The View from CREC '15
By: Ron Derven, contributing editor, Development. Margarita Foster and Julie Stern contributed to this article.
Winter 2015 2016
Key takeaways from NAIOP’s Commercial Real Estate Conference ‘15 include insights into industrial, office and mixed-use development as well as capital markets and more.
ATTENDANCE AT NAIOP’S 2015 Commercial Real Estate Conference, held in Toronto, Oct. 12-15, hit a new record. Almost 1,300 attendees from across North America and beyond took part in leading-edge educational programming as well as project tours, National Forum meetings and numerous networking opportunities.
This is a great time to own light industrial buildings — 50,000- to 250,000-square-foot structures — according to Rene Circ, director of research, CoStar Portfolio Strategy, and other speakers at a session on growing demand for this product type.
Speakers noted that inventory is tight, which is pushing rents higher. The market will probably remain tight for at least another two years before construction begins to catch up with demand. Developers have not jumped into this market since the end of the Great Recession because, until recently, light industrial buildings could be purchased for less than the cost of building new ones.
Costs may also be holding developers back; it can be 15 to 20 percent less expensive, on a square foot basis, to build larger rather than smaller industrial product. A 200,000- and a 700,000-square-foot structure, for example, typically require the same amount of office space. The larger building is more likely to have a single tenant, but with multiple tenants, the smaller one is likely to need multiple offices, more interior walls and split power, resulting in higher TI costs.
Many NAIOP National Forums members participated in the 2015 “Forums Exclusive” event, where economist Mark Dotzour (at podium) led a provocative dialog among industry thought leaders and Forums members about where the industry is in the current business cycle and strategies to prepare for and thrive through the inevitable downturn. Panelists included (from left to right) Mark Rose, chairman and CEO, Avison Young; Stephen Hopkins, cofounder, DisruptCRE; Rebecca Rockey, economist, Cushman & Wakefield; and Luis Belmonte, principal, Seven Hills Properties.
Big companies are firing up demand for light industrial space. Although they might need only one or two 800,000- to 1 million-square-foot bulk buildings around the country, they could require 50 to 100 smaller (20,000- to 50,000-square-foot) buildings to distribute their products to end users.
E-commerce has become an “outsized driver” of this space, for three reasons: 1) Big companies like Amazon are using the space for new formats like home delivery of food, same-day delivery of other items and product returns; 2) smaller companies that do not have 1 million-square-foot warehouses nevertheless continue to need more space as the economy hums along, and are increasingly occupying light industrial space; and 3) companies are using this space to assemble products.
Finally, investors are competing for light industrial properties because cap rates on bulk Class A projects are at peak or past peak.
HR Playing a Bigger Role in New E-commerce Facility Location Decisions. Human resources departments are playing a big, possibly crucial role in determining where fulfillment centers are located, because labor has become a critical component in this decision, according to speakers on a panel moderated by Gordon Cook, executive vice president, Colliers International. A location near consumers is critical for “final mile” deliveries, but so is access to a large, skilled labor pool.
Automation Has Been a Game Changer at Amazon. Different companies are arriving at different conclusions regarding automation, said Benjamin Conwell, senior managing director and practice leader, e-commerce and electronic fulfillment, Cushman & Wakefield, who was formerly director of North American real estate for Amazon. But for Amazon it is nothing less than a game changer. Amazon is deploying robotics throughout its large fulfillment centers to revolutionize throughput, without reducing the number of employees at those centers, so that it gets more than 7 or 8 million orders out the door during peak weeks. Other companies want to automate to boost throughput and reduce headcount.
Office, Mixed Use and More
Several speakers noted that as demographics change, employee-centered offices will win out. Office space with ample amenities, areas that encourage collaboration, better air quality, natural light and access to public transit are winning the day, according to David Gerofsky, CEO at First Gulf Corporation. Mark Stapp, executive director of the Master of Real Estate program at Arizona State University, said that it is not just the space that’s important, but the context for the space. Stapp noted that boomers and millennials now want the same things — to live and work in vibrant, appealing, accessible places — and that is a big driver for CRE.
Hundreds of NAIOP National Forums members participated in roundtable discussions at the 2015 “Forums Exclusive” event, exploring topics raised by the speakers.
Andre Kuzmicki, adjunct professor and executive director of the Program in Real Estate and Infrastructure at Schulich School of Business, York University, pointed out that “what’s old is new again. People have always enjoyed socializing and collaborating…. Basic human needs are emerging as bigger drivers of demand for CRE.”
Planet, People and Profit Gain in Importance for Employees. “Conscious capitalism” or “the three Ps, planet, people and profit” are becoming more important to employees and investors. According to Diane Danielsen, COO of Sperry Van Ness International Corp., in order to attract young, talented workers as well as sophisticated clients, tenants and investors, CRE companies will need to convince them that what the company does has a larger purpose. Joy Hou, cofounder and CEO, MREN, a real estate tech startup, agreed that culture and purpose are more important to millennial workers than money. They need to be assured that the company is “making a difference.” Danielsen and Hou added that “purpose-driven” businesses have been demonstrated to outperform other business models, so what’s good for the community and the planet is also good for business.
Residential Uses Drive Mixed-use Development in Toronto. Thanks to a 10-year-old regional growth plan for the Greater Toronto Area, “residential projects are driving development in this thriving market,” said Syl Apps, managing director, Hines. “Almost without exception,” he added, “residential is the highest and best use in downtown Toronto.” Most of the new mixed-use development there involves new construction of high-rise residential towers with retail or other commercial space at grade, primarily as an amenity for residents. “We’re seeing a number of credit retailers, national brands, moving away from the tried-and-true retail streets and wanting to locate in transit-oriented mixed-use developments,” he noted.
The “Cube Farm” Is Not Future Proof. Developers and property owners are still building out office space with giant, “big-ego” offices around the perimeter, while “worker bees” sit in cubicles and are lucky if they see the light of day, warned Sheila Botting, partner and Canadian real estate leader for Deloitte. These types of workplaces “completely reinforce the hierarchy, the territory, the silos. There is no collaboration or community space, and [they are] completely out of balance with where the world is going today,” she said. Botting and Debra Moritz, executive managing director and head of business consulting for Cushman and Wakefield’s Global Consulting Group, suggested that employers do the following to rethink their office space needs for the future:
- Examine and recalibrate what the future looks like for your business.
- Look at what digital disruption will actually mean to the business.
- Focus on people.
- Evaluate and improve technology to enable your workforce to be fully mobile.
- Go completely digital to eliminate storage for paper records.
- Stop thinking in terms of the number of square feet per employee; start thinking about “experience per square foot.”
Focus on Strategy, Not Tactics. Bryan Koop, senior vice president, Boston Properties, offered an example: “Everyone is going to ‘benching’ today, but we can tell you horror stories about benching,” he said, adding that companies that do that may wind up with a huge amount of turnover. “Let’s focus on strategy, rather than the tactics that someone is selling us,” he suggested, noting that Boston Properties focuses on “the big four: collaboration, well-being, talent and culture. Nothing manifests your mission more clearly than your physical surroundings.”
Investment Beyond the Border
At a session titled “Beyond the Border: Foreign Investment In and Out of Canada,” three panelists representing Canadian pension funds discussed the markets and product types in which they are investing as the cycle progresses. With most core properties having reached peak pricing in Canada and the U.S., these investors are searching for the right opportunities in secondary U.S. and European markets.
Dean Shapiro, Peter Ballon and Micheal Dal Bello spoke at a session titled “Beyond the Border: Foreign Investment In and Out of Canada” that was moderated by Karen Brennan, international director, LaSalle Investment Management.
Peter Ballon, managing director and head of real estate investments, Americas, for the Canada Pension Plan Investment Board (CPPIB), summed up CPPIB’s strategy by saying that they are “looking for maximum return on a risk adjusted basis.” He added that they have pulled back from the U.S. Ballon acknowledged that “fundamentals in the U.S. are the strongest in the world,” but noted that this had already been priced into the market. “What we have been doing is moving into the sectors where we think the capital is flowing.” This has led CPPIB to the health care sector, specifically medical office buildings, where he says “there is no doubt that the returns are higher.”
Ballon said that his team spent quite a bit of time asking, “are we just moving up the risk curve, or actually getting better risk adjusted returns?” They concluded the latter, believing that less liquidity in that sector is fine for a long-term investor and that less capital chasing those assets will lead to higher returns without additional risks.
Dean Shapiro, senior vice president, investments, U.S.A., with Oxford Properties, noted that their strategy is not simply to invest in real estate: “…we are trying to build a platform similar to what we have here in Canada,” one with management and leasing capabilities, albeit smaller. To that end, in the last few years Oxford has made significant investments in the U.S. Executing on two substantial transactions, Oxford became the second-largest landlord in Boston. Purchasing at this scale is in line with their strategy to own a critical mass of properties in a single market.
Micheal Dal Bello, senior vice president, real estate, Alberta Investment Management Corp. (AIMCo), said that the bulk of their investments have been in office product in large gateway cities. The company dabbled a bit in Houston, but has largely invested in San Francisco, Los Angeles, Chicago and New York. Recently, AIMCo has focused on office investments in the U.K. and Western Europe. They are also active in residential investment in London, where they are in the process of delivering entitled sites “for what we [North Americans] call affordable housing, or everyman housing” — housing “within the commuter shed that is a little more affordable” for people who work in London.
(From left to right:) Frank McKenna, Toronto Mayor John Tory, 2015 NAIOP Greater Toronto President Craig Smith and NAIOP Greater Toronto Executive Director Constance Wrigley-Thomas visited before Tory welcomed CREC ’15 attendees to the city.
When asked if they buy and invest as a currency hedge, all three panelists responded that currency risk is managed by others in their firms and that they focus on real estate deals.
CREC attendees enjoyed the meeting’s distinctly Canadian flavor, thanks in large part to the efforts of staff and volunteers from NAIOP’s Greater Toronto Area chapter, the association’s second largest. The chapter hosted a special networking reception at the Hockey Hall of Fame, where attendees tried their skills at interactive games, viewed one-of-a-kind exhibits and sampled Canadian foods — and watched the Toronto Blue Jays win Major League Baseball’s American League East Division.
Mark your calendar now for next year’s Commercial Real Estate Conference in Scottsdale, Arizona, Sept. 25-28, 2016.
Teamwork and Partnership
Three inspiring speakers at NAIOP’s 2015 Commercial Real Estate Conference underscored the importance of teamwork and partnership, not just for success in a business endeavor, but for living and thriving as nations.
Ed Roski, CEO, Majestic Realty Co. and 2015 Developer of the Year, attributed his firm’s success to a fine team that has worked together for many years.
“It takes teamwork to stay ahead of the curve, ahead of the pack, ahead of the competition,” he said. “There is something very special about the extraordinary chemistry of a great team. When challenges threaten to pull them apart, they find ways to band together. When things don’t go as planned they act quickly to set a new strategy. When the chips are down, they rise to the occasion taking calculated risks that lead to great rewards. When the going gets tough, they push through the pain and endure.”
Frank McKenna, former Canadian ambassador to the U.S. and former premier of New Brunswick spoke of the special relationship between Canada and the United States. After discussing how blessed the two countries are with abundant energy, water (20 percent of the earth’s fresh water supply borders the U.S. and Canada) and other natural resources, he said: “We have something more important than that, we have two countries that have a healthy respect for democracy. In our two countries we conduct our democracy in a thoughtful, deliberate manner. [We] don’t take our democracy for granted. This is not the case all over the world, in fact, it is rare around the world. [We] don’t take our friendship for granted. It is rare that countries that are so close are actually so close. It is rare that a relationship would be this civil after so many decades of living together side-by-side. Having a good neighbor is a precious gift.”
Tom Ridge, former governor of Pennsylvania and the first Secretary of the U.S. Department of Homeland Security, discussed the critical need for partnership between the U.S. government and business community to help protect the nation. Ridge sees two permanent changes: the scourge of global terrorism and what he termed “the digital forevermore,” the hyperconnected world in which we now live. “There are risks associated with both of these, but the way to manage [them] is through public-private partnerships.”
Ridge believes that government must improve communication with the business community: “One of the biggest challenges we have is to get the information from the government down to the private sector about the threats and risk, so you’re able to do something about it,” he concluded.
Toronto Industrial Tour Spotlights Opportunities For Developers and Investors
Project tours are one of the key highlights of NAIOP’s annual Commercial Real Estate Conference. Attendees at CREC ‘15 had their choice of seven tours, three of which were repeated on the final day of the conference. By foot, bus and subway, nearly 300 conference attendees explored projects and neighborhoods throughout the Greater Toronto Area (GTA).
Carttera’s recently completed 8875 Torbram Road was one of the stops on the Greater Toronto Area Industrial tour. The LEED Gold-certified structure is the largest speculative development in Canada.
One of these tours also traveled by train. Werner Dietl, executive vice president, managing director, and Kyle M. Hanna, senior vice president, both from CBRE, and Gil Gordon, senior vice president, Cushman and Wakefield, hosted the GTA Industrial tour, which returned via the Union Pearson Express train after visiting three big box industrial projects in the Toronto West market.
Hanna explained that the Toronto industrial market is the third largest in North America, with over 800 million square feet of industrial space, a 1.9 percent vacancy rate and considerable opportunity for developers and investors to grow and prosper. “Although acquiring properties is difficult because of tight inventory, it is a market that is now on the radar of most international investors and developers,” he explained.
The tour explored three properties that highlighted important characteristics of this market:
Prologis Park Mississauga Gateway Centre. According to the guides, this park signifies an important trend in the development of the Toronto industrial market. In 2006-2007, Prologis entered the market and began to develop a 98-acre, 1.8 million-square-foot industrial park on spec. This was the first development to bring the larger, double-loaded, deeper and higher bulk distribution format to the market. The park was a “home run” for Prologis and signified the beginning of other U.S. developers entering the market. It has experienced little turnover.
Participants in a tour of Toronto’s Distillery District donned hardhats, boots and safety vests before touring a property that was still under construction.
Orlando Corp.’s Churchill Business Community. To understand the Toronto industrial market, the guides insisted, you must understand the role that Orlando plays in the market. It is Canada’s largest privately owned industrial real estate developer and landlord as well as the dominant industrial developer in the GTA. Orlando develops, owns and manages Class A business parks with a wide range of different sized facilities, from small warehouses to huge distribution centers. When Churchill is complete, it will have close to 9 million square feet of space on 500 acres. The guides also used this development to demonstrate the trend of larger distribution space going west along the Route 401 corridor.
Carttera’s 8875 Torbram Road. Guides commented that this structure — a rare infill redevelopment project on 37 acres in Brampton’s Bramalea Business Park — is the largest speculative building in Canada today. Carttera has redeveloped an 825,000-square-foot building on the site into an 895,000-square-foot spec multitenant distribution center. The new, LEED Gold-certified building contains 122 dock doors (one dock per 7,300 square feet), 224 trailer parking stalls, 38-foot clear height, 4,000 amps of power, a new HVAC system and a 60-foot staging bay.