The contrast between the positive performance of commercial real estate markets in Canada and weak, if not deteriorating, economic conditions and real estate markets in the U.S. and Europe has never been greater. How are Canada’s real estate executives responding to this extra-ordinary situation? What are their plans for 2012?
Paul Finkbeiner, President of GWL Realty Advisors
A recent RBC report showed that institutional investors in Canada are allocating 15 to 25 per cent of their investment portfolios to real estate explained Paul Finkbeiner, President of GWL Realty Advisors speaking on a panel at the Toronto Real Estate Forum. For GWL Realty, which has about $12-billion under management and is one of Canada’s largest real estate organizations, it is all about looking for good real estate for its pension fund clients to maintain this strategy.
“With respect to uncertain times I don’t think any of us have seen prices this high or experienced a low growth environment” said Finkbeiner. “I am concerned about managing in a low growth environment. In the past ten years everything we bought really doubled in value. Trying to add value in today’s market is going to be difficult. It is going to be good hard leasing and good hard property management.” In a low growth environment it is difficult to motivate people and to get them excited about improving the NOI instead of performance related to the most recent acquisition he explained.
The past year was one where GWL Realty undertook significant development with over $1-billion committed to various projects across Canada. In 2012 Finkbeiner expects GWL to be a net buyer and will have about $2.5 billion to spend, $1-billion from a new pension fund client. The company is also seeking tenants for 700,000 square feet of new office space in downtown Toronto that is currently under construction.
David Henry, CEO, Kimco Realty Inc.
While painting a rosy picture of Kimco Realty’s portfolio of retail properties in Canada as having low vacancies, stable rents, rising prices and good relationships with their operating partners David Henry, Kimco CEO added that it is a time to be careful. “When prices are as high as they are, and CAP rates are low as they are in Canada and other parts of the World, it is easy to blow it,” he said.
“Prices can fall. Interest rates can spike. The World is a pretty scary place right now” said Henry. “Canada is not an island and if Europe falls apart and some of these others things happen then we can all blow it.”
In general we are a long-term holder in Canada and we feel very good about the long-term prospects compared to other markets we are in, explained Henry. “We do what our operating partners want to do, Riocan, Anthem Properties and Plazacorp who we have long-term relationships with”. Kimco is an active buyer of retail properties today and over the last few years we have been selling primarily non-retail properties.
“It is a time to be cautious because things that are totally out of your control, and out of your asset class, can come and bite you” reiterated Henry. Recently Kimco has renewed its line of credit for five years as a hedge against future events.
Michael Cooper, CEO, Dundee REIT
“We are very fortunate in Canada, we don’t have worries about vacancies and in fact we have we rental growth in a lot areas. So it feels great (in Canada) but the potential scariness out here is enormous. I worry a lot more now than I did five years ago,” said Michael Cooper, CEO, Dundee REIT. Cooper went on to explain that he is less concerned about prices and interest rates and more worried about the ‘macro stuff’ – global market demand and problems such as those in Syria, Iran and Europe. “We should all be prepared for something to happen that is not as good as the last five years” said Cooper.
In 2011 Dundee REIT made over $2-billion in acquisitions in Canada targeting office properties in downtown locations in Toronto and Montreal as well as in the west particularly in Calgary. Describing Dundee as ‘very bullish’ this year Cooper said he didn’t know about the company’s 2012 acquisition strategy although it would likely be the same as in 2011. The long-term trend is for it to become harder to get good quality real estate and therefore over time it will become exceptionally valuable explained Cooper.
There is a risk that not just one bad thing but that one of a ‘100 things could happen’ (in 2012) according to Cooper. His approach is to be prepared to continue to operated Dundee if anything negative was to take place.
Dori Segal, CEO, First Capital Realty Inc.
“Real estate as an asset class is doing very well and better than almost any other asset class around the globe,” said Dori Segal, CEO of First Capital Realty. His number one worry is that ‘liquidity is a less certain’ and that something would occur in another part of the World that would affect the availability of capital and the ability to operate the company.
Asked about First Capital Realty’s acquisition strategy, Segal said that the budget line for acquisitions on his company balance sheet has never been accurate. Decisions to buy are not determined by the ‘bottom of the market’ as much as finding the right opportunity and experienced people can identify the ‘dogs’ regardless of market conditions.
“In the GTA between 427, 401, the DVP (Don Valley Parkway) and the lake there are very few supermarket anchored neighbourhood shopping centres with parking at grade that have traded in the last 10 years. We have been buyers of those properties. In markets where the population growth or income growth will exceed the ability of the market to provide retail properties at grade buying only those assets presents very little risk” said Segal.
Comparing the benefits of urban versus secondary markets, Segal said that in urban areas “as rents go up in these markets it provides opportunities for second floor retail and underground parking”. In secondary markets where there is a lot of land, a retailer has the option of buying or building a box.
“When we were small entrepreneur (operated company) it was much easier to run a business. As you start running a much larger company you have to rely on other people and the mistakes you could make could be very costly,” said Segal reflecting on the prevalent sense of uncertainty. “As we grow it is important to surround myself with people who have the same understanding about risk management.”
Problems associated with poorly managed Governments in Europe, debt levels in the U.S. and emerging social problems are the primary source of concern for Segal in 2012. He also sympathized with the Occupy Wall Street movement to the extent that a growing income gap is a new and real situation identified by this group.
Toronto Real Estate Forum Opinion Poll
An opinion poll taken at the closing session of this year’s Toronto Real Estate Forum on December 1st found that the majority of those participating in the session were ‘slightly pessimistic’ about 2012. This is a change from the 2011 Forum where the attendees were ‘cautiously optimistic’.
Real estate executives on the panel seemed to share a similar sentiment as expressed by the poll but nevertheless they are moving ahead with their corporate strategies that utilize the seemingly endless supply of capital that continues to be available in Canada.