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State of the Canadian Commercial Real Estate Market

Posted By Michael Brooks, January 27, 2017

Although Canada is a small nation in economic terms relative to the U.S., Europe and Asia, it has a sophisticated and mature real estate market. By mature we mean that the dominant players in the Canadian commercial real estate market are not wealthy families as one might find in some developing nations, but publicly traded corporations, pension funds, life insurance companies, real estate investment trusts (REITs) and other pools of professionally managed capital. To be sure, there are still many wealthy individuals and families invested deeply in real estate throughout Canada, but many have also sold their assets to a public entity, or taken their company public so as to allow further growth through access to public capital markets.

Data on the size of the commercial real estate market (as opposed to the institutional grade market) in Canada, and therefore Canada as a percentage of the global commercial real estate market, sourced from within Canada, is annoyingly difficult to come by without using a top-down approach. Statistics Canada does not keep nor seek out particular data on the size or value of the commercial real estate market generally. The Canada Mortgage and Housing Corporation (CMHC) has reasonably good data on the apartment sector only. Aggregating broker market-area reports from major urban centers would be a start, but might not cover enough of the Canadian market to be useful. However, larger institutional investors tend to focus on larger markets such as the six or eight largest cities in
Canada; others may focus regionally or have a suburban strategy. Knowing the size of the market based on reliable data would enable investors to better understand market share and more precisely manage over-investment and under-investment in a given market. |

Commercial real estate is a large part of the Canadian economy. REALPAC commissioned a report in 2012 that conservatively suggested the Canadian commercial real estate sector produces:

• over $60 billion in annual economic activity

• approximately 340,000 jobs

• $7.2 billion in personal and corporate income tax revenue annually

• $18.1 billion in earned income annually.

Construction taken together with real estate is likely one of the two or three biggest industries in Canada.

The Canadian commercial real estate market is large to Canadians but small in relation to the global market. With US$784 billion of institutional grade real estate, there is much to choose from in Canada. On the other hand, Apple Inc. had a market capitalization of US$735 billion as at June 2015. If Canada’s institutional grade real estate market is 1/10 the size of the U.S. institutional-grade real estate market, Canada’s market size should be US$2.6 trillion.

The Canadian real estate market may be small by world standards but offers ample opportunity for investment. Those with capital seeking a return on investment can purchase income producing real estate and obtain a yield and perhaps capital appreciation as time goes by. Traditionally, well-maintained real estate is a good inflation hedge. In most cases, capital appreciation can be enhanced by appropriate additional capital investment, active and intelligent management, careful leasing and proper ongoing maintenance. On the other hand, capital appreciation is not guaranteed. Most real estate markets are cyclical, reflecting the ups and downs of the economy at large or, in some situations, unique market ups and downs based on local overbuilding, poor management, regional economic events, a significant immediate drop in local demand, and the like. Prudent investors diversify their investments to avoid or minimize the effect of down cycles; declines in value in one area or asset class can be offset by stability in the other areas or asset classes and leave enough equity or cash on hand to enable the investor to ride out the down cycles.

Canada is an excellent country in which to invest in real estate. The country is politically stable and federal, provincial and municipal laws encourage growth while systematically guiding rational development of residential areas, commerce and industry. As with all investments, there is both opportunity and risk in commercial real estate. There is opportunity because of the ability to add value through physical improvements to land. There is the ability to add value through regulatory approvals to land (such as by increasing permitted height and/or density, or changing permitted uses to a use more highly valued in the marketplace). There are opportunities to benefit from increasing rents to the extent there is scarcity of supply (or excess demand) in a given market for that particular use or location. There is the ability to achieve capital gains if inflation makes substitute properties more expensive or if the market demand for the rent generated by the building increases the value of the building.

Although commercial real estate is made up of land and buildings, it is really a business about people, for people and by people: giving people a place to live; giving people a place to work and shop; giving people places to go; giving places life – places that are attractive to people draw renters and generate higher rents; those that do not, generally do not rent well, or rent at a lower price point. Those needs change over time, reflecting changing societal priorities, technological advancement, and economics. Low-ceiling-height industrial was made obsolete by lift trucks that could lift pallets of goods higher. Newer industrial facilities now have ceiling heights approaching 40 feet. Strip retail and main-street retail were overtaken (at least for a time) by modern enclosed (and air conditioned) indoor shopping malls. Older brick office and other buildings with fixed interior concrete walls were made obsolete by steel and concrete office towers with clear longer spans between the elevator and the external windows, and movable partitions. Elevators and air conditioning made obsolete those buildings that did not have them.

At 2,200 people, the annual Toronto Real Estate Forum, co-sponsored by REALPAC, is a who’s who of the commercial real estate sector, at least for Ontario: people get to know people, people talk, people do deals, and people invest across Canada. This brings us to the final point: reputation matters. Trust matters, professionalism matters. In the community of people involved in the real estate industry in Canada, trust and reputation fuel the transactions that occur every day. Big money is at stake. No one wants a partner, lender, borrower, supplier, purchaser, vendor, lawyer, accountant, appraiser, consultant or agent who cannot be trusted, has a bad reputation, is a poor (or non-) communicator or is unprofessional. Those who lack those qualities become less desirable participants in any deal. Those who have those qualities find people to do business with and are successful.

The above article was sourced from the first Canadian commercial real estate textbook titled “Canadian Commercial Real Estate: Theory, Practice, Strategy”, authored by Dr. Michael Brooks and published by REALPAC. This innovative new textbook is now available for purchase here.

Tags:  Canada  cdnpoli  CRE  economics  education  REALPAC  textbook 


What if development approvals were instantaneous and free?

Posted By Michael Brooks, May 31, 2016
Updated: May 31, 2016

I dream of an Uber or Airbnb for development. When I started in this business, most development seemed to occur "as of right”. In other words, zoning bylaws matched the official plan, densities were reasonable and allowed profitable development, and for developers not interested in fighting those designations at City Hall, they just had to produce drawings consistent with the zoning bylaw, and apply for a building permit. City staff merely checked for compliance and issued the building permit. Boom. Done. Start digging.

Today? In most major Canadian cities; slow, uncertain, frustrating, and expensive. And seemingly getting worse as politicians find more ways to squeeze subjective fees out of developers and dream up new taxes, and planners think of even more things worth considering in their quest to make every part of every city consistent with the latest buzzwords and visions.

What if development approvals were instantaneous and free? Fill out a long form questionnaire online, behind the scenes software analysis occurs in a nanosecond, and development approval, site plan approval, and building permit get issued instantly. This is the modern version of “as of right” zoning approvals. It just replaces people checking the plans against the zoning bylaw and the official plan with software.

The software would conduct that analysis much more quickly and cheaply than a staff of planners and building officials. And because of that, what if there was a flat rate application fee of just a few hundred dollars? What would happen to development and prosperity?

I have the answer to that question: a torrent of new supply would be unleashed in every major market where that software was employed, bringing down costs and markets across Canada, inciting a lot more entrepreneurs (who are currently completely frustrated by the length, uncertainty, and cost of the process) to enter the business of building the physical infrastructure that Canada needs. A supply pipeline of 18 to 36 months all of a sudden contracts, releasing everything in that pipeline. Think of the instant job creation and new supply coming to market.  

Developers, shocked by their ability to finally ascertain all development costs upfront with no surprises, and accurately predict the date of release of building permits (tomorrow!) would be able to attract more capital to the now de-risked business and entice buyers and tenants who can now know almost exactly when they can move in. What a concept. Planners would be employed with software specialists specifying densities, heights and development configurations in advance, programmed into the software. Developers and planners would sit down every five years for the building code and software updates to the latest desired specifications to match the new Official Plan.

Such an idea is not impossible given some of the recent planning and development regulations implemented by municipalities in Canada.

For example, the City of Toronto has implemented a Development Permit System (DPS) – a kind of area- based Secondary Plan – that pre-zones a prescribed area and sets out development standards and guidelines in advance of any development within that area. The DPS provides transparency and clarity for developers and eliminates the need for tedious negotiation and renegotiation of development parameters. Developers simply get the rules of the game earlier and build based on those rules. In municipalities with a DPS, software and other expedited approval mechanisms would be a natural complement for a development system already becoming more time efficient an uncomplicated.

Surplus planners, development review specialists, lawyers, and bureaucrats would be freed from the drudgery of their current jobs to cross the floor and actually build something. Municipalities would see a drastic reduction in salaried overhead. People would get excited about building Canada's future. People would get excited about innovation. The city of the future would happen much quicker.

Who is building that software? And how do we get municipalities to subscribe to it?

Tags:  cdnpoli  city building  city planning  commercial real estate  CRE  development  REALPAC 


Enabling City Building in Canada: Barriers to Economic Growth

Posted By Michael Brooks, April 27, 2016

It is sometimes hard to square the rhetoric of senior level governments about enhancing productivity, attracting innovative new businesses, growing current businesses, and improving regional prosperity, with the cost and delays associated with local development. Planners and politicians are quick to take the credit for city building, and to be fair, the planners at least are looking long term. The politicians may just be looking to the next election. All of those new businesses of course need real estate: they need houses, apartments, offices, industrial buildings, and those employees need retail and a variety of municipal services. The construction and real estate sector generates some $63 billion in annual economic activity in Canada, including 340,000 jobs, and $32.4 billion in total net contribution to Canada’s GDP in 2011[1]. One would think municipalities in Canada would all want a piece of that.

So why does it take so long and cost so much to get approvals to build those houses, apartments, offices, and industrial buildings in many Canadian cities? Why would it take more than 12 months in Toronto, Winnipeg, Montréal, and Halifax to process an official plan amendment, when Edmonton, Regina, Saskatoon, and Ottawa can do it between 4 and 6 months? Why would it take more than 12 months in Toronto, and between 7 and 11 months in Calgary, Saskatoon, Winnipeg and Halifax to do a zoning bylaw amendment, when Vancouver, Edmonton, Regina, Ottawa and Montréal can all do it between 4 and 6 months? Why do 6 of 10 major Canadian cities not even have a target for the processing time of an official plan amendment or a zoning bylaw amendment, and 5 of 10 have no processing timeline target for a plan of subdivision or plan of condominium? [2]

Why does it cost between $38,000 and $115,000 (standalone retail $38,000, standalone office $81,000, standalone industrial $181,000 and Mixed Use $115,000) to get a zoning bylaw amendment in Toronto, when in Halifax it’s $330 across the board, in Winnipeg $1500 across the board, and in Edmonton from $2200-$5000? Even Ottawa seems an outlier at $15,000 across the board compared to Halifax, Montréal, Winnipeg, Saskatoon, Regina, and Edmonton.[3]

If cities and governments in Canada were truly interested in trying to attract new business to their jurisdictions, they ought to spend a lot more time looking at that “welcome” from the development approvals and cost point of view. This is particularly so in high cost cities such as Toronto and Vancouver. Developers and investors have real money at risk. Politicians and planners have no skin in the game, and no disincentive to overtax and delay development.

It is the developers and investors who are at the leading edge of attracting and retaining existing tenants, buyers of land, buyers of buildings and buyers of houses.

Only the developers and investors are talking to market participants on a daily basis and are sensitive to changes in demand. Often, developers and investors have a better idea of what economic participants in the city want than the planners and politicians. Greater collaboration is needed between those two camps.

Developers and investors need cost and timeline certainty to de-risk development. A slow or delayed process adds uncertainty and may cause developers to miss current markets. All municipalities in Canada need to set hard processing timelines with a view to enabling economic development in their community instead of restricting and adding risk to it.

The approval costs of development in certain Canadian cities are out of line and send a negative message to economic participants. The costs and delays are a silent economic drag: the city will never know what business it lost, or which constituents went elsewhere because it just takes too long and costs too much compared to alternatives. Ultimately, delays and high upfront fees drive up the costs of land, doing business, and living, in those cities.

A change in cost structures, if affected after a developer has committed to a project, can be the difference between profit and loss. Some costs are completely unbudgetable such as Toronto’s notorious Section 37 of the Planning Act charges, and Vancouver’s Community Amenity Contributions.

Canadian cities need to consult the development and investment community much more earnestly if they hope to continue to attract the business and activity the senior levels of government say they want. Expedite and streamline approvals, publish all criteria in advance, and drop fees to more modest levels, then maybe these prospective businesses will show more interest. 

[1] The Contribution of the Commercial Real Estate Sector to the Canadian Economy; REALpac and NAIOP Research Foundation, September 2012 (report prepared by the Altus Group)

[2] 2012 Canada wide development process survey report, REALpac, 2012

[3] Canada-Wide Key Performance Indicators: Survey Report on Planning and Development, REALpac 2015 (report prepared by The Planning Partnership)


Tags:  cdnpoli  city building  city planning  commercial real estate  development  REALPAC 



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