Notes from the Toronto Real Estate Forum: The optimists, the cautious and the pretenders

The economic crisis that has unfolded in North America and spread around the World in the past two years was the dominant theme at this year’s Real Estate Forum held in Toronto on December 2-3. Panel discussions were liberally sprinkled with commentary and opinion about the state of the Canadian and U.S. economies and where they are headed. Those attending the conference were striving to understand the situation and what to expect in 2010.

RENX spoke to several participants prior to, and during the conference, who said they were ‘cautiously optimistic’ about the year ahead – all using exactly the same phrase. ‘Cautious optimism’ seems to have entered the lexicon via the REALpac / FPL Canadian Real Estate Sentiment Survey conducting during the Fourth Quarter of 2009 although RENX was never able to confirm its origin.

In the absence of a definition, we will assume that ‘cautiously optimistic’ lies somewhere between optimistic and pessimistic. Given that it is more optimistic than pessimistic, and to pin it with a metric, lets just say it is 60:40 to the good.

In an effort to further clarify the outlook of real estate executives as 2010 approaches, and challenge the ambiguity of ‘cautiously optimistic’, RENX has taken a stab at separating ‘the cautious’ from ‘the optimistic’ among the panelists at The Forum – who is leaving the house with sun block and who is taking an umbrella.


Following are three individuals who represent the optimists attending The Forum.

The Optimists:

The worst is over and we are on the road to economic recovery – except maybe in some markets in the U.S.

David Henry, CIO, Kimco Realty Inc.

A clear leader among the optimists, notably based in the U.S., was David Henry, CIO of Kimco Realty . Kimco is the largest retail property owner in the U.S. and also has an interest in over 50 Canadian properties. Henry said he is expecting a V-shaped recovery and considers the situation ‘clearly different than it was five months ago’. He said, ‘the tenants are out their foxholes and business activity is returning. The train wreck many have anticipated is just not happening’.

While acknowledging that debt levels in the U.S. are a concern, Henry believes the lenders, borrowers and special service operators are working through the most problematic issues and making progress. The cost to carry a borrower in default is less than foreclosing which provides incentive for the lenders to extend. ‘CMBS issuers are prolonging their terms’ he added noting that there is a fiduciary duty for them to attempt an amicable resolution.

Kelly Marshall, Managing Partner, Corporate Finance, Brookfield Asset Management

“The economy is at the bottom of the trough and beginning to grow out of it” according to Kelly Marshall. He is ‘very positive about 2010’ and added that ‘the financial crisis isn’t about real estate, it is about the rest of the economy.’

Marshall said that “Brookfield has been protected by the Canadian market” leaving the company in a good position to move forward from here.

In August, Brookfield Asset Management announced a new US$4-billion distressed real estate fund. According to a recent article in the Financial Post Brookfield Properties will have first crack at opportunities available to the Fund in the markets where they are already present.

Marshall qualified his optimism by saying that the situation is very different for large and small cap companies. Small cap companies are continuing to experience problems accessing credit that large cap companies in Canada never encountered.

Asked about the Calgary market he said that the downtown market is going to recover and will perform well in the future. Toronto too he added will maintain a strong downtown office market due to the prevalence of the banks.

Frank McKenna, Deputy Chair, TD Financial

Frank McKenna seemed to relish the opportunity to speak to an audience after some years away from politics (formerly Premier of New Brunswick) and given the current crop of dreary political orators in Canada it was fun to have him back.

A clear cheerleader for all things Canadian, McKellar touted the stellar qualities of our banking community and their ‘virtuous circle of financial management’. He backed up his claim by explaining that Moody’s Rating Service has given a Triple A credit rating to only three banks in the World: two are Canadian and the third, which is in the U.S,. is led by a Canadian.

As former ambassador to the U.S. he also (affectionately) reminded us of Canada’s reliance on the U.S. by explaining that 40% of GDP is tied to exports to our neighbour.


The Cautious:

Our economic troubles are far from over, anything could still happen particularly in the U.S.

The cautious, those leaning toward pessimistic, are more difficult to pin down because nobody wants to be seen to be ‘negative’.

A particularly challenging group to categorize is the ‘vulture-like’ investor who is waiting to pounce on distressed real estate. This group is growing in numbers with mounting evidence that in the U.S. banks holding commercial real estate debt are going to sell off marked down properties and possibly fail.

Banks are going to make the transition from what Jacques Gordon, Global Strategist with Jones Lang LaSalle referred to as a policy of ‘pretend and extend’ to one of ‘foreclose and dispose’ creating a potential bonanza of opportunity to acquire property.

Are the vultures cautious or optimistic? RENX labels those investors who are intent on following the ‘axis of pain’; a term coined at the Global Property Market, to find distressed property as ‘cautious’ although they may be ‘optimistic’ about their fortunes and would likely prefer to be called ‘opportunistic’.

While it may seem like a great time to acquire property at significantly depressed values there are cautionary warnings about weak NOI and high unemployment.

William Jandrisits, Director of Finance, Starwood Capital Group

There is $US 1.40-trillion dollars in commercial real estate debt that was generated at the peak of the market in 2006/07 coming due in the U.S. over the next three years.

‘It is going to get incredibly messy’ according to Jandrisits. ‘$US 400-million is going to be lost. The banking system is not going to be able to handle it and the regional banks are just beginning to get hit.’ There are currently about 520 banks on the FDIC watch list.

Mr. Jandrisitis also indicated that while the commercial real estate debt problem is looming, in other regards stability is returning to the financial sector and there are banks that are now ‘available for a closing’. He sees the real estate market is ‘beginning to clear away the problems’ and to recover although high unemployment will continue to be a big concern.

Benjamin Tal, Senior Economist, CIBC World Markets

“It’s far from over but we are not turning Japanese,” was how Mr. Tal summarized his perspective on the Canadian economy.

Tal noted that Canada had a turning point in November when it experienced a huge 70,000 job loss and drop in the employment quality index. While in past recessions in Canada and the U.S. consumer spending has been responsible for pulling the economy out of its slump ‘this time it is going to be different’.

A decline in house values in the U.S. has meant that consumers no longer have equity in their homes to secure loans and the overall economic situation is draining consumer confidence. Speaking about both countries Tal said that consumer spending would contribute half as much to the economic recovery in this recession that it did in the last one.

With respect to Tal’s comment about ‘not turning Japanese’ comparisons are made between the current situation in the US and Japan. With Japan is now experiencing its fifth recession in 15 years, there is concern North America will follow the same pattern.

Mr. Tal said that while the origin of the current crisis is similar to what Japan witnessed in the early 1990s the North American policy response has been different. Both the U.S. and Canada have aggressively dropped interest rates and the U.S. quickly established the Troubled Assets Relief Program (TARP) where similar initiatives took Japan over 5 years to implement following its crash.

Paul Campbell, President and CEO, SITQ

Mr. Campbell expressed caution in his closing remarks to the conference, “It seems like there has not been enough pain for all that has happened in the U.S.” His other comments referred to an SITQ plan to maintain its course and take advantage of opportunities as they present themselves. He added that the rise in the equity market has meant pension funds are not under pressure to sell real estate to rebalance their investment allocations.


In addition to The Optimists and The Cautious at The Forum there was another group who defy categorization. They are people who take a more global view and may see the Real Estate Forum as ‘rather parochial’ and point to us as ‘The Pretenders’.

The Pretenders:

North Americans are ‘The Pretenders’ because we believe we are in control of our economic destiny while in reality larger more powerful forces are shaping our future.

Kevin O’Leary, Chairman, O’Leary Funds; venture capitalist, eco-preneur and member of the CBC-TV’s Dragon’s Den

Kevin O’Leary didn’t mince words. He said that everyone in North America is fat and complacent (or words to that effect). He described young people in the emerging countries – which he clarified have already emerged – who are well educated, work around the clock and who are willing to sleep beside their phones and computers to ensure that a job goes well. He asked if anyone knows young people here with that level of commitment to work?

O’leary said that in his view one of the biggest risks to North American investors is the ‘risk of being in North America’.

C.Y. Leung, Convenor of the Executive Council, Hong Kong SAR, Chairman, DTZ Asia

Although we are reminded daily about the influence of China on our affairs it was a jolt of reality to listen to Leung talk about his homeland. Proudly Chinese, he presented an overview of the country, its people (1.4 billion), the economy (ranked third in the world by GDP) and its growing interest in real estate.

With respect to real estate, China is issuing it’s first REIT in the next twelve months, insurance companies are allowed to invest in real estate starting October 1st 2009 and a recent Government circular included in Mr. Leung’s presentation gives Chinese investors permission to acquire foreign real estate beginning in 2010.

The first wave of main land Chinese financial investment in foreign property is now approved according to Leung. We would be deceiving ourselves not to recognize this is the beginning of an entirely new influence on Canadian real estate markets.

Jeff Rubin, Author, Former Chief Economist at CIBC (in absentia)

The most quoted, yet absent, participant at the conference was Jeff Rubin who has been a keynote speaker at the conference several times in the past. His widely publicized thesis that North America’s economic performance is determined by the declining availability of cheap oil was mentioned on several occasions. In his absence we were reminded of the ubiquitous global impact of energy issues and how our World may be about to get a whole lot smaller.


Several panelists indicated they thought there would be a slow recovery and that the economy would ‘bump along the bottom’ for a long time while jobs remains scarce. The current upswing in housing sales in Canada was generally considered a temporary aberration brought on by low interest rates and a rush to sell prior to introduction of the HST. Many are also anxious that once government stimulus money is withdrawn the recession will return and most definitely taxes will go up.

Everyone was trying to put on a happy face but in reality no one looked particularly gleeful at the Real Estate Forum and some people are genuinely worried about 2010. It is reasonable to speculate that those attending the conference are likely more vulnerable to the downside of the recession than the executives surveyed by RealPAC/FPL.

I would not want to say that I found the mood of the conference was ‘cautiously pessimistic’ doesn’t sound right, or ‘positively pessimistic’ which is even worse but ‘cautiously optimistic’ seems almost too good. Lets just say that from my perspective the mood of the conference was at best 50:50 – but better than last year.

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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