Continued strong demand for developable land and a rapidly changing financial landscape are already being felt, according to commercial real estate experts who met on June 7 Territory & Planning Conference to Greater Toronto Convention Center.
MSCI Head of Real Estate Economics and Chief Economist Jim Costello, who lives in New York, moderated the panel and opened the discussion by saying debt costs are rising for land acquisitions and developments.
Necklaces Emeka Mayes, partner and head of capital markets, said most developments are happening in the industrial and multi-residential asset classes due to rental growth in those areas, but lenders have less confidence in the growth. future multi-residential rents, they will therefore not subscribe based on these potentials. future rates.
Casey Gallagher of Toronto, executive vice-president of the CBRE Capital Markets the national investment team, said the pandemic had a more immediate impact on the low-rise housing market than on high-rise buildings, where construction times are longer.
Caution with transactions and developments
“I certainly think there’s a greater sense of caution in the approach to land deals right now,” Gallagher said, adding there’s a lot of sensitivity in Toronto, Montreal and Vancouver because the prices are aggressive and construction costs are high.
“I think we’re going to see some softness in land deals as people think about and take into account increases in building costs, increases in development charges, parks and all the other ancillary costs that matter as much as hard cost increases count for a pro-forma.
The number of transactions has slowed and transaction sizes have become smaller, according to Mayes, who is based in Montreal.
Mayes said developers are more selective about which projects to pursue in a time of rising inflation and interest rates. They act only on those which seem to them the most financially attractive.
Based in Vancouver Gig Properties Chief Investment Officer Andrew Tong agreed with Mayes that some developers were temporarily suspending projects to mitigate risk.
However, he thinks there will always be chances to buy in and take advantage of opportunities, especially involving small, highly indebted developers.
“Residential developers are actually moving out of the center and looking to find bigger, cheaper lots,” Mayes said.
Gallagher said he sees land price premiums being paid for quality sites in downtown Toronto and “there is a lot of competition for a non-infinite amount of capital for many sites that are core-plus “.
Zoning and approval issues
Tong said whether the land is zoned or not has an impact on the number of offers and the price paid. Land zoned in extremely good transit nodes will certainly receive a higher price, while there will be more uncertainty and a thinner bidder pool for other properties.
Mayes sees the construction of multi-residential developments moving away from downtown Montreal to areas where there is access to public transit, but where development costs can be avoided.
She also sees projects originally conceived as purpose-built rental apartments being replaced by condominiums.
Tong said the rezoning approval process is long and uncertain in Vancouver, which can also impact developer costs. As a result, he sees more activity in areas where there is more certainty and a clear path to development that can be underwritten and priced more easily.
Tong said different levels of government need to better align their requirements to create more efficiency, otherwise they won’t achieve the increase in affordable housing supply they are trying to achieve.
Mayes said most developers want to build social housing and create affordable housing, but solutions are needed to make construction faster and cheaper.
“It’s a simple solution, but right now all the solutions that are being implemented come in the form of an indirect tax that just has the opposite effect.”
Offices and industrial sectors
Tong said the flight to quality in office assets doesn’t just apply to buildings; lenders are asking for more commitment and security even from their best customers due to the uncertainty within this industry.
Gallagher said there had been a rapid increase in the costs of industrial and construction land and there was a shortage of quality, well-located and easily accessible industrial land in Canada.
Tong thinks there is “more juice” in industrial rental rates. He doesn’t think the market will slow down because vacancies are so low and demand is so high in inner cities.
Concert just completed a lease renewal with a 120,000 square foot industrial tenant that saw its rent go from $7 to $18 a square foot, with built-in escalations, so Tong thinks the asset class “still has lots of legs.”
Gallagher said large industrial developers operating in multiple Canadian markets will seek lower-cost opportunities. He mentioned how much cheaper it is in Calgary than in Vancouver, as an example.
“I can get a great facility, a great workforce and all the land I need, so I think Calgary will continue to be the hub of industry in Western Canada,” said- he explained. “I think Vancouver will be a great location, but because there’s so little land, it won’t attract the big logistics facilities.
Gallagher mentioned Oxford Properties‘ multi-storey industrial project at Riverbend Business Park in the Vancouver suburb of Burnaby (fully leased to Amazon).
Such buildings, however, are difficult to achieve on a large scale, so he doesn’t expect to see many between 500,000 and one million square feet.
Mayes cited an industrial vacancy rate of less than 1% and rental rates that have doubled in parts of the Montreal market. Large tracts of brownfields around the city center that were previously unattractive to develop are now open, she added.
Office space in Alberta represents about 0.8% of Concert’s portfolio and the company was considering converting an office building to multi-residential as the city encourages such moves. It was decided, however, that such a transition would not work out financially in this case.
Concert converted a well-located Victoria Hotel into an apartment block, but Tong said costs increased due to the condition of the building’s superstructure.
Gallagher said it’s generally not worth the cost and effort it takes to convert old office buildings to other uses.
Environmental, social and governance factors
Costello noted that increasing environmental regulations are forcing or will require owners of older buildings to make significant improvements in performance and reducing carbon emissions. New buildings will also have to meet new high environmental standards.
Costello asked how this impacts building owners and developers.
Tong said investors, especially institutional investors, demand that developers and building owners have strong environmental, social and governance plans for their portfolios.
Gallagher said a major challenge is that regulations often change faster than large buildings can be built, so developers are forced to adapt and react on the fly.