UDI Vancouver – Annual Industry Forecast Luncheon

By Sarah Jones, Kyle Wilson & Shauna Towriss

More than 1100 audience members at UDI's Annual Industry Forecast Luncheon were treated to a big helping of confidence from a panel of industry leaders. While there is still no shortage of risk following the world-wide financial crisis, and change is a constant for developers, Ryan Beedie of the The Beedie Group, Anthem's Eric Carlson and Neil Chrystal of Polygon responded to questions from moderator Diana McMeekin of Artemis Marketing with optimism evidenced by their companies' plans for increased activity for 2011.

What is it that keeps you up at night when thinking about 2011?

Both Eric and Neil are sleeping well at night these days, and certainly much better than two years ago. With British Columbia seeing positive job growth, strong immigration, and banks increasing their lending, Eric and Neil are both seeing positive things ahead in 2011. Ryan is concerned about the prospect of an NDP provincial government, as well as unsustainable levels of public debt – cautioning that if governments do not take action soon, the market will do so. The issue of local governments getting more heavily involved in developing real estate (and what that means for fair competition) also keeps Ryan up at night.

What are the good and bad things influencing your market sector?

In the retail/commercial area, Eric pointed to urban densification creating infill development opportunities. However, with most food stores becoming their own developers, food anchor centres are becoming increasingly difficult to develop. On the residential side, Neil sees strong immigration, low interest rates, and improving economic conditions generally all being good for the market. In contrast, increased competition pushing land values up and the slow political process of approvals are negative factors for the residential industry. Improved confidence, increased immigration, and businesses correspondingly being willing to invest, are positive influences on the industrial front. Neil and Ryan agreed that political instability and the uncertainty surrounding HST are negatively influencing both the residential and industrial sectors. Ryan also cautioned that the current stimulus-driven economic growth is not sustainable, and members of the industry need to be prepared for a period of moderate growth.

What municipalities/market areas are going to be the most active in the next year?

Neil sees buyers from Asia driving the residential market in the year ahead, especially in the inner suburbs, such as Richmond, Coquitlam and Burnaby and on Vancouver's West Side. These areas all provide great schools and an established network of businesses that speak the language. Surrey and Langley will also attract many first-time homebuyers. For the industrial sector, Vancouver and Burnaby will lead the way, with users looking in these areas with a sense of urgency. In contrast, Eric is happy to develop a commercial project "anywhere that works!" In particular, the retail sector is influenced by where people gravitate to, which in the year ahead, means Richmond due to immigration, Surrey and Langley because of land affordability, and Burnaby because of transit. Also influencing the developers' decision is just how easy a municipality makes it to develop in their jurisdiction.

What's hot or not in the industrial, retail and residential sectors?

Large bay strata developments are hot right now in the industrial sector, with 10,000 to 15,000 sq. ft. units providing the Beedie Group with its current bread and butter. With the supply of the potential market for industrial investment product diminishing, we could see cap rates compressing. Eric also sees falling cap rates in the retail sector, with anything retail being hot right now. Movement into Canada by U.S. retailers, such as Lowe's and Target, is also hot in 2011. On the residential side, Neil sees HST as not being hot in the residential sector in 2011, while hot commodities are anything on the West Side, as well as small suites at attractive price points for first-time homebuyers.

What is the forecast for construction costs over the next year?

The entire panel sees moderate increases to construction costs in the year ahead. Ryan predicts a three to three and a half percent increase due to commodity pricing and increased labour costs, but noted that if HST is eliminated, a further three percent will also automatically be added to construction costs (in non-residential sectors). Eric predicts that steel and concrete project construction costs will increase by a couple of percentage points, and wood-frame developments will see an even further increase. Neil confirmed that higher lumber prices will contribute to the rise.

Where do you see your buyers/end users coming from in 2011?

Neil again advised that many 2011 residential buyers will be new to our province, particularly those arriving from Asia. With low interest rates and good value being offered outside the downtown core, 2011 will also be the year of the first time home buyer with a push coming before March 28 when new and moderately more restrictive CMHC rules come into effect. On the industrial side of the equation, Ryan expects to see end users relocating within geographical areas as companies continue to be driven by the location of transportation routes and a desire to not disrupt the lives of employees. On the retail side, Eric predicted that we will continue to see tenants like Target and Lowe's coming from the United States and Sobeys from eastern Canada, as western Canada becomes a bigger factor for national GDP growth.

Do you think there will be a provincial election in 2011 and if so, who do you believe will win?

In Ryan's opinion the possibility of a provincial election in 2011 will be driven by the identity of the winner of the Liberal leadership race, noting that we will likely have an election if Christy Clark wins the race while life will likely carry on as-is if either Kevin Falcon or George Abbott win the leadership. Eric felt that there would not be an election in 2011, noting that the Liberals are "too intelligent" to call an election after previously fixing election dates. Neil echoed Eric's comments and opined that it is crucial that the Liberals stay in power in order to maintain the confidence of the Province's business community. No one would predict a winner.

What are your biggest concerns re: BC developments in 2011?

Eric joked that Onni is his biggest concern because they are buying everything. On a more serious note, he indetified the cost of land, the decreasing availability of land and "urban planning exuberance" as concerns; with the high cost of land and equity, developers can only go so far with what they can build. On the residential side, Neil confirmed that affordability will be a concern in 2011, commenting on the fact that with increasing land costs and new competitors entering the development game, developers generally have to overpay in order to win a site. Neil also noted that for residential buyers there will be new lending constraints from CMHC, interest rates will go up and put a squeeze on buyers and additional municipal costs required in various jurisdictions will be added to developments and passed on to buyers. From an industrial perspective, Ryan noted that irrational application of green standards is a cause for concern and advised that municipalities should look to Richmond and the "checklist" process they have implemented for guidance. Ryan also commented that the approval process is simply too slow in a number of jurisdictions with approvals for relatively simple industrial developments taking up to 10 months.

With the ever increasing popularity of Facebook, will social media affect your business?

Neil acknowledged that the residential sector has tried to embrace Facebook and while companies are still trying to find their way with social media, the ability for a developer to target a specific buying group through Facebook is certainly appealing. Neil commented that the most important aspect of Facebook is that people are now able to communicate their buying experience (either good or bad) immediately. Ryan pointed out that many industrial clients are not using Facebook, but agreed that for the residential market, social media is very important and transfers power to the customer. From a retail perspective, Eric observed that Facebook is simply another tool in the tool belt of developers, noting that the use of social media is critical to incorporate into you business because of the fast connection between developer and end user.

As we approach the first anniversary of the Olympics, what do you think were the most significant ways the real estate industry benefitted from the event and what will be the most pronounced long term effects?

Eric believes that the Olympics had a significant positive impact on the Province and the economy in 2010 and will continue to do so in 2011. He noted that our rich assets (economic, human, cultural) were exposed to the world like never before and that this will promote the important capital and immigrant influx into British Columbia.

Neil noted that the Olympics kept British Columbia's economy and markets alive and vibrant for much longer than they would otherwise have been, while other economies and markets, especially south of the border, were collapsing. He predicted that advantage will hold the Province in good stead in 2011.

Ryan observed that many strides were made in terms of infrastructure, and that in the industrial sector in particular, infrastructure is significant in terms of attracting new business to the Province.

What challenges may people experience with their lenders in 2011?

During the downturn, lenders increased fees and rate spreads as their exposure to risks increased, but Neil said that to the credit of lenders (no pun intended), a great many of them kept lending. His fear, based on a recent trip to Toronto, is that because the major lenders are headquartered in Toronto, and there seems to be a small tremor of concern right now in the Toronto market regarding perceived over-building, that British Columbia developers may feel the ripple effects when it comes to obtaining financing for projects, even though our market is significantly different and an overbuild concern doesn't apply here.

Ryan predicted greater pre-leasing and pre-sale requirements. He noted that this will be a challenge for many developers in the industry, particularly those without existing capital or who do not own their land already and may therefore get squeezed out of the market.

Eric admitted to the amusement of the crowd that he used to take his lenders for granted back in his "shallow and superficial days". He agreed that pre-sale requirements and ratios will be tighter. Most notably, Eric said that banks are tending to look harder and more carefully at management teams when making lending decisions – they consider the depth, quality and track record of the team, and developers just starting out will need more equity than in the past and may find obtaining financing difficult.

What effect would an NDP government have on your business?

In response to audience member and frequent UDI panellist Rob Macdonald's colourful question, sanitized for our readers as "What effect would an NDP government have on your business?", the panellists did not shy away.

Ryan said that it would depend on who the NDP chooses as their leader. An NDP government run by Adrian Dix, for example, would look significantly different for business than an NDP government led by the more moderate Mike Farnworth. The impact it would have on his business and business in British Columbia worries him, predicting that an NDP government would bring about an increase in cap rates and a general state of indeterminate freeze throughout the industry and the economy in general as people waited to see what policies the NDP would implement.

Like Ryan, Eric thought that if a more moderate leader took the helm of the NDP, business in British Columbia might have less to worry about. But, he said with his usual candour, the "hard left" of the party "scares him to death". Eric noted that the NDP has in the past exhibited a "profound lack of understanding" of the concepts of capital, risk and creativity and how the three come together. He noted that the people who do understand the important interplay of these concepts, and who excel at mastering them, are "freaked out" when a party like the NDP takes power and so such people end up taking their business, ideas and creativity out of the Province.

Neil echoed the sentiments of both Ryan and Eric, and recalled the mass exodus of business, capital and talent from British Columbia to Alberta when the NDP was last in power. He expects that an NDP government would cause instability and uncertainty and have a "drastic impact" on business and the Province generally.

What will be your focus in 2011?

Eric boldly told the group that Anthem would be focussing on "everything, everywhere". In seriousness, he said he feels very good about the prospects for 2011. He noted that people keep moving into the region, and predicted that British Columbia's economic growth will keep improving as we continue to harness the energy and goodwill created by the Olympics. Anthem has many new projects in the pipe and Eric said that that although it will involve "working twice as hard, for twice as long and will require twice as much equity" as previous projects, he is excited and optimistic.

Neil agreed with Eric and thinks it's a great time for new homeowners to get into the market, given the general consumer confidence in the market and the low interest rates.

Ryan said that the Beedie Group is excited to be launching its first residential project in 2011 and plans to continue with the large strata projects its had so much success with in the industrial market. He reported that they were happy to be making in-roads into Alberta and that the Beedie Group plans to expand its philanthropy in 2011.