How High & Why
Property Development Trumps Acquisitions as 2012 Growth Strategy
Property Biz Canada
Mon Dec 19 2011
Property companies across Canada are expanding their development departments to address buoyant demand for new space and to take on the challenges of building complex, mixed-use projects while overcoming the barriers presented by escalating municipal approval processes.
Conditions in Canada have emerged where REITs, pension fund owned companies, municipalities, crown corporations, private equity firms are embracing development as available Class A acquisitions have dried up or are over-priced, and capital remains readily available.
Indicative of the phenomena is the program for this year’s Toronto Real Estate Forum where there were two entire sessions, that were both fully attended - one with standing room only - dedicated to development. On the panels there was representation from the Concorde Group Corp, Concert Properties Ltd., Carttera Private Equities Inc. , Primaris Retail REIT, Build Toronto, The Daniels Group, Trinity Developments Group and Kirkor Architects and Planners .
About 18 months ago, Primaris Retail REIT hired veteran shopping centre executive Anne Morash (formerly with Cadillac Fairview and Ivanhoe Cambridge) as Vice President of Development to identify and implement strategies for increasing the value of its asset base. The REIT has a growing department with a number of development managers, investment analysts and market researchers, explained Morash.
Primaris REIT owns 32 shopping centres both regional and community in seven Provinces across Canada totaling 13.5-million square feet. Morash described the portfolio as ‘primarily as enclosed shopping centres that are A assets in B markets, or B assets in A markets’ that have average sales in excess of $450 per square foot and 97% occupancy.
Eglinton Square in Toronto is an example of about 9 properties the REIT has identified as key development opportunities said Morash at the conference. It is the only enclosed shopping centre in the Golden Mile in the GTA. The trade area is experiencing a demographic shift toward young families buying and renovating wartime housing who are within a five to seven minute drive of the shopping centre. Morash said it is a property that should be ‘a lot more than an enclosed shopping centre’ and the REIT is spending a lot of time and money tracking consumer trends in the area to determine its future.
The amount of time and effort it takes to get municipal development approvals is the most significant change Morash has experienced in the development industry in the past 5 to 7 years. "The time has become so inflated that developers have to be strong communicators with municipal staff, strong negotiators with rate payers and they have to work with both the staff and politicians" she said.
A shortage of prospective employees to stick handle projects from start to finish is an ongoing frustration for Primaris and Morash. The challenge is finding people who have experience in the development industry, and yet are at the early stages of their career not at the senior level who have high expectations about their role in the projects.
Primaris REIT is looking to partner with like-minded condominium developers who can assist with building out their retail properties, explained Morash.
In April 2009, Lorne Braithwaite was appointed as the CEO of the new Build Toronto real estate venture. An entrepreneurial developer most notably Founder and CEO of Cambridge Shopping Centers (now Ivanhoe Cambridge), an industry leader with international development experience in Dubai and China, Braithwaite is implementing a strategy to develop municipally owned properties under the Build Toronto banner.
Build Toronto is currently responsible for 35 properties all in the 416 area of Toronto. The organization has $200-million dollars worth of real estate in the development pipeline and intends to grow this to $400-million over the next 24 months. It is Build Toronto’s intent to maintain an inventory of property at this level on an ongoing basis explained Braithwaite.
Studies conducted by Build Toronto have shown that property development, compared to outright selling property, can generate twice the revenue Braithwaite said. It is a major trend for municipal, provincial and the federal government to tap into the embedded value of their property through development that we can expect will continue for some time he emphasized.
While admitting that Build Toronto had the inside track with City Hall, Braithwaite described the municipal approval process as a major barrier to developers to getting their projects in the ground. He indicated that after London, England where it can take ten to twelve years to see a project to fruition he considered Toronto to be the municipality with the second most bureaucratic process.
Building free standing office buildings around transit stations started about 15-20 years ago and is now beginning to gain momentum according to Braithwaite. He cited Build Toronto’s proposed office tower at 4050 Yonge St. by the and York Mill’s subway station as an example. Centrally located in Toronto’s prestigious Hoggs Hollow it is a connection point for the Yonge subway line, Go Bus network and it also has convenient access to Highway 401 and Don Valley golf course. It is being designed to exceed the environmental footprint of the Manitoba Hydro building, currently the most energy efficient in Canada, going beyond the Model National Energy Code by 55% or more.
Speaking at the closing session of the Real Estate Forum Paul Finkbinder, CEO of GWL Realty Advisors mentioned that GWL has grown its development division to about 36 people. Responding to the requirements of its pension fund clients, Finkbinder expects development to be a key aspect of GWL's 2012 strategy.
Traditional box retailers moving into the downtown core, the growth of intensified urban centres in the suburbs such as Mississauga’s downtown, the decline in car ownership in urban areas, immigration driving growth in Toronto, the rising cost of land and the growth in infrastructure based development were all development related topics discussed at the conference.