The commercial property market appears to be on its way to a near record year for investment and new projects show the demand for office space is not slowing. The Financial Post?s Garry Marr sat down with the Pierre Bergevin, the chief executive of Toronto-based Cushman & Wakefield Canada, to talk about the state of Canada?s major markets, where rental rates are going and the ongoing battle with condominiums for land space.
Q Calgary just continues to grow with Brookfield Properties announcing it plans to build the tallest tower in the city at 56 storeys. Some tenants like Imperial Oil are finding it too expensive now. What?s next for the oilpatch?
A Everything in Calgary is bigger. The capital projects that are going on are in the billions and multiple billions. It?s like trying to stop a freight train. Nobody saw the vacancy rate decreasing in Calgary and becoming ridiculously tight in 2008. You think of The Bow [the new headquarters for EnCana Corp.], with the trailing vacancy it left behind, and nobody would have seen this coming. But now if you now need 20,000 square feet and up there is not a lot you can do. Imperial Oil moved [out of the core]; find me another example and we will talk a trend. If they wanted an option with the size of that tenancy, they would have to wait four years [for a new building to be constructed.] Is it an issue of wanting to go to the suburbs or are there no options?
Q How much has Vancouver?s market benefitted from the resource boom and how will the market there be affected by any slowdown in China?
A Vancouver is tight. There are three towers coming out and five planned. They are generally the type of floor plates you see on the West Coast, smaller tenants that are extensions of satellite offices from Asia-Pacific or the U.S. Vancouver is resource-based but less on oil and gas and more on wood and water. They are attracting some tech now which are growing into something bigger. Commercially they are not as tied [to China] as you think. That?s more residential. We are seeing wholesale development of investment from Asian investors planning for a major [commercial] development. We haven?t see that before.
Q Does anybody really care in the Montreal real estate world about the change in government to the Parti Qu?b?cois?
A I don?t think it?s met with as much fanfare as anticipated. We have three new towers in Montreal, all of which are scheduled to go. Nobody has stopped any investment that I?m aware of. When was last time three towers went up in Montreal without provincial government interference? It?s probably been 30 or 40 years.
Q Toronto already has 4.4 millions square feet of development happening right now, How much more new space can the city absorb?
A All of it is substantially leased. Based on rules on financing it wouldn?t be happening otherwise. It?s not so much about [companies] wanting to be back downtown as much as that?s where their labour wants to be. The decision to locate is predominantly about the people, especially if you are white-collar, knowledge-based and young. We are not building buildings for 20-year-olds. There is a whole group of that knowledge base that wants to be in an urban section.
Q Are condos actually impinging on commercial development, as space tightens in urban cores? Which asset class wins out?
A You can make more money with mixed-use development, more than two [of retail, office and residential]. In the case of Maple Leaf Square [in Toronto], there is even a hotel. Mixed is a self-contained community. In major global markets like in Asia you have second and third floor retails, though that may not fly here. It?s just a better use of density. It provides communities within communities. It provides the retail amenities for the people living there and it appeals to office tenants. As you migrate your core, those people want amenities. We have it London, New York. You need a big urban core so you may not get as much traction in Calgary, Winnipeg or Ottawa but in major urban centres. Place Bell [in Montreal] is an example.
Q What is driving the demand for commercial investment activity?
A There is almost $2-billion of industrial activity happening right now. It?s the chase for yield. People need to retire, they need income. The TSX Composite versus the TSX REIT [index], there?s almost a 41-percentage point difference over the last two years. It?s become a no-brainer. What is the alternative asset class? The spread between bonds and rates is 300 [basis points]. There is an argument that cap rates could go down [and prices further up]. The capital markets have raised over $6.3-billion year to date and we still have a year to go, that?s publicly traded stuff. That?s a record and it?s beating last year?s record. Look at the buyers, in every sector but industrial [real estate] 60% has gone to the [publicly] traded sector. Where is all this foreign investment? The pension funds, they?ve become the developers. [Return] on existing [property] is 5% and new build is 8% to 9%. The risk return favours new builds for pensions. The REITs have to be accretive, so they are buying.
Q Put yourself in the shoes of a tenant, where do you see rental rates going?
A They have less do with the economy than supply and demand. Rates are getting tighter everywhere. Any time your national central core vacancy rate is sub 5%, you are going to have upwards pressure on rates. Supply? It takes four years to build, once you have found someone who can wait for four years. Since it?s the pension funds, and they don?t have obligations until well down the road, they?ll come out of the ground when things are frothy. They know they?ll be substantially pre-leased. There is upward pressure on rates, and combine that with the fact your developers, pension funds have deep pockets, they can withstand all kinds of strife and not blink. These guys are about value, they don?t need income right away.
Source: http://business.financialpost.com/2012/12/05/more-money-in-mixed-use-developments-cushmans-bergevin/
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