At this year’s Annual Industry Forecast Luncheon of the Urban Development Institute – Pacific Region moderator Diana McMeekin of Artemis Marketing introduced the presentation by referring to this year’s theme of Innovate or Stagnate. Ms. McMeekin challenged the 1,100 attendees by asking whether they should enter 2014 standing still and hoping for a positive outcome or looking to innovate their way into a more successful year. The same theme was carried through each of the three speakers’ presentations and the question and answer session which followed.

The proceedings started with Mark Betteridge‘s of Discovery Parks presentation on the Office and Technology sectors.


Mark Betteridge of Discovery Parks
Michael Penalosa of Thomas Consultants
Colin Bosa of Bosa Properties

As has been the case in years past, before moving onto more specific questions for individual panelists, the proceedings started with each being asked to answer the question “What’s in store in 2014?” for their respective areas:
Office & Technology Markets: Mark Betteridge, Executive Director, Discovery Parks

With technology being the fastest growing industry sector in the province, it is no surprise that Mark believes that technology will play an important role in the real estate industry in 2014. With the technology sector boasting virtually full employment, the result is that employees are calling the shots in terms of where their offices are located. For these employees, the technology environment is more about the neighborhood outside the building than the building itself. These employees are gravitating towards employers that are located in cheap, trendy locations, where net rent is in the teens. In particular, Main St. and the I-1 zone are attractive due to lower rents (for now), hip space and great food and drink options. In contrast, suburban business parks are less favoured by tech employees. In terms of growth areas within the province as a whole, Mark views Kelowna and, perhaps, the Comox Valley as having potential. Mark believes that there are financing opportunities, either to find or create capital pools to invest in both real estate and technology.

Retail Market:

Michael Penalosa, Managing Principal, Thomas Consultants
In a world of increasing e-commerce, Michael believes the key to retail space maintaining relevancy is to find a way to drive people into those spaces. Instead of single-purpose shopping malls anchored by department stores, or the suburban strip malls, retail spaces will need to change their role and function. Shopping malls will need to be multi-purpose in nature, combining office and residential space with the retail component, and providing people with experience-driven environments. Michael commented that examples of innovative retail spaces can be seen in the US, with shopping malls that integrate entertainment, restaurants, residential space, connections with LRT systems, retractable roofs and community gathering places. The UK and Dubai also have been ahead of the curve, incorporating “triple drama” storefronts, exclusive tenants, extensive fountains and an aquarium. These comprehensive retails places provide value for customers, demonstrate the necessity of community buy-in, and indicate that relevant retail spaces are all about the experience.


Colin started off by saying that 2013 turned out to be a good year for home building and noted that MLS sales were up 12% over 2012. Despite this, he said that there is no shortage of opinions or questions regarding the state of the real estate market. In particular, everyone wants to know if there is room for growth in the market and whether there is a housing bubble and if so, will it burst? Colin said that supply and demand are the key factors in answering these questions and in doing so we must go back in time and look at the causes of previous downturns in the market. He attributes the last downturn in the market to a poor economy, low in-migration and low employment levels resulting in less demand for housing.

He noted that the balance between supply and demand for 2014 looks promising. He pointed out that the BC Liberals have made job growth a priority, US housing starts are up 20% which is good for BC’s lumber industry and the LNG projects in northern BC will increase BC’s GDP – all of which will also create more employment opportunities. So, on the demand side, he predicts that greater employment opportunities, lower interest rates and increased migration (CMHC projects 30,000 people to move to the Lower Mainland) will create increased demand. On the supply side, he predicts that supply will be curtailed due to approval processes for developments and community plans taking longer and lenders acting more rationally.

He briefly discussed the concept of change in the real estate industry and noted that because sales have been robust since 2001, there has been little need for change. Meanwhile, he pointed out that there have been changes in the way that people shop, work, commute, travel and communicate and that developers need to take these factors into account when it comes to the designs of their homes. Although he predicts that 2014 will be a good year, as the market slows down, the companies that will be the most successful are the one that can adapt to change.


Since 2001 the real estate market has been doing well (other than a minor correction in the market in 2009). Looking into your crystal ball, how much longer will this last?

Colin said that although interest rates are on the rise, in the short run, the real estate market looks good. He noted that that supply and demand, which are the key factors in determining market stability, are in balance right now. He cautioned that there may be somewhat of an imbalance in the longer run, as supply increases due to greater activity on the development side as project and community plans are approved and demand decreases due to a slowing of international migration and an increase in interest rates.


It seems like online shopping has no bounds. What is the future of bricks and mortar?

Michael doesn’t think that bricks and mortar will disappear. He says that shopping in malls is very much a social activity and people will not replace it altogether with online shopping. He noted that some of the shortcomings to online shopping include the lack of instant gratification for the consumer and the inability of a computer to “up-sell”. In terms of shopping habits, he pointed out that people still like the “touchy, feely” aspect of shopping in person and generally are less likely to purchase items online that they need to see or touch. On a positive note for consumers, he does think that the popularity of e-commerce and, specifically, the ability of consumers to very easily compare prices online, will force retailers to be more competitive with pricing. Although bricks and mortar are here to stay, Michael thinks that online shopping will eventually have an impact on the size of retail shops as on-site inventory requirements lessen.


Will technology become a more important sector in the BC economy in 2014?

Mark said that technology will inevitably be a more important sector in the BC economy this year. He attributed this to the fact that technology, in any industry, is at the forefront of creating jobs and generating revenue.


What will be hot in the residential market in 2014?

Colin thinks that affordable homes offering value and located near public transit will be popular. He provided examples of how his company has maintained affordability by designing units with adaptable space and transferable components.


Will an anti-mall sentiment emerge in 2014?

Michael doesn’t think that an anti-mall sentiment will emerge in 2014. He noted that major renovations to existing shopping centres and the introduction of new products, such as outlet malls, are examples of how malls are invested in not only getting the best tenants but also responding to consumers.


Do pure technology companies behave differently as tenants compared to other firms?

In order to answer this question, Mark said that a distinction must be made between start-ups and more established, profitable technology companies. As tenants, start-ups are generally more of a risk than other companies as they are still at a pre-revenue stage and a landlord must really do its homework to determine where the company is going and what it may grow into (i.e. will it be sold to a bigger company or maintain its own operations). In the case of a profitable technology company, a landlord would do a conventional credit check (as it would for any other company) and, as it would for any other tenant, ensure that it is generally comfortable with the company’s products and operations, as opposed to mainly its financial background.


Who will be buying condos in 2014: Owners or investors, onshore or offshore?

Colin noted that 10 years ago, the split was 50% investors and 50% owners, peaking at 90/10, and now about 75/25. As to the offshore element, he does not see a large number of truly offshore buyers, observing that nearly all foreign buyers are actually immigrating or buying for someone who is here.


With the arrival of Target, Nordstrom and probably Saks, do you see more US department stores coming to Canada?

Michael first countered that not many retailers see themselves as traditional department stores anymore. Despite the well-publicized struggles of Target’s arrival here, there are opportunities that US retailers who see themselves as specialist will pursue.


How do landlords deal with the risk of renting to start-ups?

The key, according to Mark, is to recognize that they are start-ups and accept that there will be turnover – not so much because of business failures, but more often, tenants growing out of the space. This means a couple of things: all lease terms will be month-to-month and you need to have lots of tenants to mitigate the turnover risk.


Why is your company so bullish on Surrey Central?
Bosa takes a long term approach with everything they do. Colin says that any developer should want to be involved in any area with rapid population growth, massive infrastructure investment, Skytrain, SFU and reasonable land prices, but that the lingering stigma associated with Surrey has been a hurdle for others. Colin says that, for buyers, the combination of affordability (mid $400s per square foot) and an abundance of local amenities has resulted in faster than expected presales.


Are shopping area like the Village at Park Royal and Edgemont Village indicating a trend?

Michael says that in different ways both places have created a community feel that shoppers enjoy. Park Royal was and is a mall, but it has adapted successfully. Edgemont meanwhile was an actual community first and things have grown around it. Michael believes that whenever one can create authenticity, there will be a receptive audience.


Does mixed-use development really work? How do you do it?

All agreed that mixed-use is difficult and complicated, but very worthwhile. Mark says that combinations of rapid transit, density and multiple amenity and activity opportunities is “the only way to go forward.” Michael said “we preach it”, but recognizes that it is a lifestyle choice that is not for everybody – it may be noisier and more urban option, but also greener and more fun. Colin takes inspiration from the plazas of Europe, combining residential, commercial and outdoor spaces to create a sense of community. He also values the innovation that comes out of mixed-use projects and notes that retailers are increasingly open to new formats.


NAIOP’s breakfast Industrial Outlook for 2014 was attended by an attentive, quiet group of over 300. Mark Renzoni, introduced the session by reviewing the 2013 Industrial Outlook forecast. In 2013, the panel was generally bullish, predicting an improving industrial market, but with a lower level of sales (in terms of both number of sales and absolute dollar volume), primarily based on a lack of supply. In fact, Vancouver’s 2013 industrial market outpaced that of 2012, with over $1 billion in industrial transactions completed. As is typically the case in the Vancouver market, nearly 90% of the transactions were under $5 million in value.

Mark also noted that 2013 to 2015 will be a key period in the development cycle for industrial space in the Vancouver market, with several developments underway or in the planning stages, adding that market participants likely didn’t realize at the start of 2013 that the development cycle was about to commence.

Turning to the panel, Mark asked for a short summary of 2013 activity for each of the panelists and their view of overall market activity in 2014. Darren Cannon, discussed several large transactions which completed in the Vancouver market in 2013 and suggested that 2014 will be less active, as there are no large transactions on the horizon. Darren also predicted that capitalization rates for industrial properties in Vancouver would not change materially in 2014.Beth Barry, advised that the Beedie Development Group continues to be a buyer in the marketplace, but that she felt that a lack of available opportunities would limit their activity in 2014.

In terms of product availability nationally, Jeff Miller, advised that the lack of investment opportunities for industrial properties extends across the country and was expected to continue into 2014. He also noted that the average transaction size in Vancouver in 2013 was half of that in Calgary and Toronto. In addressing cap rates across the country, Kevan Gorrie, noted that cap rates for industrial properties are very “market specific”. Whereas the cap rates for institutional grade properties in Vancouver are very low (in the low 5% range), cap rates are in the low to mid 5% range in Edmonton and Calgary, in the high 5% to 6% range in Toronto and possibly as high as the high 7% to 8% range in Montreal. Markets across the country have moved apart in terms of cap rates, perhaps even more so than the divergence of cap rates between asset classes. Kevan noted as well that other than for institutional grade properties, cap rates have moved up slightly across the country, due to the increasing cost of capital for REIT purchasers.


Mark then spoke about the strata market. Darren was asked whether there is/will be a shortage in strata over the next 12 to 18 months. Darren responded by saying there is no oversupply. So long as interest rates stay low, mortgage and lease rates will be comparable. Mark asked Beth about pricing, specifically construction costs. Beth spoke about increases in strata construction costs. She referred to changes in municipal bylaws and the building code which have resulted in increased costs. She pegged the increase to $10-$15 per foot over the past 5 years. Jeff said that Oxford would not develop strata and also mentioned that corporate America did not want to see real estate on the balance sheet.

Mark then posed specific questions to the panel members.


Do you see land prices going up?

Beth said that land prices are definitely going up. She noted that from Beedie’s perspective, the “easy” sites are gone and land opportunities are now mostly available in more challenging sites (from a site preparation and location perspective) so there is also pressure on costs to develop.


Do you see the Norampac mill site development putting pressure on land value? What impact will the Norampac mill site have on land value?

Jeff doesn’t think that the Norampac development will have any impact on pricing. A lot of the remediation for this site was accounted for in the purchase price. He noted that there is a massive gap between the user market and what developers will pay. Input costs are increasing and he didn’t think land value will increase more until we see more absorption and rental growth.


What bets would you make if you were buying land?

Darren said that he didn’t know if land prices will go up. He noted that it is really tough to make pro formas work when a developer has to sit on land (while it’s being developed) without any return for 2-3 years, so there is a need to be more creative, suggesting joint venture arrangements or leasehold models.


Will REITs buy land?

Kevan said that Pure Industrial Real Estate Trust (PIRET) has avoided buying land because, up until now, they have been limited as to what they can do due to their size and investor expectations. He noted, however, that the timing is now right, (both from a size and investor perspective) for PIRET to get into buying land – but not in the Vancouver market. Most likely PIRET will focus on land purchase and development in the Toronto or Alberta market. He added his prediction that Vancouver land sales will be flat and vacancy rates will be soft.


What is your view of Alberta land values in comparison to BC land values?

Beth said that the average price per acre in Calgary is less than in Vancouver. Specifically, she noted that the price per acre of land in Calgary is in the high 6 figures whereas in Vancouver it is over $1,000,000.

Mark then noted that the forecast last year that vacancy rates would decrease turned out to be correct. He predicted that vacancy rates would continue to go down in 2014 but likely stabilize by the end of the year due to new development.


Are rents set to increase?

Darren said that the leasing market is tough because there is lots of new supply. He noted that the bright spots in the market are for well located, tier 1 buildings. He said that rental rates have been rolled back to the rates he saw in 2004 and 2005 but he expects to see rental rate growth in 2015.


Do you see an opportunity for rents to increase on lease renewals?

Beth said that she has seen renewal rates go up due to a lack of supply. She noted that their build-to- suit clients are looking for value so there is less ability to increase rates but pointed out that their rates are reflective of development costs and not of the general rental market.


Can you give us a national perspective on the movement of rental rates?

Jeff said that last year there was real pressure on rental rates. He noted that rental rates in the US have been strong and cited a 20-30% increase in rates which helps the business case for rates in Canada. He said that the Greater Toronto Area is primed for growth. He thinks that Edmonton is the strongest market and predicts continued growth in Edmonton due to the energy sector. He noted that the Calgary market is softer than Edmonton and predicted that rental rate growth would be flat. Jeff thinks that Calgary needs more demand and absorption in order to jump start growth.


Can you give us a national perspective on the leasing market?

Kevan said that the market in Toronto is very strong and that there is a great deal of demand across the board. He noted that the Calgary market is soft and that in Calgary location will be the most important factor in generating demand. He said that the Vancouver market is somewhere in between Toronto and Calgary and noted that they just completed that their last lease deal in Vancouver and don’t expect to do any more until 2015. He described Vancouver, Calgary and Edmonton as a “tenant’s market”.


Are you seeing any new users?

Beth said that the trend she has noticed in the last 8-10 months has been a growth in manufacturing. Many of their build-to-suit clients are in manufacturing as opposed to distribution. She noted that from November 2012 – 2013, manufacturing, particularly in the areas of transportation, food and machinery, has grown significantly in BC compared to the national average.


Are you seeing this trend (i.e. growth in manufacturing) in the East?

Jeff described manufacturing as “spotty” in Toronto and noted that there are manufacturing companies in their portfolio that are struggling. He added that big box retailers are active in the East and e-commerce is still emerging.


Who is experiencing positive growth on the user side?

Darren said that he hasn’t seen any significant expansion requirements for tenants but predicts that we will see that change in the next 18 months.


Noting that a low Canadian dollar is good for business in Canada, especially manufacturers and distributors, and that as of the start of the breakfast our dollar had dropped to US$0.89, he asked the panelists for their forecasts for this time next year. They all were in the 87 to 90 cents range, with Kevan venturing that the inevitable pipeline approvals, allowing Canadian oil to be sold to more lucrative markets than the US, will eventually drive the Canadian dollar upwards again.