A mountain of uncertainty and the wall of capital

Report from the Global Property Market and Toronto Real Estate Forum held in Toronto between November 30th and December 2nd.

At the opening session of the Global Property Market, Peter Hobbs, Senior Director of Group Business Development, Investment Property Databank Limited set a tone of ‘unprecedented uncertainty in 2011’ that prevailed through out the annual Real Estate Forum held in Toronto last week.

“Real estate predictions for 2010 have generally been wrong. They missed out on the scale of events as well as the major turning points,” Hobbs said. “We don’t know what is going to happen to both the economic outlook and the (real estate) markets”

Jacques Gordon, Global Investment Strategist, LaSalle Investment Management reinforced the inadequacy of predictions by saying, “we are still in the midst of the crisis and you can’t use the past to judge the future”.

Further ratcheting up the sense of uneasiness about 2011, Rick Hillier, Former Chief of Defense Staff for the Canadian Forces made a keynote address about the World’s hottest war zones. Hillier itemized global conflicts where nuclear weapons are a viable option and as he said “more likely than ever to be used.”

Predictions were generally absent from presentations, speculation about the future – as opposed to data driven analysis – was abundant and strategies for how to invest through a period of economic uncertainty was the topic ‘du jour’.

While a mountain of uncertainty looms, a flood of yield seeking capital is flowing into REITs, pension funds, institutions, private and public coffers tagged for real estate investment. This rising wall of capital is excerpting pressure on organizations to find accretive investments and grow existing real estate portfolios.

In contrast to Canada, the U.S. and Europe, which are encumbered by low productivity, aging populations and a scarcity of suitable investment property, in other parts of the World opportunities abound for companies to acquire and manage commercial real estate.

According to Jacques Gordon there is over 34 trillion dollars in investment grade commercial real estate in the World of which only 6 trillion is currently professionally managed or owned by an institutional investor. Two (2) trillion dollars is publicly listed primarily as REITs which are experiencing astronomical growth.

Gordon said seven of the top ten largest listed property companies in the World are in Asia-Pacific region. Sun Hung Kai Properties is the largest and has about $32-billion in real estate under management. The largest REIT IPO in the World occurred this year which generated over $3-billion in just three hours.

In the U.S., there is a shifting view about where the opportunities lie for property investors in 2011. Commercial real estate in the gateway cities such as Washington, New York and Los Angeles has bounced back from the recession. It has recovered its value as institutional investors have bid up and acquired a small but significant number of available Class A properties.

As the concern about bidding wars for ‘core’ properties increases alternative investment strategies are being pursued. To facilitate a closer look at the U.S. market Canadian property companies are strengthening their U.S. advisory services.

Andrew Trickett, Senior Vice President, Investments, Oxford Properties Group Inc., recently relocated from Toronto to New York City. In New York he can provide continuity for Oxford’s investment culture and be positioned closer to the U.S. opportunities.

Oxford Properties completed a significant acquisition in the U.S. in 2010 when it acquired a 50% interest in Hudson Yards, investing alongside New York-based Related Companies in a 26-acre development with a 12 million square foot master-planned, mixed-use development.

The merger of Bentall LLP, Canada’s largest real estate advisory and services organization, and Kennedy Associates Real Estate, America’s largest independent real estate advisor into a one of a kind Investment Management platform – Bentall Kennedy – is another example of a Canadian company changing its approach to U.S. markets.

Bentall Kennedy is to serve the interests of more than 400 clients across 130 million square feet of office totaling $23 billion throughout Canada and the US.

Doug Poutasse was recently appointed Executive Vice President and Head of Strategy and Research by Bentall Kennedy and will be located in the U.S.

Speaking to RENX before the Forum, Poutasse said there are very close linkages between the two economies (US and Canada). He advices investors to continue to re-evaluate how the relationship between Canada and the U.S. is changing and to drop pre-conceived ideas. He said, “The two countries have a power relationship that is going to evolve in unexpected ways”.

Responding to a question about the risk of acquiring property in the U.S., Ed Sonshine, CEO of Riocan REIT said that while their first priority is to ‘be careful’ that you have ‘to pay up to acquire property’. He added that it is only over the long run that you learn if you have paid the right amount.

Bruce Flatt, Senior Managing Partner & CEO of Brookfield Asset Management said that Brookfield’s strategy in the U.S. is to buy quality buildings, in prime locations below replacement cost. It was pointed out however that replacement cost is a moving target in a volatile economy.

Prominent U.S. economist David Hale described the precarious nature of the U.S. economy and the U.S. Government’s burgeoning debt. In his presentation he raised the possibility that in April, unless congress agrees to raises its lending limit, the U.S. Government will be shut down. A shutdown, which also occurred during the Clinton administration, would force a resolution of the Government’s debts recovery plan.

The availability of cheap debt was also a recurring discussion at the Real Estate Forum fueled by the expectation of rising interest rates in the year ahead. It represents an opportunity to property investors who can take over distressed loans on otherwise good real estate. It also offers an opportunity to refinance existing debt at the most favorable lending terms in about 40 years.

Bruce Flatt advised that now is a good time to negotiate the best rates possible, for as long as possible on the most properties as the lending environment “just doesn’t get any better”.

In Canada an aging stock of office properties has emerged as both an issue and an opportunity. Office buildings that have recently been renovated, particularly those that have pursued green building practices, are experiencing lower vacancy rates than other buildings, most notably in Ottawa and Toronto.

In downtown Toronto First Canadian Place is being renovated with the goal of achieving a LEED EBOM designation as a strategy for attracting new tenants and retaining existing ones. Other older downtown Toronto properties are expected to follow a similar strategy.

Renovation of existing space also allows building occupants to implement space compression plans to office layouts. According to Peter Coughlin, Principal of The Redbourne Group space allocation for office workers has dropped from 260 square feet to 160 square feet and we can expect this trend to continue toward a 120 square foot norm. In Asia 110 square feet per person is not unusual.

According the Sandy McNair, President, Altus InSite, in Calgary, where employee retention is given a high priority each person is allocated about 300 square feet. Encana, the sole occupant of the Bow office tower currently under construction in Calgary, is expected to provide 350 square feet per person.

Advice about how to strategize for the year ahead was nicely summed up by Paul Zema, CIO Bentall Kennedy who said, “This is not your Grandmothers recovery, expect the unexpected.”

Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

Read more

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