In order that you can savour the flavour of the past four decades we have chosen an excerpt from one issue of our newsletter for each year.
The f Word
On 11th January 2011, Canada will join the more than 100 countries, including Australia, the European Union, Hong Kong and New Zealand, that have adopted the International Financial Reporting Standards [IFRS]. This marks a departure for Canada: previously it had been moving its Generally Accepted Accounting Principles (GAAP) towards the American GAAP. Instead the United States has started the process of moving American GAAP towards IFRS and is expected to be compliant, in as much as it effects the treatment of real estate, by 2014. The financial crisis of 2008 and its aftermath has provided ammunition to those in favour of retaining GAAP, and the proponents of IFRS. The train however has already left the station, IFRS promises more transparency and compatibility of financial statements worldwide. The replacement of Canadian GAAP by the IFRS will be mandatory for all of the country’s 4,500 Publicly Accountable Enterprises [PAE] (publicly traded companies, credit unions, insurance companies, trusts, REITs). Privately held companies can opt to adopt the IFRS but having done so cannot easily revert back again. Government Business Enterprises [GBE] i.e. self revenue generating bodies such as Canada Post, CMHC, public utilities, et al, have been directed by the Public Sector Accounting Board [PSAB] to adopt IFRS on 1st January 2011 but have been fighting a rear guard action. Government Business Type Organisations [GBTO] that rely on government subsidy (housing commissions, some First Nation corporations) are also resisting PSAB’s directive to adopt the IFRS. Organisations that adopt the IFRS will require comparative (2010) financial statements: the starter’s pistol has been fired, the race is underway. The major difference between GAAP and the IFRS is the option to replace historic cost with fair value, i.e. “mark to market”, for assets such as real estate. Given that the country has rather a lot of the latter, this promises to be a monumental task. There is a plethora of information on the Canadian move to the IFRS, Google will reward your enquiry with almost 600,000 articles. We commenced our research eight months ago and it is apparent that the migration from GAAP to IFRS is a moving target. However given recent requests from clients for Year 2010 IFRS compliant valuations, and the resultant challenges that have surfaced, we deem it worthwhile to commit to print. The transition to IFRS is dominated by the accounting profession and naturally focuses on their sphere of concern. It is a world replete with acronyms … and not a little confusion. The move from historic cost to “mark to market” is a valuation problem and here the devil is in the details. Although the European Union only moved to the IFRS in 2005, the United Kingdom moved to “mark to market” in 1972. The Royal Institution of Chartered Surveyors’ Valuation Standards (RICS Red Book) has a pedigree dating back to 1976. It incorporates the International Valuation Standards (IVS) published by the International Valuation Standards Committee (IVSC), the Board of which includes representatives of the RICS, the Appraisal Institutes of Canada and America and well as similar bodies in Australia, China, Germany, Hong Kong, Holland, Malaysia, New Zealand, Romania and Russia.
In October 2003, the International, Canadian and American Standards Boards met in Toronto together with representatives of the North American appraisal and valuation professions. Following that meeting, the latter (RICS, American Society of Appraisers, Appraisal Institutes of Canada and America, Centre for Advanced Property Economics, The Appraisal Foundation) agreed to co-ordinate their efforts to expedite the convergence of financial reporting standards and affirmed their support of the International Valuation Standards Committee (IVSC). Since the RICS Red Book already incorporates the International Valuation Standards (IVS) and is based on thirty five (35) years experience of marking to market it provides an excellent reference source on the subject. We have utilised it and the International Valuation Standards Eighth Edition 2007 for the real estate valuation aspects of IFRS in this article. Brace yourself; this is exciting.
Vanishing Halifax: An Inconvenient Truth
On June 21st 1749 British Governor Edward Cornwallis splashed his way through pristine shallows to land on the wooded slope of a large drumlin which today houses Halifax’s downtown. Development followed; bawdy, boozy and boisterous, Halifax prospered most in times of war. Today, students have replaced the soldiers and sewage the pristine shallows; that apart the character of the City is little changed: it is a lively place in which to live and work. The centuries since have best left their mark in a legacy of stone, brick and timber buildings which jostle for space with high rise office and apartment towers on the slope below the ramparts of the Citadel, a star shaped fortress whose roots date back to Cornwallis’ landfall. In the early 1970s peacetime prosperity found Halifax: concrete was king. A large interchange was constructed at the north end of the downtown and bold plans were created to cut a swath through the City’s heart to construct Harbour Drive, a new highway which would sever the waterfront from the central business district in the same manner as Toronto’s Gardiner Expressway. Centuries old buildings would be sacrificed: the City would finally enter the twentieth century. Heritage groups mobilised, Harbour Drive was stillborn, signature neighbourhoods such as Historic Properties were rescued from the wrecker’s ball, and the essential characteristic that today differentiates Halifax from urban dross, survived. Forty years later the interchange still stands, a dilapidated orphan little used, a monument to ignorance and outdated convention. It will be demolished when City Council musters the courage to make that decision. That initial battle however over what defines Halifax as Halifax, ignited a rancorous debate which erupts into flame every time a new high-rise building is proposed. The battle over Harbour Drive and Historic Properties laid a foundation of mistrust between those who want to preserve the past, the development community, and elected officials. It has been nurtured over the past thirty eight years by City Council dithering, ineptitude and lack of leadership.
In 2006 HRM Council initiated a Regional Centre Urban Design Study (HRMbyDesign) for Halifax’s Central Business District including the Spring Garden Road commercial area. HRMbyDesign is now in its final stage and will proceed to a ratification vote of City Council in June 2009. If approved HRMbyDesign will alter building heights and density, and change the look and feel of the city. It is an exciting plan which attempts to introduce some flexibility into the development process whilst reducing uncertainty. Design rules will replace some of the present approval process: there will be less opportunity for public participation and therein lies the rub. Heritage groups mistrustful of the present process view HRMbyDesign as an attempt to neutralise their opposition to development which threatens historic buildings. They will no longer participate in the planning process. Some developers, and government or quasi-government agencies such as the Greater Halifax Partnership and Nova Scotia Business Inc. (NSBI) have voiced concern that HRMbyDesign will unduly restrict development and hamper their efforts to accommodate the fleet of financial firms anxiously anchored at the mouth of the harbour.
Spring 2008/Spring 2009
Investment Property: Shifting Sands
Ronald Regan's election to the Presidency of the United States in 1980 triggered a programme of tax cuts and financial deregulation that resulted in a 72% increase in the country's gross domestic product during the decade that followed. However the deregulation also unleased an orgy of reckless lending and fraud that culminated in a financial crisis, the collapse of 1,000 Savings and Loans Associations, which ultimately cost American Taxpayers $124.6 billion. The Canadian government attempted to soothe its taxpayers with assurances that things were different here: a couple of years later the Trust Company crisis laid to rest that fond hope. Trust companies, many household names, went down like ninepins. During the dying days of the decade an entire sector of the Canadian financial system disappeared. Then the Thai baht collapsed, the result of over exuberant property lending by that country’s banks. The contagion spread to Japan, whose banks had exhibited similar malaise, and then around the world. We pin point May 1990 as the start of the recession in Atlantic Canada, based on the reduction in residential sales volume and prices, an activity we have tracked continuously since 1978. In reality however the commercial property market started to feel the pinch in 1989 as credit dried up. During the ensuing two years the market seized up: credit was unavailable, properties could no longer elicit prices which would allow vendors to liquidate their existing mortgages; sales activity ceased. In 1992, vendors forced by financial pressure to sell, faced an awful fact, an average 50% of their nest egg had evaporated; its value eviscerated by a banking system paying penance to past excess by refusing to lend at all. Our financial system had found religion, credit was unavailable because commercial property was worthless… ipso facto such was the case. If like us, you lived through that era, you may now perforce be experiencing a feeling of déjà vue… together with a sense of grievance that you have to suffer through it all again.
Warren Buffett opines that the United States’ economy has “fallen off a cliff” and wisely declines to predict the height it has to fall, or when it will reach bottom… but only that eventually the world’s most entrepreneurial economic system will bounce back. Canada will follow suit. What clues can be drawn from the 1990 recession? Is Atlantic Canada teetering on the edge of another property market meltdown?
The Wharton School’s 1998 research paper on the financial crisis which washed ashore in Atlantic Canada in 1990, determined that commercial property values collapse because of (1) a sharp fall in demand, or (2) a rapid rise in supply fuelled by easy credit, or (3) both of the foregoing. Atlantic Canada’s market meltdown was caused by a severe recession which sharply curtailed demand, during a period of rapidly expanding supply. The latter resulted from over-exuberant lending by the banks (offices, multi-tenant industrial, retail), CMHC (apartments) and government agencies such as ACOA (industrials, hotels, motels). Signals such as rising vacancy rates were ignored. Today the region does not face the same over-supply situation which heralded the onslaught of the 1990 recession. The danger lies in demand… and the determination of government to spend their way out of the recession by embarking on projects lacking any other rationale, but whose impact threatens to destabilize the supply/demand equilibrium by encouraging building that is not required.
The 1990 recession lasted for two years: GDP dropped by 3.2% in the first year; growth was almost non existent the following year. Commercial property prices in Atlantic Canada plunged during that period. It took 5 to 9 years from the start of the recession (apartments 7 years, industrial 7 to 8 years, offices 8 years, retail 9 years) before demand returned. Recovery to pre-recession capital values took 10 to 15 years. Today there is little surplus supply so the fall in property values will be driven by softening occupier demand; we do not expect the same erosion in capital values. However the reduction in credit availability, its high cost and the lack of confidence engendered by the financial crisis is also persuading investors to reprice risk. We project that overall capitalisation rates will increase by 100 to 200 basis points (1% to 2%) over their 2006 levels and that the spread between the various property types (apartments, industrials, office, retail) will widen again to historic levels. Market values will fall by 10% to 25% depending on the property type and its location. The recovery in capital values will be rent rather than yield driven, and will track the recovery from the recession.
That Sinking Feeling
The effects of climate change are particularly pertinent for Atlantic Canada. In common with many cities in the region, Halifax's Lower Water Street is just 2.4 metres (8 ft.) above the tidal benchmark known as chart datum. During spring tides, water enters the basements and crawl spaces of the older buildings lining the street. What does climate change mean for coastal communities in the region? We set our Economic Intelligence Unit to work to find out.
Property owners can expect extreme weather conditions to occur with much greater frequency. In urban areas, storm water systems are unlikely to be adequate to deal with the more extreme rainfalls that will occur. The Maritime Provinces face a dual problem: their land mass is sinking; sea levels are rising. The impact of hurricanes such as Juan, which hit the region in September 2003, will be much more pronounced in the future. The resultant storm surge can be expected to cause extensive flooding particularly in low lying cities such as Charlottetown. Anything below the 5 metre contour should be viewed as being at risk of flooding.....and the problem will increase as time rolls by...
WHERE HAVE ALL THE WORKERS GONE? GONE TO ALBERTA EVERYONE!
Well actually no, many still head for Ontario, to replace workers who have headed for Alberta. But the effect is the same: Atlantic Canada is bleeding workers. This haemorrhage is getting worse: during the twelve month period ending 30th June 2006 the region lost almost 1% (12,213) of its workforce to greener pastures elsewhere in the country. Very few return, and those that do so are widely quoted in the media as criticising this region's high taxes. Since it is the younger workers who are more mobile, the out migration is contributing to the aging of the population. Births still outnumber deaths, and immigrants from other countries outweigh emigration, but not in sufficient numbers to redress out migration to other provinces. We estimate that the region's working age population fell by 2.07% over the five year period ending 30th June 2006.
Although there is anecdotal data confirming the out migration to other provinces on a scale unprecedented in recent history, all of us now know of neighbours, colleagues, friends and/or relatives who have migrated within the past twelve months; the impact has been masked in the metropolitan centres by an influx of people from the countryside. Humble Hodge has happily swapped his hovel of thatch and wattle for an eyrie in the sky at one of the apartment high-rises mushrooming in the region's urban landscape.
Implications for Real Estate
What are the implications for real estate in the Atlantic Region as the working age population declines? We first realised something was afoot when Public Works and Government Services Canada (PWGSC) commissioned us in 2006, to undertake a survey of office and warehouse rental space in each of the major metropolitan areas in the region. Our Economic Intelligence Unit surveys every office building (≥ 10,000 ft.²) and warehouse (≥ 20,000 ft.²) available for rent in St. John's, Halifax Regional Municipality (HRM), Charlottetown, Moncton, Saint John and Fredericton. The first surveys were completed in June 2006: a second series of surveys was completed in December 2006. The June 2007 surveys are now in progress. The surveys are the most comprehensive ever conducted in the region. They capture information on property ownership, building size, occupancy level, rental and operating expenses on an individual property basis. The data is entered into an "intelligent" geocoded database, specifically designed for this project. Our contract with PWGSC provides that we retain ownership of the data. We are thus able to provide participants in the survey with the survey results at no cost. We have had tremendous participation by property managers: virtually all responded with information; and we are continually improving the database to make it easier for them to participate.
PWGSC also provided us with data from similar surveys conducted for them during the period 2001 to 2005 by Royal LePage (now Cushman & Wakefield LePage). Since these surveys encompassed a much smaller population of buildings and were conducted variously on six month or annual cycles, we developed heuristic algorithms to create a time series based on a consistent twelve month cycle. These algorithms, (1) compensate for the missing data, (2) utilise the existing data to calculate demand for the entire population of properties included in the Turner Drake surveys, (3) ensure that the historical data will improve as we conduct subsequent surveys. The Federal Government, through PWGSC, has thus enabled our Economic Intelligence Unit to provide developers and investors with access to a resource of a breadth, depth and quality never before available in this region. The algorithms, our 2006 survey, and the earlier Royal LePage surveys, allow us to compute market demand for office and warehouse space in each of the six metropolitan areas for the years 2001 through 2006.
During the period 2001 to 2006, aggregate demand in the six major metropolitan areas decreased by 1.69% (warehouse) and 1.27% (office): this despite the fact that the total population of these areas increased by 3.82%. Perhaps more significantly, the Atlantic Provinces' working age population decreased by 2.07%. Real estate in the region is going to face significant challenges if the population of working age continues to decline. There has been no co-ordinated response yet by the provincial governments: they continue to compete with each other in a region with half the land mass and population of the next smallest province. Such responses as have occurred focus on draining tax monies from the region's successful firms to subsidise companies from outside the region who wish to relocate here, and billboard advertising in Alberta designed to persuade workers who have migrated there, they have made the wrong decision.
The changing pattern of demand within the region reveals systemic changes due, for example, to shifting methods of conducting business following the 1990 recession. This has meant that Moncton has continued to grow as a distribution centre for the three Maritime Provinces. It has captured 305,409 ft.² of warehouse demand during a period when Halifax CMA lost 313,968 ft.² and Fredericton CMA lost 69,670 ft.². Moncton's central location was further consolidated by the completion of the Confederation Bridge to Prince Edward Island in June 1997 and the twinning of the Trans Canada Highway through New Brunswick, expected to be completed this Fall.
We have built a supply and demand model to assist clients with their asset management. At present it is confined to office and warehouse property. It captures existing and past supply and demand from our surveys and utilises that information, together with current and projected economic data, to forecast vacancy, rental rates and operating expenses in each of the six major metropolitan areas in Atlantic Canada. The model is driven by recent historical data together with intelligence on projects currently under construction or in the pipeline. We use a five year forecasting horizon. Our model is pragmatic rather than esoteric: it favours a practical methodology built on our thirty years' observation of markets in the region rather than arcane mathematical formulae, unless of course we exhaust our ideas, in which unhappy event we rely on obscure mathematical techniques, entrails from the odd chicken, a crystal ball, any clean palm, tarot cards, pontificating provincial politicians (well perhaps not the latter)
TEMPLES TO A DYING DEITY?
On July 15th we completed the most comprehensive study ever undertaken of the Atlantic Region's office and industrial real estate markets. The study was conducted by our Counselling Division's Economic Intelligence Unit. Over a five month period, our ten person team of researchers, data entry staff and a programmer, surveyed 30 million square feet, spread over 606 buildings, located in six urban agglomerations (Moncton, Saint John, Fredericton, Charlottetown, Halifax, St. John's). They had great support from the real estate community and were able to capture information on the building sizes, occupancy levels, rental and operating expenses, for virtually every building surveyed in the Maritime Provinces, and 86% of those in St. John's, Newfoundland. (We are still working on the hold-outs in St. John's and have now hired very tall, muscular and mean researchers, and when we say "mean" we mean, mean. So wait for that call and say 'sir' dammit). If you participated willingly in any of the twelve surveys we will be pleased to send you a copy of the raw data in .pdf format, by email. For Prince Edward Island and New Brunswick, contact Nigel Turner (email@example.com). For Nova Scotia and Newfoundland, email Michael Lim (firstname.lastname@example.org).
Public Works & Government Services Canada (PWGSC) commissioned the market survey to assist their leasing officers. They provided us with data from similar surveys, on a much smaller population of buildings, undertaken during the past five years. Some of these surveys were on a six month cycle, the remainder were conducted annually. In order to combat the missing data and missing surveys, we developed heuristic algorithms which allow us to create a time series based on a consistent twelve month cycle. The algorithms (1) compensate for the missing data, and (2) ensure that the historical data will improve with the subsequent market surveys we are to conduct as part of an ongoing program.
In order to best utilise the information from the market surveys, we designed, built and populated an intelligent, geocoded database. This Market Survey Database has now been integrated into our proprietary Compuval™ family of intelligent databases (they chat to each other; really!). Together they provide our Valuation and Property Tax consultants with an unsurpassed knowledge of the property markets in the region.
Part of our mandate in undertaking the assignment, was to project future supply and demand for office and warehouse space in each of the six communities. This exercise required that we analyse economic conditions over the past five years and the response of the office and industrial markets to them, take stock of current conditions, and utilise the foregoing data to project ahead for the next five years. This analysis took place in the face of two events which have, and may, forever change the face of real estate in Atlantic Canada: the 1990 recession, and the escalating outward migration of population to more friendly economic environments such as Alberta.
The 1990 recession hit real estate markets east of the Rockies, hard. It also resulted in a systemic shift in the way business was to operate; flash was out, function was in! For offices, this meant that accessibility and flexibility assumed as great, or greater, importance as prestige and a presence in a Central Business District (CBD). The growth of broadband Internet and mobile phone use during the 1990s gave workers greater mobility. An accessible location with free on-site parking often outweighed the advantage of a downtown location. Shareholder concerns about lavish office space, which had surfaced during the recession, resulted in a more Calvinistic attitude: firms that had sought prestige office space now preferred something less ostentatious, and the rental premium captured by this type of space melted away. The more vigorous economic environment engendered by the recession, and the improvement in, and lower cost of, communications spawned outsourcing and the relegation of "back office functions" to call centres. The latter were better located in business parks because of lower land and construction costs, the availability of ample free on-site parking, and their proximity to residential areas favoured by their usually younger and less affluent staff. In 2005, the rapid rise in energy costs once again focussed tenants' minds on conservation; "green" buildings started to rise in prominence (Newsletter Vol. 2 No. 82). Design requirements now favour unostentatious lobbies and a secure, pleasant working environment with sprinkler systems, natural light, windows that open, and energy efficient climate control mechanisms such as heat pumps. Broadly speaking, the older the building, the less likely it is to reflect the design and locational requirements desired in today's business environment. Buildings erected prior to 1990 in particular, are unlikely to do so.
The 1990 recession created a sea change in the way warehouse space was utilised in Canada, towards fewer but larger facilities, located at key distribution centres. This change was lent impetus in The Maritimes by (1) the completion of the Confederation Bridge in June 1997, which for the first time provided a fixed link from Prince Edward Island to mainland Canada thus rendering warehousing on the Island less necessary, and (2) the twinning of the Trans Canada Highway through New Brunswick during the last five years, to connect to Nova Scotia's divided highway system. Design requirements now favour warehouse clear heights of 24 ft. to 30 ft. versus the 18 ft. height common before 1990, and better climate control systems to cope with humidity in a warmer, wetter environment. The standard 40 ft. long containers have been replaced with 53 ft. long boxes, thus necessitating more manoeuvring room around the buildings. Structures erected before 1990 are unlikely to reflect these requirements.
BRIDGING THE GAP
A Canadian's home is his castle? Fortunate then that most are blissfully unaware of the precarious nature of their "ownership", held as it is at the whim of the Crown. At any time the Federal or Provincial Governments, or any body designated by them, may decide to exercise that whim and regain ownership. Sometimes they will compensate the property owner: often-times they will not, though usually this occurs when they abrogate only part of the bundle of property rights that, in total, constitute property ownership. The latter often occurs when the Government imposes planning controls, rezones the property, or moves the serviceable boundary, as hapless owners in the Halifax Regional Municipality are now finding out to their cost. Property ownership today is dynamic; protection of property rights is not embodied in the Canadian Charter of Rights and Freedoms so it is necessary for owners to aggressively defend the rights they do have by virtue of statute or common law. Vigilance should be the order of the day! Yet most property owners are passive, anxious to co-operate, willing to subjugate their own interests to the common good, quietly confident that they will be treated fairly by any government department needing their property for a new road or redevelopment scheme. In our experience, this confidence is rarely warranted. With the possible exception of the Federal Government, most acquiring authorities conduct their activities based on a strategy of minimising their own inconvenience and cost. No more so is this in evidence, than in New Brunswick. There, the Department of Transportation disports itself in a manner that is often opaque, frequently misleading and at times, threatening. Pity the poor property owner! It is our job to bridge that gap. We currently have two teams working for private property owners in the province, both led by Chartered Surveyors (Fellows of the RICS) and accredited appraisers. Lee Weatherby, a veteran with twenty nine years experience of expropriations, and an outstanding expert witness, is working for owners affected by the twinning of the Trans Canada Highway between Grand Falls and Edmundston. He is assisted by colleague Charlie Dunn. That team is also working for owners affected by the Gunningsville Bridge project in Riverview. Mike Turner assisted by colleague Nigel Turner, is advising owners impacted by the Woodstock to Perth Andover section of the Trans Canada Highway realignment. Mike too is an expropriations veteran and an experienced expert witness.
When the acquiring authority first approaches you to open negotiations for the purchase of part, or all, of your property, rarely will they mention the word "expropriation". They may not be motivated solely by a desire to spare your feelings. The Federal and Provincial Expropriation Acts may be draconian in their powers, but they do have many redeeming features. They establish the legal framework within which the acquiring authority is obligated to act, and that framework is designed to protect your rights. The Acts usually stipulate too that the expropriated party is entitled to the protection and support afforded by proper legal, real estate and other professional advice. Unfortunately, the cost of that advice is not borne by the acquiring authority unless your property is expropriated. Nor are you legally entitled to the other protection afforded by the Act until your property is expropriated. Previously, we had advised property owners that they should proceed to negotiate so long as the acquiring authority committed itself, in writing, to afford the property owner all the rights and privileges conferred by the Expropriation Act. Based on our experience with the New Brunswick Department of Transportation, we no longer believe this to be sound advice. It is our opinion that property owners should not rely on such assurance, and should instead refuse to negotiate until their property has been formally expropriated, only then will they enjoy the security afforded by our court system. Property owners have a natural tendency to assume that the acquiring authority will act in their best interest, or at the very least treat them fairly. This sometimes happens, but in our experience it is the exception, rather than the rule. It would be wise not to take any promise by any acquiring authority at face value ... even if it is in writing. Nor should you assume that the person negotiating with you is knowledgeable in real estate or your business, or that any appraisal which accompanies their offer of compensation bears any relationship to your loss. It is common practice for the acquiring authority to commission a "baseline" appraisal, particularly in rural areas. The NBDOT does so, as do other bodies such as the gas pipeline companies. The purpose of a baseline appraisal is to establish the "average" land value along the route of the new highway or pipeline. These appraisals ignore depreciation in property value due to, for example, "injurious affection", usually the most substantive part of any claim. Yet the acquiring authority may utilise their baseline appraisal figure to demonstrate the "reasonableness" of their offer, which will usually be in excess of their "average" land value and often be in excess of its market value where only part of the property is being acquired. The gloves usually come off if the property owner requests that the acquiring authority commission a "property specific" appraisal to address the actual loss suffered by that particular property. We are told that the usual response to such a request is a warning that it may result in lower compensation than that already offered. If the property owner persists, the acquiring authority will then commission an appraisal from a private company. However it is NBDOT's practice to place constraints on the assignment, and thus preclude the private appraisal firm from considering all of the items which are properly compensable under the Expropriation Act.
OH LORD! BENCHED AGAIN!
On July 19th 2004 the New Brunswick Court of Queens Bench heard an appeal by Service New Brunswick, the provincial assessment authority, from a decision by the Assessment and Planning Appeal Board which had lambasted SNB's methodology of including the 15% H.S.T. (a "pass through" tax similar to the G.S.T.) in its calculation of assessed value as "an affront to common sense". The Judge agreed with the Board and in dismissing Service New Brunswick's appeal reiterated that "It would be an affront to common sense that the cost of an item could be increased by the amount of a local tax which is rebated to the payer, with an offset of one with the other". Service New Brunswick's Director of Assessment, Mr. William Morrison, was in court to hear the decision, which also awarded costs to the Respondent. This case was an appeal of the latest, in a series of scathing decisions by the normally reticent Board, which has called into question the judgement, competence and experience of SNB's assessment staff (Newsletter Vol. 2 No. 76).
In June 2001 a Board decision (Baxter Foods Limited versus Director of Assessment) dismissed SNB's argument that the functional inadequacies of an old dairy plant should be ignored because their assessor "was only doing a bricks and mortar appraisal". The Board, whilst noting that the assessor had "prepared an excellent and thorough Building Valuation Report" also decreed that "functional and economic" depreciation had to be reflected in the assessed value.
In a November 2001 decision, (NB Publishing Co. versus Director of Assessment) the Board plainly thought it ludicrous that facts, known before the assessment date, were ignored by the Assessor in arriving at the assessed value. In tones of mounting incredulity the Board observed that "it was the assessor's position, and obviously that of the Respondent (Service New Brunswick) that no matter what you found out what was to happen after January 1st of any particular taxation year, you must ignore it! He believes the Assessment Act requires him to focus on conditions on January 1st, 1998 no matter what happens, no matter how catastrophic an event takes place on January 2nd, 1998 and, even if you knew this event would happen in November of 1997".
The assessment appeal involved a multi-storey printing plant, still being utilised for this purpose, but with the widely published decision having already been made to move the process to Moncton.
A December 2001 Board decision (Small Fry Snack Foods Inc. versus Director of Assessment) was even more forthright noting that Service New Brunswick's "Exhibit D-13, which was presented as some sort of valuation report, is woefully deficient in virtually every respect. Because it lacks a signature, the Board does not even know who is the author" and "It must be stated this document (it is difficult to call it a report) was full of misinformation, partial information and error". Whilst the only witness called by Service New Brunswick was a senior level assessor with 25 years experience, "her experience with industrial properties like that of the Appellant was limited".
The December 2003 Board decision referred to earlier (Food City Limited versus Director of Assessment) involved the use, by Service New Brunswick, of the Boeckh costing system to calculate the assessed value. This is a well established technique for ascertaining the value of "specialised property"; real estate that is often built by the occupier to fulfill a specific function such as a saw mill, oil refinery, and in this case a large food distribution warehouse and supermarket. Even though SNB had utilised the Boeckh costing system since time immemorial they had not realised that the costs were inclusive of the H.S.T., a "pass through" tax similar to the G.S.T., but levied at 15% instead of 7%. The Board decision observed that "This rather startling revelation came to light when two local agents of the Respondent (Service New Brunswick) advised the Board they were unaware of this". Once they discovered that their costing figures included H.S.T., SNB did a flip flop and decided that this was the way to go. Since property owners engaged exclusively in commercial activities are entitled to full Input Tax Credits for the H.S.T. they incur, the tax is a "wash". The Board was plainly outraged by SNB's tactics and said so; the Court of Queens Bench concurred.
(Very Late) Spring 2003
URBAN DECAY - THE WRITING'S ON THE WALL
Graffiti first found a home in Atlantic Canada during the late 1990s. On January 11th 2000 we wrote to the Halifax Regional Municipality advising them that their $100,000 clean-up problem in Halifax Central Business District would explode into a $1 million mess unless they took prompt action. Ours was not the first voice raised, the councillor for the area had already voiced her concern a few months previously. The C.B.D. is a treasure trove of heritage buildings: all were threatened. The late Kate Carmichael, Downtown Halifax Business Commission's energetic Executive Director threw herself into the fray, organised an Anti-Graffiti Clean-up Day and voiced her alarm "A downtown covered with graffiti says a lot to tourists and visitors. It says we don't care. It creates the impression that many areas are unsafe, and it destroys Downtown Halifax's unique heritage identity. It is time for businesses, citizens, H.R.M. Council and H.R.M. Police to say 'enough is enough'". The media treated the matter as an "is it art, or vandalism?" issue. City fathers smiled indulgently, and went back to sleep. A similar reluctance to treat the matter seriously prevailed throughout the Atlantic Region; graffiti spread like SARS. Two years later H.R.M.'s new Mayor and Council finally launched the Community Response Initiative, an attempt to rid us of "graffiti, scrawl, vandalism, litter and other incidents of property damage and destruction". Gary Martin its Co-ordinator, now estimates that annual clean-up costs, including law enforcement, are "easily $1 million". He, we and you are losing the battle. Does it really matter? There is now a body of empirical data which explores that very question.
Graffiti varies in complexity from simple scribble to complex paintings: the higher in the hierarchy, the greater the prestige ("fame") which attaches to the writer. The latter can elevate his "fame", literally, by creating "heavens" tags on inaccessible locations such as highway signs, the top of power station walls, etc.
In the early 1990s New York City Mayor Rudolph Giuliani and his first Police Commissioner, William Bratton, declared war on graffiti and minor misdemeanours. They revisited the "Principles of Law Enforcement" first enunciated by Sir Robert Peel, founder of London's Metropolitan Police (Scotland Yard) in 1829, that "the basic mission for which police exist is to prevent crime and disorder" and launched their "broken windows" initiative. Crime rates in New York City plunged. Between 1990 and 1998, murder declined by over 70%, robbery by over 60%, total violent offences by over 50%, and total property felonies by over 60%. These declines were the steepest ever recorded. Indeed the slide in murder was so abrupt it significantly affected the national murder rate.
Graffiti initially hits the owners of residences and small commercial buildings the hardest because their properties are the most accessible and hence very vulnerable. Ultimately however we all suffer. Atlantic Canada stands to lose more from graffiti than the rest of the country because we are the custodians of its oldest buildings. It is often impossible to eradicate graffiti without destroying the original stonework. Add to that, the fact that resources are scarce and must be diverted from more useful ends such as health care and education to remedy vandalism, and we face a no win situation.
THE ENRON BOMB
"To be efficient, markets need reliable information. Enron shows the extent to which they are not getting it." The Economist, February 9th., 2002.
The fallout from the Enron debacle continues to spread around the globe. The bankruptcy on December 2nd. 2001 of America's seventh largest company and the behaviour before and after the failure, of its auditor Arthur Andersen, the world's fifth largest accountancy, were initially overshadowed by events in Afghanistan. No longer! As the battle against al-Qaeda wanes, the spotlight is increasingly focused on the transparency, honesty and, well accountability, of accounting practices in the United States and worldwide. In part it is fuelled by anger at a system which allowed senior managers at Enron to pocket millions, shortly before the "restated" accounts rendered the pension plans of less enlightened employees virtually worthless. No doubt other Enron shareholders were pretty peeved too.
An Excess of Enron
Enron and its siblings are likely to have at least as large an impact economically and geographically as the events of September 11th. The effect will probably be of greater longevity. If one cuts through the wailing, breast beating and gnashing of teeth, there appears to be general agreement that the auditing function failed because of the following weaknesses: (1) Auditing is self regulated;(2) The accounting firms earn considerable revenue for consulting activities from the firms they audit; (3) Five accountancy firms do the bulk of the auditing work.
There is a clear parallel between the relationship of appraisers undertaking portfolio valuations for asset managers, and accountants auditing companies. Although no real estate body has yet reacted to the crisis of confidence engendered by Enron, by happy coincidence the Royal Institution of Chartered Surveyors had already struck a Working Party to study the very issues which have now surfaced in such spectacular fashion. The RICS is the world's premier real estate body with 110,000 members in 120 countries. The Working Party, chaired by Sir Bryan Carsberg a Chartered Accountant, published its report in February 2002. It drew upon research conducted by the Universities of Reading and Trent in the United Kingdom on real estate appraisals carried out for financial reporting purposes, commissioned by investment fund managers (pension funds, insurance companies, unit trusts) and property companies. The RICS extended that research to the Appraisal Institute, the largest professional body of appraisers in the U.S.A., and to auditor members of the Institute of Chartered Accountants of England and Wales. The RICS noted that many of the issues highlighted were also applicable to appraisals for secured lending purposes for banks and other financial institutions.
The findings of the Carsberg Report have applicability to Canada particularly as they relate to self regulation (an oxymoron!) and client influence on the appraisal. Our Federal and Provincial governments have shied away from dealing with these matters despite the collapse of many prominent Canadian financial institutions based on faulty real estate loans, during the past twenty years (1983-Crown, Greymac and Seaway Trusts: 1985-Northland Bank and Canadian Commercial Bank: 1992-Central Guaranty and Shoppers Trust: 1993-Confederation Life; Prenor, Security and Dominion, Trusts: 1993-Royal Trust saved by Royal Bank: 1994-Monarch Trust).
Everybody in Canada has paid dearly for the failure of the financial industry and the appraisal profession to clean up their act. We continue to bear that cost today: it's as if the sorry parade of financial institution failures from 1983 to 1994, never happened. At the time we wrote to the Federal Canada Deposit Insurance Corporation (CDIC) as well as the Federal Office of the Superintendent of Financial Institutions (OSFI) suggesting that "most of the problem of biased and inflated appraisals could be avoided if real estate loan regulations mandate that the appraiser contract directly with the mortgagee rather than the mortgagor. This will remove an obvious conflict of interest". CDIC and OSFI both responded, essentially saying it was the other's responsibility and that neither could govern the conduct of appraisers since this was a Provincial responsibility!
The cost of the bank, trust and life company failures was borne by every taxpayer, bank user, policy holder in Canada, as well as by the creditors of the institutions that failed. The bank and trust companies were, and continue to be back-stopped by the CDIC. The life companies created an industry (i.e. policy holder) financed body, the Canadian Life and Health Insurance Compensation Corporation (CompCorp) in January 1990, to perform a similar role to the CDIC. The biggest cost to Canadians however, lies in the difficulty and cost of financing real estate. Prior to 1990, banks and trust companies were the primary source of finance for commercial mortgages of $1.0 million: the life companies performed the same function for larger loans. The commonly stated loan to value ratio was 75% of the property's market value. Today all commercial mortgages are more difficult to obtain even at the current loan to value ratio of 65% and loan sources continue to evaporate, particularly in Atlantic Canada for $0.5 million mortgages. Although the credit unions have taken up some of the slack, mortgages are less available and more costly. The life companies have only recently returned as a source for higher value loans ( $2.0 million), joining a couple of the banks that stayed the course, and conduit financiers such as Merril Lynch, GMAC, et al.
Despite the foregoing: (1) Self regulation has actually been legislated in New Brunswick and Nova Scotia!; (2) Conflicts of interest are the rule, rather than the exception; and (3) Asset managers almost always request Draft Reports, the conclusions of which have to be discussed prior to the issuance of the final figure: most insist on this commitment before they will commission the assignment.
SEPTEMBER 11TH: THE AFTERMATH
The economic effects of September 11th on this region, pale into insignificance when measured against the pain suffered by those personally effected by the terrorist attacks in New York, Washington and rural Pennsylvania. But, coupled with the recession and the all too recent memory of the 1990 property meltdown, they do raise the spectre of the latter again. How real is that possibility?
The effect of the terrorist attacks in the United States was felt immediately in Atlantic Canada as air traffic destined for American airspace was diverted to airports around the region. The second wave occurred shortly thereafter as cross border traffic slowed to a crawl impeding exports; as cruise ship passengers cancelled trips during the busy Fall season; as tourists stayed at home; and as the airline industry struggled to adjust to the new reality. We are now experiencing the third wave as industries not directly impacted by the cutbacks in air travel, tourism and cross border trade, experience the knock-on effect. Businesses have placed expansion plans on hold and some have started to lay off staff. Some of this decline in economic activity was coming anyway, but the events of September 11th have escalated the downturn and will deepen it. The anthrax contamination in the United States continues to dampen economic activity in this region too, often to the point of absurdity. Buildings in Halifax have been evacuated because of dust on a civil servant's computer keyboard, in a workman's boot, on a laundry room floor. Are we now facing economic Armageddon? We think not. Indeed we venture to suggest that such unremarkable events as dusty civil servants, dirty boots and soapy floors will shortly command little attention. What will endure is the jolt to the economy as the economic downturn continues.
Fools rush in where angels fear to tread. These are our predictions:
Hotels and motels are the most vulnerable market and have been hit during the busy fall season. Property values will fall as investors discount revenue per available room (RevPAR) over the next 24 months and demand higher return on investment (ROI) to compensate for the extra risk.
Retail, particularly Community Shopping Centres will fall in value as shoppers focus on big box retailers during the economic downturn.
The industrial markets will generally hold their value. Some specialist types of industrial property such as airport facilities will experience declines in value.
The office markets will hold their own but rental growth will be flat for the next 24 months. Trophy buildings will no longer be able to claim the same rental premium and rents will soften slightly.
Apartment rents will be flat for the next 24 months but demand for apartment buildings will increase and prices will rise as purchasers take advantage of low mortgage rates to leverage their return on equity.
Governments at all levels misallocate resources: deprived of the profit motive and accountability, politicians and bureaucrats expend tax dollars on projects that often inflict economic damage with no measurable benefit to anybody but themselves. It behoves us all to remedy this situation by minimising the money we direct into taxes. Our Property Tax Division shows you how.
Our Valuation Division fuelled by Tim Hortons, criss cross the Atlantic Region and Ontario. "Market Intelligence" focuses on the real estate markets in two cities in our service area.
It's a litigious world, but not to worry, our Counselling Division has a "very strong bench", to quote a legal client. Sable gas is thrusting its way into every corner of the Maritimes; and Provincial governments, especially New Brunswick, are twinning major highways. If you are effected, read "A Civil Affair".
We conclude our article on "The Pre-Millennium Meltdown", the Wharton study on the global real estate market collapse of 1990, and inject some ideas of our own.
Our Brokerage Division is part of New America International. NAI was the first real estate organisation to utilise the Internet for B2B: they've just raised the ante.
LET THE GOOD TIMES ROLL!
It's been a tough ten years for everybody involved in real estate but at long last the tide has irrevocably turned. During the dark days that followed the 1990 market meltdown we felt like the priest who discovers there is no God. The very mention of the words "real estate" caused bankers to blanch, mortgage officers to moan and clients to cower. The sight of our own banker visibly shrinking from us across the table, as though we had some dreadful contagious disease, is indelibly etched in our memory. To all of you who kept the faith and refused to believe in Chicken Little; good on you! Real estate has bounced back. How long will the recovery continue? Read the continuation of the "The Pre-Millennium Meltdown. Will it Happen Again?" in this issue of Newsletter.
The recovering economy brings rising taxes as assessment authorities rush to increase property assessments, and municipalities refuse to reduce tax rates. You can expect large tax increases next year unless you take action now. Our Property Tax Division tells you how.
Our Valuation Division are a peripatetic lot: Saint John one day, St. John's the next. The falling cost of communications and travel ensure that we can provide clients with the same seamless service, no matter where their property is located. We have thumbnail sketches on the property markets in several major cities in the Atlantic Region.
Pipelines are thrusting their way through the Maritimes, and causing concern, apprehension and aggravation to some property owners. Pipe Dreams explores their right to compensation.
World Wide Web; Accurate, Accessible, Helpful, Topical ?
Not the words perhaps that readily spring to mind as you browse the Internet: "Swimming through molasses" is a more accurate description than "surfing the net". That said, we are heavy users and enthusiastic proponents of the Internet. In fact, given the wide geographic area we serve, it is difficult now to imagine working without it. Call us about a highway widening in Grand Falls and we'll pull up your property records and site plan to assess the situation, whilst we discuss it over the phone with you. Task us with identifying potential uses for a two storey cold war bunker in Debert and we'll zip around the world to view similar facilities and their uses. The Internet contains a motherlode of information, but extracting it is akin to mining gold, you have to move a tonne of muck to get a gramme.
We launched our new web site www.turnerdrake.com on April 1st (the date is not significant). The web site is high on content and low on graphics; it's designed to deliver information (lots of it) in a timely manner. You don't have to troll through a morass of brochureware for that nugget of useful information, we've built a site that is easy to navigate. We've even provided a search engine for those impatient souls who prefer to cut to the quick.
If you are a lawyer with clients effected by the Trans-Canada Highway widening or the Sable Gas pipeline, we track the latest expropriation case law for you.
If you own or occupy property in our service area, i.e. the Atlantic Provinces and Ontario, you may wish to check on your right of appeal and the relevant case law. Since most property tax case law is not reported, our web site provides you with a unique source.
Check out our News and Research section for articles that have appeared in past issues of Newsletter on Reits, Contaminated Properties, the PEI Fixed Link, Baby Boomers and more.
Our web site also includes all of the properties we have for sale and lease, posted on the day they are listed. It also has links to New America International (NAI) our global partner. NAI now has offices in 28 countries in North, Central and South America, Europe and Asia. NAI is a real estate leader in electronic commerce with impressive Internet and Intranet sites.
We've packed so much information onto our site, we anticipate most visitors will wish to print out the topic of their choice, rather than read it on the screen.
Check us out, we're a good looking bunch, modest too! www.turnerdrake.com. Get in touch!
Remember when each year used to have twelve months, 365 days, 8,760 hours and, well you get the idea. 'Tis no longer the case, time has shrunk, barely do we welcome one new year, and the next is upon us. All of us are now attempting to do more with less and whilst the official statistics on productivity cast doubt on the effectiveness of our collective effort so far, a sea change has occurred in the way business and government operates. The market meltdown in 1990 toppled real estate from its pedestal. No longer an icon of corporate stability and wealth; its role has been subsumed to the operational imperatives of the enterprise. Real estate has been relegated to the ranks; it is now just another asset which has to earn its keep every hour of every day.
Many businesses have divested themselves of their real estate, preferring to rent rather than own. Real estate investment trusts (Reits) have been a useful vehicle for facilitating this process. We continue to place Reits under the microscope in this issue.
All businesses, and some levels of government are attempting to reduce the cost of operating their real estate assets. Our Property Tax Division is saving clients millions of dollars annually. Unfortunately we are unable to report our most spectacular successes in Newsletter, it is too public a forum. However it is not unusual for us to save a client several hundred thousand dollars a year on a single property. This issue brings you up to date on property taxes in the four Atlantic Provinces and Ontario. With the falling cost of travel, we can now offer a cost effective property tax service in most of the country. Tom Mills is our property tax guru. However we have delegated responsibility for New Brunswick to Giselle Kakamousias and Ontario to Rick Escott. All can be reached at 1-800-567-3033.
Risk management is a challenge, compounded by property ownership. If you own real estate, read our article on fire insurance. It won't help you sleep better but you will be able to fine tune your policy to better fit within your risk management/cost constraints. If you require further information Mike Turner (1-800-567-3033) may be able to help (maybe not!).
Greater competition breeds er, fear! Appraisers in Nova Scotia have witnessed a decline in their business over the past decade because of emili, CMHC's risk management system which virtually eliminates the need for residential appraisals. Their misery has been doubly compounded. The private sector has increasingly turned to more knowledgeable sources for commercial real estate advice. The real estate market has, and is, changing rapidly and appraisal firms used to raking through the dying embers of past transactions have been unable to keep up. As a result property owners have sought more pertinent advice. They have turned instead to commercial brokers, property managers and management consultants. In a desperate attempt to force property owners to utilise only their services, the Nova Scotia Association of the Appraisal Institute of Canada ever so quietly initiated a private members' bill on 23rd November 1998 to grant themselves a monopoly on "appraising" in the province. Did they succeed? Read on and find out!
Looking for office space in Greater Halifax? Want to invest instead? You may be in for a surprise. Our Brokerage Division casts some bread on the water for you.
What a summer! We were thrice blessed here in Atlantic Canada: the weather, H.S.T. and the Flink, well twice only in P.E.I., no H.S.T. for them yet. As the economy gathers momentum H.S.T.'s slaying of the P.S.T. will we believe, provide the region with a competitive edge. The huge investment in road communications, the twinning of the Trans Canada Highway in New Brunswick and Nova Scotia and the Fixed Link joining P.E.I. to the mainland, will also help shrink the Maritimes into a single economic unit. For companies such as ourselves that operate most efficiently from a single location it means that every major city in the Maritimes can be reached by road in a morning. Telecommunications too have erased the frictional effect of distance; thanks to the Internet we can search New Brunswick property records as easily as those for Nova Scotia. The mineral riches of Voisey's Bay, Hibernia's oil fields and now gas off Nova Scotia, Canada will want to join us before long, thank goodness for Quebec.
They savaged the good Doctor in Nova Scotia this summer; brains and principles, a lethal combination for a politician! Both are absent when it comes to property taxes, this issue of Newsletter has advice on how you can savage them. Fire insurance, hardly a burning issue unless you are so favoured, we have some thoughts to quench your enthusiasm. Lasercad™ , our new service for asset managers has a pied piper effect on tenants: it's useful for dispute resolution too. Every morning the faithful kneel and pray, so do we, our new computer system now works, most of the time. Expropriation, more silliness from simple servants and how to survive it. Contaminated property, a further article in our series. Finally, the dark secret we can hide no longer, our brokerage team are lunatics dedicated to serving our clients: little wonder we make no money.
(Early) Spring 1996
We started Newsletter in March 1978 with the modest goal of producing a witty yet erudite publication aimed at a target audience of sophisticated (and charming) group of connoisseurs with the sublime good taste to own property in Atlantic Canada. It is gratifying to record that we have met our objective (thank you for the kind letter)
There is a considerable amount of angst abroad in the land. The Quebec referendum shook confidence somewhat: the country chopped in two; without Quebec to boot; it doesn't bear thinking about. Get a grip: anybody who opines that they don't care whether Quebec stays or leaves has obviously never visited La Belle Province. We challenge anybody who holds that opinion to sample Quebec City in the spring. Anyone who can view untouched, the majestic panorama of the St. Lawrence from the heights of Dufferin Terrace as evening mellows into night, and hawthorne blossom perfumes the air with heady aroma, is tired of life itself. If your spirits don't soar as the lights of the lower town begin to twinkle through the dusk below, and the upper town starts to throb with Quebecois joie de vivre, well you deserve to live in Toronto.
And whilst we are on the subject of joie de vivre and the lack thereof, our own region is a little down in the mouth these days: particularly Newfoundland and Nova Scotia. Their economies continue to splutter and there is too much real estate, and in the wrong locations. It is easy to forget that we live in a spectacularly beautiful corner of the globe when there is so much uncertainty, so much change. The old order is being swept away at a mind numbing rate by structural changes in the economy, technology and demographics. Property, because it is fixed in location, size and often use, is particularly vulnerable. This and future issues of Newsletter will help you ride this tidal wave by showing how to develop cost effective acquisition, holding and exit strategies for your real estate. A holding strategy must include cost containment: use our property tax feature to control this major expense. We lift a corner of the curtain to peak at the activities of our valuation personnel. We also take a look at a major change in the region's transportation system, the Fixed Link, which will finally end Canada's isolation from Prince Edward Island. The effects on the country are unknown but we use our crystal ball to forecast its impact on the hotel/motel market in the province. We also continue our series on expropriation.
The appraisal industry in Nova Scotia is on the point of collapse. The appraisers have a solution: force consumers to use their services, all they need are some gullible politicians. We appraise that situation for you.
There is an inordinate amount of doom and gloom abroad in the land and an astonishing lack of confidence. Real estate in particular is regarded with all the enthusiasm of a wet Monday. Get a grip Canada; keep a sense of perspective! We have the highest annual GDP growth of any G7 country: we also top the league of the fifteen most highly industrialised nations in the world. Real estate is a bargain, gold waiting to be scooped from the table.
In this issue we take a look at property cycles, and at the opportunities presented by the present situation. We have advice on reducing property taxes and some great news for businesses and property owners in Nova Scotia, some not so good news too! The Provincial and Municipal governments in the province, increasingly desperate for cash, are looking (literally) under every stone to find ways of taxing property owners, whilst claiming to hold the line on taxes. We have the story.
Despite all the brave talk about free trade, New Brunswick has raised another barrier to inter-provincial business by acceding to industry demands for the licensing of real estate appraisers. We have some observations on its impact on property owners in the province. Continentwide though, it is a different picture. The new open skies policy is already having an impact on our business, and probably yours too.
We also focus on the leasing and sale of real estate in the region's capital. Halifax is host to the G7 summit in June and our little jewel of a city is a hive of activity as landscapers, pavers, painters and construction crews rush to complete their work during the next few weeks. Whilst as taxpayers, we question whether any of the work is necessary (the city already looks pretty good to us) government can find less useful ways of wasting our money. Anyway, we're sure that our visitors will find that Halifax is indeed a treasure to discover.
Finally we poke around polluted property and offer our observations on the impact of recent changes in provincial law concerning the environment. And of course it's Spring again: fresh fiddleheads, sweet lobster and cold white wine. Terrific!
UPDATE - Government Debt Keeps a Piling Up!
It's Spring! At last! Life is bursting forth again throughout Atlantic Canada. To celebrate the fact, this issue of Newsletter takes a look at the Moncton Miracle, economic renaissance amidst economic doom and gloom. New Brunswick has weathered the recession better than any of the other Atlantic Provinces: Greater Moncton though is a special case; a little city that has taken several blows below the belt but still comes back fighting. We explain how they are doing it and what it means to the various real estate markets in the community.
As usual we have some advice for recession weary businesses who want to avoid being lumbered with the burden of government deficits, and what a time bomb the latter are proving to be. We also cast some pearls before the swine on the subject of negotiation. Plus our usual insightful comments on the property market, and all for the price of thirty minutes of your time!
Thanks for the fan mail, the other too. Our articles on privatisation (Vol. 2 No. 47) and the Federal Government deficit (Vol. 2 No. 46) evoked a less than rapturous response from some readers. The City of Halifax's Finance Department sniffed at the "claimed increase in efficiency" resulting from N.S.P.C.'s privatisation, whilst the Public Service Alliance of Canada faxed us from Charlottetown enquiring about our country of domicile. It's still Canada guys, that's why we are so concerned. How about you? More encouraging news from the pages of The Economist though. The program of "market testing" in the United Kingdom whereby many civil servants now have to compete against outsiders for jobs such as the provision of information - technology services to government has saved the taxpayers $188 million on $2.36 billion of government contracts. Their experience with outright privatisation has cut government costs by an average of 25% (40% in some instances). Presumably this is why Nova Scotia industrialist and lawyer Sir Graham Day was reported to have told Finance Minister Martin in Halifax recently that he could cut 25% from the operating costs of any government department "in the blink of an eye". Let's get on with it: we don't have any time for further waste, the recent turmoil with the dollar is a chilling portend of the future unless we get to grips with the problem now.
It's Spring! Sure it is; March 21st was the vernal equinox.
The recession is over! Sure it is, Statistics Canada said so.
O.K.! O.K.! But it is Spring; so let your mind slip ahead a couple of months and dream for a moment . . . fiddleheads, freshly picked from the banks of a New Brunswick brook, sweet fleshed lobster recently plucked from the cold Atlantic; and to wash it down a medium dry white wine pressed from grapes nurtured on a balmy Northumberland shore: blossom bursting forth, gently perfuming the air. Aaah! Merry times in the Maritimes again.
Now, back to the present. The recession, like the sooty snow is lingering and we suspect that the private sector is going to be left with most of the shovelling. The politicians have done a grand job of identifying the public debt problem, but so far have tiptoed around the solution with all the enthusiasm of a Vestal virgin in a brothel. As the Globe and Mail succinctly puts it, the choices are delightfully simple: cut the cost of the civil service by 30%, or raise taxes by a commensurate amount. Now, which do you think they are going to do? Right! So do we! So eyes down, we have another bagful of goodies for you.
(Late) Summer 1992
Uh oh! The leaves are turning; it's the Fall, we must have had summer! Let's face it, the past few months have had a dampening effect on even the most gregarious Atlantic Canadian: the recession like the rain, refuses to go away. Oh well, onward and upward. Let's see how we can assist you squeeze some benefit from the present economic climate. First though, we would like to welcome those readers who are receiving this epistle for the first time. Congratulations on joining the crème de la crème. We have to warn you though, this is serious stuff, we need your undivided attention (and business) so inform your secretary that you are not to be disturbed, grab a coffee, close your office door and read!
Our Spring issue (Vol. 2 No. 42) reviewed the sorry state of the hospitality industry in Atlantic Canada and identified how property owners could prise some value adding opportunities out of the current recession. (One client saved themselves $75,000 in taxes by taking our advice, there is a silver lining to every cloud (well some clouds anyway). This issue attempts to answer the question of whether the ethnocentric (Toronto) view of the world, as expounded by the national media, really reflects the situation in Atlantic Canada. It also reviews the industrial real estate market in the region. All of the articles have been researched with our usual meticulous care and months of navel gazing (through a haze of wacky baccy). And, if you are not richer and wiser as a result of reading them, read the damn things again.
Since we are buoyed by delusions of grandeur and have convinced many of you in the far flung corners of the Empire to seek our professional assistance, we have installed a toll free number 1-800-567-3033. Don't be shy; if you have a real estate problem, give us a call.
A Look Ahead to the Third Millennium
Gee, Mr. Mazankowski, you got it wrong, the recession wasn't over! Never mind, we weren't fooled; but then the stench of battle is a little stronger in the trenches.
We live in interesting times: The future is replete with uncertainty. Quebec (will she, won't she?), the recession, the Free Trade Agreement and the globalisation of world markets, a rapidly changing world (and the concomitant metamorphosis of dinosaurs such as General Motors and I.B.M.), Provincial and Federal governments simultaneously faced with huge deficits and tax revolts: it's a script worthy of Machiavelli.
Well, fools rush in where angels fear to tread, so we feel quite comfortable in predicting the events and trends that will influence the property market in Atlantic Canada during the balance of this decade. Some of these events and trends are no more than faintly flickering images in our crystal ball, others have already occurred or are gaining in strength. All present opportunities, and threats, to the property owners of this region.
(Late) Fall 1990
What a year; the inmates have taken over the asylum! The P.M. rolled the dice at Meech Lake, boasted about his winnings and lost the throw! Premier Wells of Newfoundland got in a huff because Quebec politicians thought they were different. Premier Bourassa got in a huff because he thought he was, and so proved he wasn't. In Nova Scotia, land of the high tech toilet seat, Honest John had us in stitches by protesting that patronage was a figment of Michael Zareski's imagination, and then accepted a patronage appointment to the Senate. In Ontario, where they actually take politics seriously, they voted in the N.D.P. In Ottawa, Michael Wilson lectured us on being competitive, and then blew his budget again! What a bunch of comedians; we can't wait to see what they come up with next year!
About 800 of the 3,000 savings and loans associations in the USA are technically bankrupt. Estimates of their unfunded liabilities leap by the month. The latest estimate, by the American Society of Real Estate Counselors, was a staggering $180 billion, up by $30 billion from the amount quoted just two months' earlier in Canadian Business. Unless successfully controlled, the situation will result in the collapse of the U.S. financial system. A headlong rush into real estate resulting from the relaxation of investment controls during the Reagan years, coupled with greed, incompetence and fraud are cited as the reasons for the mess. The savings and loan industry rushed to loan money on real estate, appraised (fraudulently or incompetently) at values in excess of their market value. Thank goodness the financial community doesn't work that way here! Curious thing though, we spend a lot of time analysing properties offered for sale for our Property Investors Club (P.I.C.); most of them appear to be mortgaged well in excess of conventional mortgage loan/value and debt coverage ratios.
There is a fairly strong demand for investment properties in the Halifax/Dartmouth metropolitan area with between $30 and $40 million worth of property under agreement of purchase and sale at the present time. However the majority of these properties comprise a single portfolio transaction. A portion of this demand can be attributed to the continued influx of foreign investors into, eg. the Toronto market. They have pushed down yields forcing Canadian pension, life and mutual funds to search farther afield for "acceptable" returns. Many of these funds are already motivated to invest in the Atlantic Provinces because of their desire to match their geographical investment base with the source of their contributions.
The Office Building Sales Market appears to be reasonably strong despite the fact that the present office space surplus will continue for the next three years. Due to the lack of available product most sales have occurred in areas peripheral to the Halifax C.B.D., though on the Halifax Peninsula. Sales of three buildings totalling 254,000 ft.² are under agreement of purchase and sale at the present time. One major (114,000 ft.²) office building did sell during the year from a national to a regional company.
After the Provincial election, the government followed through with its promise to go to tender for its space requirements. The first tender, for approximately 5,400 ft.², closed recently. Trizec were the successful bidder at $18.60/ft.² gross for part of the 10th floor of the Centennial Building. The latter is a 13 year old Class A building in the Halifax C.B.D. This change of policy by the Provincial Government should attract national investors back into the market. Hitherto it has been desirable to have a local partner if one wished to lease space to the Provincial Government.
Appraising - Setting the Standard
Ho hum! So another Trust Company has gone bankrupt; the victim of overvalued property, just another in a litany that is threatening to become commonplace. In our opinion, it won't be the last; appraisal standards (standards?!) are pitiful and government action appears to be directed to papering over the cracks rather than tackling the real problem. Well, what the heck, if the industry itself won't do it, if government cannot do it, we'll do it.
All of our I.C.I. appraisers operate to our own standard Code of Practice. The enclosed brochure is a synopsis of that Code of Practice, what it is, why we do it and how it benefits you. Use it for "comparative shopping"; it will help you make an informed choice of your real estate consultant.
The chuckle of wavelets against the canoe, white clouds stealing across an azure sky, the whine of mosquitoes (aaah!) the sounds and sights of summer. The commercial real estate market is not relaxing though. In Dartmouth's Burnside Industrial Park, there is a flurry of removal vans as the oil industry pulls out for more hospitable climes. Falling oil prices and the collapse of offshore oil activity are persuading many firms to leave. Most of the offshore related companies were tenants rather than owners, so there is no evidence yet of large numbers of buildings for sale but some are coming on the market. Property owners with buildings rented to single offshore related tenants can be expected to place them on the market before the leases expire. Burnside has experienced healthy growth in property values over the past five years: look for one or two bargains over the next year or so.
Demand for the purchase of investment property continues to be strong in Atlantic Canada, particularly in the Halifax/Dartmouth Area. Despite the prospect of an oversupply of office space in the Halifax C.B.D., good product finds a ready market. However, rental rates are softening as the over 1 million ft.² of office space comes on stream. During the period 1984-1986, 1,078,600 ft.² of new space will be offered on the market, a 5 to 7 year supply (Newsletter Vol. 2, No. 14). Prime space is being offered nominally at $19.50/ft.² but turnkey deals and other tenant inducements are driving this cost down. The Purdy's Wharf (Phase I) comprising 316,900 ft.² has been aggressively marketed and is now reported to be 75% leased. Much of the space has been taken by major tenants. Two of Halifax's largest legal firms have taken 65,000 ft.² between them and we understand that at least three national accounting firms are to join them. Meanwhile, rental rates in other Grade A office space in existing buildings have fallen by about $1.00/ft.² over the past 12 months. Tenant inducements of about $5.00/ft.² are now common for this type of space. The Federal Government has "consolidated" the Public Works Department (90,000 ft.²) in the Maritime Centre from 6 other office buildings in the C.B.D., four of which are privately owned. Public Works were once destined for the peripatetic Federal Building, last seen heading down Gottingen Street towards Bedford Basin. We understand that Public Works are now safely ensconced with a 10 year lease with two 5 year options to renew.
The Atlantic Provinces - What Oil Boom?
Interest in the Atlantic Provinces as a region in which to invest in real estate has been heightened over recent years. The publicity nationally about the oil and gas boom has focused attention on the area in general, and Halifax in particular. The scarcity of suitable investment opportunities elsewhere in the county has also forced investors, pension funds, life insurance companies, etc. to cast their net farther afield to garner good product. Whilst the oil/gas 'boom' is still more promise than substance, it is still gathering momentum witness the increasing number of Alberta license plates on the streets of Halifax this year.
What opportunities does the Atlantic Region offer property investors? Who is investing here and to what degree? This issue of Newsletter focuses on the regional capital. If you thought that you were confused before, just wait until you have finished reading this!
If you live in Saint John or St. John's, New Waterford or Necum Teuch, Charlottetown or Chatham, stop reading at this point! You'll never believe what we have to say! Here in lotusland, where unemployment is a mere 11% and they actually advertise a non-government job or two, something is afoot: the first stirrings of post depression. Little louder than the rustling of a newspaper on a metro bus, hardly more visible than a Monday morning smile, it's there if you search hard enough; a quiet optimism that things are getting better. It just requires a little more optimism, a pinch more faith, to reach critical mass. The tremendous pent up demand will then explode. The residential market has been very active for the last 2 months. In fact, we undertook as many residential appraisals during that period as during the first 6 months of last year. However, we think that the majority of purchasers are still holding back until they are confident that the economy has turned the corner.
Downtown Halifax is another example of latent potential. Office rents rose by 40% or so during the 12 months of false pregnancy that ended abruptly in June 1982. They have softened since then. Only 4,000 m² of office space was rented last year, about a quarter of 'normal' demand, as firms played the waiting game. One developer currently reports 4,600 m² of space committed, pending approval from head offices in Toronto and Calgary. The following development proposals have started or are waiting in the wings: 17 offices buildings (in excess of 235,000 m² - 2.5 million ft.²), 2 hotels (765 rooms), 1 convention hall (37,161 m²), 2 parking garages, retail space, and 80 waterfront condominiums. Even if only a quarter of the above actually gets off the ground, it will equal the boom of the early 70's; a boom that changed the face of the City for all time.
It is easy to become sated with the oil boom. It embellishes the pages of every newspaper. Easy to become cynical too; like the upturn in the economy, it is always just around the corner. You could go round the bend waiting for it (sorry!). Yet slowly, almost imperceptibly something is happening, something concrete that is; not just the hackneyed outpourings as tired and shopworn as the politicians who utter them.
Like a pot that never appears to boil, then, first reluctantly, and then with ever increasing vigour, releases its bubbles to the surface, the oil boom too is coming to Halifax/Dartmouth. Part of it has been here for a while: the Mobil Oil Offshore Base at Woodside in Dartmouth; then their 4 ha. Pipeline storage yard behind the Moirs Chocolate factory, nearby. Of latter months the new Shell Offshore Base at National Harbour Board's Richmond Terminals near the MacKay Bridge. The reports that another operator has petitioned Halifax County Council to expropriate land from Texaco (Canada) Ltd. at Eastern Passage following the latter's lofty refusal to sell. These are perhaps the most public twitchings and stirrings of the oil boom.
In Dartmouth's Burnside Industrial Park there is other concrete (literally) evidence. Propelled in part perhaps by Tom Rath, Dartmouth's energetic industrial promotions officer, there is considerable building activity. A quick survey of existing buildings discloses a goodly number of tenants whose nomenclature indicates an association with the oil patch.
The pot has started to boil, soon it should be steaming.
The Commercial Scene
Mortgage rates are higher, inflation rates are higher, so the rates of return on commercial property are higher, right? Wrong!
Consider this: the overall rate of return on unleveraged triple A retail property in the United Kingdom a decade ago was 6% to 6½%. Since then the U.K. has experienced rampant inflation (up to 20%) which has only recently, because of draconian money supply management (interest rates of up to 20%), been reduced to 13%. Yet those same triple A properties now sell at overall rates of return of 5% to 5½%. "Well, so what?" you say; "that's a different market".
Well yes it is, but something similar is happening too in the U.S. Over the past year the American Institute of Real Estate Appraisers has been working itself into a lather advising its members how to deal with the paragon of negative equity dividend yields. (Equity dividend is the rate of return on the purchaser's equity investment as represented by the cash flow remaining after debt service. A negative equity dividend yield simply indicates that the cash flow from the property is inadequate to fund the debt service. The purchaser, therefore, has to pay for part of his/her mortgage principal and interest payments out of his/her own pocket).
The Residential Property Market in 1981
"Fools rush in where angels fear to tread". Our winter issues of the 1978 and 1979 Newsletters boldly forecast trends in mortgage rates, since they in turn affect property prices. We were 100% wrong each time which, if you think about it, is just as difficult as being 100% right. With that sort of record, we have nothing to lose, so here goes for 1981!
Residential property price rises are highly correlated with increases in salaries, since it is the quantum of the latter that determines the amount the mortgagee will extend in the way of a loan. Salaries in their turn are highly correlated with the inflation rate, as measured by the Consumer Price Index. Thus, residential property prices tend, in the long term to rise in tandem with the inflation rate. We have had two years recently, 1977 and 1979, where property price increases have been well below the inflation rate. High interest rates, and a faltering economy, dampered down demand during those two years. We anticipate that this pent up demand will eventually 'explode', forcing prices up well above their 8% to 9% annual normal increase.
Property prices are still depressed and it is much cheaper to purchase existing stock rather than build new. Accordingly, building starts continue to be down, thus restricting supply. In this situation of inelastic supply and increasing demand we can anticipate a surge in house prices in the order of 15% to 20%. The governing factor in all of this is the cost of money. If mortgage rates, currently at 15% to 16%, fall to 12%/13% during the peak selling season (March onwards) we would expect to see the surge in prices mentioned earlier.
The Effluent Society
The decision of the Prince Edward Island legislature this year to freeze shopping centre development in that Province brings into sharp focus a problem that we have preferred to ignore as a society, presumably hoping that it will go away. Our past sins are now catching us up. The affluent society is becoming the effluent society. Water and air pollution problems have multiplied in the past decade as we became aware that the physical environment is a fragile creature, to be nurtured with care rather than treated with crass disregard. Whilst we in the Maritimes may not be able to do much, other than protest, about the acid rain that assails us from the U.S.A., the first tottering steps are being taken to rectify some of the problems near at hand. Most towns are taking some steps to control waste disposal, yet it does seem incredible that Halifax, the regional capital of Atlantic Canada, with a population of one quarter of a million, still continues to dispose of its raw sewage by the simple expedient of dumping it into the harbour. An effluent society indeed!
Why a Newsletter?
There are several reasons why we chose a Newsletter.
As a relative newcomer (we were born into this cold world in October 1976), we wanted to alert the world to our presence. Since we did not have access to a large advertising budget, a Newsletter directed to a select group appeared to be a good medium to put our message across. At the same time, we felt that it could provide an interesting and informative commentary on the local property scene - a gap which nobody else appears to have attempted to bridge. We hope too that it will serve to emphasise our own philosophy of qualitative judgement based on quantitative research.
We intend publishing the Newsletter on an occasional basis during the year and hope to include at least one major article of interest in each issue.