott hypothesized that “pent-up energy” coming out of a record-breaking year kept deals flowing even after interest rates spiked upward in March 2022, until a new reality eventually set in.
“Things started to slow. That was really driven, I think, from the debt perspective. People were starting to look at: What is happening with occupancy? And what is happening with construction costs? And where are my returns going? And do I need to do this transaction?” he recounted. “Then, into Q4, there were very, very few transactions. It was just: We’ve had enough. We don’t know where things are going. We’ll just sort of sit on our hands.”
Ten months later, he reports that transactions are occurring in all property sectors, but typically with painstaking and prolonged due diligence. Looking to the future, the analysts foresee a return to more active deal-making when interest rates stabilize, there’s more clarity around pricing and refinancing pressures prompt more vendors to move.
“There is capital awash to invest,” Chilcott said. “It does come down to what’s a quality location and what’s a quality building. ” He drew parallels with the tail-end of the global financial crisis period when some investors proactively acquired assets with an eye to long-term returns, and suggested that purchasers with private equity backing are well positioned to do that again. Meanwhile, Axford heralded the return of old-school savvy.
“People who are in the market simply playing that spread between what you can borrow at and the cap rate on the building, hoping to benefit from continued cap rate compression or financial engineering — a lot of those players are going to be taken out of the market. Understanding what to pay for a building is going to be so asset-specific,” he submitted. “People who’ve got those traditional real estate skills of understanding the qualitative and quantitative aspects, who’ve got the capital to deploy and can take advantage of the current market are going to find it a really, really productive market.”
Real estate analysts with Avison Young recently scanned structural data of more than 26,000 commercial buildings in 14 major North American markets and identified hundreds of possibilities in each of Toronto, Montreal, Vancouver and Calgary that met two key criteria for conversion to a residential use: floor plates no greater than 15,000 square feet; and pre-1990 construction vintage.
Stephen Silverstein, Avison Young’s Managing Director of construction management in the United States, calls the analytics “a clear snapshot, as a starting point, of what could be possible for these markets,” while also clarifying that “costs, location and surrounding amenities” will strongly influence the business case.
Speaking during the REMI Show in Toronto earlier this spring, Canadian industry insiders agreed that the Avison analytics highlight a basic prerequisite for office-to-residential conversions. Smaller floor plates are needed to accommodate relatively standard unit sizes and configurations between a building’s central spine and its exterior walls.
“It’s a matter of geometry. With a bigger floor plate, you’d end up with something like two windows in a 2,000-square-foot apartment, which wouldn’t be workable,” observed Terry Flynn, now heading his own consulting firm after retiring from a long career in operations and project management, most recently as a general manager with BentallGreenOak.
Combined with the age threshold of 33+ years, it’s presumed the analytics capture a large share of Class B and C office buildings that are facing onerous competition from better quality alternatives as the general demand for space declines. A switchovers to residential is presented as an additional angle for asset managers to consider when they devise repositioning strategies.
“People are rethinking how they use office buildings and how they view the entire downtown,” says Sheila Botting, a principal and President of Avison Young’s professional services in the Americas.
“Adaptive reuse is an important conversation we are having around the art of the possible.”
The data scan identifies 923 such possibilities in Toronto, 611 in Montreal, 548 in Vancouver and 521 in Calgary. However, Flynn maintained that’s unlikely to translate into affordable housing unless there are incentives to help with capital costs and/or subsidies for incoming tenants.
“Landlords are going to have to be really driven to do this because they’ll have to write down the value of the building, and they’re going to have to get the rents to support all that work,” he submitted. “Most of them have a 10-year horizon on getting their return on investment so that will be expensive space to rent.”
The Urban Land Institute offers more evidence in its recent overview of 28 commercial-to-residential conversions in the United States, encompassing 19 office buildings, four hotels, three industrial facilities and one “other” structure. The projects were undertaken between 2014 and 2021 with 20, including 12 office conversions, occurring between 2019 and 2021. The median cost — covering acquisition, hard and soft construction costs — is pegged at USD $255,000 per unit, translating to CAD $336,600 at the current exchange rate.
Drawing on career experience that stretches back the 1990s’ real estate market collapse, Cheryl Gray, now consulting to the industry after retiring as head of special projects, operational excellence, with QuadReal Property Group, noted that current presumptions about the future of office demand aren’t definitive either. She suggested many landlords will be more inclined to sit on vacant space for awhile than to make quick decisions about conversions.
“I don’t know that it [conversion] is a solution that’s viable financially and I don’t know that it’s going to solve for affordability when it comes to housing,” she mused.
Locke drew parallels with upheaval in the retail sector, arguing that there will be continuing demand for both bricks-andmortar shopping venues and office buildings, but that some “reinvention” will be needed. He cited the city of Calgary’s incentive program for office-to-residential conversions as one example.
Climate risk and investors’ ESG imperatives are also expected to prompt some culling.
“With the goal of net zero and the amount of money that will have to be put into some of these office buildings, there’s a question of whether or not that is justifiable, especially with the softening of the rents with the high availability rates,” mused Raymond Wong, Vice President of the Altus research and data division.
Altus panellists listed rising interest rates, difficulties in securing financing and discordance in buyers’ and sellers’ expectations as key reasons for unusually low transaction volume across all property types. Colliers Canada’s snapshot of Q1 capital markets illustratively reports a 49% year-over-year drop in investment value
between Q1 2022 and 2023, and webinar participants acknowledged that a slowdown in transactions affects appraisal.
“Sales really drive yield rates, but there is a whole other piece of the puzzle — the cash flow. The value of real estate is driven by cash flow projection and an appropriate yield, and there is a lot of work you can do inside the cash flow projection to reflect current markets, fundamentals and circumstances,” Locke submitted. “When it comes to yield rates, in the absence of sales, I think we survey the market a lot more than we ever have. We talk to brokers and investors and fund managers, and we try to build consensus and consistency. We look to the financial markets for clues as well.”
“We have a well-defined methodology that’s consistent across valuations in a given sector, save for market- or asset-specific nuances. What’s happening is just a lot more conversations with clients, brokers, investors, anyone involved in underwriting assets,” Helm concurred. “Something really important to clients right now is the performance of their assets versus their peers.”
For Q1, Colliers reports a quarter-overquarter increase in office transactions with
$786 million worth of deals, up from $452 million in October, November and December. Wrapping up 2022, Colliers analysts remarked on the diminished REIT and institutional activity that accounted for just 49% of office acquisitions for the year. For the start of 2023, they characterize office transactions as “on the smaller end of the market” primarily in the $20- to $25-million range.
“I am not hearing the same conversations around distressed assets or sales that we’ve heard in the U.S. So I wonder if that will continue to be the case over the balance of 2023,” Helm reflected.
Locke foresees more deal activity with stable interest rates and some initial sales to reset the market.
“The gap between purchaser expectations and vendor expectations, that’s the key hurdle to kind of get over,” he maintained. “There’s lots of capital out there that’s looking to be deployed; it’s getting an understanding around pricing. I think there could be a situation where you see one or two benchmark transactions and a bunch to follow.”
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ADVOCATES for the Canadian commercial real estate industry are asking the federal finance department to clarify why real estate investment trusts (REITs) have been included in a pending new tax measure. The 2% tax on the repurchase of equity — also known as share buybacks — was first announced in the government’s fall economic statement last November with the promise of more details in the 2023-24 budget. Those elicited some surprise when they were released this spring.
“We were not expecting it to apply to REITs. It makes little sense when REITs are required to distribute all their taxable income,” says Michael Brooks, Chief Executive Officer of REALPAC, which counts REITs among its wider membership of prominent commercial real estate companies, property funds and investment managers. “Mutual fund trusts are exempted, which also makes the reasoning for the application to REITs murky.”
The tax has been framed as a similar measure to a new 1% tax on the repurchase of equity that came into force in the United States in January 2023, but REITs are explicitly exempted from the U.S. levy. It’s generally assumed that’s in recognition of the structural differences between REITs and other types of publicly traded companies that issue dividend stocks.
For the latter, share buybacks could be a means to distribute excess cash with more favourable tax consequences for shareholders than if it was paid out as dividends since investors would be taxed on capital gains rather than on earnings on investment. However, the tax rules governing REITs already preclude that option.
REITs are afforded a corporate tax exemption but, in turn, are required to pay out 85 to 100% of their taxable income to investors through monthly distributions. The resulting product
offers a wide range of investors, including individuals and pension funds, indirect ownership of real estate assets with the benefit of professional management, along with the potential for higher dividends than they might earn from a comparable investment in dividend stocks.
Erkan Yonder, an associate professor with the Jonathan Wener Centre for Real Estate and Chair of the finance department at Concordia University’s John Molson School of Business, notes that REITs enjoy this special tax arrangement in 44 countries around the world. He suggests a tax on repurchasing equity would be something of an incursion on that status in Canada.
“Real estate is a capital-intensive investment so if REITs lose their tax benefit, this can create a wave of privatization,” he says. “Public REITs are very important to add transparency to the real estate markets.”
The budget document outlining Canada’s proposed new tax measures states that REITs, specified investment flow-through (SIFT) trusts and SIFT partnerships have been included “to ensure comparable treatment among different types of publicly traded businesses”.
As proposed, Canadian-resident companies that trade shares or units on Canadian exchanges would be subject to a 2% tax on the net annual value of equity they repurchase through normal course or substantial issuer bids. There would be three general exceptions for: repurchasing debt-like preferred equity; share/unit buybacks related to specified corporate reorganizations and acquisitions; or a volume of buybacks totalling less than $1 million for the taxation year.
The budget estimates the tax should garner $2.475 billion between Jan. 1, 2024, when it is scheduled to take effect, and the end of the 2027-28 fiscal year. It also asserts: “Importantly, this would also encourage firms to reinvest in their workers and businesses.”
That is likewise a rationale for the U.S. tax, which was introduced as part of that country’s multi-faceted Inflation Reduction Act (IRA). In
part, the measure is aimed at encouraging companies to reinvest their profits in the various avenues for reducing greenhouse gas (GHG) emissions that the IRA enables.
Analysis from the U.S. Congressional Research Service charts the growing use of share buybacks and a particular uptick after the country’s tax laws were revised in 2018. This now far outdistances dividends as a mechanism for returning profits to shareholders with the total value of share buybacks pegged around USD $1 trillion in 2022 versus the USD $550 billion dispersed in dividends.
Critics of the practice argue that it diverts reinvestment, spurs debt financing that can have longer-term destabilizing effects and disproportionately rewards major shareholders since taking shares off the market should push up the value of the remainder.
While tech and digital communications firms like Apple, Meta Platforms, Alphabet, Microsoft and Oracle are identified as the leading repurchasers of stock in the U.S., analysis from the accounting and tax services firm, Andersen, hypothesizes that the Canadian
government may be more focused on public oil and gas corporations — noting that they “have been especially criticized for making record profits and issuing share buybacks instead of reinvesting their excess capital in clean energy”.
Yonder advises REIT managers are most likely to repurchase equity when they judge the market value of their stock to be out of sync with the value of their underlying real estate assets. That dissonance has been notable recently as investors ponder rising interest rates and the fallout of the COVID-19 pandemic in the office sector.
“REIT stock prices are more subject to misvaluation currently due to these uncertainties,” Yonder maintains. “Earnings management is less of an issue for REITs than other corporations, and stock repurchases are more tools for [addressing] undervalued stock. Taxing REIT repurchases makes things more complicated for REIT managers.”
“We will be following up with the federal department of finance to clarify and possibly seek an exemption,” Brooks affirms.
ONTARIO AND QUEBEC’S 2023-24 provincial budgets both announced investment incentive programs that could have spinoff implications for land deals and/or producers of technologies and products that the commercial real estate industry uses.
Quebec has expanded the parameters of its pre-existing tax holiday on large investments of at least $100 million. As of budget day, March 21, 2023, the maximum rebate on capital investment has increased for projects located outside Montreal and Quebec City and the program has been extended an extra five years, giving candidates until Dec. 31, 2029 to qualify.
Approved investors can receive tax exemptions on the combo of the completed project’s revenue and the employer’s contributions to Quebec’s Health Services Fund equivalent to 15% 20% or 25% of the eligible capital costs of the project, to a maximum of $1 billion prorated over 10 years.
Previously, five categories of economic activity were designated for the tax holiday — manufacturing; wholesale trade; warehousing; data processing; and development of digital platforms — but that has now been broadened to include: information and cultural industries; professional, scientific and technical services; arts, entertainment and recreation; agriculture and forestry; and extraction of critical and strategic resources.
The budget document calls this a move to “accelerate the expansion of activity sectors with growth potential” and identifies investments that improve productivity, have a multiplier effect in the broader economy or support the netzero energy transition as particular priorities. It also promises a simplified application process, which, along with a shorter timeline for rebate payout — 10 versus the previous 15 years —is expected to “make the measure more attractive to businesses”.
Some of newly designated investment categories appear to overlap with commercial real estate’s business interests, but it is one of 23 sectors explicitly excluded from benefitting. Others on that list — such as motion picture/video industries; broadcast and content providers; accommodations and food services; and spectator sports — would likewise seem to be logical investors in the arts, entertainment and recreation or information and cultural areas.
Even so, real estate industry insiders speculate the new program criteria could help get obsolete industrial lands
cleaned up and back into productive use and/or prompt more interest in remote communities and those that have suffered an erosion of their once mainstay industries. The latter encompasses 26 specified territories of “low economic vitality” where a 25% investment rebate is on offer, while urban centres outside Greater Montreal and Quebec City are in the zone where a 20% incentive applies.
“There is a desire to do clean tech,” says Luciano D’Iorio, Quebec Regional President for the commercial brokerage, CDNGLOBAL. “In the eastern part of Montreal, the Chamber of Commerce is active in trying to promote clean tech for those areas that were traditionally heavy industrial with refineries and petrochemical industries, and there is also a push for logistics space and companies. However, this [the incentive] could have more effect outside the Montreal area.”
The Ontario government has allocated $780 million over three years to underwrite its newly unveiled tax credit for investment in manufacturing facilities and/or equipment. It will take the form of a 10% refundable corporate income tax credit, to a maximum of $20 million per year, on qualifying costs of acquiring, constructing or renovating buildings and/ or purchasing machinery or equipment used in manufacturing or processing.
Canadian-controlled private corporations with a fixed place of business in Ontario are eligible. The tax credit is available on investments made as of budget day, March 23, 2023.
This tax incentive would help local manufacturers invest and expand, creating good-paying jobs and helping rebuild the economy,” the budget document states. “The government would undertake a review of the credit every three years. The review would evaluate the credit for effectiveness, compliance burden and administrative costs.”
Meanwhile, a larger review of Ontario’s tax system is promised.
“The tax review will build on the government’s track record of supporting business, seniors and working families. It will prioritize competitiveness and long-term growth in the province, as well as the fairness and effectiveness of tax relief and supports,” the budget document advises. “The review will also focus on modernized administration tools that strengthen Ontario’s growth and prosperity and complement Ontario’s ongoing efforts to reduce red tape.”
THE PA NDEMIC interlude ushered in a change in building users’ expectations of comfort, aesthetics and convenience in commercial environments. People want more from the spaces where they work and spend their time. To stay current, building owners/managers are turning to smart technologies to enhance operational efficiency, security, sustainability and create a better user experience.
Smart technology is a broad term, covering many different products and design philosophies. This becomes even more complicated in commercial real
estate, where one building often houses multiple tenants with varying needs, while mixed-use spaces might include office, retail and residential spaces in different areas of the same building. Smart surveillance technology can support efficient operations through system integration.
Traditionally, systems have been very isolated in their control and functionality. CCTV systems recorded video and not much else; HVAC systems regulated temperatures and not much else; and access control systems regulated entry, and not much else. There was little
interaction between these systems that wasn’t a product of manual observation and action or integrated by physically wiring devices together.
Now, an integrated approach to smart building technology can link systems together in the pursuit of a more efficient operation, but it requires the underlying technology to do so. When owners and designers approach either new buildings or major retrofits, they should consider that building needs will evolve over time and choose versatile and adaptable smart technologies.
Both hardware and software installations will benefit in the long-term from forward-thinking choices that opt for solutions that can be easily swapped in and out or integrated with other solutions. Future-proofing commercial buildings will require consideration of whether solutions have the potential for more intricate use cases in the long-term.
As an example, an access control system should not be assessed solely on its ability to control access to buildings, although this is obviously critical, but also its ability to integrate with other systems like lighting, HVAC and surveillance systems. In the future, that access control system may be integrated with a visitor booking system, or a surveillance system that grants delivery personnel access upon request. Even if such functionality is not needed immediately, it is a good idea to choose solutions that will make their implementation simpler at a future date.
Open flexible solutions for access control can support security, sustainability and emergency response. For example, an organization that owns multiple buildings can scale access control across its portfolio so that security teams can see who is inside each building at any given time and be aware of their clearance for certain areas. Central monitoring and management capability reduces the need for on-site personnel at each building, all performing similar tasks.
In terms of sustainability, automations can be designed to manage energy usage more efficiently. This could mean integrating access control and HVAC systems to automatically lower temperatures and increase ventilation when an area of a building experiences a higher-than-normal gathering of people. Or it could reduce heating or cooling in areas with low occupancy.
Access control and network audio can be combined for numerous purposes, including instructing visitors on how to navigate the premises, pre-recorded messages that play in
specific areas to deter loitering, or instructional audio that plays during an emergency to direct evacuation procedures. An integrated access control system — which in and of itself opens and closes doors — can deter intruders and crime, as well as the cost of dealing with the resulting incidents.
Connected systems should be premised on increasing security, safety and comfort of any user on the premises. Some systems will apply to all types of users, whether they are office workers, consumers or residents. An appropriate ambient environment can make users feel safe and comfortable, by having smart lighting and HVAC systems that integrate with access control and surveillance systems.
Network cameras with analytics can enable smart usage of lighting in different areas of a building by automatically illuminating areas
when they are accessed by users and contributing to energy savings by turning off when no human presence is detected. For buildings with special security considerations, an integrated system can be a tool for balancing ease of movement and keeping access points secure.
For example, a smart system’s data on foot traffic can be leveraged in combination with access control systems to adjust staffing rotations and open extra access points to temporarily reduce congestion. This information can also inform future building redesigns.
Jason Chiu is the Professional Services Group Manager with Axis Canada, a provider of video surveillance, access control, intercom and audio systems and networks. For more information, see the website at www.axis.com.
An integrated approach
technology can link systems together in the pursuit of a more efficient operation, but it requires the underlying technology to do so.
CANADA’S LEADING commercial real estate players are increasingly turning to ESG (environmental, social, governance) metrics to track responsiveness to a range of emerging risks and business imperatives, and to benchmark their competitiveness as new tenant, investor and regulator expectations reshape the market. The task is both growing in complexity and gaining more resources as companies set in-house targets and prepare for external mandates that may be imposed upon them in the future.
REALPAC, an industry association that counts many of Canada’s most prominent real estate companies, investment managers and institutional investors in its membership, has released a macro-level look at the trends in an inaugural ESG report, drawing from a recent survey of its members along with Canadian data from sources such as
GRESB and the Global Real Estate DEI (diversity, equity and inclusion) Survey.
Meanwhile, several REALPAC members are also affiliated with OSCRE (Open Standards Consortium for Real Estate) International, which is currently developing standards for managing and reporting environmental data.
“Investor demand for more ESG data could not be higher. Having good quality data is fundamental,” Ailey Roberts, Principal, Sustainable Investing, with BentallGreenOak, asserted during a recent webinar sponsored by OSCRE. “It’s actually a business critical need. We can’t raise capital without it. We can’t report to investors without it. It’s going to impede our ability at the end of the day if we don’t wrap our heads around it.”
OSCRE identifies some core elements of that process. It recommends that ESG be incorporated into a company’s overarching data strategy with a clear delineation of how it connects to all business functions and how it is to be collected and aggregated.
That will entail what’s known as master data management to ensure uniformity and accuracy, and to assign reporting accountability across the enterprise. A specific ESG data standards strategy then provides further tools and processes for managing and analyzing the data.
Many companies are still grappling with the logistics of that framework as demands for data collection and management evolve rapidly. Experienced practitioners are scarce, data can be difficult to locate and retrieve, and longer established
business units may not be aware of, or receptive to, their required contributions.
Landlords can encounter complications in trying to track energy and water use, waste generation and other pertinent ESG factors within tenants’ premises, while, within their own operations, there is a vast supply chain to consider. Chris Lees, an OSCRE Technical Director, notes that both internal business units and external contractors tend to be largely focused on the types of information that they need for their own purposes, which is often narrower than ESG’s expanding scope.
“Even if you can establish some clarity around the ownership, it still doesn’t mean the data is just there for the taking,” he observed. “You’re often asking for something that people don’t feel very obliged to provide.”
“ESG data is embedded throughout the organization, in places that you probably didn’t know it existed. As we think about what is included within the pillars environmental, social and governance, this really does touch on all facets of an organization,” Roberts concurred. “We need to get incredibly granular with the level of detail, and the expectations to
report on ESG data is typically put on our team, not necessarily on some of these other groups to report that data.”
For now, that’s necessitating some labour-intensive exercises. For example, Roberts’ team is currently going through BentallGreenOak’s leases to identify clauses that are relevant to ESG and the company’s target for net-zero greenhouse gas (GHG) emissions by 2050. Extracted information is being plugged into a spreadsheet at this initial stage, with the goal of converting it into more workable data.
“These are things contained in very manual PDF documents that possibly no one has looked at for a number of years,” Roberts recounted. “The next question is: where’s this information going to live? We’ve never had this quality or this level of data before, but now our team is challenged with finding a home for it so that we can access it in the future and actually leverage it to make decisions and have an informed conversation.”
IT is critical to the endeavor as the ESG team collects everything from asset-level operational data to HR and financial data.
In reaching into almost every department within the company, Roberts suggests ESG is also something of a new conduit for communications between them.
“There’s a lot that the entire industry is learning about,” she said. “There’s constantly some new regulation, new standard, new framework to report on, and it’s our job to figure that out, and not only educate ourselves, but educate our stakeholders.”
REALPAC’s ESG report reiterates commercial real estate’s direct interest in nine of the United Nations’ 17 sustainable development goals, including:
• good health and well-being;
• gender equality;
• affordable and clean energy;
• decent work and economic growth;
• reduced inequalities;
• sustainable cities and communities;
• responsible consumption and production;
• climate action; and
• partnerships for these goals.
The membership survey, conducted in April 2023, finds that respondents’ most
pressing ESG priorities, in order, are: net zero carbon; diversity, equity and inclusion (DEI); reporting disclosures; energy management; and green building certifications.
Currently, 83% of REALPAC members have either a formal DEI policy or some measures in place; 75% consider climate risk in investment decisions; 70% participate in the GRESB annual ESG reporting and benchmarking exercise; 48% report on scope 1 and 2 GHG emissions, encompassing direct emissions from on-site or fleet use of fossil fuels and indirect emissions from the production of electricity that assets consume; 37% have a target to achieve net-zero emissions; and 33% report on at least some categories of scope 3 emissions, encompassing the broad range of emissions from activities within a portfolio over which landlords have no control.
In his introduction to the report REALPAC’s Chief Executive Officer, Michael Brooks, commends the membership for proactively embracing ESG and grasping how it underpins their business credibility and agility. Along with the snapshot of industry
efforts, the report discusses the challenges to comply with and report on an expanding list of fiduciary and regulatory requirements.
It also highlights some convincing economic prompts as the price of carbon ticks upward in $15 annual increments to reach $170/tonne in 2030, and there is increasing pressure to integrate ESG and financial reporting.
“REALPAC is proud to support our members on ESG — from developing the first office green lease in North America, to setting targets for energy consumption in office buildings, to publishing guidance on greenhouse gas accounting and net zero carbon, to offering insights and best practices on diversity, equity and inclusion, and to being a strong voice on affordability and housing solutions,” Brooks states.
Envisioned OSCRE environmental data management standards will drill down to technical protocols for exercises like greenhouse gas accounting — which the REALPAC ESG report identifies as a “key challenge for the industry” fraught with “greater uncertainty around the quality and availability of scope 3 emissions data”.
“At the industry level, we can’t make progress without having these environmental data standards,” Roberts maintained. “There are so many different pieces of data that we are talking about. If we’re not able to compare apples to apples, it makes our jobs really difficult.”
Lees further places that in the context of a comprehensive strategy to address inherent dynamism in the standards themselves.
“Actually, you’re looking at a kind of hybrid set of standards effectively to cover all of your needs, and how you bring those together is an important part of the standard strategy,” he advised. “Those standards will not be static because the world is changing all the time. If you’ve got several standards today and they are evolving, you’ve got to have a strategy about how you’re going manage that.”
REALPAC’s 2023 ESG Industry Report can be found at https://realpac.ca/ product/2023esgindustryreport. More information about OSCRE International’s environmental data standards project can be found at www.oscre.org/LeadershipInnovation/Environmental-Data-Project.
ULTRA-LOW OVERNIGHT (ULO) electricity rates are now on offer in some areas of Ontario as all of the province’s 60 local distribution companies (LDCs) work toward the November 1 deadline for having the new pricing scheme in place. It will be available to residential and small business consumers on the regulated price plan (RPP), but it will likely be difficult for condominium corporations and rental housing landlords to realize the benefits unless they have energy storage systems alongside electric vehicle (EV) charging infrastructure.
The ULO rate of 2.4 cents per kilowatt-hour (kWh) from 11 p.m. to 7 a.m. is 67.5% lower than the off-peak rate of 7.4 cents/kWh that’s in place from 7 p.m. to 7 a.m. through the RPP’s standard time-of-use pricing. However, it comes with a counterbalancing on-peak rate of 24 cents/kWh in the hours between 4 and 9 p.m., and a mid-peak rate of 10.2 cents/kWh in place from 7 a.m. to 4 p.m. and 9 p.m. to 11 p.m.
“The 10-to-1 ratio, on-peak to off-peak, is quite extreme,” observes Peter Love, an energy consultant who served as Ontario’s Chief Energy Conservation Officer from 2005 to 2009. “This rate is meant for people with EVs; that’s clearly what the intention is. They are primarily the people for whom this makes sense.”
“There will be cases where ULO rates might benefit EV drivers in multifamily buildings, but would result in higher costs for the entire common area or bulk account unless other strategies are employed to shift building consumption to the overnight period,” advises Rob Detta Colli, Energy and Sustainability Manager with Crossbridge Condominium Services. “However, having ULO opens the door to consider things like pre-cooling and/or energy storage strategies. For example, that could be something like making ice, using cheaper overnight rates, then melting it to offset chiller use during the heat of the day.”
In announcing the ULO rate schedule in April, the Ontario government presented it as an opportunity for hydro customers who work evening shifts, heat their homes with electricity or have an EV charger tied to their account to potentially save about $90 per year. Perhaps more importantly, it is intended to have broader benefits for the entire electricity system, shifting demand to a period when there is typically surplus power capacity and easing peak demand at other periods of the day.
In ULO rate design recommendations submitted to the Minister of Energy in the spring of 2022, the Ontario Energy Board projected that a relatively modest enrollment of 23,000 customers, including 9,800 EV owners, could cut average annual peak demand by about 3 megawatts (MW). A more vigorous uptake of 318,000 consumers, including 32,000 EV owners, was projected to deliver about 40 MW of average annual peak demand reduction.
Love has long been an advocate for greater differentiation in on-peak and off-peak prices. He maintains that 4-to-1 or 5-to-1 is a more effective ratio to promote energy-saving behaviour.
Instead, the on-peak and off-peak rates have moved closer together, going from an approximate 3-to-1 ratio when time-of-use was first introduced in 2006 to a 2-to-1 ratio since 2009. As well, the Ontario Energy Board has begun to grant approval for LDCs to charge transmission and distribution fees at a fixed rate in place of heretofore variable rates tied to thresholds of consumption.
“That is disappointing. No matter how good you are at conservation, or how bad you are, you’re going to pay the same distribution rate. It’s not a big impact, but it does dampen the impact of time-of-use,” Love says. “The new ultra-low overnight rate is the right move. We have a lot of off-peak power and it has always been the ideal that electric vehicles would charge at night when the system is at a low peak. It could also signal to people that maybe this would be a great time to buy an EV because this rate is very attractive.”
Meanwhile, the investments needed to effectively benefit from the ULO rate in common areas and elements of large residential buildings would generally also reduce greenhouse gas (GHG) emissions. That may align with the corporate mandates of some multifamily landlords or the directions that condo boards are receiving from their members.
Among possible complications, energy management specialists caution that energy storage systems could require a level of operational expertise that on-site building operators or superintendents may not have.
“It’s a big investment so there would also be concern about a switch in political direction and the rules changing again,” adds Scott Rouse, Managing Partner of the consulting firm, Energy@Work.
By Rebecca Melnyk
LOBBIES IN major downtown office towers were originally designed to intimidate and impress, with angular surfaces, cold materials and bright lighting imparting the message: This is not a place to linger. Canderel is taking a new approach in its portfolio, which encompasses more than 24 million square feet of real estate across Canada, with a plan to give lobbies boutiquehotel ambience and to respond to employee needs throughout the building.
Brett Miller, Canderel’s Chief Executive Officer maintains the new philosophy complements evolving attitudes about tenants’ workspace requirements, as companies consider how to convey the value of their office space to staff who have shifted to remote work arrangements.
“Now, the office building is a community to fulfill your life. It’s a welcoming place to learn, network, connect, stay fit,” Miller submits.
This summer, Canderel will begin rolling out a workplace hospitality program called OKKTO across its buildings in Montreal, Toronto, Ottawa, Edmonton and Calgary. The idea is to help tenants entice their workers back by offering much more.
The transformation includes converting a floor for conference and meeting uses. That will include a co-working lounge, individual work pods, conference centres and a cold kitchen for catering. It serves up a combination of open spaces where employees can interact
across various layouts outfitted with new technologies to support hybrid meetings.
“Tenants can take a little less space in the leased area because they don’t have to have a large boardroom or employee lounge,” says Miller.
Lobbies will be reimagined with soft seating and lighting, signature aromas, calm music, lower ceilings and a hospitalitytrained concierge team. Club-like building activities for socializing could include an art exhibit in the lobby, a lunchtime walking club through the local park or a five-to-seven cocktail time.
Meanwhile, spa-like gyms with mindfulness rooms, spin bikes, towel services and trainers might encourage people to swap their fitness club membership for a free pass in their office building. The program will connect with professional wellness service providers — from massage therapists to life coaches — to create a holistically healthy workplace.
Makeovers are planned for all buildings across Canderel’s portfolio, although smaller office buildings may not be in line for all the contemplated components. It’s expected that Constitution Square in Ottawa, Edmonton City Centre and Stantec Tower in Edmonton will see a full rollout of amenities.
Canderel managers expect they’ll be called on to help employers along the way. For example, one large tenant renewed its
lease on condition that a property manager commit to animating and engaging their employees.
“You used to just collect the rent and now it’s much more about running a community,” Miller muses.
In developing the program, Canderel also looked to focus group findings about the reasons workers were reluctant to return to the office.
“People said: The reason I want to come back to the office is I feel I can contribute to the culture of the company, training young people, being social or giving ideas,” Miller shares. “People are motivated to give back, not just take.”
Across the portfolio, the number of tenants’ employees currently working on-site in the office varies. He reports small and medium-sized companies are “pretty much back,” but there appears to be more reluctance within large companies. Canderel looks to provide the means for employers to draw their staff back without resorting to draconian decrees.
“I think it’s a discussion,” Miller reflects. “To say: Here is the value as to why we want you back from a company perspective and here’s what you get back as an individual. It will be a much more complete experience.”
Rebecca Melnyk is the Editor of Canadian Facility Management & Design.
