2012 Vancouver Real Estate Forum

By Commercial Real Estate Group at Clark Wilson LLP

Keynote Address – Economic Overview: What is the Outlook for the U.S. and Canada?

Speaker:

Warren Jestin, Chief Economist, Scotiabank

In his presentation entitled "Not So Fast Forward", Warren Jestin provided the Forum with a global economic overview, in order to underpin the discussions which would follow. He noted two key points which are affecting global economic events: first, the world economy is going through enormous structural change – by the end of the decade the United States will no longer be the world’s largest economy, having been replaced by China; and second, that increasingly, economic matters are becoming political in nature – for example, the approval of the Keystone pipeline in the United States, the European debt crisis and dealing with nuclear developments in Iran.

Mr. Jestin noted that Canada is currently lagging behind the United States in growth rate, a result of having led the United States and other G7 countries out of the recession. However, he noted that unlike the United States, which still has five million jobs to gain in order to get to pre-recession employment levels, Canada has not only regained all jobs lost in the recession but is above pre-recession employment levels. Canada is ahead of the United States in most every economic indicator. Mr. Jestin projects that the growth rate will be 2.0% in Canada in 2012, and 2.5% in the United States, and that these rates will continue for several years. In Canada, growth will be highest in British Columbia, Alberta and Saskatchewan, a reflection of their commodity-based economies.

When speaking on the United States, Mr. Jestin noted that government and monetary officials are not having an "adult conversation" about the fiscal problems in the United States. He noted that the United States has no plan for eliminating the annual fiscal deficit. While corporate balance sheets are strong, unlike Europe, where the problem is an inability to fix fiscal problems due to overwhelming sovereign debt, a lack of growth and high unemployment, in the United States the problem is an unwillingness to fix their fiscal problem. Despite these factors, Mr. Jestin predicts that international funds will still flow to the U.S. Dollar, keeping it strong in the overall sense. He predicted that the Canadian Dollar will continue above par with the U.S. Dollar and will perhaps trend upward two to three cents over the next 12 months.

In terms of Europe, Mr. Jestin noted that the Eurozone is in recession, with high governmental debt levels and high youth unemployment. Germany remains the exception. Mr. Jestin predicted that the European sovereign debt crisis will continue for many years, ranging from country to country, and will affect global equity and bond markets and exchange rates. When speaking on emerging markets in Asia, Mr. Jestin noted the continued strong demand in those markets for commodities and the housing and motor vehicle sales booms, particularly in China. The housing boom in China will particularly help British Columbia’s forestry sector.

Mr. Jestin predicted that inflation will remain low, as will central bank interest rates. He noted that the only interest rate risk is in the bond market, where long bonds may see a 1/2 % to 1% increase over the next 12 months. Lastly, Mr. Jestin stated his view that there is not a "housing bubble" in Canada, and that with continued job growth and low interest rates the Canadian housing market, which is current "red hot", will cool and prices will trend "sideways".

A Global Perspective on Vancouver Real Estate – Is Vancouver still Attractive and if so Why?

Moderator:

John O'Bryan, Vice Chairman, CBRE Limited

Panel:

Andrew Bibby, President & CEO, Grosvenor Americas
David Bowden, CEO, Colliers International
Joe Mazzocco, Partner, Investments, KingSett Capital

When providing their views on Vancouver and its place in the global marketplace, the panel were all of the view that Canada presents a very attractive investment target in the global perspective, having been an "oasis of stability" over the past several years, with vacancy rates which are lower in every real estate sector than they are in the United States. One factor of note has been the ongoing ability for investors to obtain financing, in both primary and secondary markets (a function of our stable banking system), which has not consistently been the case in the United States. Generally, they see Canada continuing to be an attractive marketplace for global real estate investment, with ongoing significant demand.

While noting that Western Canada is leading the country economically, the panel also pointed out that Calgary provides better opportunities for investment than Vancouver. Vancouver is an expensive market for investment and lacks the large users prevalent in the Calgary market. With a larger office market, deal flow in Calgary is greater than in Vancouver. Joe Mazzocco noted that his firm, KingSett Capital, will invest in Vancouver for long-term capital appreciation, but in terms of value-add transactions they focus on Toronto or Montreal, where there are more opportunities to acquire, re-develop and sell.

In terms of the Vancouver residential market, David Bowden noted that, while expensive, the market seems to be in balance, without a lot of "flipping" and that developers are still able to build and sell at a profit. There continues to be strong demand for multifamily development sites. Andrew Bibby pointed out that in the global context, Vancouver is still behind Sidney, Australia and well behind London, England (where top residential prices are at $10,000 per square foot) in terms of pricing. The panel agreed that there should not be a housing “bubble” bursting in Canada.

With respect to the Canadian office market, the panel noted that there is an under-supply in most markets, without significant development given the overall size of the marketplace. Mr. Bowden felt that even with several new office towers under development, the Vancouver office market will not be oversupplied and that all of the new office space can be absorbed with only 1% annual job growth. He predicted that although market rental rates will be in the mid $40 dollar range, he fears that once the new supply is committed the "spot price" in 2014 or 2015 may go up to $50 or $60 per square foot. He noted that office space demand has focussed in the downtown core and along transit routes, and predicted that properties not in those areas will start to suffer.

Lastly, the panel predicted that capitalization rates will remain low. In arguing that this is a good time for investment, Mr. O’Bryan presented a slide showing that the "spread" between Canadian capitalization rates and the 10 year bond has grown to 439 bps, as compared to 420 bps in 2003 and 396 bps in 1998 (the spread was negative in 1990 and prior years).

Legendary Series: A Panel of Legendary Players in the Vancouver Market

In discussion with:

Ward McAllister, President & CEO, Ledingham McAllister Properties Ltd.

Panel:

Natale Bosa, President, Bosa Development Corporation
Joseph Segal, President, Kingswood Capital Corporation

Ward McAllister led Nat Bosa and Joe Segal through a captivating discussion of their long careers in the Vancouver real estate development and investment businesses. When asked why they chose to make their careers in real estate, Joe Segal said that real estate allowed much more sales revenue per transaction than the retail business where he had his start. Mr. Bosa noted that he didn't feel he had much choice. Leaving school, he started as a labourer in the construction business, and through hard work and taking hold of opportunity grew to where he is now.

Both Mr. Segal and Mr. Bosa attributed their success to hard work, honesty, luck, good relationships and timing. Mr. Segal commented a few times that in order to succeed in the real estate business you need to establish a strong relationship with your banker and have to be unafraid to make decisions. Mr. Bosa noted that you shouldn’t be "too smart", and that he felt if you overthink a deal you may end up not doing it. Both noted that you have to believe in what you're doing, with Mr. Segal noting that much of his success has come from buying and holding for the long term.

Mr. Bosa noted that the "game changing" deal for him was his development of the City Gate project in Vancouver. This project, in a previously industrial area of town, represented a significant risk in neighbourhood-making. Its success provided a springboard to other, larger deals. Mr. Segal's "game changing" deal was in the retail sector, being the takeover of Zellers stores and significantly increasing their sales, so that they became a takeover target for The Bay.

Both Mr. Bosa and Mr. Segal see a continuation of the strong Vancouver marketplace. In terms of what motivates them to get out of bed in the morning and continue to work so hard, both pointed to their love of what they do, the relationships they have and the ability to keep doing deals.

A Changing Landscape – the Vancouver Office Market

Moderator:

Mark Renzoni, Executive Vice President, CBRE Limited

Panel:

Franz Gehriger, President, SwissReal Group Canada
Jocelyne Legal, Director of Leasing, BC Region, Tonko Realty Advisors (BC) Ltd.
Jeff Rank, Vice President, Development Projects, Bentall Kennedy (Canada) LP
Chuck We, Director of Leasing, Oxford Properties Group

Moderator Mark Renzoni set the stage for this session with some predictions. With 1.1 million sf of downtown currently under construction (50% of which is already pre-sold), Mr. Renzoni noted that this number will only increase over the next three or four years given the new construction set to take place. Noting the current 5% vacancy for AAA and A buildings downtown, Mr. Renzoni forecasted that this rate would likely stay stable over the near future and be pushed to 6% as a high water mark. He predicted more movement in the suburbs from the current 12% vacancy to 15 or 18%, given the significant projects in Burnaby set to complete in the next few years.

Mr. Renzoni then opened the discussion by asking for the panellists' perspectives on current downtown activity. Chuck We noted that low availability rates have been maintained even with the slowdowns in the US and Europe, which has taught us that we have less dependence on the US than originally thought and little correlation to Europe. Jeff Rank thought that the tight vacancies created a feeling amongst tenants that they have no option other than to stay in their current spaces, but found it surprising that a number of tenants with leases set to expire soon appeared to make their decision without doing much investigation of the new buildings.

In terms of the suburban market, Jocelyne Legal noted that vacancies in Burnaby dropped significantly in 2011. Ms. Legal attributed the drop not so much to tenants moving out of the downtown area, but to the typical suburban user who found opportunity in Burnaby’s central location and transit connections and didn't see the need to be downtown. From a global perspective, Franz Gehriger described the special nature of Canada and BC as having the capacity to attract foreign investors due to strong markets, resources and the potential for growth.

The panel also discussed office trends from the landlord's perspective. All panellists picked up on the trend of preparing for a generation of workers who are attracted to certain amenities such as fitness centres, shower and locker facilities, bike storage and daycares; and features like green buildings and proximity to public transit. The panel felt that given the tight employment market, tenants are increasingly driven by the desire to foster a competitive workforce by providing attractive work environments.

On the topic of overbuilding and backfill space, Mr. We described himself as being bullish on the Vancouver market and felt that the new construction would appeal to different tenants. Ms. Legal agreed and added that barring another catastrophic economic downturn, a staggered output of varied buildings would not lead to an overbuilding issue. Mr. Rank pointed out that not all tenants are interested in new buildings and backfill space is often quickly filled by such users.

In response to an audience question about lease rates, Mr. Rank noted that lease rates are already going up and that owners will capitalize on the lack of supply in the downtown area in the short term. Mr. We agreed and noted that when high demand is combined with short supply, lease rates may "boil over". Ms. Legal stated that in comparison to downtown Vancouver, Burnaby "looks good", while Mr. Gehriger predicted that gross rates will not change.

Land Development in Vancouver: Density, Housing Affordability, the Public, and other Emerging Factors

Moderator:

Gary Pooni, President, Brook Pooni Associates Inc.

Panel:

Jeff Fisher, Deputy Executive Director/Senior Policy Advisor, Urban Development Institute
Brian Jackson, Director of Development, City of Richmond
J. Liam Murray, Senior Director, Cost Consulting & Project Management, Altus Group
Christopher Vollan, Vice President, Development, Rize Alliance Properties Ltd.

Jeff Fisher started out the discussion by noting that affordability is currently a top priority for the Urban Development Institute. Not only is the high cost of housing impacting the economy, with employers having trouble competing for workers, but Vancouver is second to only Hong Kong in terms of affordability. The challenges to realizing affordable housing in Vancouver include high government charges, regulatory costs, and the basic issue of supply and demand. These challenges are compounded by the lack of usable land surrounding Vancouver, and the usable land being reduced by the Agricultural Land Reserve, the Urban Containment Boundary and governmental policies such as green space. In theory, this reduction in available land should encourage development in certain areas, such as those surrounding transit, however, convincing voters that they should be accepting density is difficult, even though this density would improve affordability. Mr. Fisher believes that to obtain more affordable housing in Vancouver, the policies that result in freezing land must be reviewed; the industry and the government must work together to outline for the public the benefits of growth and transit oriented plans; additional areas plans should be created; and a better job should be done of linking transit to development. If a community is seeing the benefit of transit dollars being spent in its region, that community needs to alter its land use expectations accordingly. Without more homes for more people, costs will remain high and affordability will be a challenge.

Christopher Vollan gave his perspective "from the trenches". He views the cities' struggle to obtain funds for growth – most prominently evidenced through Vancouver's community amenity contributions – as hindering affordability. Mr. Vollan believes that greater predictability in development fees and a streamlined timeframe for movement through the municipal process are needed in order to help affordability. He illustrated the differences in developing in Vancouver in comparison to Surrey with two of Rize Alliance’s recent projects. Its development at Kingsway and Broadway in Vancouver took 630 days from submission to public hearing; the rezoning approval duration was roughly two days per 1,000 square feet, and the municipal costs were approximately $35/gross floor area (GFA). In contrast, Wave in Surrey took 117 days from submission to public hearing; the rezoning approval duration was roughly 0.3 days per 1,000 square feet, and the municipal costs were approximately $14/GFA. Overall, the expedited process in Surrey (when compared to Vancouver) significantly reduced the costs of developing. In terms of trends in the marketplace, it appears that more people want to walk to amenities, and are willing to give up a backyard in order to live in a compact neighbourhood. While the desire for single family homes has not gone away, these homes have just become too unaffordable. Mr. Vollan also cautioned that social media is driving much of the slowdown in the development process – and that the industry rapidly needs to catch up.

Brian Jackson gave an overview of Richmond's development policy. Richmond has a new City Centre Area Plan (CCAP) in place, focusing on five key regions. Richmond intentionally created the plan with a significant level of detail in order to provide greater certainty to both purchasers and developers within the city. Mr. Jackson noted that the plan was prepared in order to provide the community with greater detail in terms of heights and density, and that the plan also allows council to make decisions quickly and effectively. The CCAP identifies amenities necessary for the development of the city centre – so that developers are able to identify what they are going to have to pay and when.

Liam Murray gave a breakdown of the average land development equation, which has estimated construction costs of 65%; development costs of 12%; marketing and sales costs of 5%; financing costs of 8%; and land costs of 10%. Mr. Murray notes that costs are tight for developers in many areas of the province, particularly in the Lower Mainland, and that this problem is exacerbated when developers are faced with municipal delays. A developer needs certainty in order to prepare its pro forma, and currently increasing development cost charges are not providing this certainty. Mr. Murray sees construction costs as holding steady in the market currently, as are marketing and sales costs (although these may increase if sales volumes slow). With respect to financing, money is currently inexpensive to borrow and generally available. The return of PST will increase construction costs by approximately 2-3%. Mr. Murray believes density is one way to provide affordability, and that reducing or eliminating parking requirements will also help create affordability.

40 under 40: Who are the Next Leaders and Game Changers in BC Real Estate?

Moderator:

Jennifer Podmore Russell, Real Estate Advisory Leader, Deloitte

Panel:

Erin Gibault, Managing Partner, Headwater Projects Inc.
Houtan Rafii, Vice President, Residential Development, Beedie Development Group
Ben Smith, Vice President, Marketing, Polygon Homes Ltd.
Angelo Tsakumis, Vice President, Development, Epta Properties

Moderator Jennifer Podmore Russell set the tone for this session by asking the panellists, who asked to be referred to as the "kids table", the following questions: where have they come from, where are they going and what do they think the future holds?

Erin Gibault shared that he got his start as a real estate broker. Mr. Gibault explained how being a broker helped him to understand the construction and flow of a deal, to gain insight into an investor's decision making process and to establish connections to the Vancouver real estate industry.

He expressed that seeking guidance from experienced members of the industry is invaluable and based on his own experience, when he was starting his own company, Headwater Projects Inc., there are endless numbers of people willing to impart their wisdom in Vancouver. He observed that many of Vancouver's real estate icons have survived at least one big economic downturn, which is not something members of Generation X and Y can relate to.

Mr. Gibault commented on how the buyer group for private real estate is shifting from 65 year olds and up to 35 to 45 year olds, which means for marketing purposes it is key to keep that age group's perspective in mind. He stated that his company's current focus is on on multi-family and High Street retail development and creating value in under-utilized properties.

Ben Smith was pleasantly surprised by how approachable people were in Vancouver when he moved from Toronto. According to Mr. Smith their are two avenues for young professionals in the industry: (1) working for a big company and gaining experience through the volume of work, or (2) working for a smaller company and gaining experience through doing everything. He chose the first avenue and has worked at Polygon Homes Ltd. for approximately 6 years.

Mr. Smith pointed out that in today's market two-thirds of vacant jobs come from retirees and there is a shortage of people from Generation X to fill these vacancies, which means people from Generation Y will need to step up. He went on to say that the industry needs to start acknowledging this issue and focusing on areas such as mentorship, succession, transferring knowledge and changing the structure of companies. He complimented the efforts of organizations, such as the Urban Development Institute, that are attempting to address these issues by creating U40 and U35 groups.

Mr. Smith observed that the major player in our local residential market is the first time home buyer and even within that group their are discrete smaller groups (e.g. new immigrants). From the marketing perspective, he stated he is always grappling with how to address the wants, needs and desires of this group. He commented that Vancouver is not a "grown-up" city yet and that it needs to expand and add density to reach that stage.

Houtan Rafii spoke about how his father, a trained architect, advised him during his teen years not to become an architect and instead become a developer. Mr. Rafii has been working in real estate development for more than 15 years. He shared a lesson he learnt in the early stage of his career, which he still carries with him today: with any project always keep the end-user's perspective in mind.

Mr. Rafii observed that the residential projects his employer, Beedie Development Group, is pursuing are consistent with needs and wants of Generation X and Y: connectivity or access to public transit and mixed use developments. He expressed his belief that many people, especially from Generation X and Y, including himself, make decisions regarding where they reside based on lifestyle. Finally, he commented that employers in the industry should keep in mind that promoting a balanced lifestyle is valued by members of Generation X and Y, especially since we are on the West Coast.

Angelo Tsakumis discussed how his initial exposure to real estate was through his father, who would drive around with Mr. Tsakumis looking for potential properties for restaurant development. His first job in real estate was with Royal LePage Commercial doing sales and leasing. Mr. Tsakumis values that he got to do more than one role in the jobs he has held, which has allowed him to analyze and understand real estate from different perspectives. He suggested to industry employers that allowing their employees to take on diverse roles is something members of Generation X and Y would find attractive.

Mr. Tsakumis talked about how his company, Epta Properties, is focusing on the development of infill properties in close proximately to Vancouver. Sharing similar views with Mr. Smith regarding Vancouver's current stage of development, Mr. Tsakumis commented on how Vancouver needs to continue moving in the direction of mimicking European and Asian cities, increasing density and encouraging community oriented living.

Residential Market: Is this Market Sustainable?

Moderator:

Richard Weir, Vice President, Bosa Development Corporation

Panel:

Michael Ferreira, Managing Principal, Urban Analytics Inc.
Cameron Muir, Chief Economist, BC Real Estate Association
Christopher Philps, President, Fairborne Homes Ltd.

Cameron Muir noted that three factors must be considered in determining what affordability is – home prices, income and interest rates. Mr. Muir commented that if a price correction is going to occur, then mortgage rates will have to increase to their average of 10%, which likely will not happen anytime soon. Mr. Muir queried why so many transactions are occurring if housing is unaffordable – particularly where a little over one-third of those buyers are first-time home buyers. Christopher Philps also raised the question of who is being looked at in determining whether Vancouver is affordable – if considering that Vancouver is one destination in a global market, there may be a different answer in terms of whether it is affordable. Mr. Philps noted that international migration is strong, and that those foreign buyers will help drive demand, resulting in price pressure.

When looking at market fundamentals, Michael Ferreira commented that the offshore investor is a small component in the market, while the new immigrant buyer is a strong component. The core areas (Vancouver and surrounding areas) are providing what those new immigrant buyers are looking for, so those fundamentals remain strong; however, moving away from the core one can start to see a more balanced market – for example, in Cloverdale, townhouses are being sold for the same price they were sold for in 2006. In certain suburban markets, new multifamily homes are remaining affordable. In addition, the market is starting to see an increase in rescission due to people being unable to obtain financing. Mr. Ferreira believes that overall, the market fundamentals remain good.

In commenting on whether investor demand remains strong, Mr. Philps pointed to the recent successes of Marine Gateway and Telus Gardens as evidence that investors are confident in the market. Mr. Philps noted that Vancouver has a good brand and that investors respond positively to it as a result. Mr. Muir noted that the idea that foreign investors are driving the market is a fiction. Mr. Muir stated that only an estimated 1-3% of home sales in Vancouver are generated by foreign investors – so while these numbers may be enough to drive up prices in certain neighbourhoods, they are not enough to drive the entire market. Those investing the real estate typically tend to be local, and these investors tend to hold onto their properties longer than the average owner/occupier, providing a supply of rental stock that wouldn’t be available otherwise.

When questioned on the degree to which Canadians are currently leveraged, Mr. Muir noted that the Bank of Canada is indicating that the debt individuals are taking on is too much. However, Mr. Muir believes that this will result in slower economic growth in Canada, rather than an impending disaster, as Canadians' ability to service this debt remains strong. In addition, only approximately 20% of home sales are those with high ratio financing – the remainder are purchased either with conventional financing or cash.

In terms of whether construction costs have risen over the past twelve months, Mr. Philps observed that for wood frame product, prices have remained steady over the last year, and that there is trade capacity in the Fraser Valley. In terms of concrete construction costs, those prices also have not moved over the past year; however, with the upcoming demand from the development of new office towers downtown, this may change.

When looking at the influence first-time homebuyers and empty nesters have on the market, Mr. Ferreira commented that first-time homebuyers are driving most of the activity in the market. Within the Fraser Valley, however, the new target market has become the "blue collar downsizer" – who is coming into retirement without as much money as anticipated, and looking to purchase a three storey townhouse or larger wood frame condo. In terms of market strength, those areas that are north of the Fraser River, such as Port Coquitlam, have remained relatively flat since 2008. Vancouver, Richmond and Burnaby have all come back strongly from the downturn, although downtown Vancouver is still not where it was at the peak of the market.

When questioned on whether design boosts prices or accelerates absorption, Mr. Philps noted that the must-have design features are utility and value – the real way to address design is to create home layouts that give more liveability for less. In addition, Mr. Philps noted that there has been a steady specification creep in the market, and that granite countertops and high-end appliance packages have become more commonplace. In commenting on unit size, Mr. Ferreira noted that for investors, smaller units are king, but where the end user is the purchaser, those users still want space – not just in terms of size, but also in terms of utility.

In terms of population growth in Vancouver, Mr. Muir commented that the main driver is immigration, and that the estimated growth figures are 20,000 new households per year over the next five years. Mr. Ferreira observed that 2011 was the first year in a number of years where there were four consecutive quarters without an increase to interprovincial migration. Mr. Muir responded that, for Vancouver, interprovincial migration is not a large driver, and that these figures tend to more largely influence other areas within B.C.

When questioned on whether buyers are willing to pay the price of going green, Mr. Philps wryly observed that if a family is looking to purchase a townhouse, it is never willing to give up a third bedroom in order to make a donation to the planet. From Mr. Philps’s perspective, the essence of sustainability is creating density around transit and amenities. Mr. Ferreira noted that if cities were to create more great neighbourhoods that people want to live in, then a lot of the affordability issues would be solved.

In discussing the upcoming provincial election, Mr. Philps noted that having an investment-friendly tax policy and regime is important. The province currently has good growth, which is resulting in housing demand; if that growth is threatened, then developers will build less. Mr. Muir noted that it is difficult to predict the impact of the next provincial election, as the government policies going into this election are currently unknown. Mr. Ferreira commented that the prospect of a NDP government is a difficult one to face having lived in B.C. during the 1990s – when many developers simply stopped building.

In terms of predictions for next year and beyond, Mr. Ferreira and Mr. Muir both see the market staying steady, with Mr. Muir seeing an upward trend in 2014. Mr. Philps is more optimistic, and believes that the next year could bring a surprising upside.

The Changing Retail Market in Vancouver: From Brick to Virtual

Moderator:

Michael Penalosa, Managing Principal, Thomas Consultants Inc.

Panel:

Bob Nicholson, Retail Asset Manager, Morguard Investments Limited
Wes Purdie, Regional Director, Harry Rosen Inc.
Wynn Spencer, Vice President, Store Development, Lululemon Athletica

Michael Penalosa asked the retail panelists how online shopping or e-commerce is impacting the business of Lululemon and Harry Rosen respectively. Wynn Spencer described online shopping as another channel for Lululemon where the retailer is able to reach customers without adding additional stores; however, he noted that Lululemon's focus remains on creating a great "one-guest" experience for its customers, where the "kitchen party atmosphere" of their store and high level of customer service makes customers want to come back and shop at the brick and mortar retail premises. Mr. Spencer noted that Lululemon has embraced e-commerce and the requirement of Lululemon to meet a high level of service online (ie. shipping merchandise to customers within a certain period of time and sending a Lululemon bag with every online purchase), but he also said that he doesn't expect to reduce the number of Lululemon stores or store size as result of online sales. Instead, Lululemon intends to enter into short term leases so it can continue to reevaluate the size of certain premises and rental rates being paid for those premises as required.

As for Harry Rosen, Wes Purdie reported that online shopping currently makes up only a small part of the business for this luxury clothier, and while they recognize the importance of investing in online sales, they still see online shopping as being a bit of a black hole. Mr. Purdie said that Harry Rosen’s view is to use online shopping and technology as a multi-channel approach to intrigue and engage customers and bring them down to their premises where customers have the opportunity to try on the clothes they're purchasing. In an age where online shopping is becoming more prevalent, Harry Rosen is expanding their stores and business in locations throughout Canada. Mr. Purdie acknowledged that it is important to strike a balance between mediums, but based on lessons learned in the 80's, it is important for Harry Rosen to stay true to its brand and the quality and service customers have grown to expect.

Asked how online shopping is impacting brick and mortar establishments and their businesses, Bob Nicholson noted that the trend for shopping mall owners and developers is to create smaller spaces. He commented that shopping mall owners and developers cannot afford to be stagnant, but instead have to provide customers with shopping malls that continue to evolve and give better shopping experiences to their patrons. With online shopping becoming more and more prevalent, Mr. Nicholson described the big suburban shopping mall of the future as being a mixed-use development that must be located on a rapid transit line, with amenities, amenities and more amenities, where families are able to mingle shopping with entertainment, where they can have dinner and a movie or watch live theatre, and where their trip to the shopping mall is transformed into an experience.

Building a New Downtown Within an Existing City

Moderator:

James Stewart, Partner, Hamilton Duncan Armstrong Stewart

Panel:

Michael Cairns, Managing Partner, Blackwood Partners
Joanne Curry, Executive Director, Simon Fraser University Surrey
Murray Dinwoodie, City Manager, City of Surrey
Bing Thom, Principal, Bing Thom Architects
Peter Webb, Senior Vice President, Concord Pacific

The panel discussed Surrey's plan to develop a new city centre. Moderator James Stewart started the dialogue with a question about the importance of having a downtown. All panellists agreed that it is critically important to have a vibrant downtown. Michael Cairns noted that every city that works has a major downtown and this is a factor that institutional investors look for. Joanne Curry noted that having a downtown is crucial for a growing young city like Surrey: when you think of a city, you think of the city centre. Murray Dinwoodie agreed, adding that a downtown functions to identify cities and provides the iconic images associated with the city. Peter Webb said that the city centre concept is the beating heart of the city. Andy Yan borrowed from this analogy to suggest that the new downtown will be the heart of the city and the region where academics, public and private institutions and people can form networks.

In response to Mr. Stewart's question about the challenges of choosing to build a city centre rather than allowing it to grow organically, Mr. Dinwoodie acknowledged that the situation in Surrey is different and suggested that these differences relate to the fact that Surrey is a city made up of several town centres and the Surrey is the heart of the region. Mr. Dinwoodie talked about Surrey's fast-paced growth and the need to design a city centre that will become a regional hub for commerce and population growth.

Mr. Yan commented that a lot of cities go through the challenge of how to urbanize suburbia, particularly in the US, and that many international cities are looking at Surrey as an inspiration as it has successfully developed connections between the development community, city hall and the university. In contrast, Mr. Yan pointed out that many other cities have gone a more traditional route of focusing on condominiums.

Mr. Dinwoodie attributes a large part of Surrey's success to the visionary, results-oriented and aligned city council and mayor. Mr. Dinwoodie explained that the city has made significant investments in the city centre and has shown that it is committed to development. As well, Mr. Dinwoodie noted the importance of responding to ideas from the developer community, and providing good processes and a stable environment for development.

On the investor side, Mr. Cairns commented that Surrey’s mixed-use space of office, residential and university is attractive to investors, especially with SFU’s commitment to its campus, the transit hubs, high density and progressive mayor and city council. From SFU’s perspective, Ms. Curry notes that the demographics are compelling, pointing to the rising population of young people in Surrey that will become tomorrow’s working population.

The session concluded on the topic of future challenges and opportunities. Mr. Cairns noted the opportunity exists to continue the drive to create a downtown in a fast-growing city, but the challenge will be how to deal with the up and down cycles of the economy and for future mayors and city councils to remain loyal to the current plan. Ms. Curry sees the opportunities for SFU to double its population but agreed that a slower economy would affect its plans for growth. Mr. Webb's answer was "jobs, jobs, jobs" and he stressed the importance of the marriage between jobs and development. Mr. Yan suggested that the opportunity is for innovative SFU students who could bring a dynamic element to Surrey's economic engine. A challenge Mr. Yan identified is the building of a transportation system that will circulate people around the city and region.

Luncheon Keynote: What Lies Ahead for 2012 & 2013?

Speaker:

Michael Campbell, Business Analyst

Michael Campbell started his luncheon address by observing that we're living in a historic period (European/World financial crisis) and that in the next two decades the world is going to figure out that we've borrowed more money than we'll ever be able to pay back. Something has to give in the current crisis and there are going to be winners and losers. According to Mr. Campbell, the winners will be those in the private sector and the losers will be those that work for government or are reliant on government.

In terms of trends shaping society, Mr. Campbell advised that the Chinese driven cycle is not over yet and that audience members should figure out what China wants to buy and get ahead of it. He also noted that the current financial crisis will change our currency when its done and predicted that we will be talking about Japan in 2 years, much like we're talking about Europe now, and in 2015 we will be talking about the United States. He predicted volatility in the coming years, with a dramatic change in interest rates 3 or 4 years out, and noted that we've seen the peak of government suggesting that as government can't fulfill promises it has made, we will start to see the replacement of the public sector by the private sector (ie. schooling, health care, policing, etc.). As our government enters a new phase of government desperate for capital to pay for unfunded liabilities, he feels a strong private sector will be the key to funding health care, education and pensions.

He concluded by stating that British Columbians have an opportunity to prosper – he feels that our major commodity boom is a huge gift, that the 2010 Olympics continue to provide opportunities and that our Province has won a major "energy lottery".

Being Nostradamus: How Demographic Upheaval and Technology will Change the Real Estate Development World – Likely Sooner than You Think

Speaker:

David Allison, TCo-Founder & President, Braun/Allison Inc.

David Allison's engaging presentation examined two current trends and contemplated what things will look like in 40 years' time for Vancouver's real estate industry. Saying that "people will be different and the way we communicate will be different", Mr. Allison considered Vancouver's rapidly changing demographics and the world's "communication revolution" and made predictions about what the democratization of media and the change in the make up and mind set of Vancouverites of the future will mean for the real estate industry.

Mr. Allison predicts, based on his research, that by the year 2050, the population of Vancouver will have doubled and will be comprised 70% of first and second generation immigrants. Vancouverites will largely be ROVERS: Richer, Older, Very Educated, Retired, Strangers. Vancouver will continue to attract wealthy individuals, although they will be older and most often childless. They will be very educated, both formally but also experientially and based on the sheer volume of information that will be consumable in the future. They will be retired, but not necessarily the way we think of it now – they will live more and work less, such as teaching a course part-time via some future equivalent of Skype at a Bogata university from the comfort of a Coal Harbour condo. They will also be strangers – ironically, of course. Despite unprecedented connectivity and communications ability linking them electronically to people all over the world, Vancouverites will not know people in their local coffee shops and restaurants. ROVERS have already started to arrive, and each of us knows at least one in our lives today.

Mr. Allison discussed seven factors that real estate players will need to consider in the future given that their products will be assessed, scrutinized and acquired by ROVERS:

  1. Land. Developers should not buy land unless they can pro forma true value into that land. ROVERS won't accept window dressing on C-class product in an attempt to disguise it as A-class. They will be savvy information gatherers and will see through this. They will continue to demand housing near transit hubs, to build density outside of the downtown core.
  2. Design, and not just architecture. ROVERS will want buildings that resonate with them and make them feel like a building is “their” building, but will also demand building designs that facilitate interaction with neighbours.
  3. Construction quality. The democratic, immediate and interconnected nature of media and communication at the ROVERS' disposal will mean that properties (and their developers) that are not "up to snuff" or are perceived to be lacking quality can and will feel an immediate impact in social media and other new media spheres.
  4. Information/Stories. Information available to purchasers will need to be improved because ROVERS will be used to having easy access to information and they will want to make smart, informed decisions about the properties they are buying.
  5. Customer Service. The development industry needs to revolve around it. Developers should adopt the mindset of considering the customer's needs/wishes right from the moment financing is arranged and property is purchased.
  6. Reputation. Developers, construction firms and other industry professionals need to spend the time in between completing one building and starting the next by engaging with their market and customers. The word "marketing" will become passé and "engagement" will be what ROVERS expect.
  7. The Team. Real estate players of the future should not to forget their consultants, advisors and other external team members. These people will also be ROVERS, and their use of communication technology will mean that negative perceptions about the company and product will spread just as quickly (perhaps even more quickly) as positive perceptions.

Mr. Allison ended by asking the attendees: If you could speak to your future ROVER self, what would you say? How would you want the ROVERS to do the business of real estate in a way that will make sense for all of us in the future?

The Outlook for the Industrial Real Estate Market

Moderator:

Andrew Tong, Senior Vice President, Investments, Concert Properties Ltd.

Panel:

John Boer, Executive Vice President, Colliers International
Tom Corsie, Vice President, Real Estate, Port Metro Vancouver
Ron Emerson, President, Emerson Real Estate Group Inc.
Lee Hester, Vice President, Cushman & Wakefield Ltd.

Andrew Tong had a bit of fun moderating this session by not supplying the panel with his questions beforehand, then probed them on trends and broader policy matters.

Pricing and cap rates were the first topics.

When asked what sort of price per acre an ideal (clean, pre-loaded, etc.) 5-acre parcel of industrial land would fetch both now and in 12 months, the brokers on the panel agreed that in South Burnaby the price would be above $1.3m, Richmond over $1.45, South Vancouver $200,00 higher, and all a bit higher next year. Cap rates for an ideal building ("A" location, "A" covenant, etc) were seen as just below 6% with potential to go as low as 5.5%, especially in the 50,000 s.f. range where private investors are looking for steady income. Less ideal properties ("B" in all categories) are currently in the 6.5% range. One of the factors increasing demand, and therefore pricing, is the South Perimeter Road project, which is about 50% constructed.

In terms of trends:

Turning to "policy"

Why is Apartment Investment Activity so Tight? Has this Market Out-Performed all other Real Estate Asset Classes?

Moderator:

Robert Greer, Principal, Avison Young Canada

Panel:

Sandra Cawley, Principal, Burgess Cawley Sullivan
Ward Jones, President, Western Investment Properties
Jim McPherson, President, Realtech Capital Group Inc.
Daniel Sander, Director, Hollyburn Properties Ltd.

Moderator Rob Greer began this session by giving an overview of trends for cap rates, vacancy rates and rent. He noted that there has been decrease in cap rates across Canada from a high of 9% in 2003 to around 3% in 2011, with Vancouver falling in the middle at 6 1/2% in 2003 and 4% in 2011. Vacancy rates across Canada in the apartment market continue to be fairly low, with Vancouver having the lowest vacancy rate. The tertiary markets do have slightly higher vacancy rates but those are still only at 3-6% meaning that apartment investments have the lowest risk level of any of the real estate asset classes. Finally, he noted that overall, rent has steadily trended upwards.

After turning the discussion to the panel Mr. Greer asked Jim McPherson how buyers are financing the purchase of apartments. Mr. McPherson commented that apartments are benefiting from the low interest rates and that because of the incredibly low mortgage rates, even with the current low cap rates, buyers are getting positive leverage. According to him, the best way to finance the purchase of an apartment is through CMHC financing. This sentiment was seconded by Daniel Sander with the caveat that it does somewhat depend on the building. Ward Jones was also of the opinion that each apartment warrants its own considerations of the individual circumstances when determining who to obtain financing from. Mr. McPherson commented generally that lenders love apartments because they are very liquid, and relative to the other types of real estate assets, there is no occupancy risk, making apartments great security for loans. Mr. McPherson did caution that any building with a cap rate of less than 3% however would be subject to higher rates and less loan value.

Later, when asked how has availability in financing changed, Mr. McPherson noted two ways. First the CMHC program has brought in small capital lenders which increased supply and lowered rates, and second with the economic collapse came a rush of equity, which in turn pushed down yield.

When asked how the profile of apartment buyers has changed Mr. Sander responded that there are now many first time buyers looking for better yields on their investments, and for those buildings under $5 million, there are more people looking for diversification in their investments. Ms. Cawley believes that for those buildings between $2-5 million there are many more empty-nesters that cannot afford to buy in Vancouver so they are looking at smaller apartments and taking the top floor for themselves.

Next Mr. Greer asked the panel how buyers are making sense of current pricing. Mr. Sander believes that buyers are considering the decreased rates for 10 year bonds, the need to diversify their investments, and they compare pricing of apartments to the pricing of single family units. Mr. Jones' perspective in New Westminster, Burnaby and Coquitlam is that the cap rates there are high enough to justify the pricing.

With respect to where opportunities lie for first time buyers Mr. Sander cautioned against buying in Vancouver as it is too expensive and very competitive. Mr. Jones also advocated looking to the suburbs as they have better cap rates and with the skytrain, are now quick to get to. He also noted that there are opportunities in buying older family-owned buildings which are poorly managed and outdated.

As for the sub-three cap rates, Ms. Cawley pointed out that traditionally cap rates follow bond an interest rates. She believes that the cap rates will stay flat for a while but when interest finally goes up, the cap rates will follow.

Executive Round Table Discussion on Vancouver: Final Comments on the Risks, Trends, Challenges, and Opportunities for the next 12-24 months

Moderator:

Brian McCauley, President & Chief Operating Officer, Concert Properties Ltd.

Panel:

Eric Carlson, CEO, Anthem Properties
Remco Daal, President & COO, Canada, Bentall Kennedy
Michael Emory, President & CEO, Allied REIT
Gino Nonni, President, Wesgroup Properties

The day wrapped up with an entertaining discussion of numerous current issues and trends.

The group saw many reasons for Vancouver continuing to have historically low cap rates in every sector, including low interest rates, continued "high quality population growth", and high replacement costs as a result of ever increasing local government charges and lengthy approval processes.

Speaking of local government, and referencing Michael Campbell's lunch time speech predicting an increasingly desperate government need for capital, Brian McCauley asked what can be done to combat it. None of the panellists had a clear answer but had some interesting observations. Eric Carlson's view is that municipalities used to only collect money to provide roads and sewers, but now, along with Metro Vancouver, local governments see themselves increasingly as city states providing ambitious and expensive social programs. Whereas community amenity contributions used to be tied to specific amenities as part of smart, scaled density planning, cities are now just selling density without context, creating "Pigs in Space". Gino Nonni agreed that CAC discussions are "negotiations without parameters" creating uncertainty, which is deadly for developers. Mr. McCauley noted that such costs are ultimately borne by the end users.

Surprisingly perhaps, with the huge wave of new office construction downtown, the panellists did not see any significant oversupply on the horizon, expecting new space to simply catch up in line with historical absorption. Vancouver currently has the highest office rents in Canada. Michael Emory observed that Vancouver, along with other major cities from Winnipeg west, is evolving along the lines of Toronto and Montreal with nice, lower cost, inner city submarkets emerging in Gastown, Yaletown and Crosstown.

The panellists agreed that the arrival of Target and other US retailers would be a game changer but their impact will be mostly limited to regional and big box centres, rather than, for example, food anchored strip centres. Some "de-malling" of marginal enclosed centres should be expected and existing competitors such as Wal-mart are responding with renovations.

With increasing densification, mixed-use development is seen as a necessity, and an aesthetic and creative opportunity, but it can be very difficult. Vertical mixed-use is seen as especially difficult. It cannot be done practically or affordably in phases and requires the right mix of uses, which local planners may not appreciate. In Mr. Emory's experience in Toronto, both residential and office can work well with retail, but office with residential is extremely difficult, and mixing all three is a nightmare.

Lastly Mr. McCauley asked what the panellists were doing to nurture the leaders of tomorrow in their respective organizations. The answers included growing the organization itself in order to provide increasing opportunities and clear career paths, identifying prospects with high potential and providing formal training, mentoring and leadership development programs to them, and lastly, no matter the size of the organization, ensuring that it has a clear vision of its future.

Didn't they say the same thing last year? Links to Feature Articles from past Vancouver Real Estate Forums:

2011 Vancouver Real Estate Forum

2010 Vancouver Real Estate Forum

2009 Vancouver Real Estate Forum

2008 Vancouver Real Estate Forum

2007 Vancouver Real Estate Forum

2006 Vancouver Real Estate Forum