ommercial Real Estate

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1 CONSTRUCTION Timber time Wood s comeback as a building material for commercial projects may gain even more momentum with a new pledge of federal funding. PAGE 6 G TUESDAY, NOVEMBER 28, 2017 SECTION E... ommercial Real Estate EDITOR: JEFF BROOKE DESKS FOR HIRE As co-working grows, new spaces are rushing to open. A report indicates co-share spots could one day represent 20 per cent of the entire office market... DAVID ISRAELSON... Need to borrow a stapler or a pen? There s a new workplace just off Toronto s trendy Queen Street West where you can borrow the entire office. Spaces, opening at the end of November, is a co-sharing office. It s a 46,000-square-foot, eight-storey building where you can stay and work for a day, a week or a lifetime. It comes complete with the amenities a worker, especially a millennial, might expect good WiFi, lots of electrical outlets and smartboards, a rooftop patio, ground-floor hipster café and, of course, a lounge area with foosball. In a co-shared office, many individuals, professional services or different companies work under the same roof, for organizations and firms that are not necessarily related. Sometimes they re together at the same big tables, renting tiny fractions of buildings or rooms on flexible rental schedules. The design of co-sharing workplaces has been evolving, says Wayne Berger, executive vice-president of Spaces Canada. People discovered that they can t work all the time out of the coffee shop or at home; they need space that s small enough and flexible enough that they can afford. Typical co-sharing agreements are similar to gym memberships, where a renter signs up on a monthly basis and can come and go to a co-sharing company s various workplaces in different locations or cities. While some co-sharing tenants enter rental agreements for several months or even years, co-sharing enables people and businesses to park with their laptops and lattes for as short a time as a day. Rates quoted are around $600 a month for a dedicated desk in a coshared building or less than $300 for What to do with a tired tower a hot desk, in which a renter can grab an empty spot the way you might do at a coffee shop. The new exposed-brick-and-beam facility in Toronto is the first in Canada for Spaces, a Dutch company that specializes in this growing trend in office accommodation. Spaces itself was acquired in 2015 by Regus, an office sharing giant that offers more traditional short-term workplaces in office towers and suburbs, with 41 locations in Toronto alone and nearly 600,000 square feet of space. Co-sharing companies have a growing number of rivals around the world, as the trend becomes more common. There s quite a transformation going on, says James McKellar, associate dean at York University s Schulich School of Business and director of Schulich s Brookfield Centre in Real Estate and Infrastructure. Co-working, Page 6 Tenants are quickly moving into Spaces, the latest co-working office in downtown Toronto. The eight-storey building is designed to accommodate both permanent and casual business clients. GLENN LOWSON/THE GLOBE AND MAIL Converting surplus office buildings to needed residential space seems to solve two problems, but the economics don t always add up... KATHERINE KERR EDMONTON... Owners of office buildings in high-vacancy markets are kicking the tires on the idea of converting problematic B and C class buildings to apartment or condo properties, but analysts in the commercial real estate field predict there will be no large trend to actual conversions. Even in Alberta, where the vacancy rates in Calgary and Edmonton are in the high teens to mid-20s, the economics look positive for only a handful of conversions, say executives at commercial realestate giants Avison Young and CBRE. Mark Fieder, principal and chief operating officer for the Canadian operations of Avison Young, says there hasn t been a trend for conversions for the past 10 or 15 years in Canada, and most Canadian cities don t have the right market conditions now. Mr. Fieder says only in Calgary or Edmonton could a trend develop. A lot of his company s client base is looking at opportunities there. But he says there are a number of impediments even in the Alberta market. The big issue in Alberta, both in Edmonton and Calgary, is vacancy rates on the residential side recently are quite high [too]. For the last two or three years they ve gone up significantly, he says. At the end of 2016, apartment rental vacancy rates in both cities hovered around... Connect with facebook.com/globeandmail linkedin.com/company/the-globe-and-mail 7 per cent. The cost of conversion is also a major negative factor, say experts. Construction costs are relatively high and 40- to 50-year-old buildings can present expensive challenges. Many don t have a suitable floor plate to convert to apartments and there can be surprises on the mechanical side, as well. Once you start peeling back the layers, I think buyers will find it becomes uneconomical. Some of the buildings just don t lay out well for apartments [in terms of] balconies, parking, says Brad Gingerich, senior vice-president for CBRE in Edmonton. The B and C class towers most likely to attract conversion are in the city centres. While the vacancy rates of those older properties are significantly higher than the average, some as much as 50-per-cent vacant, they also face competition from new housing stock in both city cores. Conversions, Page 6

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3 THE GLOBE AND MAIL TUESDAY, NOVEMBER 28, 2017 G COMMERCIAL REAL ESTATE E3 Downtown department stores not just for shopping Iconic retailers, facing uncertain sales but blessed with prime real estate, are leveraging their space for other purposes... GUY DIXON... Department stores were never just stores, back in the days of dressing well for lunch at the Eatons Grill Room in Winnipeg or taking visiting relatives to the Marine Room in Vancouver. A department store s departments and dining rooms were cornerstones of aspiration, even a little civic self-identity. That sense, at least the aspirational side, can be felt with the plan by Holt Renfrew and merger partner Ogilvy to open their joint flagship downtown store by 2020 on Montreal s Saint Catherine Street. A key aspect is that the Four Seasons Hotel and Private Residences next door will be connected to the store, emphasizing the ambience of richesse. If there was any doubt left about the fate of Canadian downtown department stores, this removes it. Department stores occupy desirable real estate, primed for a return to being cornerstones. Yet this time their multiple use isn t just about a store s various departments, but also about other attractions and businesses attaching themselves to the space. The movement not only means upscale Holt Renfrew Ogilvy having a luxury hotel and residential attachment, and the plan for Hudson s Bay Co. to have trendy coworking spaces, leased by co-share giant WeWork, on the upper floors of its downtown Toronto and Vancouver stores, as announced in October. It s also about making the stores themselves into real estate that s even more highly coveted. With the retail industry in flux, this push is coming from various sides from people s preferences to live and work in urban clusters, and from landlords and developers pushing that urbanization. Department stores have a challenge, Ed Sonshine, chief executive officer of RioCan Real Estate Investment Trust, said in a telling interview this month on Business News Network. RioCan has an equity stake in a real-estate joint venture with Hudson s Bay which includes Vancouver s downtown Bay. To survive, department stores must give shoppers a reason to get Merger partners Holt Renfrew and Ogilvy will open their flagship store in Montreal by But they won t be the only purveyor of luxury on the block. Four Seasons is adding a hotel and residential tower next door. HOLT RENFREW out from behind their computers and internet retail sites, and go back to the physical stores. He believes department stores can do this by offering a more unique experience and a large selection of high-end products. But they must also recapture that sense of occasion, that sense of place. Yet, retailers can also make the flagship stores themselves more efficient. Mr. Sonshine noted the many possibilities for the 600,000 square feet of prime space occupied by Hudson s Bay downtown Vancouver store. The productivity of a department store actually, any retailer really goes down as you go up, Mr. Sonshine said in the interview. So that the sales per square foot on the ground floor might be five or six times what they are on the sixth floor. The WeWork deal, brokered by Richard Baker, the interim CEO of Hudson s Bay, will turn the top floors of the stores into leased office space and thus become a source of Regional malls evolve into town centres high rental income for the retailer. I think it s brilliant, and I think it s scalable. The net result is that his store becomes far more efficient, Mr. Sonshine said. Yet, exploring multiple options, Hudson s Bay and RioCan are also considering the possibility of selling the Vancouver property, although Hudson s Bay would still operate in the building. James Smerdon, vice-president and director of retail consulting at Colliers International in Vancouver, noted that the price for the building is rumoured to be more than 10 times its assessment value. Speculation bandied around has the possible selling price as high as $800-million to $900-million. The higher value obviously assumes the site would be redeveloped by the new owners, Mr. Smerdon said, one option being adding high-end condos to the site. Flagship downtown stores are absolutely prime real estate, but not for retailing, Mr. Smerdon added. Everyday shoppers, as a whole, perhaps those buying for the basics, tend to prefer suburban department stores, he argued. The highest and best use of downtown sites in major Canadian cities is generally a mix of uses, dominated by residential condominium towers. There are a host of other possibilities for Vancouver s downtown Hudson s Bay, such as turning some of the street-level storefront into cafés and adding other retail stores that pay high rents, Mr. Smerdon said. Kitty corner from Hudson s Bay, Nordstrom s downtown Vancouver store (originally the modernist Eatons store) has already long set an example with its mixed-use upper floors, housing office tenants such as Microsoft and law firm Miller Thomson. Meanwhile, RioCan has let it be widely known that it is looking to renovate many of its retail properties, adding residential units to shopping sites, to the extent that RioCan would like to see revenue from residential properties climb to about 10 per cent of annual revenue. The push to extract more revenue from the retail property itself is fierce. What we should ve done and what we should be doing as quick as possible is IPO-ing our U.S. real estate portfolio and/or IPO-ing our Canadian real estate portfolio, Mr. Baker of Hudson s Bay said during the announcement of the company s quarterly financial results last April. The talk of this has echoed for months. Mr. Sonshine noted this summer that various options could include sale-leasebacks, financing or subleasing. It shouldn t be hard because it s great real estate, he told Reuters. Even historically, when the core of the downtown shifts a few blocks over the course of many years, older department stores can remain coveted real estate with prominent second lives, as with the old, downtown Hudson s Bay store in Victoria converted into high-end residential units and the mixed-use renovation of the Woodward s Building in Vancouver s Downtown Eastside. Scarcity of downtown space helps the process, especially for companies today looking for large, core downtown office space. You can always free up space somewhere, but it s getting harder and harder, said Ross Moore, senior vice-president in Vancouver with Cresa Corporate Real Estate, a company that offers advice and services to commercial tenants. We re working with a group now looking for 30,000 square feet, and we re probably going to find them something. But if you want to get larger than that, it s all but impossible. Then, on top of that scarcity of space, is the added shortage of a trendy address in a distinctive, older building. Some tech companies and newer companies are especially interested in character buildings. Their preference is for old, cool buildings. Well, that s a finite product, Mr. Moore said. There aren t that many old, cool buildings sufficiently suitable for cool, modern offices. Flagship downtown department stores are among the few that fit the bill. Smaller shopping centres convert their empty spaces to office and residential use to become live, work and play neighbourhoods... The new Uptown in Saanich, B.C., has sprung from a former enclosed mall. The first two phases consist of 875,000 square feet of retail and office space, with a final phase that includes rental suites and townhomes. ITKASANIMAGES More so than any other land use, retail spaces are reinvested in, rebuilt, remodelled, or somehow reinvented, on a regular basis. James Smerdon Vice-president and director of retail consulting at Colliers International DAVID ISRAELSON... Attention shoppers! If it feels like you re living in the mall, it may turn out that you do. Retail centres are changing, turning into mixed-use locations with more offices, street-like walking areas and residential units. And Canada is no exception to a widespread movement to rethink the mall. Across the country, mall makers and managers are redeveloping properties like mad. It s a change that s spurred by the sputtering out of big department stores, the popularity of online shopping and the preferences, particularly among millennials, to have experiences beyond just buying stuff and driving home. It s happening a lot in the Toronto and Vancouver areas, but not just there. On Vancouver Island in Saanich, B.C., for example, a shopping centre called Uptown is being redeveloped into, well, an uptown. The 18-acre site, being developed by Morguard Investments Ltd., is being rebuilt from an enclosed mall into a neighbourhood. The first two phases consist of 875,000 square feet of retail and office space, with a final phase that includes rental suites and townhomes. The project includes a Whole Foods store, 225 bike racks, changing rooms and commuter showers for mall employees who ride to work. At least some of its buildings are being designed to a LEED gold standard. Malls are in a constant state of evolution, says James Smerdon, vice-president and director of retail consulting at Colliers International in Vancouver. More so than any other land use, retail spaces are reinvested in, rebuilt, remodelled, or somehow reinvented, on a regular basis, he says. In Colliers s National Retail Report for Canada, issued last spring, he predicted that every single one of Canada s suburban malls will undergo a fundamental structural change in the next decade. Mall owners are reacting to competition, adapting to a revolving door of local and international tenants, and trying to maintain the interest of consumers who have a near-infinite range of ways and places to spend their money, Mr. Smerdon says. Some of the more creative conversions he has seen include the building of apartments atop a mall parking garage in Richmond, B.C., and vacant units in U.S. malls being filled with labs and gaming halls, along with new apartments. Adding housing to retail mall space is compelling because it brings shoppers either literally under the roof or close enough, says Russell Whitehead, a planning consultant at Colliers in Vancouver. He points to an interesting mall conversion in Providence, R.I. The retail units in an old, failing shopping centre were converted into 48 attractive micro apartments with 17 boutique retailers that primarily serve as an amenity to residents living within the complex, he says. Smaller malls and those that have grown tired will be redeveloped more extensively than larger retail spaces that are holding their own or thriving, says Avis Devine, associate professor of real estate and infrastructure at York University s Schulich School of Business in Toronto. The class A malls like the Eaton Centre [in Toronto] are not going to go away. They might get intensified and look different than what we re used to, though, she says. Nevertheless, in the global context, Canada is a leader, Mr. Smerdon says. While mixed-use developments are not new, and some European and U.S. examples are arguably more innovative, Canada really embraced the enclosed mall in the seventies and eighties, and now we have hundreds and hundreds of them occupying thousands of acres of valuable land. They re surrounded by roads, neighbourhoods, transit, cultural venues and other elements of good town centres. It s happening slower in Canada than it could because of the more conservative development financing environment here in the U.S., but some of the projects we re seeing here will be global examples for a generation. Mr. Smerdon says that the movement to remake malls has been accelerated by the closing of major retail tenants in recent years. In 2015, Target Corp. shuttered all of its Canadian stores, leaving about 15 million square feet of retail space (and another five million in office and warehouse space) vacant at more than 130 locations, ranging from 80,000 to 125,000 square feet each. According to research from real estate service CBRE, more than 40 per cent of the old Target space is still vacant. More recently, in October, Sears Canada pulled the plug on its business, liquidating 131 stores and leaving nearly another 15 million square feet empty. Mr. Smerdon compares the closing of these anchor tenant businesses for landlords to the stages of grief people go through when a loved one dies. After exhausting their searches for suitable grocers or fitness centres as replacements, circumstances are forcing property owners to change their vision, he says. Once they reach the acceptance stage of grief, they start looking to carve up large spaces to accommodate smaller retailers, restaurants, other uses and then to demolition and redevelopment. The rise of online shopping is changing the way people interact with malls, too, Dr. Devine says. Retailing is far more experiential now. We re seeing the impact of web-rooming and showrooming, she explains. Showrooming is when you go to a store and look at something and then buy it online. Webrooming is the opposite [shoppers see something online and buy it at the mall], she says. The changing tastes of modern urban dwellers is changing peoples relationship with malls as well, Mr. Whitehead at Colliers says. In general, there is strong demand for residential units in convenient locations where residents can live, work, and play, all in a walkable community close to public transportation. Although millennials contribute to this demand, other age groups also like this form of development, he explains. It will take time for the changes in malls to percolate through society and our culture, because real estate projects take a long time to get from conception to completion, Dr. Devine says. But wait till you see what happens in 10 or 20 years.... Globe Edge Content Studio SEAN STANLEIGH, MANAGING EDITOR ELIZABETH HOLLAND, SENIOR EDITOR 6 Globe Edge manages earned, owned and paid content opportunities across all Globe and Mail platforms and formats. Send queries to GCS@globeandmail.com

4 E4 COMMERCIAL REAL ESTATE G THE GLOBE AND MAIL TUESDAY, NOVEMBER 28, 2017 A growing option: building without signed tenants In cities with high demand and low supply, some developers are betting on building on speculation... FRANCES BULA VANCOUVER... GWL Realty Advisors has $6-billion worth of development across Canada. But until recently, the company had never added to its portfolio by building an office tower on spec that is, without a single tenant lined up in a prelease agreement. That is what the company is doing now, though, on a downtown site in Vancouver, where it is tearing down a parkade near the central intersection of Georgia and Granville streets to construct a 33- storey, nearly half-million-squarefoot office tower. Why we chose to do this in Vancouver, is there s a great supply of tenants from a number of sectors. Vancouver has a classic situation of strong demand and low supply of space, says Paul Finkbeiner, the president of GWL, a subsidiary of the Great-West Life Assurance Co. GWL is not the first in Vancouver to build an office tower on spec in the recent office boom. In fact, it is one of about half a dozen buildings that have gone up or are about to be built on spec in the downtown core. Many attribute it to the city s unusual economy and mix of potential tenants such as many tech companies that do not make commitments until a building is near completion and that do not lease large amounts of space even when they do commit. But, while the trend is pronounced in Vancouver, it is not the only Canadian city with a major office building going up on spec. The developer Cadillac Fairview Corp. announced its 16 York project in downtown Toronto in March, committing to building the $479- million, 32-floor, nearly 900,000- square-foot tower before it had a single tenant signed. It s basically unprecedented for us, says Wayne Barwise, the executive vice-president of development at the company. He says now that about 40 per cent of the space is preleased, something he expected because of the office situation in Toronto. The vacancy rate here is 4 per cent and the site [16 York] is across from the main transportation hub, and the vacancy rate is one and a half per cent. Cadillac Fairview has about 10- million square feet of space downtown, and a significant proportion of its tenants were looking to expand in the coming years. That alone, not even factoring in new tenants, was enough to drive the project. Both cities share some similar factors, say company executives and commercial real-estate brokers. Wayne Barwise of Cadillac Fairview says its 32-floor office tower at 16 York St. in Toronto was started on speculation basically unprecedented for us. It s now about 40-per-cent preleased. J.P. MOCZULSKI/THE GLOBE AND MAIL The market has changed, the tenants have changed. You almost have to go on spec. Mark Chambers An executive vice-president with Jones Lang LaSalle Inc. There s a lack of big-block space in Vancouver and Toronto, says Richard Vilner, the director of market intelligence for Colliers International in Toronto. But both he and John Arnoldi, an executive managing director with Colliers, caution that the phenomenon of building on spec is rare. The vast majority of buildings are still planned on the basis of preleasing to a major tenant. That is absolutely the case for cities outside Vancouver and Toronto and still mostly the case even in those two hot markets. And even most of those supposedly being built on spec actually have tenants lined up waiting to sign. Developers are being more aggressive, yes, but most prefer to go the traditional route, says Mr. Arnoldi. There are constraints, as well, on many office developers. Pension-fund-backed companies such as Cadillac Fairview and GWL Realty Advisors can self-finance, which makes it somewhat easier for them to build speculatively because they do not need to get bank financing. But it s tough for most builders to get financing to build on spec, says Mr. Vilner. And the memory lingers of the overbuilding that Toronto saw in the late 1980s and early 1990s that resulted in some half-empty buildings and plummeting rental rates. But in some cases, it can make sense, though even for companies like Cadillac and GWL, moving ahead with a spec building requires careful analysis and a solid argument to present to their boards. You have to show to your board or your client that there is a strong demand and limited supply, says Mr. Finkbeiner. There s a tonne of thought and discipline. We run scenarios looking at what happens if rents go up, if rents go down, if it takes longer to lease. He said that care is key when you re using people s pension investments. My goal is to pay people s pensions, pay for their groceries. I want to make very certain it s going to cash-flow out. For GWL, moving ahead with the Vancouver Centre tower was supported by company leaders because it is among the first in a new group of spec offices with a building permit, which puts it ahead of other developers in attracting tenants. The latest wave of building office towers on spec in Vancouver started in the early 2000s, when Oxford Properties Group Inc. built a 35-storey spec tower, now called MNP, that eventually opened in It was fully leased by the time it opened. That prompted others, but the situation of the Exchange Tower that started construction later financed by Credit Suisse and SwissReal Group gave some the jitters. The Exchange Tower, which officially opened earlier this month, seemed stuck at near-empty for a long time. After construction on the $220-million tower started, and went on over the past couple of years, only one committed tenant, National Bank, came on board. But now it is close to being filled, with a new hotel chain and tech companies such as HyperWallet Systems Inc., the accounting firm Smythe LLP and Sovereign General Insurance Co. Almost half of the space went to tech. And tech guys make decisions three to six months in advance, not two to three years, says Mark Chambers, an executive vice-president with Jones Lang LaSalle Inc., which was marketing the site. He predicts there will be many more in Vancouver, at least. The market has changed, the tenants have changed. You almost have to go on spec.... No shortage of tenants for new industrial space It s a landlord s market in Montreal for the first time in years, and Calgary is becoming a hub for distribution networks A CONFIDENT BET On-spec buildings built, under construction or proposed: TORONTO 16 York, Cadillac Fairview 32 storeys 879,000 square feet $479-million budget Progress: Broke ground May of 2017 Expected opening: June of 2020 VANCOUVER MNP Tower, Oxford Properties 35 storeys 270,000 square feet $75-million budget Launched in 2011 Opened February of 2015 Manulife 16 storeys 250,000 square feet No budget available Launched in 2013 Opened November of 2015 *Had one pre-lease tenant for about 1/4 of the space The Exchange, Credit Suisse and SwissReal 31 storeys 372,000 square feet $240-million budget Launched in 2014 Opened November of 2017 Vancouver Centre II, GWL Realty Advisors 33 storeys 371,000 square feet No budget available Launched in October of 2017 Expected opening summer of 2021 sixone, Morguard 25 storeys 227,000 square feet No budget available Not launched yet Expected completion in early W. Georgia, Westbank/ Allied REIT 24 storeys 350,000 square feet No budget available Approved by urban design panel September of 2017 Expected completion early MARK RENDELL... Just east of Montreal s Pierre Elliott Trudeau International Airport, real estate company Bentall Kennedy is building its first speculative industrial project in the city in years. The 216,000-square-foot facility isn t scheduled to open until next summer, but with Montreal s industrial market undersupplied in the midst of an economic boom, potential tenants are already lining up to occupy the space. We ve had a lot of traction on it, said Roberto Giglio, vice-president of leasing for Bentall Kennedy s Quebec division. This is one of these buildings that we feel is going to be leased even before we complete it. Speculative building traditionally plays a far smaller part in Montreal s industrial real estate market than in cities such as Toronto, Vancouver or Calgary. But with the third quarter of 2017 seeing 15-yearlow availability rates, and demand booming from the logistics and aerospace sectors, Montreal landlords are beginning to develop their remaining parcels of land on spec a trend unseen in many years, according to CBRE Group Inc. s third-quarter research. It s clearly a landlord s market, said Avi Krispine, managing director for CBRE s Quebec operations. Companies used to be able to take four, five, six months to decide whether they re going to go ahead with their project or not, in terms of leasing. Today good luck if you have a couple of weeks. Across the country, industrial continues to be one of the best performing commercial real-estate asset classes. The national average net asking rental rate was up 7.2 per cent year-over-year in the third quarter, and availability across the county reached a 16-year low of 4.3 per cent. Toronto and Vancouver continue Bentall Kennedy launched this warehouse in Montreal before taking the usual step of securing committed tenants. This is one of these buildings that we feel is going to be leased even before we complete it, executive Roberto Giglio says of the 216,000-square-foot facility that s expected to open next year. BENTALL KENNEDY to lead the country in terms of low vacancy, at 2.3 and 2.6 per cent, respectively. But Montreal s market is tightening, with almost 2.2 million square feet of absorption in the third quarter alone more than Vancouver and almost as much as Toronto. In fact, Montreal and Calgary saw almost half of Canada s net absorption of industrial real estate in the third quarter. In Montreal, this was led by large aerospace and logistics leases by companies such as Avior Integrated Products Inc. and Syncreon International Group. Smaller companies are likewise demanding space, as business confidence in the province s economy continues to soar. At the same time, available product, especially on crowded Montreal Island, isn t keeping pace with demand. On the whole island of Montreal, there are five spaces of 100,000 feet or more, said Mr. Giglio. The vacancy rate for buildings over 24- foot [clearance height] is something like 2.5 per cent, and that s in the entire Greater Montreal. Adding to this is a decline in older industrial stock. With Montreal leading North America in terms of growth in technology jobs 18 per cent over the past year, according to CBRE tech companies are transforming high-ceilinged, exposed-brick industrial space into offices, said Mr. Krispine. A different scenario is playing out in Calgary, the other standout performer in the third quarter (beyond the usual suspects, Vancouver and Toronto). At 8.5 per cent, industrial vacancy remains high in Calgary, three years after the oil price drop sent Alberta s economy reeling. But things are beginning to look up, with nearly 1.2 million feet of space being absorbed in the third quarter, and speculative development is likewise returning to the market. Bentall Kennedy, in partnership with Highfield Development, is developing Calgary s first industrial building on spec since The 420,000-square-foot building, with 36-foot clearance height, will open next summer in Balzac, an area just outside Calgary that s home to a number of major distribution centres for companies such as Wal- Mart and Sobeys. Amazon also recently announced a 600,000- square-foot fulfillment centre in the area. The fact that we were able to sell such a substantial, in some respects risky, development really speaks to what the insiders in this market already know, which is we re going to be out of supply very quickly, said Iain Ferguson, executive vice-president for industrial and logistics at CBRE Canada. Demand for Calgary s industrial space is being driven partly by a return of capital expenditure to the Alberta oil patch and associated investment in manufacturing. More than this, however, is a continuing effort by companies to consolidate their Western Canadian distribution networks, treating Calgary as a kind of inland port, said Mr. Ferguson. With Amazon and other e-commerce giants changing consumer expectations, companies are having to raise their logistics games. That means increased demand for large, high-tech industrial buildings in transportation hubs like Calgary. It s going to be very expensive for everybody to chase Amazon down the rabbit hole, said Mr. Ferguson. In a lot of cases, [competitors will need] bigger warehouses, more investment in SAP systems and infrastructure and material handling. It s definitely a take-a-deep-breath moment for a lot of people in the market....

5 PERFORMANCE ADVANTAGE 50% Interest Portfolio * 50% Interest * Office Portfolio * * Office & Retail Vancouver, BC Toronto, ON Office Various Locations Acquisition Term Financing* $1.9 Billion $750 Million $750 Million $480 Million $240 Million Ottawa, ON 75% Interest Acquisition Financing and Acquisition Term Financing Toronto, ON ntown Hotel Downtown nto, ON Toronto, Suburban Head Office Montreal, QC Office Complex Burnaby, BC * * Development Land Vaughan, ON Enclosed Retail Abbotsford, BC Development Land Toronto, ON Multi-Housing Edmonton, AB 50% Portfolio * Portfolio * Ottawa, ON Retail Burnaby, BC Suburban Office Mississauga, ON Office Calgary, AB Portfolio Portfolio Acquisition Term Financing Toronto, ON Multi-Housing Halifax, NS Retail Ontario and Quebec $$401 Million $220 Million $188 Million $126 Million $82 Million $335 Million $214 Million $175 Million $125 Million $396 Million $280 Million $200 Million $191 Million $155 Million $138 Million $113 Million $102 Million Toronto,, ON CBRE delivers real estate outcomes that drive business and bottom-line performance. In 2016, CBRE completed US$322.2 billion of lease, sale and debt transactions globally, while our 22 Canadian offices completed over 4,850 successful engagements. With over 90.2 million square feet of commercial real estate under management in Canada, we help our valued clients unleash the potential of their real estate portfolios. How can we help you transform your real estate into real advantage? CBRE Limited, Brokerage All transactions dated January 2017 to December 2017 * Co-Advisory

6 E6 COMMERCIAL REAL ESTATE G THE GLOBE AND MAIL TUESDAY, NOVEMBER 28, 2017 Wood reaches new heights in construction Timber-frame revival may gain even more momentum with new federal funding... Countries such as South Korea are leading the way, says Prof. McKellar. They re beginning to redefine the whole concept of an inner-city community, for example, by integrating facilities such as libraries and community centres into co-shared office space. Canada is moving fast, too, though. The shared workplace and co-working trend seen for some time in other countries has now officially arrived in Canada and is poised to shake up the Canadian office space market like nothing before, says a report from Cresa Corporate Real Estate, a company that offers advice and services to commercial tenants. The shift in perception toward shared office space has been rapid and quite startling, it says in the October report. Our own view is that shared office space could be as much as 20 per cent of the overall office market within the next decade. The current percentage in Toronto is less than 1 per cent and it s even smaller in Vancouver. It s changing fast, though. WeWork, a giant co-sharing competitor that is valued at $20-billion (U.S.) on the markets, already has locations in Vancouver and Toronto including one just around the corner from Spaces new Toronto location. WeWork s activity in the United States is a sign of what s to come in Canada it recently purchased the flagship Manhattan Lord & Taylor department store for $850-million to set up as a co-share facility in New York. (WeWork is also taking over floors in Hudson s Bay Co. anchor stores in downtown Toronto and Vancouver.) Co-sharing is increasing because of technology, demography, sociology and the economy, say those who are involved with or watching the trend. Because of the internet, people can work anywhere, says Spaces co-founder Martijn Roordink. Prof. McKellar adds that today s most prized workers in technology, finance and knowledge-based industries are no longer as satisfied as their predecessors were with toiling away in a monolithic company office. The big firms recognize that the jobs follow the people, and younger workers want to live in cities, Prof. McKellar says. A lot of firms that were in the suburbs are moving downtown, and it s all being driven by access to bright young people. Brock Commons, a student residence at the University of British Columbia, is the world s tallest timber structure at 18 storeys. It may be the first of many similar buildings at the Vancouver university. UBC THE CO-SHARE ECONOMY... Primary co-sharing cities in Canada are Toronto and Vancouver, with facilities also growing in Montreal. Toronto market has one million square feet of co-sharing space (out of about 150 million square feet total office space) in 85 locations (59 in the downtown core). Vancouver market has nearly 790,000 square feet of co-sharing space at 52 locations, 39 downtown. Big players include WeWork and Regus (which owns Spaces, now opening in Toronto). Based on square footage, nine operators run about 87 per cent of co-working in the Greater Toronto Area WeWork, Regus (and Spaces), iq Office Suites, Workplace One, Workhaus, Office Exec, Brightlane, the Centre for ADAM STANLEY... George Brown College has steadily grown since its establishment in 1967 and now operates out of more than a dozen buildings spread throughout Toronto s core. One of its future facilities will be the most unique. The public college of 26,000 students plans to erect a 12-storey tower framed of wood at its waterfront campus on Lake Ontario to house its computer technology program and a centre for researching climate-friendly building practices. Once ready in 2024, the tower dubbed The Arbour will be the highest wood-framed building for institutional use in Ontario and a significant milestone in the revival of timber as a construction material for tall structures. The future is certainly wood, says Shane Williamson, a principal at the architecture firm Williamson Williamson Inc. in Toronto. Wood was a dominant building material in Canada s early days for commercial and residential properties, but it gradually gave way last century to safer and sturdier materials like concrete and steel as building heights grew. But with new safety and engineering insights into timber, tall wood buildings are making a strong comeback. The revival may gain even more momentum under a new federal government program announced this fall. The Green Construction Through Wood initiative, meant for buildings 10 storeys and above, will provide nearly $40-million in funding to developers over four years, starting in April of The deadline for applicants is Dec. 6. Ottawa is also expected to push along revisions to the National Building Code of Canada that would allow tall wood buildings to go beyond the current limit of six storeys. (Provincial limits differ and vary.) George Brown has already put in its bid for some of the program money. The government of Canada s tall wood program is an excellent opportunity to create a low-carbon campus that s innovative, stimulating for student learning, and responsive to the needs of our future, says college president Anne Sado, who is hopeful The Arbour will help demonstrate the latest techniques in design and green construction. George Brown plans to hold a competition to determine which company will design the building. Mr. Williamson, who is also director of the University of Toronto s master of architecture program, says there is a tremendous amount of interest from other builders, too, as they reawaken to wood s green and efficiency virtues. It s a cost-effective approach to building tall, says Mr. Williamson, whose architecture firm recently captured a Canadian Wood Council award for a private multi-generational home it designed in Ancaster, Ont. There has been long-standing issues around combustibility with current building regulations to make everyone feel comfortable and safe. But we re building taller. The Brock Commons student residence at the University of British Columbia may be Canada s best example of what he s talking about. The 18-storey residence is the world s tallest timber structure and was erected in just 70 days after the wood components arrived on site. It s made of cross-laminated timber (CLT) and features some concrete and steel as well. Brock Commons and similar tall wood buildings around the world demonstrate the safe and practical application of engineered mass timber in larger structures, says John Metras, managing director of infrastructure development at UBC. The reduced carbon footprint of wood buildings can play an important role in the development of sustainable cities. He says UBC will continue to use mass timber in building applications in the future, given the positive results of Brock Commons, which opened this year. The wood movement is also spurred by product development. FROM PAGE 1 Co-working: Internet allows people to work anywhere Social Innovation, and the Fueling Station. Average price for a dedicated desk in a co-sharing office is $483 a month in Toronto and $414 in Vancouver. Average price for a hot desk (sit anywhere) in Toronto is $288 a month and $281 in Vancouver. By comparison, cost of a dedicated desk in Hong Kong is $700 a month, $1,001 in London and $1,275 in New York (all in Canadian dollars). Co-sharing commercial real estate market in Canada is predicted to grow to 20 per cent within the next decade. Source: Canadian Co-working and Shared Office Study, October of 2017, by Cresa Corporate Real Estate Montreal-based Nordic Structures has emerged as a leading manufacturer of CLT. Five rows of lumber are stacked and glued together, and can be used to make wall panels or floor and roof slabs, helping speed along construction. Nordic recently completed Origine, a 13-storey residential project in Quebec City. It was able to build 13 storeys after a series of rigorous tests at the National Research Council in Ottawa showed wood s safety. Mr. Metras compares the prefabricated mass timber components to a Lego set. The structures are efficiently assembled, reducing construction time, minimizing waste and cutting down noise impacts to surrounding homes and businesses. CLT in some ways can be considered a replacement for concrete, adds Mr. Williamson. In many ways it provides similar characteristics while offering tremendous benefits The new exposed-brick-and-beam facility in Toronto is the first in Canada for Spaces, a Netherlands-founded company that was acquired in 2015 by co-working giant Regus. GLENN LOWSON/THE GLOBE AND MAIL While co-sharing suits bigger firms because they can be flexible in the amount of office space they need, it can be especially suitable for startups or second-stage companies that are just getting off the ground and don t want to be tied to big long-term leases. Privacy and protecting intellectual property can be a concern, admits Mr. Berger at Spaces, but most companies protect their data nowadays by storing it on secure sites in the cloud. Although co-sharing is now becoming big business for companies such as WeWork or Spaces, it has its roots in organically developed workspaces such as Toronto s notfor-profit Centre for Social Innovation or the MaRS Discovery District, which was designed as a space for big thinkers and prospective funders to mingle. Co-sharing is definitely part of our model, says Karen Greve Young, MaRS Discovery District s vice-president of partnerships. Companies come here to be colocated with organizations they want to work with, and they re indifferent to which particular desks they have within that open space. The point is that, she says, they learn from each other.... FROM PAGE 1 Conversions: Costs often prohibitive... 9 We ve seen a lot of purposebuilt rentals in both Calgary and Edmonton, and that s a game-changer for groups trying to convert office buildings, says Mr. Gingerich. For companies thinking of investing in an old building with an eye to doing a conversion, the cost of buying, even in the B and C class, is another issue. Real estate has largely retained its value despite the recession, says David MacKenzie, vicepresident of multi-family investment for Avison Young in Calgary, which means the cost of acquiring a building plus the cost of conversion construction becomes too expensive to be cost-effective. I think you d be highly challenged to acquire even an older office building at the right number to be able to compete with the existing submarket of new-built, purpose-built condos and apartment buildings, he says. And yet there are fans of conversion in the West and some companies are moving forward with projects. Cory Wosnack, a principal and managing director for Avison Young in Edmonton, says the new purposebuilt residential buildings in the Edmonton core are all of a similar, relatively expensive class. Repurposed B and C class towers could add diversity to that housing stock, he says. We have a handful of [office] buildings that have full or near-full vacancy and these buildings are going through a very serious investigation to see them taken out of the office inventory and into residential. Mr. Wosnack says the Edmonton real-estate market would welcome having some of the older B and C class buildings taken out of the office inventory. Having a 17-per-cent vacancy rate would indicate a very weak market and yet much of that vacancy really doesn t compete for today s tenants. It s a drag on the market statistically and it s creating a false impression. Calgary-based Strategic Group has one office conversion under construction and another in the design and concept stage in Edmonton. It has four buildings in Calgary in the concept and design stage. In 2014, we witnessed the market turn to a new day, says Randy Ferguson, Strategic s chief operating officer. We began to contemplate the longevity of our B and C class office space and to think about those buildings that are best positioned in markets where people would enjoy living. Can we find efficiency in converting those buildings to another asset class? Mr. Ferguson s view is that both Edmonton and Calgary are underserved for residential rental property, having lower apartment stocks per capita than elsewhere in the country, even though the cities have demographics including many young people wanting to live downtown. Strategic s first conversion in Edmonton will be Harley Court, a building in the city core, around the corner from a grocery store, close to light-rail transit. The second will be the Centre West Building, a tower in the government district not far from Harley Court, which Strategic acquired with a plan to do a conversion. But even in Calgary and Edmonton, Mr. Ferguson doesn t expect a wholesale trend toward conversions, simply because of the many impediments. Artis REIT, based in Winnipeg, is in the stage of getting permits for one downtown building conversion in Calgary, Sierra Place, and is reviewing the economics on three other buildings. Dennis Wong, Artis s executive vice-president of asset management for Western Canada, agrees the inventory of suitable buildings in the right location is small. These are all one-off projects, says Mr. Wong. In the last Calgary Real Estate Forum there was a panel, and they did an analysis of the number of class B and C buildings. There was only a handful that met the criteria.... OPEN SPACES Third-quarter 2017 office vacancy rates across Canada: Vancouver 9.1 per cent Edmonton 17.1 per cent Calgary 23.1 per cent Toronto 6.8 per cent Ottawa 10.6 per cent Montreal 12.8 per cent Source: Avison Young

7 Experience the Difference Avison Young is the world s fastest-growing commercial real estate services firm, with 82 offices in North America and Europe. We are structured around a principal-led, collaborative model focused on client performance and satisfaction. The Avison Young difference translates into intelligent solutions that deliver a better client experience and better results. Client-Centric Solutions Providing a full range of commercial real estate services to owners, and occupiers of office, retail, industrial, multi-family and hospitality properties. Leasing Investment s Financing Property Management Valuation & Advisory Consulting Project Management Learn how you can experience the difference at avisonyoung.com Partnership. Performance.

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