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2008 Vancouver Real Estate Forum

By the Commercial Real Estate Group at Clark Wilson LLP          April 30, 2008
    


Economic Overview for 2008 & 2009: BC and Canada in the Context of International Economics

Speaker:
Jeff Rubin
, Chief Economist & Chief Strategist, Managing Director, CIBC World Markets Inc.

Jeff Rubin, Chief Economist and Chief Strategist of CIBC World Markets, provided the Forum’s 800 attendees with an overview of how international economic forces are expected to affect the Canadian economy in 2008.

Referring to the downturn in the U.S. housing market as a result of the subprime mortgage meltdown, Mr. Rubin stated that the U.S. economy is clearly in a recession and has been since the 4th quarter of 2007. This recession is being driven by reduced consumer spending (as opposed to reduced capital investment, as was the recession of the early 2000’s), which will present a challenge to Canadian exporters and the Canadian economy as a whole.

At the same time, Mr. Rubin noted that the U.S. economy continues to have a decreasing impact on global GDP growth, and that economic slowdown in the U.S. is not dampening either global growth rates or rising commodity prices, which are being fueled by growth in the emerging BRICA countries (Brazil, Russia, India, China and Asean). Given Canada’s resource-based economy, global growth should result in economic growth in Canada throughout 2008 and 2009.

Mr. Rubin predicted that oil will rise to $130 per barrel in 2008, and $200 per barrel within five years (with gasoline reaching $2.25 per litre at that time) and that the Canadian dollar would rise to $1.05 U.S. within 12 months. He stated that interest rates will surprisingly increase starting in 2009 as a result of “reflation” in the economy driven by rising food and energy prices.

Lastly, Mr. Rubin commented that as developed countries focus on reducing greenhouse gas emissions over the next several years, the unchecked carbon emissions in developing countries may become viewed as an unfair trade subsidy. How developed countries decide to address these perceived subsidies, through duties or otherwise, may result in higher prices for consumer goods produced offshore and affect the global trade imbalances and economic growth.



Closer to Home: Economic Outlook for Vancouver and British Columbia in the Coming Year
Speaker:
Cameron Muir
, Chief Economist, BC Real Estate Association

Cameron Muir provided an update on the state of the British Columbia economy. He noted that the province's forest sector is in troubled times as a result of the downturn in the U.S. housing market. As well, recession in the U.S. will impact the province’s tourism industry. Although both sectors more directly affect areas outside Vancouver and Victoria, their impact on the provincial economy as a whole will affect retail, industrial and office sectors in urban areas.

There are many very positive indicators. Employment growth, while slowing from earlier in the decade, will still be at or near the highest level in Canada. Unemployment remains very low, domestic consumption is strong and consumer confidence remains high. In-migration levels are very high, with 55,000 new residents expected to come to British Columbia in each of 2008 and 2009 (all of whom will require housing). As a result, Mr. Muir predicted provincial economic growth of 2.5% in 2008 (as compared to 3.1% in 2007).

With respect to the housing market, Mr. Muir countered reports regarding low affordability and stated that housing is still relatively affordable. He noted that although the focus stays on record average housing prices (skewed by homes at the high end of the market), fully 30% of apartments sold in the Vancouver CMA in 2007 were under $250,000 and a similar percentage of houses were under $500,000. Mr. Muir also stated that the Metro Vancouver market is entering a balance between listings and sales, which should result in less upward pressure on prices. He predicted 9% growth in housing prices in Metro Vancouver in 2008. Mr. Muir also noted that the top performing housing markets in British Columbia in 2007 in terms of price gains were outside the metropolitan areas, with gains of 20% to 30% year over year in smaller markets such as Nanaimo, Kamloops and Kelowna. He expects this trend to continue into the future as increasing numbers of baby boomer retirees seek housing with recreation and other amenities in smaller markets.



Assessing Risk and Being Innovative: What Does the Future Hold for Investment Activity in the Vancouver Market? Panel:
John O’Bryan, Managing Director, TD Securities Realty Group (Moderator)
Robert Levine, Principal, Avison Young Commercial Real Estate (BC) Inc.
Kevin Meikle, Senior Vice President, Capital Markets Group, Cushman & Wakefield LePage Inc.
Jim Szabo, Executive Vice President, CB Richard Ellis – Investment Properties Group

Three leading investment real estate brokers discussed how the investment market has changed over the past 12 to 18 months, both from a local perspective and globally. Their consensus was that there are definitely significant challenges in the United States, with current investment activity well off from levels of a year ago as a result of tightening credit markets, and cap rate increases of 75 to 150 basis points. Similar conditions were noted in London and parts of Europe, although cap rates have increased only slightly. As a contrast, during this same period, cap rates in British Columbia have remained fairly consistently in the 6% range for quality properties.

The panelists agreed that the most significant change in the provincial investment markets is the re-pricing of risk into properties outside metropolitan areas. The vibrant investment market over the past several years and relatively easy credit has resulted in little differentiation between the cap rates applicable to well-positioned urban shopping centres and office buildings and those properties in smaller, more remote areas, despite the obvious difference in the risk profiles. As a result of tightening credit markets and other economic factors, this is no longer the case, with spreads of up to 200 basis points re-emerging between these different product types.

Another factor affecting the investment market in British Columbia is that as cap rates have increased in the U.S., Europe and other markets, local properties are no longer seen as bargains compared to those in the investors’ home jurisdictions. As a result, the panelists agreed that foreign investors are not as active in our marketplace.

The panelists agreed that a high quality property (such as a triple A downtown office building) will still attract significant buying interest, and all viewed suburban office as a good buying opportunity. Lastly, they agreed that as the market evolves, it will be incumbent on sellers to re-evaluate their expectations in order to attract buyers.



Mixed Use Development: Not as Simple as You Might Think Panel:
Ian Thomas, Chairman, Thomas Consultants (Moderator)
Michael Cairns, Managing Director, Blackwood Partners
Stephen Knight, President, Sitings Realty Group Ltd.
John O'Donnell, Senior Vice President, Development, Ledingham McAllister Properties Ltd.
Bob Tattle, Vice President Business Development, Anthem Properties

As moderator, Ian Thomas, posed interesting questions to a panel comprised of developers and owners of some of Western Canada’s most ambitious mixed use complexes, including Surrey’s Central City, Northgate Village in Burnaby, Plaza 88 in New Westminster and Calgary’s Erlton Waterfront development.

According to Mr. Thomas, the USA has been about five years ahead of Canada in embracing large scale mixed use developments. Among other things, it has been demonstrated that in a successful development, each of the component uses benefits from the presence of the others. He noted that “public spaces are the new anchor”. Mr. Thomas spoke of residential product located in high profile destination retail complexes achieving “staggering” price premiums over their stand alone counterparts. Against this backdrop, his questions for the panel focussed on the local experience.

The panellists agreed that mixed use development, especially on a large scale, presents many challenges. Stephen Knight commented that “mixed use is all about compromises”. For example, with underground parking costs of around $60,000 per stall, Bob Tattle observed that major retailers simply have to accept much lower parking ratios than they have traditionally been able to dictate. Stores may need to be designed around elevator cores. Developers must be prepared for a much lengthier design and planning process in order to get it right.

Asked about mistakes to avoid, Mr Tattle warned against taking on too much density and thereby compromising quality and utility. John O’Donnell observed that losing sight of overall objectives is an easy mistake to make in mixed use development, such as inadvertently allowing a relatively small but incompatible ground floor retail use to potentially inhibit the sale residential units.

If the challenges are addressed successfully, mixed use projects are “greater than the sum of their parts.” While retail tenants will not necessarily pay higher rents, the complementary uses and public spaces, according to Bob Tattle, “give them a reason to be there.” Michael Cairns noted that the 4,000 workers in Central City’s office tower and an additional 4,000 students, faculty and staff in the project's university component provide the Central City retailers with a tremendous daily base of customer traffic. While the look and feel of some current Skytrain stations may not be seen by retailers and residents as positive, the panel was generally enthusiastic about the benefits of incorporating transit within (as at Plaza 88) or near a project (as at Central City and Northgate Village).



Rising Costs of Office Space Downtown: Current Climate and Future Implications Panel:
Sandy McNair, President, Altus InSite (Moderator)
Bart Corbett, Senior Vice President, Office Leasing, Cushman & Wakefield LePage
Sandy Cruikshank, Executive Vice President, Tonko Realty Advisors Ltd.
Maury Dubuque, Vice President Leasing, Bentall Real Estate Services Limited Partnership
Rob Kavanagh, Vice President Asset Management, GWL Realty Advisors

Vacancy rates remain low across Canada. The already low vacancy rate in Greater Vancouver decreased even further in the last year to 5.3%, and in the Downtown Core, the rate has decreased to 2.4%. Statistics show that the market is tighter than it’s ever been and that even if there’s a dramatic shift in vacancy rates by 250,000 square feet per year, we still won’t hit a vacancy rate of 10%. Market rents have continued to see huge and rapid growth. Rob Kavanagh pointed out that the trend in the market has been steadily rising since 2004 at a rate of 15 – 20% and therefore, the current rental rates are supportable. Bart Corbett considers what’s most surprising, is the willingness of CFOs to realize that markets change and that budgets negotiated 5 years ago aren’t going to work in Vancouver. The panellists agreed that tenants have understood it’s a landlord’s market.

Sandy Cruikshank points out that there’s a greater attention being paid amongst tenants as to the rents they’re paying. He thinks landlords might see a more cautious attitude from tenants going forward. Tenants will pay high rents if it’s preceived to make sense. The panellists discussed the importance of a quality environment for employees and that this is available in the suburbs. Firms with a large number of employees recognize space available in newly constructed buildings in the suburbs (Burnaby, for example), however, there does not appear to be any trend towards relocation of firms that are currently in the Downtown Core. Sandy Cruikshank predicts that the firms that need to be in the Downtown Core will stay in the Downtown Core despite the continuing rise in market rents.

The panellists also commented on whether or not a landlord’s level of environmental responsibility has an impact on the willingness of tenants to pay higher rents. Maury Dubuque, speaking about the Bentall buildings, pointed out that from 2000 – 2007, not one tenant mentioned the recycling program of the landlord, and this year, every single tenant did. According to Sandy Cruikshank, tenants are looking to landlords for environmental responsibility. How the landlord deals with waste – removal of garbage and a recycling program – is the big issue. Rob Kavanagh and Bart Corbett agreed that it’s gotten to where tenants need to know that their landlords are attaining certain standards of environmental responsibility, although the standard is unclear.



Open Dialogue with City Planners on Upcoming Transportation Initiatives and the Impacts

Panel:
Peter Ladner, City Councillor, City of Vancouver, Vice Chair, Metro Vancouver (Moderator)
Fin Donnelly, Councillor, City of Coquitlam
Lon LaClaire, Strategic Transportation Planning Manager, City of Vancouver
Jean Lamontagne, General Manager, Planning & Development, City of Surrey

The City of Coquitlam’s key message, according to Fin Donnelly, is that the rapid transit connection to the North East sector is moving forward. The City of Coquitlam was designated as one of the original four growth zones (now increased to eight) and rapid transit has been a long time coming to Coquitlam. The form that rapid transit will take has been a roller coaster ride for Coquitlam, alternating between at-grade transit and elevated sky train transit. The current rapid transit plan (which is on hold pending determination of station locations) proposes an elevated sky train system. The long awaited Evergreen line will connect three separate areas in Coquitlam: City Centre, Lougheed and Burquitlam. The City is focusing on densification, pedestrian infrastructure and retail development around these transit hubs.

The City of Vancouver’s approach to land use planning incorporates environmental sustainability, affordability and liveability. Transportation, according to Lon LeClaire, is a key element to success. According to Lon LaClaire, the City is meeting its objectives. In particular, more people are coming into the city but with fewer vehicles. The greatest success has been in the downtown where the 2021 goals are already being met with 65% of all downtown trips being walking trips. An area that has not seen similar success yet is Central Broadway where a bus every minute is not meeting the current demand. The ability to grow transit trips on the Central Broadway corridor is currently limited by capacity.

The Canada Line is predicted to be a success. Lon LaClaire commented that a pleasant surprise of the Canada Line construction was the innovation that has resulted from the P3 process – reflected in increased blocks of tunnel, preservation of the Cambie heritage boulevard and station design.

Lon LeClaire also predicts that the UBC transit system will take the form of an elevated skytrain system because the capacity limitations with at grade rapid transit will not satisfy demand.

Some additional City of Vancouver initiatives to be on the look out for are a Public Bike System, Granville Street Redesign and Carrall Street Redesign.

Jean LaMontagne, echoing a common sentiment of the panel, stated that the City of Surrey is also moving toward a trend of higher density. According to Jean LaMontagne, the ratio of multi family to single family permit applications for 2008 is currently 3:1 and housing is concentrated around towncentres in Surrey. In addition, according to Jean LaMontagne, close to half of Surrey residents work within Surrey. The current problem with transit south of the Fraser is that it is focussed on getting people to Vancouver (as opposed to around Surrey) when approximately 80% of residents are not going to Vancouver. According to Jean LaMontagne, the City of Surrey’s share of transit resources is very low in comparison to other regions, however, the City is working with Translink and the Provincial Government to improve the transit system in Surrey.



Vancouver's Residential Market: Bubble or Not?

Panel:
Sandra Cawley, Principal, Burgess Cawley Sullivan & Associates (Moderator)
Hani Lammam, Vice President, Development & Acquisitions, Cressey Development Group
Cameron McNeil, Partner, MAC Marketing Solutions
Chris Philips, Executive Vice President, Polygon Homes Ltd.
Richard Weir, Vice President, Real Estate Acquisitions, Bosa Development Corp.

The panel was unanimous: There is no bubble

Richard Weir noted that “bubbles inflate rapidly and then explode, leaving nothing”. That simply will not happen in the Lower Mainland. His more realistic concern is a levelling off and less absorption.

Hani Lammam, Chris Philps and Cameron McNeil each cited many reasons for general optimism in the multi-family market. Immigration – both international and interprovincial – will continue to be strong. Condominiums are the only form of rental housing being built. Employment is high and the local economy is much stronger than the rest of the country for many sustainable reasons. Interests rate are expected to remain relatively low. Speculative buying is not out of hand. Construction prices have levelled off, and for wood frame construction even declined. Very significantly, there is no over supply.

There were some notes of caution. The reality of the liquidity crisis and economic slowdown in North America cannot be ignored, especially in lending practices and consumer confidence. Banks have increased both equity requirements and pre-sale thresholds, with the latter, as Mr. Lammam observed, being a double-edged sword, increasing certainty but limiting pricing. Such restrictions can be a good thing, discouraging marginal developments and limiting supply, Mr. McNeil noted that rapid sellouts are pretty much history. His firm is retraining their agents in the art of holding nervous purchasers’ hands. Mr. Weir cautioned against the uncontrollable power of investor sentiment. It can be fickle and turn quickly, as he observed, first hand, in San Diego and San Francisco. Those markets had strong fundamental similar to Vancouver’s but experienced sudden drops in purchaser confidence and activity.

Despite the caution signs, the panel was bullish on medium and long term prospects. According to Cameron McNeil. “there are probably 15 niche markets that make sense right now”, citing as examples suburban projects aimed at affordability and downtown Vancouver product just below the luxury level. The entire panel agreed that the key in a slowing environment is to know the target market and aim accordingly.



Retail Development and Leasing: the Conundrum of Achieving a Profit Margin Whilst Dealing with Sky-Rocketing Costs, Government Regulation and Other Challenges Panel:
Scott Lee, President, Northwest Atlantic (Canada) Inc. (Moderator & Presenter)
Joe Allbright, Director of Real Estate, Wal-Mart Canada
Cam Gresko, Director of Leasing, The Cadillac Fairview Corporation
Tom Munro, Vice President, Real Estate & Store Development, Overwaitea Food Group
Jeff Wren, Principal, Staburn Property Group

The theme of this panel discussion was that while costs are high and the hurdles, particularly in tertiary markets, are considerable, the prospects for the retail industry in B.C. are good.

Jeff Wren noted that the tight credit market means obtaining suitable interim and take-out financing is challenging. Lenders are demanding higher equity contributions from developers and challenging developer’s assumptions about cap rates, income projections and tenant choice. Construction prices and commodity prices are increasing and the labour shortage is having an impact not only on construction costs, but on tenants who must compete for staff by offering higher wages. As a result, landlords must be prepared to accept lower returns.

The panel discussed government regulation, noting lengthy delays in getting their projects though planning departments, especially where development permits are required. Developers should expect every municipal planning department to emphasize (if not mandate) sustainability targets on developments and that “green” changes to the Building Code are coming. The best strategy, noted Joe Albright, is to engage with the municipality early in the process to assess their needs and to be prepared to meet sustainability goals.

The slow down in the U.S. economy is not expected to hurt retail revenues in Canada. Retail development may be spurred as retailers seek to escape the U.S. slowdown by expanding into Canada. In the Vancouver market, however, retail revenue will be effected by cross-border shopping, something other markets (i.e. Calgary, Toronto) are not contending with to the same degree.

Cam Cresco noted that while retail developers grapple with how to create a good retail mix in their projects, they will also need to focus on making their projects unique. Jeff Wren noted that projected grown of B.C.’s population means that prospects for retail operations are good, especially for mixed use developments. Tom Monro noted that margins on food prices are very thin. The grocery industry will still focus on expansion. Joe Albright noted that Wal-mart plans to expand in the B.C. market, but the expansion will be focused in areas that can assure solid returns.



Migration to Premium Recreational Properties Inc British Columbia and Beyond – Current Developments and Projected Trends Panel:
Tony Letvinchuk, President, Macdonald Commercial Real Estate Services Ltd. (Moderator)
Peter Dupuis, Chief Executive Officer, S & P Destination Properties
Steve Laver, President, Playground Limited Partnership
Mark Lester, Senior Vice President, Unique Properties, Marketing Group, Colliers International

According to Steve Laver, the biggest issue in respect of premium recreational properties outside of Canada (especially in the United States) is financing, both for prospective purchasers and developers. Lenders across the United States are refusing to finance entire developments sometimes based on a single factor which include the location or the type of product. Once a lender refuses to finance a particular development, the other lenders follow and the entire development is blacklisted. The flip side is that there are great buying and auction opportunities as a result.

Other trends that Steve Laver and Playground are seeing in the premium recreational property market are more discerning, logical buyers, larger numbers of Canadians buying in US markets (especially in Hawaii, Palm Springs, Palm Desert) and disappearance of the investor from the market. According to Steve Laver, with investors leaving the market, a key to the success will be accessing the luxury user. The luxury buyer’s confidence has been hit (at least in the US) and Steve Laver predicts that it will be a rocky ride in the industry for the next two years. He predicts that this will have an impact in the market in British Columbia.

In spite of this prediction, Steve Laver continues to see healthy demand in Whistler. Because of scarcity, he asserts that the Whistler market is stable and predicts that it will continue to do well. The typical buyer in Whistler is a domestic or foreign investor. The US investor left Whistler a few years ago with the rise in the Canadian dollar.

According to Peter Dupuis, current trends in the luxury property market include large sustainable highly amenitized communities, access to “wellness and medical” facilities, branding and cross branding, safe adventure, privacy and highly personalized service. Another trend in the luxury market is, according to Peter Dupuis, buyers driven by a desire to accelerate or expand their social community.

All three panellists agree that there will always be buyers for luxury properties with unique features. Mark Lester does not see the values in unique recreational properties falling. According to Peter Dupuis, unique features are a key to pricing –the closer you get to the waterfront or the mountain, the more elasticity in the pricing.



2010 and Beyond: Where Are We Going? Panel:
Larry Beasley, Principal, Beasley & Associates Planning Inc., 'Distinguised Practice' Professor of Planning, University of British Columbia School of Community and Regional Planning (Moderator & Presenter)
Ken Peacock, Director Economic Research, Business Council of BC
Al Poettcker, President & CEO, UBC Properties Trust
David Podmore, President & CEO, Concert Properties Ltd.

Ken Peacock was cautious in his view of Vancouver post-Olympics. He noted that there is currently a slowdown in non-metropolitan B.C., with economic and employment growth going forward focused in the lower mainland. While non-residential construction activity has already peaked, the immigration component has been consistently positive. In terms of whether there will be growth in the wake of the Olympics, he noted that studies of cities that have hosted summer Olympic games typically show evidence of a slowdown in the year following the games. Some factors that will be looked to in order to sustain B.C.’s expansion include Western economic strength, in-migration, economic diversification, Asia-Pacific growth and the gateway role B.C. provides. Constraints to B.C.’s growth include the additional run-up of value of the Canadian dollar, higher electricity prices, and labour and skill shortages – even after 2010. While Mr. Peacock believes that we will see a slowdown of GDP growth post-Olympics, there are positive external factors that must also be considered.

David Podmore was more optimistic of what Vancouver will look like post-Olympics. He noted that the provincial government is looking beyond 2010 with its major infrastructure investments, and believes that the public sector will sustain itself following the games. He cautioned that the private sector should prepare now for the changes that will come following the Olympics. Mr. Podmore noted that we need more economic generators, such as convention, meeting and cultural facilities in order to generate traffic in the community. He disagreed with the use of summer Olympic host-cities as comparisons to Vancouver hosting the winter Olympics – arguing that the facilities being built in Vancouver are more appropriate scale-wise for use on a long-term basis than those built in summer host cities. He believes that the industry needs to strategize through the slow times. Mr. Podmore noted that there are always opportunities in a slow market, and that slow times breed better builders and developers. Mr. Podmore views 2010 as an opportunity – Vancouver will need strategies to draw people back, but these strategies will require creativity and courage.

Al Poettcker was also cautious in his view of Vancouver post-2010. Emerging issues in the B.C. economy include B.C.’s weak position nationally in terms of exports and productivity growth. Mr. Poettcker believes that corrections are possible to deal with the rising cost of construction – and does not believe the rise to be sustainable. He noted that non-residential permits are trending down and there are fewer residential housing units being built. Transit stations are not being densified as they could be.

Moderator Larry Beasley noted that the panel provided a sobering overview of Vancouver post-Olympics and recognized the common theme that people need to be thinking of the blind spots that may arise after 2010.



An Update on the Industrial Real Estate Market: Why the Delay? Panel:
Bill Tucker, Partner, Omicron Consulting Group (Moderator & Presenter)
Ron Emerson, President, Emerson Real Estate Group Inc.
Randy Heed, Vice President, Colliers International
Andrew Tong, Vice President, Acquisitions, Concert Properties Ltd.

Randy Heed set the stage for this panel discussion by reflecting on the changes in the industrial market since he last sat on the panel two years ago. Land prices continue to soar, almost doubling in the last 3 years, with buyers now paying upwards of $1.4 to $1.6 million per acre. There continues to be very little supply of raw land in our region and there is a desperate shortage of developed industrial space. As a result, we continue to see movement to the east, with Surrey – Campbell Heights having 200 available acres (and 1500 acres more in developable land), Abbotsford having 400 acres and Chilliwack having 250 acres (contrasted with Burnaby Business Park and Mitchell Island having 30 acres and 20 acres respectively).

What is driving our market? According to Mr. Emerson, the manufacturing business is disappearing with our market being driven by distribution. Tenants are wanting to build up and are looking at cubic footage instead of square footage. They need distribution space but unfortunately there is not much supply. The scarcity of land and increasing land and construction costs are making it difficult to develop in this market, and with long approval times and the complexity of the approval process in various municipalities, developers are being forced to go to different jurisdictions. Each panel member stressed the importance of streamlining the approval process and developing a regional frame of mind.

What kind of buyers are in the market? According to Andrew Tong, there continues to be competition from pension funds and wealthy individuals. A couple of years ago 12 lenders were quoting on deals while today maybe 2 are at the table. Cash remains king and if you don’t have to rely on debt you continue to be a player in the market today.

Where are we going? The panel was asked to predict where the industrial real estate market is going and their answers where virtually unanimous: (1) cap rates will remain neutral on grade A buildings, while grade B and grade C buildings will go up; (2) the huge discrepancy in lease rates and costs cannot continue, emphasizing that lease rates must go up; (3) interest rates will go down short term but will increase long term; (4) vacancy rates will remain neutral; and (5) land prices will continue to go up – users will continue to drive the market, with Andrew Tong predicting that we will see a user pay $2 million per acre not too far down the road.



What Has Happened to the Credit Markets? How Has This Affected Private Equity and the Capital Markets?

Panel:
Dean Atkins, Vice President, Mortgage Investments, BC Investment Management Corporation (Moderator)
Bruce Clarke, Vice President, Commercial Financial Services, HSBC Bank Canada
Brian McGuire, Vice President, Real Estate Lending Western Canada, Scotiabank
Jim McPherson, President, Realtech Capital Group Inc.

The panel noted generally the decrease in the investor and financier’s risk tolerance for real estate. Brian McGuire acknowledged concern that the U.S. recession will spread to B.C. Costs for banks have increased, and will be passed along to borrowers. Jim McPherson noted that the long-term lending marketplace is much less competitive, and that long-term lenders have the ability to cherry-pick. According to Mr. McPherson, lenders are generally sticking to major metropolitan areas. Mr. McPherson commented that lenders are interested in being more liquid now – they want more cash on the balance sheet just in case they need it. While the pool of capital has shrunk, there are lenders willing to step into the void, with increased mezzanine financing business. Mr. McGuire and Bruce Clarke both noted that a good relationship between the developer and the lender will have significant importance going forward. Mr. Clarke noted that banks will be taking a long-term view, and will focus on this established relationship.

Given the increasing importance of the relationship between developers and their lenders, amongst other factors, entrepreneurs may have a difficult time navigating through the changing market. Mr. Clarke suggested that communication is key. Borrowers should start talking to lenders early on in the process. Mr. McPherson agreed with this perspective, and suggested that developers look at the financing available at the front end of a project, before they are over-committed to it. Mr. McGuire noted that lenders are willing to do deals, but the deals will have to be done differently. More equity will be required, costs will have to be better pinned down, presale requirements and deposits will be higher. Mr. McGuire suggested that developers new to the industry may want to consider partnering with those who have been in the business longer.

It was clear that from the perspective of the panelists, there is a predominantly more conservative attitude running throughout lending. Borrowers will have to recognize this change in attitude by expecting more rigorous loan terms, and by looking at alternative lenders and lending and project structures.



Chairman's Roundtable: Assessing the Risks, Trends, Challenges, and Opportunities for 2008-09

Panel:
Neil Chrystal, President & CEO, Polygon Homes Ltd. (Moderator)
Eric Carlson, President & CEO, Anthem Properties Ltd.
Jon deC Evans, President & CEO, Trilogy Properties Corporation
Steve Laver, President, Playground Limited Partnership
Ward McAllister, President & CEO, Ledingham McAllister Properties Ltd.

The discussion at the Forum’s final event reflected the sentiments expressed throughout the day’s sessions.

Steve Laver observed that in the USA prices across all types of real estate continue to drop, inventories continue to grow, the bottom of the market is not imminent and, if history is any indication, a recovery may take many years. In our corner of the continent, we continue to be in good shape generally.

Economic and market fundamentals are generally good for real estate in BC, for the many reasons mentioned at the earlier sessions. There is no excess inventory, and no perceived bubble. With a limited supply of land, there will not be general over supply, even if some projects fail. Construction prices, on balance, have started to level out, with lumber and some subtrade and labour costs dropping. Rebar, steel, and concrete prices continuing to rise.

Looking at opportunities for the future, the panel saw the frenzy around sustainable development becoming more practical in its application, focussed more on better quality design rather than on potentially impractical standards and buzzwords. There was considerable excitement about the potential for density developed around rapid transit. Ward McAllister mentioned that only 11 of 47 Skytrain stations currently have any significant development nearby. As more rapid transit is built, the panel agreed that it would be most helpful to see municipalities empowered to battle the NIMBYism that would otherwise stand in the way.

 

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