Emerging Trends in Real Estate 2012 - Urban Land Institute

Chapter 5: Emerging Trends in Canada
financing without significant presales and substantial (15 to 25
percent equity) deposits. “Developers also have the right to sue
for specific performance on the entire sales price if buyers try to
back out.” Affected by government intensification policies and
European-inspired greenbelts, infill land costs escalate to eyepopping
numbers in site-restricted 24-hour-city neighborhoods,
especially around Toronto and Vancouver. Land bankers can
score grand slams on projects thanks to their lower basis or jam
through hard bargains partnering with developers looking for
sites. “In core areas around the GTA, developers’ margins get
squeezed on land costs. That’s why they start building more big
towers.” Homebuilders get clobbered by the inflated land costs,
too, especially within intensification zones, and are forced out to
the fringes. Everyone complains about municipal development
charges—upwards of $60,000 a unit in some places. Looking to
limit unpopular property tax hikes, governments hit developers,
who pass on costs to homebuyers or eat some of the expenses.
Increasing bureaucratic hassles and approval delays also raise
blood pressure levels.
Best Bets
Investment
Hold Those Trophies. That’s the Canadian way. Husband
cash flows, astutely manage properties to control costs and
retain tenants, and consider retrofitting with energy-saving
technologies to ensure future competitiveness. “In the lowinterest-rate
environment, clipping coupons makes sense.”
Turn More Wary. The big-city condo surge looks unstoppable,
but maybe it’s time to turn a bit more cautious. Whenever something
looks too good to be true, it usually is. The investor wave
could give out, and pricing may need to take a breather.
Be Selective. Other sectors offer few opportunities beyond
a choice office building in certain 24-hour downtowns like
Vancouver or even Montreal. Mixed use gets a boost across all
major markets: retail developers work on infill projects aligned
with condo construction. New apartments make sense in markets
where condo construction is muted; demand will always be
there. Hotels go nowhere.
Property Sectors
Buy or Hold Apartments. Continuing immigration will fire
steady demand.
Buy or Hold Class A Offices. These are irreplaceable assets
in the downtown cores.
Buy or Hold Fortress Malls and Grocery-Anchored
Retail. In prime suburban districts with barriers to entry, these
properties will continue to excel.
Buy or Hold Big-Box Industrial Properties in the Toronto
Area. The tenant market gravitates to new distribution properties
over old-school storage space. Development opportunities
exist for converting well-located low-ceiling warehouses into
big-box formats.
Hold Hotels. It’s no time to sell.
Buy or Hold Infill Land. Intensification policies will continue
to propel land values in the gateway cities: available sites look
like gold. Prices may appear “crazy” today, but could seem like
bargains tomorrow. “You won’t be able to replicate these opportunities
in the GTA or Vancouver.” Move-back-in trends work
against outer suburbs and disconnected suburban nodes.
Don’t Take Chances. Equilibrium markets provide limited
opportunity to score big investment gains, and the economy
enters a slower growth mode. For more opportunistic returns,
investors could partner with hands-on operators to take underused
class B–/C apartment buildings and improve NOIs. Old,
well-located warehouse space in prime GTA locations could
be ripe for conversion or redevelopment into condominium or
mixed-use space.
Development
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