“Partnerships” and “mixed-use” have become mainstays in the vocabularies of REIT executives as they increasingly turn to development to maximize returns for shareholders.
They were also central themes of a panel discussing risk mitigation at the 14th annual RealREIT conference at the Metro Toronto Convention Centre on Sept. 7. All five panelists agreed development, or redevelopment, is an increasingly important sector for REITs as acquisitions become increasingly difficult to make and cap rates are squeezed ever lower.
“The industry has evolved and the requirements to grow as an entity are certainly there,” said Jonathan Gitlin, senior vice-president investments for RioCan REIT (REI.UN-T), which has embarked on a major redevelopment program at retail properties across Canada. “To achieve that growth, if you limit it to acquisitions it’s not going to create the appropriate value for unitholders and shareholders so I think it was natural that we, all across the REIT and REOC landscape, look at other means of growth.
“We’ve been developing retail for a long time now and I think it was a very important part of the evolution of RioCan and other entities. It shows that we are diverse.
“It’s an important vehicle as long as you do it in a measured and risk-averse manner.”
Two key factors for banks
However, developing in your area of expertise and moving outside that sector are two different things. Development carries more risks than buying assets with established revenue streams. Developing outside your area of expertise, as many REITs now do with mixed-use residential and commercial or retail projects, can again increase the risk.
Scotiabank director of real estate and REITs analyst Pammi Bir said there are two overarching factors banks consider when deciding the potential viability of a project.
“When we see the REITS move into areas where they have less expertise, having a partner onboard both for capital and from a management standpoint, is from our perspective pretty critical,” he said. “Perhaps down the road, as you build up more expertise, maybe you go more alone.
“Other than the expertise, it’s also how much capital is at risk.”
Bir said investing five to eight per cent of a REIT’s total asset value into development is generally acceptable. Anything more and “you have to be careful . . . from a leverage perspective.”
Dream mixed-use development in Ottawa
To illustrate their points, each panelist offered examples of partnerships and/or mixed-use projects they are developing.
For Jason Lester, vice-chair of development for Dream Unlimited (DRM-T), it’s the massive Ottawa / Gatineau Zibi project, in partnership with local developer Windmill. Located on the Ottawa River not far from Parliament Hill, it could take two decades to build out.
“Between the two sites (islands), there is close to 3.8 million square feet of mixed-use,” Lester said. “It’s a brownfield site, it’s dirty, it’s complicated in terms of the servicing, you are dealing with two provinces, two languages, but given the location it’s something that we are extremely excited about developing.
“When we start developing the site, we are going to be very thoughtful in terms of the mixed-use, placemaking. The retail won’t be the traditional big-box retail, (it will be) something similar to what we’ve done in (Toronto’s) Distillery District in the past 15 years, very unique.”
On the residential side, Lester said the condo and apartment builds will be smaller than what might be constructed in the GTA, averaging 100 to 150 units apiece and spread over several years to maximize market absorption. Commercial and institutional uses are also planned.
First Capital builds adjacent to Liberty Village
“One is very unique for us, in that it’s not just a mixed-use development, but it has key features that are not going to be able to be bought anywhere else,” said Shpigel, First Capital’s senior vice-president development. “This will be a mixed-use development that will fit all the things we look for.
“It’s a rental building and we are expecting to see strong rental growth rates over the years. We have significant retail that will contribute to that, it’s in a fantastic demographic neighbourhood in the city, that’s growing both in population and in household income.
“We’re next to Queen West, King West, Liberty Village, so we’re all these things. Most importantly, we are next to a transit station.”
Melcor to develop 60-acre Calgary site
“One of the projects we are most excited about is across the TransCanada highway in Calgary, across the highway from COP (Canada Olympic Park), and we call it Greenwich.
“It’s a 60-acre site, so small in terms of the scale of some of these that we are talking about today, but we are right into it and we are optimistic about our chances of making it happen in the short term.”
The site will feature all the elements of the live-, work- and play-type of mixed-use – from a cluster of restaurants and retail on the main floor, to offices and multi-family above.
RioCan to redevelop Toronto strip mall site
Gitlin had several ongoing redevelopments to choose from, but highlighted a Toronto site which has been home to a strip mall.
“It is a property we’ve owned since 2006 or 2007 and it’s a strip mall we bought, at Bayview and Eglinton. It was a 52,000-square-foot pharmacy-anchored strip that we’ve had in our portfolio and was a decent producer.”
But with a crosstown LRT station slated for the area, RioCan saw an opportunity to increase the value of the property, currently known as Sunnybrook Plaza.
“To me, this is a great example of; a) city building because we are building a transit-oriented development and; b) taking something that is not a good size or best usage and creating something that is.”
The time is right for mixed-use
The timing for these mixed-use projects couldn’t be better. The REITs are looking for relatively safe development opportunities, and in large urban markets there is a new demand for these communities.
“It is driven more by demand than anything,” said Melton. “The opportunity, the demand shows itself, so you take advantage of it.”
He said municipal planners have been pushing for these main street-type developments for years. Developers resisted “because there hasn’t been a demand for it.
“But we’re seeing that change to the extent that we have probably four projects on the Melcor Development side which we’re fully embracing more of a town centre, main street concept.”