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NAIOP Panel Bullish on BC for 2004

By Darren Donnelly                                     January 29, 2004 

The gold rush into real estate will continue through 2004.

That was the consensus of moderator Ron Bagan of Colliers and panelists Scott Cressey, Ryan Beedie and Gino Nonni at NAIOPís Developers' Perspective Ė 2004 breakfast seminar held January 29th at the Vancouver Four Seasons. All of the panelists were bullish despite the prospect of labour shortages, rising construction costs and increasing challenges related to sustainability.

Labour Shortages and Construction Costs

Construction labour shortages are the biggest issue facing the industry today, according to Scott Cressey, President of Cressey Development Corporation which currently has 300 employees and $300,000,000 of residential, commercial and industrial product under construction. He noted that there is no influx of workers returning from the US and Alberta as construction continues to be strong in those regions. Compounding the problem is an insufficient supply of young workers from local trades programs. The result, according to Cressey, is that "we are stealing employees from each other and I just see the labour market getting tighter and tighter".

Ryan Beedie, whose Beedie Group is by far the largest industrial landlord in BC, said that although he understands labour shortages to be a major issue in the residential sector, he has yet to experience it with his own work force. He has, however, seen some increases with respect to materials and has recently had his first experience with price increases being demanded (read "extorted") on site.

Impact of Environmental Issues

Gino Nonni, President of Wesgroup, an industrial and commercial developer with a portfolio of over 2,000,000 square feet, sees the publicís need for sustainability as an ongoing issue. In addition to streamside and other environmental regulatory requirements, municipalities are becoming ever more demanding with requirements such as greenways and bike paths. With the land supply tightening, developers are finding themselves, sometimes unwittingly, becoming brownfield developers. Nonni notes that contaminated properties are difficult, if not impossible, to finance. Developers must be prepared to walk away from acquisitions if they cannot structure the deal to achieve the potential for greater returns to compensate for risk.

Impacts of the Rezoning and Development Approval Process

The entire panel and moderator nodded in agreement as Nonni discussed the incredible up-front costs in any major project, mentioning consultant costs and development cost charges among other expenses. In addition, the income for the municipality generated following conclusion of the project is also substantial. On one particular project, Nonni noted that annual property taxes on the 40 to 50 acre site will be enough to fund the operating costs of all of the municipalityís recreational facilities, including ice rinks and swimming pools.

Scott Cressey noted the market risk created by the length of time involved to achieve rezoning and approvals. For example, his companyís project at 7th and Ash in Vancouver went through a two year rezoning process for a residential use in the mid-90ís only to see the market crash; they then pursued a further two year rezoning process for high tech office building only to see the tech market melt down. Fortunately for Cressey, they persevered and the Echelon Centre, which will be substantially complete in the next 60 days, has found a niche biotech/medical market and is 100% pre-leased.

Effect of Real Estate Gold Rush on Existing Developers

The entire panel acknowledged that the amount of capital "chasing real estate" has been phenomenal. Investors range from individuals buying single apartments to high net worth families acquiring stable return industrial portfolios. And, of course, REITs and other institutional buyers continue to have an insatiable appetite for real estate.

Scott Cressey expects that as neophyte investors learn about the costs of managing real estate and encounter the many risks involved, there will be an eventual shake out. Ryan Beedie noted that the environment of low interest rates and lenders very aggressively wanting to lend to both developers and buyers has been a boon to end users. The result is that Beedie is now developing approximately 90% of its product for end users, which is a significant change from their traditional 50-50 mix with tenant occupied product.

Gino Nonni agrees that now is an excellent time for end users to develop and purchase their space, but cautions that buyers of investment product need to be very careful because much of the product is overpriced.

Outlook for 2004 and Beyond

All of the panelists were upbeat for 2004. Gino Nonni sees BC as a great place to live and believes that, as long as interest rates remain low, the local real estate market will continue to be driven by people who wish to live and work here. Looking at 2005, Ryan Beedie is wary of both the economic impacts coming from the United States following Novemberís presidential election and difficulties being experience by tenants impacted by rapid appreciation of the Canadian dollar. Most bullish of the three is Scott Cressey who acknowledges there will be ups and downs but believes that the overall outlook is strong through the next several years leading up to the Olympics in 2010.

- Darren Donnelly  
 

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