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2006 Vancouver Real Estate Forum Buzzes

By the Commercial Real Estate Group at Clark Wilson LLP          April 20, 2006

The full house packing the Hyatt Regency Ballroom at this year’s Forum heard from a host of industry experts that the good times would, for the most part, continue in BC through 2006. For those who missed it altogether, or had to choose between concurrent sessions, here are some of the highlights.

Keynote Address: How will our economy perform over the next year? How much growth can we expect?

Warren Jestin, Senior Vice President & Chief Economist of Scotiabank, predicted that the national economy would continue with steady annual growth of around 3% over the next several years. Inflation will remain low in Canada at about 2% with price deflation in many consumer goods off-setting oil prices, which will remain at historic highs. Interest rates will rise another half a percent soon, then rise very gradually in a way which he said "will not turn off the economy." The Canadian dollar will continue to strengthen, hitting 90 cents US in the next few months, where it will pause before continuing to rise. It will also rise, but at a slower pace, against other currencies. Job growth will continue but be less robust as supply constraints leave many jobs unfilled.

Mr. Jestin showed a number of statistics indicating that "the West is best" by virtually every measure, with Alberta leading the way. In BC, annual growth will be closer to 4%. The western provinces will continue to benefit from huge waves of international investment interested in our massive energy reserves, and from strengthening ties with the booming economies of China and India, where annual economic growth just under 10% will continue. All of which segued seamlessly into Jock Finlayson’s presentation…..

The Regional Outlook: When can we expect the market
to change and why?

"The BC economy is booming. We are in the middle of a period of robust growth," according to Jock Finalyson, Executive Vice President, Policy, Business Council British Columbia.

BC’s growth is broadly based, occurring not only in the Lower Mainland but all across the province, and in a wide array of sectors. And contrary to the notion that job growth has been in lower paying service jobs, Mr Finalyson reported that BC’s approach to "full employment" has been accompanied by significant growth in real wages. 80,000 new households are expected to be created in greater Vancouver over the next 5 years. Taxpayer supported debt in BC is the lowest in Canada, excluding debt-free Alberta, and the provincial government is, in Mr. Finalyson’s opinion, managing finances well.

Economic growth has impacted all real estate sectors positively. Housing starts increased by about 20% in each of the 4 years prior to a levelling off -- at a very high level -- in 2005. Further growth is expected in 2006. Retail sales have been ever increasing, with January’s statistics showing growth at an annual rate of 9%. The value of non-residential building permits issued in 2005 was 55% higher than 2004 and will continue to grow for at least the next two years.

Overall, despite worries such as a continuing drop in US tourism, rising Canadian dollar, weakening US economy, rising construction costs and traffic congestion, the outlook remains bright for both the BC economy and BC real estate.

Mr. Finlayson’s presentation, replete with statistics and charts can found at http://www.mmpiwest.com/realestateforumswest/vancouver/downloads/2006/

The Investment Roundtable: What does the future hold
for transactions in the Vancouver market?

John Zaytsoff, Real Estate Market Leader, KPMG Vancouver
Remco Daal, Senior Vice President, Portfolio Management, Bentall Real Estate Services
Mark Hannah, Partner, Avison Young Commercial Real Estate
Jim Szabo, Vice President, Investment, CB Richard Ellis

Mr. Finlayson’s presentation was followed by a panel discussion on the current state of the investment market and what the future may bring for the Vancouver market. Moderator John Zaytsoff introduced the discussion by summarizing the current state of the investment market in Canada. He noted that although the past several years have seen unprecedented investment activity (due to low cap and mortgage rates), the Vancouver market did not see the same percentage increase in sales from 2004 to 2005 (3%) which was experienced nationally (14%) or in the United States (62%), which was attributed to a lack of inventory in the Vancouver market.

Generally, the panel agreed that strong economic fundamentals and low cap and mortgage interest rates will continue to drive institutional investment in the Vancouver market in 2006. Institutional investors are starting to favour yield on investment over quality of investment, and are more than ever prepared to invest in secondary markets such as Victoria, Kelowna and Nanaimo, particularly if they can acquire the highest quality property in those markets. Because there may not be much opportunity for further compression in cap rates, investors have a new focus on properties which offer the opportunity to increase rents, and will seek out opportunities where in place rents are below market for leases expiring in the short to mid term.

The panel felt that foreign capital should be more aggressive in the next several years, as Vancouver gets "on the map" from a global investment perspective. In particular, this will apply to US investors seeking to diversify their portfolios from a currency perspective (i.e. invest outside of the US Dollar, which is expected by many to decline in value). Those investors can achieve the same investment yield on properties located in Calgary or Vancouver as for properties in the domestic US market, but by investing in Canadian Dollars may also receive a gain on the currency exchange.

From the risk perspective, the panel saw increasing interest rates and the possibility of "negative leverage" as being the most significant risk for the investment market in the next several years.

Major Trends in the Retail Market: Why are major retailers
now focussing on smaller markets?

Stephen Knight, President, Sitings Realty Ltd.
Scott Lee, President, Northwest Atlantic (B.C.) Broker Inc
Christina Flanigan, Leasing, Westbank Projects Corporation
Bob Tattle, Vice President Business Development, Anthem Properties Ltd.

The mid morning program, moderated by Stephen Knight, focussed on the retail sector and smaller markets in BC, being everything outside of the Lower Mainland and Greater Victoria regions, such as Kelowna, Kamloops and Nanaimo.

Scott Lee believed that there are three reasons why retail tenants are locating in the smaller markets. Firstly, a lot of these companies are public companies and need to continually grow so as to increase shareholder value. Secondly, the retailers have identified untapped sales potential, especially in areas where there is significant employment growth. Thirdly, project completion timelines are shorter in smaller markets, which means more stores can open in a shorter period of time. Christina Flanigan and Bob Tattle both confirmed that the urban areas of the Lower Mainland required more patience from developers and retailers and both cited their respective projects at Marine Way and Byrne Road in Burnaby as examples of a municipal process that has taken longer than expected.

However, the difficulty with developing retail centers in the smaller markets, as Mr. Tattle explained, is that in urban markets, landlords can achieve higher rents which offset currently high construction costs, while rents are lower in smaller markets but the construction costs are relatively the same. This, together with the increased land cost across the province, puts the squeeze on the developer unless tenants are willing to pay more rent. The panel agreed that at some point something had to give. But, as Jeff Wren pointed out, current capitalization rates are saving the developer in the short term.

Where is the hottest small market? Well, Scott Lee proclaimed that "Westbank is the next Kelowna", as he expressed great optimism in the future health of power centers, especially in some of the smaller but growing markets. The panel also saw strength in the regional centers and the possibility that lifestyle centers could make a significant break through in BC if the market factors were right. All in all, these are great times for the retail developer in BC, especially if your project is near a Wal-Mart.

Vancouver’s Office Market: Will the downtown core see any new office construction before the end of the decade? Will this create a trend for office growth in the suburbs?

Tony Astles, Senior Vice President, Bentall Real Estate Services LP
Bart Corbett, Vice President, Cushman & Wakefield LePage Inc.
Don Harrison, Senior Vice President, GWL Realty Advisors

The demand is high but there is little supply for both investment in and tenancies of the downtown office market. Tony Astles observed that pension funds in Canada continue to grow. The currents trends show that the size of the existing funds are increasing and the allocation by these funds to real estate investments are also expanding. In addition, there are new funds investing in the real estate office market. According to Don Harrison, there is and should be a premium for the Vancouver office market. The recent acquisition by Cadillac Fairview of the HSBC Bank Building has, according to Harrison, set a new benchmark for downtown office pricing at $375 per foot (a 5.7% or 5.8% cap rate).

What does it cost to build an office building in downtown Vancouver? The hard costs for Phase 1 of Bentall Five in 2000, according to Mr. Astles, were $115 per foot. In 2006, the estimate for Phase 2 of Bentall Five is $250 per foot and this, according to Mr. Astles, is only a guess since there is nothing in the market to compare it to. Construction costs are increasing approximately 1% per month in Vancouver (and approximately 1.5% per month in Calgary). With the long gestation period for construction of an office building, this increase can have a substantial impact on a project. Mr. Harrison shared similar statistics in connection with GWL Realty Advisor’s 24 acre multi industrial campus on the North Shore. Hard costs for the third building, currently under construction, are 28% higher than the hard costs for the first building. While labour costs are also increasing in eastern provinces, the increases are not as significant as in the British Columbia and Alberta. Harrison has seen an increase of approximately 12% in Toronto on recent projects.

Skyrocketing labour and construction costs, the "zoning error" allowing residential development and lack of available land have all but eliminated new office construction in the downtown core. There are only two buildings under construction, on of which is the second phase of Bentall 5, and there is virtually no available space in either. According to Mr. Astles, shovels will hit the ground this week on a third office building, Broadway Tech Centre, which is 25% pre-leased. Mr. Astles believes that we need either a rapid acceleration of rental rates or an event which will cause construction costs to decrease. According to Mr. Harrison, rental rates are high in Calgary and there is room for rental rates to increase in Vancouver. It is noted, however, that Calgary is a big tenant town and Vancouver is a small tenant town. The likely result is that tenants will see anywhere from a 20%, 30%, 40% and all the way to 50% increases in rental rates which will cause major relocations of tenants from the downtown core in the next 5 to 6 years.

Trends, Opportunities and Risks in the Multi Family Markets. What does the future hold for this sector? How long will the over heated market continue?

Cameron Muir, Senior Market Analyst, CMHC
Eric Carlson, President & CEO, Anthem Properties Ltd.
Bob Rennie, President, Rennie Marketing Systems
Brenda Brockbank, Senior Relationship Manager, Multi-unit Residential, TD Canada Trust
David Goodman, Goodman Report, Macdonald Commercial Real Estate Services Ltd.

The condominium and apartment markets in BC continue to grow at unprecedented levels with very limited inventory available. According to Cameron Muir, this is supported by economic fundamentals which include a robust economy, strong exports fuelled by world demand for local commodities, increased domestic consumption and confidence, provincial job growth which leads the nation, low unemployment rates, increased migration and low interest rates Our economy is firing on all cylinders and this is reflected in records sales last year in Greater Vancouver and the Fraser Valley.

How long will this market last and is Vancouver in a housing bubble? According to Bob Rennie, the Vancouver residential condominium market is an extremely stable market with no overhang of supply. Further, according to Mr. Rennie, the Vancouver investor is an international investor who can accommodate increased construction costs. Presales continue to be between 75-100%. Eric Carlson believes irrational exuberance would indicate a housing bubble and he has not seen a lot of this in the Vancouver condominium market.

When asked to comment on the presence of speculation in the market and the risk of mass divestment by speculators resulting in a flood of inventory in the Vancouver condominium market, Mr. Rennie stated that there are very few "bulk buyers" in the condominium market in Vancouver and that there will be no such mass divestment of condominiums. David Goodman echoed this sentiment as it relates to the residential apartment building market in Vancouver. According to Mr. Rennie, speculators have been pushed out of the market by developers filtering out such speculators. In particular, he referenced increased deposits, limits on the number of units which can be purchased and prohibitions on resale within one year of purchase as measures implemented by developers to prevent true speculators from entering and negatively impacting the condominium market.

The Industrial Market in Vancouver: When will land prices
stop rising?

Bill Tucker, President, Omicron Consulting Group
Ron Bagan, Executive Managing Director Western Canada, Colliers International
Jeff Fleming, Director Commercial Investments Western Canada, GWL Realty Advisors

This in depth discussion included a forecast for industrial prices (bullish), the main occupiers of industrial property in the Lower Mainland (distribution businesses) and the key driving force in the market place (scarcity).

Comments were made that the areas that were once considered on the periphery of the Lower Mainland, such as Chilliwack and Abbottsford, are no longer being treated as such in the market place. These locations are now commanding prices similar to those found the Surrey and Langley areas and it is expected that this trend will continue in the future.

As far as price trends are concerned, it is anticipated that there will be a strong demand from the user market, with a 20% increase expected in areas with tight supplies. It was also anticipated that due to the increasing property prices and lagging rent, institutional investors may be the only group, other than owner/operators, who will be able justify investing in industrial property in the Lower Mainland.

Luncheon Presentation: Vancouver icon reflects

At lunch, delegates to the Forum were treated to reminiscences of Joe Segal, who regaled the crowd with accounts of many of his more notable deals. Although he has been best known to the local real estate industry as president of his Kingswood Capital Corporation, he claims to be first and foremost "a retailer", which is hard to argue with given a resume that includes having been Chairman of the Board of the Hudson’s Bay Company, together with a long list of retail chains he has owned and operated.

Among other things, retailing taught Mr. Segal, even in real estate, that "you have to turn your inventory", selling when a good selling opportunity rather than waiting for the best deal. Arranging your affairs so that "you are not at the mercy of the banks" has also served him well over the decades.

Secondary Marketplaces: What is attracting business and investors to smaller markets like Kelowna, Victoria and Squamish?

Andrew Bruce, Manager of Development Services, City of Kelowna,
Dennis Carlsen Senior Planner, City of Victoria
Brent Leigh, Managing Director, Squamish Sustainability Corporation

The panel discussed some of the trends and opportunities in some of the secondary marketplaces in British Columbia.


According to Andrew Bruce, the main focus of the 20 year Official Community Plan (to 2020) for Kelowna is concentration on growth in the four town centers. The vision of planning for the City of Kelowna is to be a model of sustainability in North America. In order to achieve this goal, the City of Kelowna is focussing on increasing density, increasing pedestrian traffic, promoting mixed use developments, preserving existing and encouraging future commercial development, infusing residential developments and establishing a cultural district.


The City of Victoria has always been known as a great place to visit – a great tourist locale with a slow paced lifestyle. However, according to Dennis Carlsen, a great downtown, spectacular waterfront and year around recreation and leisure are attracting buyers and investors to Victoria and the surrounding region. Mr. Carlsen reported that 1300 units are planned or under construction in the downtown. The median price of a downtown condominium is $289,000. The residential market continues to be a strong market for move down buyers and investors. CMHC forecasts 225 new home starts in 2006.

According to Mr. Carlsen, the office market in Victoria also holds great opportunities. Historically, a government office market, recent government downsizing in the Victoria office market has completed and virtually all of the product has been absorbed by the private sector. There is virtually no new construction in the office market, vacancies are at an all time low, lease rates have increased and the demand is high.


Squamish, the "Outdoor Recreation Capital of Canada", is predicting a thriving and sustainable community resulting from a strong community vision, a progressive government, unsurpassed natural resources, a 2010 world focus, an established education sector, cultural diversity and participation of world class developers. According to Brent Leigh, key projects currently underway or recently completed in Squamish include the Squamish Adventure Centre, Quest University, Capilano College Squamish Campus, Oceanfront Lands and Interfor Lands.

Each of the panelists commented that in addition to the local developers, each of their respective regions, have seen increased involvement from larger developers from Vancouver and, in the case of Kelowna, Alberta for larger and more sophisticated projects.

The Vision for Vancouver: Managing the growth of a major city in an internationally competitive market.

Wayne Smithies of Martello Property Services Inc
Larry Beasley, Co-Director of Planning for the City of Vancouver
Michael Geller, President and CFO of the SFU Community Trust

This broad reaching, forward looking and lively discussion was moderated by Wayne Smithies and featured the insight of Larry Beasley and Michael Geller.

The main topic discussed was the affordability of middle income housing.

Mr. Beasely stated on numerous occasions that a possible solution to the affordability question is increasing the density in low density areas such as single family neighbourhoods. He conceded that increasing density in these areas will likely face strong community resistance and will require the municipality, the developer and the community to work together.

Mr. Geller agreed and mentioned an interesting option that has recently become available for new strata owners in Burnaby: the strata lot "basement suite". This is a separate "mortgage helper" suite (including its own entrance and bathroom) located within a strata lot. This idea was widely supported by both Mr. Beasely and Mr. Smithies and it is anticipated that other municipalities will change their zoning by-laws to permit the development of such strata lot "basement suites".

Limited commercial space in the Vancouver downtown core and the concept of sustainability were also discussed. Mr. Beasely acknowledged a problem and stated that while the residential real estate market is so strong, municipal involvement will likely be required to encourage commercial development downtown.

As far as sustainability is concerned, it was widely agreed that the time is now. No longer is sustainability a problem to be dealt with by later generations. The comment was made that municipalities will likely be required to induce developers to build "green", at least until the costs of costs of sustainable development come down.

Construction Costs & Labour Shortage: How do we address
this growing concern?

Kirk Chen, Vice President, Ledcor Construction Group
Steve Elias, Altus Helyar Cost Consulting Group
Keith Sashaw, President, Regional Construction Association

A red hot construction market means skilled labour shortage and rising material costs will continue to be pressing concerns. According to Kirk Chen, booming construction markets, increased construction costs and labour shortages are a global phenomenon. To build and be successful in a challenging market, Mr. Chen recommends managing risks that come with increased costs in pre construction stages. With hard costs increasing at a rate of 1% per month, it is necessary to schedule and budget, stick to time lines, practice strategic tendering and be realistic.

According to Steve Elias, while there is still money to be made in development, it is a more challenging environment. He heralds planning, monitoring and management as the keys to being successful in this challenging market. According to Mr. Elias, the developer needs to stay involved and be realistic. In particular, he recommends budgeting, scheduling, reviewing design to ensure buildability, knowing and tracking the numbers frequently, labour and materials estimate tracking and frequent quantity and manpower checks.

The phenomenal amount of commercial construction activity in the province is making the supply of skilled workers a challenge for the VRCA. The provincial major projects list shows projects valued at over $83 billion (an increase from $68 billion only six months ago). According to Keith Sashaw, the increase in commercial construction activity will continue to increase and peak in 2009. Demand for all trades, across the board, are high. However, steps are being taken by the VRCA to address the skills shortage issue. In particular, the association is actively recruiting at the high school level, examining training programs including fast tracking and apprenticeships, investigating and working with non traditional sources of labour such as women and the aboriginal community and looking nationally and internationally to recruit skilled workers.

Closing Session: Assessing the Risks, Challenges and Opportunities for 2006-07

Ward McAllister, President & CEO, Ledingham McAllister Properties Ltd
Avtar Bains, Senior Vice President, Colliers International
Peter Cohos, President & CEO. Tonko Realty Advisors Inc
Al Poettcker, President & CEO, UBC Properties Trust
Robert Macdonald, President, Macdonald Development Corporation

The forum concluded with a panel of industry experts discussing risks, challenges and opportunities in 2006 and 2007.

The panel and moderator Ward McAllister focussed on the continued strong economic fundamentals and ongoing economic growth in British Columbia. Mr. Bains noted that the Western provinces are leading Canadian economic growth, and Mr. Macdonald continued to be extremely buoyant about the opportunities in British Columbia and Alberta.

From the "challenge" perspective, the panel noted that high prices and lack of supply are presenting a challenge for investment funds. Mr. Bains pointed out that the supply of investment properties in the Vancouver market seems to be about what it has always been historically, and that the problem is not a lack of supply but that demand has increased tenfold or more. Mr. Midwinter noted that due to increasing prices in Vancouver (and elsewhere in the country, as other markets are now approaching "Vancouver pricing"), buyers such as GWL are becoming very selective in their investment decisions. Both Mr. Cohos and Mr. Midwinter mentioned that their companies are seeking higher returns on their investments by undertaking developments – in Calgary in the case of Tonko and Edmonton in the case of GWL. Whereas developing a "spec" building may have previously been considered risky, the strength of those two markets has reduced those concerns.

The panel agreed that despite low cap rates, quality assets will continue to sell quickly and will attract multiple bids.

On the issue of whether cap rates will continue to compress, Mr. Bains remarked that for the top 10% to 15% of the marketplace, there is still room for downward movement in cap rates, as investors for those properties have a 30 to 40 year time horizon. However, he noted that for B and C grade investment properties, investors have started to "push back" against lowering cap rates. Mr. Midwinter noted that whether cap rates will continue to fall will depend on the investors’ beliefs regarding future rental growth. As rental growth expectations are much higher in a market such as Calgary than in Montreal, cap rates may continue to fall further in Calgary than in Montreal. He also pointed out that from an international perspective, cap rates in Vancouver continue to be higher than in other "global" markets, which will continue to lead to foreign investment.

The panel touched on sustainability and environmental issues. Mr. Poettcker stated his belief that although the market is trending toward building to LEED and other sustainability standards, at the end of the day the challenge will be user acceptance of the changes to buildings which come out of the new building design. Mr. Poettcker also noted that in order for the Vancouver region to sustain its growth rate, it will have to recycle its land base, and allow further densification of single family land.


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