Sarah Jones, Shauna Towriss & Kyle Wilson, Clark Wilson LLP
Republished with permission from BCRELinks.com
UDI kicked off its 40th year with yet another sold-out Annual Industry Forecast Luncheon. Don Forsgren, UDI President and President of Intracorp Projects Ltd., launched UDI’s “More Homes for More People” initiative, explaining that lack of “affordable” housing, particularly in the lower mainland, is damaging to individuals, families, and business. The initiative is intended to start a conversation which aims to raise public awareness and explore solutions that can improve the attainability of housing for all British Columbians. Forsgren noted that meeting housing supply targets in BC is not enough to solve the affordability problems. Supply targets must be exceeded if the pent-up demand for housing and affordability are to be addressed. He said that the provincial government needs to redraw existing governmental and regulatory frameworks, reduce red tape and set an example for all municipalities in addressing the issue and taking part in the discussion.
Following on the trend from the 2011 Forecast Luncheon, the panel of industry leaders entertained the audience and left them with a confident outlook for the year ahead. All panelists agreed that risk still exists in the market following the world-wide financial crisis and the continuing economic and political problems in Europe. Nevertheless, Tony Astles of Bentall Kennedy LP, Anthem’s Eric Carlson, and Rossano De Cotiis of the Onni Group were generally optimistic, even when discussing potential changes to the BC political landscape, as they responded to the following questions from moderator Diana McMeekin of Artemis Marketing.
What are the three positive things that you forecast will influence your sector in 2012?
Tony is happy with supply for the industrial and office sectors for the next couple of years. He predicts that growth should be good in 2012 and that there will be increased and continued interest in investment grade income producing assets.
Eric predicted that world economic and political volatility will dial down a notch but will not dissipate entirely. He thinks that after the events of the last few years, British Columbians and Canadians are more accustomed to the current economic and political environment and will start to make the real-estate related decisions they’ve been putting off, such as buying new homes or properties and retiring to areas such as the Okanagan. He noted that US retailers are expressing renewed interest in Canada and predicted that business will follow.
Rossano doesn’t see a major turnaround in our future in terms of the economy. The three things he predicts as being influential in 2012 are interests rates, which will fuel demand for single and multi family housing, continued Asian investment and ongoing volatility in the stock market, which will result in people tending to favour real estate as a steady and generally reliable investment.
What are the things that keep you up at night that will influence your sector in 2012?
Eric is kept awake by a few things these days: a dram of scotch here and there; concern that market and economic volatility will continue to make it difficult for people to make the decision to invest in real estate; his nightmare of a crazy “End of Days” scenario that threads its way through the world, with the coup de grâce being the implosion of the Chinese economy (with the millions of completed but unsold condominiums not being absorbed). After suggesting that Eric should speak for him for the rest of the questions, Tony said that his main concern for 2012 is the potential for continued deterioration of the economic environment and a possible glut of office and industrial product by 2014-2016. His other concern arises from Bentall Kennedy’s focus on sustainable development. Tony worries about the surge in attempts to implement initiatives such as installation of geothermal heat sources, green roofs, and other similar green/sustainable projects. He notes that while laudable, all such initiatives need to be looked at critically prior to implementation because they are not applicable in all cases. Rossano said he’s generally sleeping well these days, but a theme that carried throughout his comments at the Luncheon was that the European debt crisis is a real concern, and if it reaches a tipping point both Vancouver and Canada will feel the negative effects.
What effect would an NDP government have on your business?
Frequent UDI panelist Rob Macdonald sent his annual political question in by email for the panelists. The question can be politely rephrased for our readers as: the splitting of the vote between the BC Conservative Party and the Liberals is a 90% certainty in the next election – what will happen to your company and the market if an NDP government is elected?
While a little squirming was evident, each panelist confirmed the importance of diversifying investments in a variety of markets rather than concentrating solely on British Columbia. Their respective companies’ intentions are to continue this practice going forward and each expressed the view that diversification will cushion them, in part, against any negative impact a change in government has on the economy.
In particular, Eric has mellowed from his stance in 2011 when he reported that the NDP “scares him to death” due to his view that they have exhibited a “profound lack of understanding” in the past of the concepts of capital, risk and creativity, and how the three come together. He said he has worked with NDP mayors in Metro Vancouver in the last 12 months, and his experience is that they are good people who care about their communities, just like their counterparts on the other side of the political spectrum. His view is that on the balance, an NDP government wouldn’t ultimately be as bad as some people suggest. He did, however, assure the audience that the NDP will increase taxes and regulation and will generally be annoying.
Rossano noted that his entire business career so far has been under the Liberal government and so he has not personally experienced an NDP government. His view is that to be successful, businesses have to be flexible and work with the government that is in power at the time.
According to Tony, economic growth and job creation are generated by many different factors. Those factors, and their impact on GDP and job growth, can change over time and with different circumstances, and government is only one of those factors.
How has Vancouver succeeded in weathering the global economic crisis so well compared to other areas? Will our market continue to be able to weather the storm successfully?
Tony and Rossano both agreed that Canada’s prudent banking laws were a saving grace for Vancouver and the rest of Canada when it came to weathering the crisis. Rossano noted his experience with the United States, which, he says, has a significantly different debt market than Canada, and has shown him that the approach of Canada’s banking industry is good for condo buyers and for developers seeking construction financing. Canada is not, however, insulated from Europe. He cautioned that a crash there will be a major issue for Canada and Vancouver.
Tony highlighted Vancouver’s continued property value stability and the fact that there are fewer big companies in Vancouver that needed to lay people off. He also noted that Vancouver is insulated from the industries that were most affected by the crisis, such as car manufacturing.
Eric sees Canada as the “True North strong and free”. Our strong national economy, strong central government, great resources, relatively good public education, healthcare and a friendly business environment are tremendous advantages. People and businesses move to Canada, and not just Vancouver, for this. His view is that Vancouver, and Canada, will continue to weather the storm due to these factors that distinguish us from other regions.
Do you see an end to the surge of Asian investment in our market and, if so, where will future demand come from?
The panellists universally agreed that they do not see an end to the infusion of Asian capital in our market. In addition, Eric noted that we already have the first generation of Asian immigrants within the market who are currently investing. Eric also believes that a lot of Chinese business capital is, and will be, coming to the market in the form of big money being used to buy oil and gas companies, as well as others. Rossano noted that the market has generally done a great job of making those immigrating to the Lower Mainland comfortable here, and like Eric, believes that businesses will now follow.
What is the forecast for the US market? When will it bounce back? What about other markets in Canada?
All three panellists are currently seeing signs of improvement in the US market. Rossano thinks that the investment market in America is presently okay, and is likely a lot better than television indicates. Rossano noted that there are some places in the US where homes should not have been constructed in the first place, and he does not see a recovery occurring in those locations. Rossano believes that the US market will see a big change over the next two to three years. Tony also noted that there seemed to be a big recovery in the US market last year, which generally indicates the beginning of improvement for the States. However, Tony assumes that the improvement will be bumpy, and agrees with Rossano that negative media coverage is a barrier to that recovery. In addition, Tony cautioned that the US continues to have foreclosure problems, and that the potential for a double dip recession in America still exists. Eric stated that we should never underestimate our neighbours to the South, and believes that the US economy is doing far better than the media would have us believe. Eric noted that while residential construction is currently on hold due to surplus inventory (leading to high unemployment figures), in three to four years time that surplus inventory will have been absorbed and a substantial number of new homes will then be needed.
In terms of Canadian markets, Tony observed that Toronto has seen some of its strongest growth ever in the last year and a half. The urbanization of the downtown core in Toronto has been positive, although the suburbs of Toronto are not as strong. Eric and Rossano agreed with Tony that the Toronto market is strong. Eric noted that immigrants are driving the Toronto market, and that office and industrial space are both doing well. In terms of the Calgary market, Tony believes that oil is driving supply in Calgary, with Class A office space in downtown Calgary having low occupancy rates and the industrial market generally being fairly solid there. Eric also views the Calgary market as doing well, although Rossano does not feel quite as bullish on Calgary.
What is the forecast for pricing and rental rates in 2012 with respect to each of your particular areas?
Tony believes that office rates in downtown Vancouver, Burnaby and Richmond will all increase, with Richmond seeing a slower rate of increase than Vancouver and Burnaby. With respect to industrial rates, Tony thinks that good product will see good absorption, while the absorption rate for bad product will not be great. For retail product, Eric observed that rental rates will depend on the region the product is in, with the urban core seeing an increase, and secondary markets fluctuating from increasing, to remaining steady, to potentially dropping in some areas. Eric noted that cap rates are likely to continue to fall, particularly in urban areas. In terms of the residential market, Rossano sees rents going up, and in terms of residential pricing, Rossano noted that it will depend on area, but pricing will generally be quite balanced.
Where are the best development opportunities in the year ahead?
In terms of the retail market, Eric observed that the opportunities are greatest in the downtown core, and that Vancouver, Burnaby, North Vancouver, and Richmond are all good bets. Eric noted that there still is not a lot of retail land available at reasonable rates. Rossano believes the best residential development opportunities exist along transportation corridors and in Richmond, where the Asian investor is still buying. For office product, Tony sees potential in the downtown core between now and 2015; however, he noted that the number of office developments planed for 2016 and beyond will result in too much product for the market to bear. During the course of 2012, Tony sees demand for office product in central Vancouver, and otherwise close to transit for mixed use product.
What is hot and what is not in particular market sectors?
On the residential side, Rossano joked that wide-planked hard wood floors are hot, as is anything green, and that overpriced real estate is not hot. He also noted that Onni recently had to combine neighbouring units in a development to create larger units for purchasers, perhaps suggesting that larger units may be hot in coming years. From Tony’s office and industrial perspective, proximity and access to the SkyTrain is hot, while suburban office space is not hot unless it is linked to the SkyTrain or there is access to the it by way of shuttle. In the retail/commercial sector, Eric feels that big mixed-use projects with a residential tower and podium are hot. He also sees smaller scale mixed use “high street” type developments with ground level retail along the major corridors as being hot, but notes that these projects are often complex and time consuming on the front end and not a lot of municipalities or people have experience in putting them together.
What will happen to your market sector (and liveability) due to the affordability problem for young people that can’t get into the market?
Tony predicts that younger people will rent more or move to suburban locations with smaller and less expensive units being built near transit. Eric acknowledged that we need to work towards getting costs down and reducing red tape in order to solve the affordability issue. However, he was also of the opinion that houses are expensive and people need to get over this and realize that life changes and evolves. While we might all want to live in a $4 million house in Kerrisdale, the reality is that younger people will have to move outside of the urban core to places like Port Moody, where developers are doing “cool things” with smaller spaces. From the retail sector’s perspective, smaller living spaces are a good thing as they force people to leave their small units and meet at coffee shops or other retail spots. Rossano confirmed that the affordability problem for younger people is a real issue and agreed with Tony that in the short term young people may look to rent or move to the suburbs. In Rossano’s opinion, a solution to this affordability problem will require the government to get involved and mandate that developers build a certain proportion of affordable housing units into their projects (e.g. 20%).
What green technology have you adopted that has caught your attention and given people the most bang for their buck?
“None” was the comment from Eric, who felt that a proper efficient design was the key to “green technology”. He said that, while green technology is hip and cool, people only want it if it’s cheap. If people have to pay for green technology they would rather do without it. Eric also stated that if people want more bang for their buck, developers and consumers can look to densification and live in smaller spaces and ride their bike to work or take public transit. Rossano echoed the sentiments of Eric, saying that people don’t want to pay for green technology. He said that Onni is currently working with reusing rainwater and using sunshades and more effective glazing. Rossano noted that LEED has done a great job of marketing, but there needs to be more of a middle ground. For the office sector, Tony said that the key is to get the outside right or get the people inside doing it right. Triple-glazed windows, low-flush water retention toilets and energy saving measure make sense and reduce operating costs for tenants. If the tenants themselves follow sustainable practices and turn off lights and computer screens and compost their waste, it takes a huge load off the building and it’s free.
You are all successful leaders in your field – what has you most excited about 2012 and beyond and what will your focus be?
Tony is stoked about Bentall’s development pipeline for the next 2 to 10 years, with a number of mixed-use products popping up along the transit corridors. He also commented that real estate is a hard asset and an anchor in the markets and that, with people continuing to be annoyed with the volatility of the market, they will move towards income producing properties, which are a defensive asset. Rossano said that Vancouver is Onni’s home base and that, while Onni is still excited about development in Vancouver, he also sees great opportunity in a number of US markets in 2012. Eric commented that when he looks at the world leaders he thinks they are dealing with problems properly and that they will eventually solve the current financial issues. Technology has him excited, as does “liveability” and the cool, fun product that Anthem has coming down the pipeline that will provide consumers with an exciting place to live.