Keynote Address – Economic Overview – What is the outlook for Canada and the U.S?
Sonya Gulati’s presentation on the economic overview painted a modest outlook going forward. Ms. Gulati started by reviewing the Eurozone debt crisis and noted the environment of high unemployment, dropping revenues, growing expenditures and the mounting number of bailouts. Moving onto emerging markets, Ms. Gulati commented that emerging markets remain commodity hungry but that a slow-down will affect commodity sellers.
On the topic of the US economy, Ms. Gulati noted that fiscal drag is here to stay as we wait for the US to get back on secure footing; as long as the economy remains fragile, the Federal Reserve will continue to inject cash into the economy. Ms. Gulati noted that the unemployment rate of about 7.6% remains high (about 9 million people lost their jobs and only about half were able to get new jobs). She also noted that the unemployment rate does not capture underemployed workers or discouraged workers; if those factors are included, the unemployment rate is actually closer to 15%.
There are some positive signs: Ms. Gulati pointed out that US consumers are showing signs of wanting to spend again, and that home prices are starting to show gains. However, Ms. Gulati cautioned that due to the backlog of inventory, a rebound in the housing market will be slow and likely not materialize until 2014 or 2015.
Ms. Gulati noted that Canada, being a small and open economy, is sensitive to fluctuations abroad. Despite this, Ms. Gulati noted that Canada fared remarkably well in the recession, due to robust consumer spending and government policy. Going forward, Ms. Gulati predicted that businesses and exporters will propel the economy, and that non-residential construction and manufacturing would be the largest drivers of growth.
On the other hand, the same robust consumer spending that kept the Canadian economy afloat during the recession has led to high household debt, which Ms. Gulati identified as the number one risk going forward, given that high household debt was one of the predecessors to the US recession. As well, Canadian exporters will face challenges as the Canadian dollar is likely to remain high and strong.
At home in BC, Ms. Gulati described an environment of fiscal uncertainty, as the government has yet to approve a balanced budget. Ms. Gulati expects the housing market to improve as slightly lower home prices and slower sales indicate a stabilizing market. In line with overall economic improvement, the unemployment rate in Vancouver is slowly declining. As well, Ms. Gulati posited that low office vacancy rates in Vancouver may help the construction industry.
In summary, Ms. Gulati noted that Vancouver and other Canadian urban markets are doing well compared to other urban markets in North America, but that imbalances in recent years will limit growth going forward. She noted that commercial real estate remains a bright spot in the low rate environment.
Vancouver Investment Panel: Is the west still considered by many the best?
Avtar Bains, President, Premise Properties
The panelists began by commenting on their respective activities in Vancouver. Michael Kitt noted that Oxford, a wholly owned subsidiary of OMERS, has taken a cautious approach to real estate in Vancouver, given the higher costs compared to the rest of Canada. Michael Emory noted that Allied is a very focused Canadian REIT, which looks for three specific attributes in its properties: they must be located close to the core, have distinctive features, and have lower overall occupancy costs compared to towers. Scott Hutcheson commented that Aspen seeks downtown offices that present opportunities to add value. Mr. Hutcheson noted that the growth in Vancouver is compelling as a steady edging tool against volatile markets in Alberta where Aspen has invested.
Avtar Bains polled the audience and found that 40% thought that the province’s economic policy decision-making on jobs was the greatest challenge facing Vancouver, followed closely by 30% that thought that global economic pressures impacting trade and immigration was the next greatest challenge. Mr. Kitt agreed and pointed out that the effect of provincial policy at the municipal level is a significant concern for Oxford.
Moving onto the topic of REITs, Mr. Bains asked if the panelists thought that REITs would last. Mr. Emory jokingly answered that he hoped so, before noting that the REIT is a sustainable vehicle for three reasons: they have low debt ratios, pay out less than they earn and are specialized. He noted that Canadian REITs in particular are more sustainable compared to their American counterparts due to their more disciplined approach to debt.
In another poll of the audience, Mr. Bains asked which asset class is most likely to have the strongest returns in BC over the midterm, and found that 33% voted industrial, 27% voted retail, 19% voted office, 11% voted deployment and 10% voted residential. Mr. Hutcheson agreed that downtown office is unlikely to see much growth as it appears to have peaked, but that retail and industrial remain robust.
Mr. Bains ended the panel by asking the panelists to give advice to young men and women starting out in the industry. Mr. Emory advised that attitude, rather than aptitude, was the key factor. He noted that the industry is small and tough, and that you need a genuine enthusiasm and passion to succeed. Mr. Hutcheson recommended that young people obtain the highest education they can get and then work for a brokerage. He also advised young people to not compromise their integrity. Mr. Kitt reminded everyone that the industry is small and of the importance of one’s reputation.
B.C.’s Leading Employers – Why (604) is worth the investment!
Lorne Burns, Partner, Audit, National Industry Leader, Real Estate, KPMG LLP
Mauk Breukels, Vice President, Investor Relations & Corporate Affairs, Finning International Inc.
David Bowden, CEO, Colliers International
Andrea Goertz, Senior Vice President, Strategic Initiatives and Communications,TELUS Corporation
Lorne Burns noted that the four firms represented on stage shared a combined existence in BC of well over 400 years, then engaged the panelists in a wide ranging discussion centering on the current and future climate for Vancouver real estate. Their perspectives were provided from three diverse industries: technology, real estate services and industries using heavy equipment.
All agreed on Vancouver’s enduring attractiveness in terms of livability for individuals and, by extension, as a place to conduct business. But the city has other advantages too.
David Bowden spends much of his time traveling the world on business and increasingly hears that Vancouver enjoys a wonderful reputation. He sees the ever-increasing diversity of the population as remarkable, providing amazing opportunities for employers. He commented wryly that one disadvantage for an international company is that once employees move to Vancouver, they refuse to be transferred elsewhere. Mauk Breukels noted that with extensive national and worldwide operations, only 15% of Finning’s employees are located here and able to enjoy Vancouver’s lifestyle, surroundings and downtown livability, so the continuing excellence of YVR is very important.
In terms of local disadvantages, Mr. Breukels said that expensive housing was a hurdle to recruiting from elsewhere, but Mr. Bowden is more positive and believes that a growing acceptance of condominium living, in ever shrinking spaces, will help that issue sort itself out – public transit, however, must be improved. Andrea Goertz advised that compared to Alberta, higher BC taxes are a negative factor, and also noted that the multiplicity of local governments in Metro Vancouver creates more bureaucracy than, for example, in Calgary.
Asked about the impact of technology on real estate needs, Ms. Goertz had the most interesting answer. As a technology company with a strong culture of collaboration, as well as environmental and social responsibility, TELUS has a goal of having 70% of its “team members” working remotely. In financial terms, the estimated annual savings is $40 million, to be reinvested into product development and services, while providing exciting and different working space for the remaining 30%. TELUS has made a great effort to determine which functions require traditional space and which thrive in more of a “living room” environment. The results to date have included greater productivity and flexibility. While TELUS may be at the forefront, others may be expected to follow.
Mr. Bowden encouraged all attendees at the Forum to really focus on social media. He is seeing its relevance moving rapidly from the consumer area into business-to-business space with far-reaching implications for all businesses.
A Game of Musical Chairs or Well-Planned Growth?
Bill Tucker, CEO, Omicron
Bill Tucker opened by acknowledging that office development is a sexy topic in Vancouver right now and told the group they were fortunate to be enjoying the insight of a panel with great depth of experience. He told the group that he would lead the panel through a discussion of office development starting with a look at the macro context and then drilling down to regional perspective and then ending with some discussion about trends.
Sandy McNair started by acknowledging there is much new supply coming onto the Vancouver market and examined three possibilities for the drive for such supply: (a) the desire of investors to acquire and develop new product, (b) incremental increasing demand, or (c) an obsolescence issue/desire by tenants to have the newest and best product. He presented a slide that showed the breakdown by age of office inventory across Canada in the major markets (i.e. Vancouver, Calgary, Toronto, and Montreal). In downtown Vancouver, only 8.2% of our inventory has been built since 2000, whereas 30.6% of Calgary’s inventory, 15.4% of Toronto’s inventory and 10.3% of Montreal’s inventory have been built in the same time period. Further, Vancouver tops the group with older product in the 1960–1989 age range with 68% of our product being built in that era.
Mr. Tucker asked Gavin Reynolds to discuss tenant mandates, both in terms of companies that reside full time in this market and those coming from outside the market. In response, Mr. Reynolds identified how high the average net effective rate was in 2009 when the market crashed, and noted that there was no real corollary reduction or fall back and tenants are still willing to pay those higher rates. He observed a resistance by many local companies to move to new product (i.e. many law and accounting firms are simply refreshing their existing office space) but he stated that global and US companies are trying to replicate what they offer their employees and clients in their other markets and so are willing to pay higher rates for new product and are not “looking for a deal”.
Blair Quinn also weighed in on this issue, saying that in his sector there’s been a massive change in the tenant mix since the meltdown. In the 2008, companies like Nokia, Microsoft started to shut down or severely downsize their operations in Vancouver but Mr. Quinn said he’s seen some bounce back as Facebook and Samsung have both taken up office space in Vancouver and local companies such as Hootsuite and Westport also continue to expand locally. He noted that there is absolutely no sublease market to speak of and that tenants have been paying the price as a result.
Mr. Tucker also asked the commentators to discuss the number of projects being built and whether the major driver is good solid demand, or capital being really ready to get to work.
Mr. We explained that for his company, building a new tower was a key piece of what they wanted to offer their own tenant base. He explained that “next gen” developments are offering unique things that older product cannot and does not offer to tenants. He also said that buildings like Telus Gardens (which he thinks would probably not have taken hold 5+ years ago) are experiencing a factor of being the right product at the right time. He also expressed confidence in Vancouver’s fundamentals and said his view is that Vancouver has the tenant base sufficient to absorb the new space.
Mr. McNair noted that one of the drivers of the new product has been an abundance of pension fund and private capital to place. His view is that if every single project in the pipeline right now got built, it would be problematic for absorption. However, he said that although there is an unprecedented number of projects coming onto the market, absorption statistics for Vancouver are good and we should end up with a bit of positive demand at the end of it all.
Mr. Tucker asked the panelists if they thought Vancouver would see any move by energy tenants and Mr. Reynolds noted that he had worked with Shell to set up a downtown office of 4,500 square feet in an Ivanhoe Cambridge building but that the move was as short term growth option and most commitments seem to be to field operations at this point. He predicts, however, that tax, political and other factors will drive some of the energy companies to set up offices in downtown Vancouver.
Before the obligatory election/politics question, Messrs. McNair and Quinn both weighed in on the future of Vancouver’s existing product in the face of the new product about to emerge on the market. Mr. McNair said that it will be interesting to watch what happens with the positioning of the A minus and B class product and where the back fill settles. C class product/owners know their game and will stick to it but the other classes may need to reposition. He predicted some big winners and some big losers and said that the pitch and position of the product will be key going forward.
Mr. Quinn agreed that branding will matter in a big way when the new product comes onto the market and thinks the industry will take a long hard look at some of the existing A class product in particular.
On the topic of what to expect after the election, they both agreed that an NDP government will cause an initial pause in the market. Mr. Quinn noted that economies go on and governments change and the pause will not last forever. Mr.McNair noted that business confidence will no doubt take a hit and that business confidence is absolutely critical to velocity so there may be some impact on rates. Mr. Reynolds’s view was a bit different – he feels that things will keep going full speed ahead in the short term and won’t slow down but 18–24 months out may be a different story as policies of the new government take hold. Mr. We’s short response was to remind the group that everyone will wake up on May 12 with deals to do and that no matter what the government, we’ll keep moving forward.
The Growth or REITs & Private Equity Funds and their Impact on the Real Estate Market
Pierre Bergevin, President & CEO, Canada, Cushman & Wakefield Ltd.
Trevor Blakely, CEO, Forgestone Capital
Kevan Gorrie, President, Pure Industrial Real Estate Trust
Shenoor Jadavji, President & CEO, Lotus Pacific Investments Inc.
Joe Mazzocco, Partner, Investments, KingSett Capital
This session featured a panel of principals from a diverse range of entities, from private equity firms, representing both institutional and high-net-worth investors seeking both value-add opportunities and long-term investments, to a publicly-listed REIT seeking to add to its growing investment portfolio. The panelists’ focus ranged from B class industrial in Canada and the Western United States, to working on the largest scale acquisition transactions in the Canadian marketplace. With such a wide range of knowledge and experience, the panel provided significant insight.
Trevor Blakely noted that with returns from the real estate sector continuing to outperform other investment sectors each year, REITs continue to attract well-priced capital, and pension funds are having their allocations to real estate increased. The investor demand for yield endures, seemingly unabated.
In addressing their sector and market focuses, panelists noted that their investment strategies include following population growth, which leads to increased demand for retail, office, industrial and residential. Trevor Blakely noted the lack of new transportation infrastructure in Canada to support the nation’s population growth, leading Kevan Gorrie to note Pure Industrial’s focus on targeting industrial property nodes that are well served by rail and road infrastructure. He also noted that significant activity in the industrial sector is taking place near to intermodal facilities, which support the distribution tenants that make up a large portion of the Canadian light-industrial market.
Panelists also discussed the importance of active asset management. Shenoor Jadavji noted the importance in the B class market of asset management to tenant retention and rental stability. At the same time, Joe Mazzocco noted the importance of actively managing a portfolio and determining when and where to add value through capital additions.
In addressing a question about what risks may arise in the Canadian market within the next 24 months, panelists mentioned a possible residential real estate bubble. However, none seemed too concerned that a bursting residential bubble will affect the investment market, as the demographic shift and turbulence in other sectors will continue to create a demand for yield producing investments. Mr. Mazzocco made the point that “you never overpay for the right real estate”, notwithstanding cycles in the real estate market.
In terms of the inevitable question regarding cap rates and inflation, panelists all expressed that there continues to be room for cap rates to compress for the higher quality assets, although they warned against overpaying for B class properties. When discussing possible increases in interest rates, Mr. Gorrie felt that interest rates could increase 50 basis points without affecting cap rates for higher quality assets, while Mr. Mazzocco felt that whether or not an increase in interest rates would affect cap rates depended on how quickly interest rates increased (a faster increase would have a greater effect on cap rates than a slow gradual increase) and on what the basis for the increase is (if interest rates increase due to inflation, cap rates may rise but so too should property incomes).
Lastly, in discussing the level of international investors’ interest in Canadian real estate, panelists noted that the high level of international interest a decade ago was driven by Canadian cap rates being very attractive in the global marketplace. With cap rates in Canada having compressed so significantly over the past decade, that is no longer the case. As well, panelists noted that international investors need a certain scale of investment to justify moving into a new jurisdiction, and that there is simply not enough real estate available in Canada to meet their requirements.
The Outlook for Capital and Debt Markets in 2013: Asset Values, Spreads, LTVs, and other issues
John O’Bryan, Chairman, CBRE Limited
Chris Dobrzanski, CEO, Citizens Bank
David Franklin, President, CMLS Financial Ltd.
Morley Greene, President, Trez Capital
Murray J. Williamson, Senior Vice President, Bank of America Merrill Lynch, British Columbia Region, Global Commercial Banking
When providing their views on the outlook for capital and debt markets in 2013, members of the panel were generally optimistic. Before directing his first question to Chris Dobrzanski, John O’Bryan opened the dialogue among the panelists with a series of slides showing continued growth in debt markets as a signal of confidence in the economy. When asked to comment on the general tone of the outlook for capital and debt markets in 2013, from a lending perspective Mr. Dobrzanski noted that he believes we are only half way through the debt de-leverage and low interest rate period. He warned that individuals and companies should be cognizant of their risk profile to ensure they are not vulnerable to rising interest rates.
When commenting on the job market, Mr. Dobrzanski noted that, although unemployment rates are not high in Canada, the jobs that have returned are not of the same quality as the jobs that were lost during the recession. People are increasingly working in consulting roles, retiring later and working two jobs to make ends meet. Particularly in Eastern Canada, the middle class is becoming a working poor class. In terms of the commercial mortgage market, Mr. Dobrzanski noted that there will be more risk in 2013 than in the last couple years, as unemployment rates remain high in the US and continue to act as a drag on the economy.
When asked to comment, Morley Greene noted that his company is more focused on the short-term side of things so he is particularly interested in the next 18 months and what governments may or may not do. Mr. Greene commented that if interest rates are kept low and things continue on as they have been, things will be fine; if interest rates rise, most projects will face significant challenges. Mr. Greene noted that his company is not having any problems with foreclosures and defaults at the moment and that he is cautiously optimistic, provided that interest rates remain low. Murray Williamson commented that he would put a slightly more positive spin on things, pointing to such things as private sector employment growth, low interest rates, high corporate profits, corporate recovery and the move towards energy independence in the United States. Mr. Williamson agreed with Mr. Dobrzanski that we are only halfway there, but noted that he is optimistic.
When asked to comment on the residential market, David Franklin noted that home value boosts spending. He commented that we are seeing an increasingly prudent approach to underwriting and reduced amortization periods. Mr. Franklin felt that the market has softened in the last year or so and he predicted that it will continue to do so. As long as employment rates remain steady, Mr. Franklin noted that this should not be a problem. Despite this softening in the market, Mr. Franklin noted that foreclosure rates in Canada are very low. Mr. Franklin predicted that the residential market will probably flatten out in 2013.
Compared to the United States, Mr. Williamson noted that Canada has very low commercial vacancy rates and is an “oasis of stability”. Canada went into the recession in better shape and similarly, came out of it in better shape. In Canada, there is a significant amount of capital and lower interest rates than in the United States. However, unlike Canada, there is less risk and more reward to invest in the United States. Lot prices are increasing in the United States and employment rates are rising as the economy generally improves. Despite the opportunities that exist in the United States, however, Mr. Greene feels that many investors are wary of investing in there.
For 2013, Mr. Williamson commented that their book in Canada is corporate and that they will continue to be very aggressive in their approach. In the United States, there is opportunity for good long-term returns in the fixed-income market. Vacancy rates for commercial real estate are decreasing in the United States and there is good long-term rate availability. Mr. Williamson noted that there is a lot of de-leveraging and mortgage restructuring opportunity in the United States, particularly in the Southwest. Mortgage delinquencies are decreasing in the residential market and there is increased confidence.
Mr. Dobrzanski noted that Citizens Bank was most active during 2009 to 2011 when there were many quality borrowers looking for loans; however, as there is now greater competition, they are less active. Better interest rates have driven this increase in competition.
With respect to commercial mortgage-backed securities (CMBSs), Mr. Franklin noted that CMBSs had increased steadily until 2007, when they dropped off drastically, and were effectively dormant in 2008. Since 2011, however, CMBSs have been returning in a very modest way. Mr. Franklin commented that the Canadian CMBS market is still in a growth phase and is very much a “niche play”, however, he noted that the experience of investors in Canada has been good. Banks in Canada are wary of securitization and feel that CMBS will not grow to the level they were at in 2007.
Mr. O’Bryan then turned the panel to a discussion of cap rates, which remain at a record low. The spread between Canadian cap rates and the 10-year bond rate has narrowed. In Canada, we are very close to where we were in 2007. Mr. Dobrzanski commented that this makes sense – if interest rates remain low, it is very logical for investors to enter the market. Mr. Williamson noted that appraisers have been under a great deal of pressure due to cap rates being so low. Increasingly, equity players have had to step up, which has been increasingly true in apartment and commercial real estate, as well as industrial real estate to some extent. Mr. Franklin noted that it’s a “frothy” market in which stability of cash flow is key. In such a market, amortization takes care of loan position. Mr. Franklin predicted that cap rates will likely increase during the next five years, however, this may not be the case. Mr. Greene provided a bit of a different perspective on this point, as short-term lenders, noting that they try to ensure that they are lending against an asset that can be refinanced.
To close, Mr. O’Bryan turned the panel to the subject of interest rates and presented a slide showing that we are currently in the fourth year of record low interest rates. He then asked each member of the panel to predict when interest rates would increase and why, and what they think will happen. Mr. Dobrzanski noted that as long as the annual increase in GDP is less than 2%, interest rates will remain low. He predicted that interest rates will increase in Canada in 2014 and in the United States in 2015. Mr. Franklin joked that he has been predicting interest rates will increase in the next 24 months for the last 48 months, so he would refrain from commenting. Mr. Williamson noted that an increase in interest rates is going to be corporate-led as employment rates increase in the United States and consumer confidence increases. Mr. Greene noted that so long as the United States wants to keep the value of their dollar low and their economy inflated, there will not be a drastic change in interest rates in Canada.
Drivers of the Industrial Market: What Do the Key Players See Over the Horizon?
Tom Corsie, Vice President, Real Estate, Port Metro Vancouver
Ron Emerson, President, Emerson Real Estate Group Inc.
Alistair Pickering, Director, National Industrial, Oxford Properties Group
Paul Tilbury, COO, Dayhu Group of Companies
There was a consensus among the panel members that Vancouver is an incredibly challenging market in terms of supply. More than once the panelists repeated the refrain that there is “no new land” in Vancouver. This of course leads to pressure on pricing and the panelists all also agreed that the Vancouver market is an issue in Vancouver, and Alistair Pickering even said it’s one of the “biggest impediments” to entry into the Vancouver industrial market.
In terms of drivers of the market, Ron Emerson clearly sees the future and demand of the market being logistics-type space. Mr. Pickering agreed that logistics as opposed to manufacturing will be the growth area and focus going forward. Tenants now need large space, proximity to rail, highway and port. Mr. Emerson said that for industrial developers, the ALR is the elephant in the room and he does not think Vancouver can grow without changes to, and lands being removed from, the ALR.
Paul Tilbury agreed that the ALR is a beast that developers will continue to fight, but he doesn’t think it’s a battle that will ever be won. He sees a lot of potential and is focused south of the Fraser. He said that Dayhu is focused on building with vertical height in mind because over the next 15–20 year horizon they predict more automation and less physical human work. He noted that they’ve got demand from clients for 36 feet to 40 feet clear of vertical space. He also noted later in the discussion that internet fulfillment centres are becoming more and more prevalent in terms of tenant use of buildings, and although it represents a material shift in the way products are delivered to consumers, it does not change the fact that products do have to be delivered. He believes the Vancouver market can serve all of Western Canada if we have the right buildings.
Stu Morrison noted that Boundary Bay and Tsawwassen are ideal for importers and that distribution centres south of the Fraser will be in demand. Tom Corsie agreed and said that in terms of drivers, he sees Delta Port as having long term positive growth potential for being a major player in the container business for the domestic Western Canadian market. This will of course create further demand for distribution centres nearby.
With unanimous agreement of the panel, Mr. Morrison commented that the two most challenging items in the Vancouver industrial market are (a) the supply of land, which he characterized as basically nil in Vancouver, and (b) the fact that the cost of buying and developing any available land is more expensive than anywhere else. He noted that a recent study reported that there are 6,905 acres of available industrial land in Vancouver but he and all the panelists expressed skepticism at that figure.
On the issue of Vancouver’s lack of existing supply, Mr. Morrison reported that Target spent 28 months trying to procure their local facility and called Vancouver the most challenging market they’ve seen in North America.
On the issue of price, Mr. Pickering said that pricing is the biggest impediment to entry into the Vancouver industrial market. He said that in this market you need to understand the land, the motivation of the seller, and you cannot simply focus on potential cap rate compression. He quoted one of his colleagues’ famous line of “anything the cap rate fairy gives, the cap rate fairy can take away”.
Mr. Tibury commented that he has talked to many tenants who feel they have no choice but to locate in Calgary simply because there’s nothing available for them in the Vancouver market. In his view, there is at least 2 million square feet of potential demand in the market looking for a home. He said this is a good reason for developers to build “on spec” and potentially in phases – he said developers shouldn’t fear vacancy and said his own company analyzed the market and tested its own “testicular fortitude” before deciding to build on spec. He says “if you build it, they will come”. He also commented that a portfolio should have a blend/mix of classes of property and that developers should nurture tenants and treat them well and this will result in tenants that move with the landlord as it grows.
Mr. Morrison asked the panelists where distribution centre requirements are being accommodated (or will be accommodated) because he sees an impending bottleneck and real challenges in this area. Tom Corsie noted that tenants want their distribution centres to be 45 minutes away from container terminals and said that the South Fraser Perimeter Road is an exciting development in that regard. He said that mayor Lois Jackson thinks it will be a real catalyst of change in that area and he agreed that East Delta will be an exciting area to watch and be involved with going forward.
Mr. Emerson weighed in, noting that availability drives absorption and predicted that Delta Port developments will absorbed in less than 5 years. After that, he said, there really is no land left and a lot of existing product is becoming obsolete. He said that expansion at Delta Port is critical.
Everyone on the panel agreed that there is a real risk that if the Vancouver market cannot “solve” the “problem” of the supply of industrial land, importers and tenants may go elsewhere and the province will lose out on jobs and tax revenues.
Transit Oriented Development (T.O.D.): What Does the Future Hold?
Anne McMullin, President and Chief Executive Officer, Urban Development Institute
Gary Andrishak opened the discussion by providing a definition of Transit Oriented Development (TOD) and reviewing a number of examples. Simply put, TOD is a compact mixed-use development where residents live, work and play in close proximity to efficient rapid transit and the automobile is an option, not a necessity.
The panelists continued by describing the TODs being undertaken by their firms. John Horton described Brentwood Mall, where Shape Properties is effectively doubling the retail component of the mall and planning to build out a mixed-use, transit oriented city core with significant residential and other amenities. He also referred to Lougheed Mall, which Shape is taking through a similar redevelopment process. Dan Turner described PCI Development’s several TOD projects, including Crossroads in Vancouver, King George Station in Surrey and Marine Gateway in Vancouver, which will include 225,000 square feet of retail, 200,000 square feet of office and 460 residential units (which sold out in four hours). Lastly, Richard Weir described Bosa Development’s 20 year history with development TODs.
The panelists agreed that transit alone does not make a great development site. Development is about “placemaking”, and that requires amenities such as shopping, dining, entertainment, jobs, office and other. However, panelists also agreed that every constituency using those amenities benefits from transit.
Mr. Turner noted that PCI Development’s initial focus for each of its TODs is on the retail use. With a need for a significant anchor retail tenant, combined with the other types of amenities that lead to successful placemaking, their projects require a certain scale, which then leads to a large residential component. Mr. Andrishak concurred, while Richard Weir noted that amenities required for a successful TOD do not all have to be within the same development, and can be located in a central core (such as downtown).
Proximity to transit is also a key component to a successful TOD. In terms of proximity to transit, Mr. Andrishak noted the well-accepted principle that 800 metres is the limit beyond which the transit component is no longer a significant factor to a development.
Responding to the question of why they focus on TOD, Mr. Weir noted that density is typically encouraged around transit nodes. With community opposition to density becoming one of the biggest obstacles to development projects, choosing to develop near to or around transit nodes allows developers to avoid this risk.
With respect to the inclusion of office components in TODs, the panelists agreed that proximity to transit is a key requirement for office properties, and referred to a recent Jones Lang LaSalle study showing higher rents and lower vacancies in office properties near transit. Panelists also agreed that traditional office parks may suffer in the future from a lack of access to transit. Mr. Horton noted that Shape’s two Burnaby projects will set aside space for future office development.
Lastly, in terms of what makes TOD profitable, panelists noted that transit-oriented sites have a higher value, not because of the presence of transit, but because they typically allow higher density.
Is the North Shore the Next Big Real Estate Play?
Mark Hannah, Principal, Avison Young Canada
Rick Amantea, Vice President Community Partnerships and Development, Larco Investments
John Conicella, President, British Pacific Properties
Beau Jarvis, Vice President, Development, Onni Group
Rob Kavanagh, Vice President, Asset Management & Managing Broker, GWL Realty Advisors Inc.
Mark Hannah, as moderator, began this session by providing a general overview of the North Shore: there are approximately 175,000 people living on the North Shore, who tend to have more education and higher income per capita; there are three ski mountains and a [related] major trauma centre; the Trans-Canada highway, a BC ferry terminal, two major bridges and major ports are all within it; Seaspan made big news when it was awarded an $8 billion shipbuilding contract, which will create numerous jobs; and currently underway or planned are at least twenty mixed-use, pure residential and commercial projects. With that backdrop, Mr. Hannah then posed a question relating to development on the North Shore to each of the panelists.
As there is a strong demand on the North Shore for housing in all product classes, Mr. Hannah asked John Conicella what he thought was fueling this demand. Mr. Conicella’s belief is that this is not a result of growth but of change. He states that we are at the crux of a generational change. For Mr. Conincella there are three factors that will therefore fuel this demand: 1) an increase in the percentage of old housing stock, 2) changes in family size and household dynamics, and 3) the existence of housing types that won’t meet the new generation’s needs.
Rick Amantea was asked how Park Royal can meet the demand for retail space resulting from the demographic shift in the increase in population. Mr. Amentea feels that shoppers currently are, and going forward will be, looking for the social aspect of shopping. Park Royal, in addition to providing the underlying retail, is addressing these social needs. As an example, Park Royal has more cafes and full service restaurants than other retail areas and is planning to further grow those areas. It is a strength of Park Royal, according to Mr. Amentea, that it provides shoppers with a full social experience. In opposition to this, Mr. Amentea is concerned about grade level commercial spaces along the Marine Drive corridor, as an example that will not be able to provide this, which may lead to vacancy issues due to the desirability of the space.
Mr. Hannah noted that the North Shore does not suffer from the luxury of excess land, therefore there is going to be pressure for mixed-used projects that challenge the existing zoning on height and density. When asked how this demand or pressure can be accommodated Beau Jarvis’ response was that it can be dealt with by managing expectations and certainty for both developers and the community. According to Mr. Jarvis, communities on the North Shore are extremely polarized between those that have been there and know the old suburb and the younger generations that are new or returning to the area. Mr. Jarvis feels there are also communication problems in that the younger generations are time impoverished and, therefore, do not provide any input for policy planning that will affect them in the future, while the more established neighborhoods are suffering from fatigue as a result of being bombarded by consultation and planning, so they find it easier to refuse to participate. According to Mr. Jarvis, before there is a conversation about accommodating demand in relation to growth, the public needs to be meaningfully engaged and provide decent meaningful feedback. In order to elicit this engagement, municipalities, developers and planners need to be creative and provide simpler avenues for consultation, which can then lead to narrowing the divide between views in the community.
Finally, Mr. Hannah asked Rob Kavanagh what attracts businesses to operate from the North Shore. Mr. Kavanagh’s resounding answer was lifestyle. GWL Realty Advisors’ Northwood project is a lifestyle business park that tries to be best in class with respect to its buildings, amenities and community, which is attractive to businesses that focus on lifestyle. Having businesses on the North Shore allows you to live where you work and, for several businesses in the Northwood project at least, allows companies to test their products in the North Shore mountains. Mr. Kavanagh pointed out that the area is not for everyone, one big reason for which is the lack of transit, but he believes that a focus on lifestyle in an important aspect for employee retention and therefore a draw for businesses.
Luncheon Keynote: What’s Around the Corner? What Lies Ahead for 2014?
Michael Campbell began his presentation by noting that he was asked not to be too pessimistic. After listing all the global crises about which one could be very pessimistic, he commented that he didn’t think we were in that bad shape.
For future economic growth, Mr. Campbell predicts that Europe will at best have very low to no growth, the US will see 2–2.5% growth, but he noted that it looks like the initial rebound in the States is slowing, and Canada will struggle to find 2%, especially without focusing on China. Mr. Campbell also noted that commodities are in a down spiral, although he predicts that the market will come back in a couple of years, and central banks printing cash is not translating into economic growth. As was the case last year, Mr. Campbell is optimistic for the private sector as they will fill roles previously held by the public sector.
According the Mr. Campbell, the problems for government are financial – simply put, they need money – and it is businesses and the upper-middle class that they will go after to get that money. He notes that Canada plans to increase revenues by cracking down on tax loopholes and clamping down on tax havens, and several other governments are increasing taxes, and when that’s not enough, they are taking money directly from bank accounts. The problem with this approach, however, is that capital and people are mobile. These increased taxes create new incentives and do not work.
Mr. Campbell did see some positives. He noted that the stock market and real estate in many places are doing well. This is because people are looking for a good rate of return, which just isn’t possible with bonds currently. However, Mr. Campbell still sees Japan in trouble and predicts Italy and France are next to fall in Europe. He believes Canada has the opportunity to avoid these troubles but we need to recognize that the game has changed.
Normalizing the Residential Market… Finally?
Cameron McNeil, President, MAC Marketing Solutions
Cameron Muir started off the discussion by noting that, in contrast to some of its neighbours in the East, overall the British Columbia residential market is not doing too poorly. While Mr. Muir believes 2013 is a transition year for both the local economy and the housing market, he predicts that 2014 will prove to be stronger on both fronts. Daryl Simpson echoed Mr. Muir’s comments, noting that BC is currently in a balanced market and that, with some exceptions, the overall outlook in the province is “pretty good”. Ralph Archibald agreed with the other panelists and, generally speaking, finds it difficult to believe that there is a problem of oversupply in the province’s housing market.
Although the panelists believe the market is currently steady, Mr. Archibald does not think that BC will see the rapid sales demonstrated by the Marine Gateway and Station Square projects in 2012 repeated during the course of this year. Mr. Archibald pointed to the Richmond area as one in which a significant amount of activity is currently being seen – with roughly 885 units having entered the market within two weeks earlier this year, and roughly 175 – 200 of those units having already been absorbed. He also sees strength in North East Coquitlam for wood frame products, as there is not much current competition there for such product. Mr. Archibald views the upcoming launch of Wall Centre Central Park as one people should be watching carefully in order to gauge the existing interest of investors. In contrast to Mr. Archibald, Mr. Simpson is cautious about Richmond, as he believes the strong supply is confusing for consumers. Mr. Simpson believes the Metrotown area, which had success last fall, is one that is still strong.
Historically, Mr. Muir noted that current consumer demand in Vancouver can still be considered low. He believes that consumers have been influenced by tighter credit impacting housing affordability, and by media messaging that Canada is in deflationary aspect. However, Mr. Muir also commented that the longer BC sees low levels of sales activity, the greater the likelihood is that pent-up demand is being generated. In addition, he noted that while sales levels have decreased, prices have stabilized as home sellers, like buyers, are taking a “wait and see” approach and have no need to sell. Mr. Muir expects to see stronger sales activities toward the end of this year, and believes that sales have possibly even been increasing over the past several weeks. In terms of the impact of the foreign investor on the current housing market, Mr. Simpson does not see the Chinese speculative investor as playing a significant role. Mr. Simpson believes that the market is at present comprised of more income investors than speculative investors. Mr. Muir also does not believe foreign buyers are driving the current market – as they make up no more than 1–4% of the market. Mr. Muir stated that the idea that the Asian investor is needed to drive the BC residential market is a myth. Mr. Muir also observed that the Vancouver condo market has not been hot for three years, and that affordability has quietly improved in Vancouver as a result.
All of the panel members believe that most of the investors entering into presale agreements currently will complete their purchases in two years’ time, when construction of the project is complete. Both Mr. Simpson and Mr. Archibald noted that they are collecting strong deposits at present. Mr. Archibald also commented that one of the lessons learned from the downturn in 2008/2009 was that developers must ensure that they stay in contact with purchasers frequently, from the date of execution of the purchase agreement to completion.
When asked about the current low interest rates, Mr. Muir stated that he doesn’t anticipate that the Bank of Canada will increase rates until at least the fourth quarter of this year, and likely beyond then. Mr. Muir commented that the lower demand in the market seen at present is not due to interest rates, but instead due to tighter credit restrictions. Mr. Muir does not believe that home prices will change significantly in the coming years, as demand will also decrease once interest rates rise. Mr. Archibald commented that buyers have been hearing that interest rates are historically low for a long time – and that the low interest rates are not significantly impacting the market at present. He does believe that the new credit qualification rules were felt in the market, and is grateful that these credit rules were not combined with increases to interest rates. Mr. Archibald also stated that the changes to and from Harmonized Sales Tax were incredibly confusing for a lot of purchasers, but is optimistic that this issue will no longer have a significant impact on the market. Mr. Simpson agreed and believes that the relatively uninformed buyer may purchase in April because the purchaser believes he or she is getting a discount (despite the presence of the BC Transition Tax).
In commenting on the impact media has on the housing market, Mr. Archibald believes that it makes his sales staff sharper, as they need to “stay in prospects’ ears” both before they buy and during the rescission period. He thinks that the average homebuyer will not be moved by a single digit percentage decrease in pricing. Mr. Muir commented that the impact of media is all about perception, and that consumers are currently asking themselves if they’ll get a better deal if they wait – which is not aided by media hyperbole. In contrast, Mr. Simpson noted that BC has been in a negative news environment for so long now that it may actually be having a positive impact, by motivating people who now believe that the market has flattened.
With respect to statistics relating to the resale value of homes, Mr. Muir commented that all statistics need to be taken with a “grain of salt”. Mr. Muir noted that consumers should look at the benchmark home price in Vancouver, which has only declined in Vancouver by 3.5–4%.
In terms of the impact the upcoming provincial election will have on the residential market, Mr. Archibald believes that, in some ways, the current climate is easier to operate in than in comparison with the last two elections because if people believe the election is a foregone conclusion, there is no lull beforehand. Mr. Simpson noted that the upcoming election has already made a difference, and that the probability of a NDP government has likely impacted the malaise in the market currently. Mr. Simpson believes the NDP, if elected, will act as a dimmer switch in market. Mr. Muir noted that government likely does not impact market performance as much as people think.
In response to whether BC is currently in a more normalized market, Mr. Muir noted that while Vancouver has experienced unusually low demand, the Vancouver market is not as flooded as people would think. Mr. Muir doesn’t see a huge difference – plus or minus – in prices on the horizon. Mr. Simpson commented that the fact that vacancy rates are down and rental rates have increased in downtown Vancouver is positive news. In addition, Mr. Simpson noted that there is not much standing inventory. Mr. Archibald believes 2013 generally is shaping up to be similar to 2012 – but the difference is that everyone knows how to operate in these market conditions now.
Shopping 2.0: What Does Main Street Look Like in 5 Years?
Christina Flanigan, President, Praxis Projects
Michael Penalosa, Managing Principal, Thomas Consultants Inc.
Wynn Spencer, Vice President, Store Development, Lululemon Athletica
Geoff Stollery, Vice President, Real Estate, Best Buy Canada Ltd.
Chris Wood, Principal, Northwest Atlantic (Canada) Inc. Brokerage
Christina Flanigan asked the panel about the effects of e-commerce. Mr. Penalosa noted that retailers have an opportunity to incorporate e-retail and compete in terms of price and delivery with their e-commerce competitors. Geoff Stollery posited that the brick and mortar store will remain relevant – the question is “in what shape and size”? Best Buy is still trying to figure it out by opening smaller stores and implementing “reserve and pick-up” practices. Chris Wood suggested that apparel has a touch/see element that is difficult to replicate online and that the impact of e-commerce depends on the nature of the items sold.
Ms. Flanigan asked how online sales affect retailers in their revenues and percentage rent. Wynn Spencer noted that online shopping is a separate channel for Lululemon to reach customers. Mr. Stollery commented that this is an evolving issue that landlords need to understand. What happens when a customer comes into a store to look at a product but then orders it online? Is this a sale under the store lease? Mr. Stollery noted that the reality is that an online presence helps pay for the brick and mortar premises, regardless of the fact that the store may boost online purchases.
Ms. Flanigan moved the discussion to what developers can do to enhance the retail shopping experience. Mr. Spencer noted that it is critical for Lululemon to find a “cool shopping center” where it is possible to create the “kitchen party atmosphere” that makes their customers feel comfortable. Mr. Stollery noted that access, visibility and parking may appear to be obvious, but these are the sometimes overlooked pillars of success. Mr. Wood pointed out the importance of putting together a proper merchandise mix of convenience (food, drug, liquor), fashion and non-core uses (e.g. yoga). Although the merchandise mix will vary from market to market, it is an important aspect of attracting customers.
Mr. Penalosa commented that people want a sense of community in the retail environment, and the development of good useable public spaces is crucial to that sense of community. Mr. Wood noted that some developers have recognized that retail creates a sense of community and that retail is an amenity for office and residential space. Mr. Spencer noted that this sense of community is what differentiates brick and mortar stores from e-commerce and what attracts the customer to return. Developers can facilitate this, for example, by designing seating areas and wide sidewalks for strollers and groups. Mr. Spencer concluded that what retailers do inside the stores (i.e. create an attractive and inviting environment), developers can do outside the stores.
Transportation Improvements Provide Market Certainty in Uncertain Times
Don Campbell, Senior Analyst and Founding Partner, Cutting Edge Research Inc.
This session followed on the morning session on Transit Oriented Development and featured Don Campbell of Cutting Edge Research Inc. Mr. Campbell started by noting that the real estate cycle is changing again. For decades, real estate development has been focussed on the housing, shopping and work needs of baby boomers. Mr. Campbell noted that “echo boomers” now outnumber baby boomers in Canada, and that development needs to change to address the needs of this new generation.
Echo boomers have different needs and demands. They are less likely to require parking, more likely to require a work space in their home, more likely to accept smaller living spaces and, in particular, shared living spaces. Affordability is an issue for echo boomers, who are only now getting into the real estate market. Echo boomers are also changing demand for retail, restaurants and entertainment. Energy costs affect their disposable income and they are more likely to seek out “green” alternatives, with enhanced technology. Mr. Campbell suggested that these needs will be addressed by locating development near to transit, closer to amenities and with less parking. Unit sizes can be smaller and with live-work capability. Technology enhancements such as fibre optic are a must. He noted that rental units need not be studios and one bedroom units, as studies have shown that two and three bedroom units close to transit are very attractive to echo boomers, who are not adverse to sharing housing.
In terms of transit, Mr. Campbell noted that rapid transit ridership in Metro Vancouver increased by 10.2% from January 2012 to January 2013. With Vancouver named as the second most congested city in North America, people now measure their distance from home to work, or other distances, in time, rather than in kilometres. Rapid transit, which can include both rail and rapid buses, and include new bridges like the Port Mann and Golden Ears, have to put people closer to their destination in time, if not in distance.
Mr. Campbell noted the 800 metre rule for proximity to rapid transit and mentioned several studies that showed the significant increase in property values and rents for properties within this distance, as compared to similar properties outside the radius. He noted that development demand around transit hubs in Vancouver and Calgary has far outstripped initial projections. However, densification and development in Vancouver along the Canada Line will likely not match that to be experienced along the Skytrain Expo and Millenium lines, as studies show that the impact of new rapid transit on development is less in neighbourhoods with higher than the median income levels.
Lastly, Mr. Campbell noted that new highways and new bridges have similar impacts on values and development as does rapid transit, and suggested that investors and developers should use government funded transportation growth as a catalyst to portfolio growth.
Closing Roundtable Discussion: Final Comments on the Vancouver Market for the Next 12-24 Months
Mark Renzoni, Chief Operating Officer, CBRE Limited
Andrew Bibby, President & CEO, Grosvenor Americas
Remco Daal, President & COO, Canada, Bentall Kennedy
Ward McAllister, President & CEO, Ledingham McAllister Ltd.
Brian McCauley, President & Chief Operating Officer, Concert Properties Ltd.
The day concluded with an entertaining and interactive discussion of numerous current issues and trends, including the economic outlook for 2013, political stability and the upcoming provincial election, the residential market, office development, land values, and retail and industrial development in Vancouver. The group was cautiously optimistic about the outlook for 2013 and felt that slow, steady growth and the maintenance of the status quo would be positive for British Columbia.
Consistent with the feeling of cautious optimism, the group agreed that they will continue to make calculated decisions, focusing on a more disciplined approach, purchasing well-placed, good redevelopment land, developing in transit-oriented areas wherever possible and seeking out assets with income growth potential.
With respect to the residential market, Mark Renzoni observed that employment trends remain critical to the health of the residential market. While the residential market may have softened in the last year, Brian McCauley noted that there is often a huge disconnect between what the press is reporting and reality. Whereas it is not uncommon for the print media to focus on declining sales, speculating that a real estate bubble has burst, Mr. McCauley noted that the market is normalizing and that continued growth at past rates could not be expected. The fundamentals remain key – well placed, well marketed, transit-oriented developments will find a market. Ward McAllister noted that there continue to be huge successes in Vancouver and other areas that remain “hot pockets” for development; Vancouver and British Columbia will continue to grow in the coming year. In particular, the group agreed that the new MC2development of Intracorp is a prime example of a well-developed and well-marketed property that found a market.
With respect to office development, the group agreed that the market is stable in Vancouver, vacancy rates are low and there is lots of tenant activity. Remco Daal noted that Telus Garden and the Canada Post site both present exciting opportunities in Vancouver, with Telus Garden currently under construction and its office space already substantially leased, and the Canada Post site being in the very early stages of planning.
As land values continue to increase for prime sites, developers are spending a lot of time focusing on new opportunities. The group agreed that this is increasingly challenging as there are often many players chasing the same prime sites. As Mr. Daal observed, this sense of competition creates a greater need for developers to take a disciplined approach, anticipating the cost and risk of each new site.
Lastly, Mr. Renzoni asked the panelists to comment on critical issues of concern in the coming year. The answers provided included electing a business-friendly government and promoting political stability, maintaining a disciplined approach with respect to acquisitions and development, focusing on quality over quantity, growing the organization itself to provide increasing opportunities for the younger generation, and creating a pipeline for planning so that the flow of product can be controlled through phasing.
Didn’t they say the same thing last year? Links to Feature Articles from past Vancouver Real Estate Forums: