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Distrikt Capital moving up to high-rise development | RENX – Real Estate News EXchange

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Distrikt Trafalgar will be the first venture into high-rise development for Distrikt Capital. (Courtesy Distrikt)

“Distrikt is only five years old, but it’s a business that was 25 years in the making,” co-founder and chief executive officer Paul Simcox says of Distrikt Capital, which acquires and develops Greater Toronto Area (GTA) real estate.

“We’ve brought together a lot of experience and work that people have done at other locations, and they want to do it at Distrikt.”

Simcox is also the founder of NorthHaven Capital Group. The private equity and real estate investment and advisory firm is focused on multi-year corporate and portfolio mandates, as well as new platform creation, investment and growth.

Simcox started his career in investment banking and private equity in New York City before returning to Canada in 2007 to co-found Whiterock REIT, a Toronto Stock Exchange-listed firm that was acquired in 2012 by Dundee REIT (now known as Dream Office REIT). He’s also been involved with retail and residential development in Canada and income property acquisitions in the United States.

Toronto-based Distrikt Capital’s other co-founder is president Emil Toma, who also founded Distrikt Developments and Toma Construction Management.

Toma previously co-led an international supply and construction services company called Caribbean International Supply that was based out of Toronto but with multiple offices in Central America. It was heavily involved in the Caribbean resort development industry.

“We were doing everything from design, tendering, supply, installation, turnkey service and after-sale service,” Toma told RENX.

The firm was sold in 2008 to enable him to return to Toronto to build custom homes and development properties.

Distrikt Capital’s launch and growth

The two men became friends when Toma was building a home for Simcox. They thought there was a good business fit between their skills and experience and they launched Distrikt Capital in 2015.

“We have the ability to oversee projects, not just on the development side, but also from construction to occupancy,” said Toma. “We’ve attracted a lot of attention from financial institutions and have a mix of private investment and institutional investment working with us.”

Distrikt, which will be up to 15 employees by the fall after making a couple of new hires, invests alongside its partners in every deal.

Distrikt isn’t involved in property management at this point.

“Once our portfolio is larger, we might look at it, but right now we get the best service and value from larger providers,” Simcox told RENX.

Focus on GTA residential development

While Distrikt’s early focus was on low-rise housing, it’s moving more into mid-rise and high-rise residential development, with some projects also including small commercial components.

The company’s current focus is on projects in Oakville and Toronto.

“We look at ourselves as investors first and developers second,” said Simcox. “From an investor viewpoint, we think the GTA is an excellent place to be.”

Simcox said Distrikt has land banked which can support up to 1.8 million square feet of development.

“We have a robust pipeline and are always looking for new opportunities where we can see value in the land, number one, and second in the eventual build-out.”

Distrikt’s Oakville projects

Distrikt The 6ixth is a sold-out 100-townhome development that’s delivering properties and will be finished construction this year.

Distrikt Trailside 2.0 sold more than 200 units, both virtually and through a sales centre, in 72 hours. After selling most of its first release, it’s pushing the second release up to this month.

The two Trailside projects will combine to have about 600 mid-rise and townhome units.

“People are excited about it because it’s a combination of good value, good design, good location and on- and off-site amenities,” said Simcox. “We look for what we call walkable suburban locations where you can walk to major transportation, grocery stores, schools and sports infrastructure.

“That’s what attracted us to these Oakville locations.”

At Distrikt Station, land is still being assembled for a condo project planned for the foot of the Queen Elizabeth Way and Trafalgar Road, near the heavily used Oakville GO Transit station.

Distrikt is working on a site plan application for that site as well.

“Oakville is growing dramatically, not only with residential population but also jobs,” said Simcox. “Five thousand people take that specific train, reverse commuting, for jobs in Oakville.”

Distrikt Trafalgar will mark the company’s move into high-rise development, with two 30-storey towers that will combine for about 650 units.

It’s on a main artery in north Oakville, close to the Trafalgar GO station and within walking distance of grocery stores, restaurants, banks and schools.

Simcox said it’s too early to talk about suite mixes or pricing since sales aren’t expected to launch until mid-2021. He added Distrikt Trafalgar may include a couple of convenience amenities, such as a coffee shop or dentist office.

Distrikt’s Toronto projects

Distrikt Islington Village is a townhome development on Burnhamthorpe Road that’s located about 500 metres from the Islington subway station and close to schools and amenities on Dundas Street.

It’s still in the planning process.

Simcox called it “a great example of missing-middle development” that will be comprised of townhomes slightly larger than average in size. He expects it to appeal to both move-up and movie-down buyers.

“This will be a higher-end, high-quality project that fits in with the historic Etobicoke area. We’re taking a lot of design cues from local buildings and integrating that into our design.”

Distrikt Forest Hill will feature 45 townhomes near Bathurst Street and Elderwood Drive in the upscale Forest Hill neighbourhood, where many homes sell for $5 million and up. Simcox expects the project to launch soon.

“This is a great form of gentle density, bringing in higher-end townhomes primarily for move-down buyers looking to stay in the area, but looking for a new product,” he said.

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The Pandemic is Changing Life Sciences Real Estate – GlobeSt.com

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As other segments of the economy have suffered in 2020, life sciences are emerging as a bright spot. 

Private investors have put more than $16 billion to work in life sciences in the first half of 2020, while the National Institutes of Health continues to up its grant volume. In 1994, NIH gave out $11 billion in grants. By 2019, that number jumped to $39.1 billion, JLL’s Life Sciences practice Global Leader Roger Humphrey wrote for NAIOP

The pursuit of COVID-19-related therapeutics, antibody tests and a vaccine contributed to this increase in funding. But it wasn’t the entire story, according to Humphrey. An aging US population needing life-sustaining and life-extending care, wellness-conscious millennials and a prescription drug market on track to reach $1 trillion by 2022 also drove this market. 

To secure funding, Humphrey writes that life sciences companies must create a work environment that encourages innovation and productivity while remaining flexible to meet new and evolving demands. 

As these firms need to remain flexible, they’re adopting more technology, such as machine learning and artificial intelligence. 

“That means a growing portion of today’s lab looks more like a traditional office, even if its operational systems are far more sophisticated,” Humphrey writes.

While computers and the internet have allowed many office workers to work remotely, Humphrey writes that life sciences companies still brought workers into labs. They are incorporating staggered shifts and social distancing to keep their work on track. Many administrative staffers at these companies are working from home.

“Flexible lab space that can adjust to a variety of work tasks with limited downtime will be critical, along with ‘free’ space that can be called on to meet changing industry conditions,” Humphrey writes.

The locations of this space could be changing, though. Boston, San Francisco and San Diego secured up to 70% of venture capital investments in 2019. While these locales offer proximity to a highly educated workforce and ties to leading research institutions, Humphrey reports some companies are starting to look to secondary markets to cut costs. He writes that these secondary markets include Maryland, North Carolina’s Research Triangle, Philadelphia, New York and Los Angeles.

Others agree that high costs are creating new life science hubs. “Major metropolitan cities like Boston, San Francisco, Seattle and San Diego that have been long-established life science hubs are expensive to operate in,” Mark Hefner, CEO and shareholder of MGO Realty Advisors told GlobeSt. in an earlier interview

 “Everything from real estate to cost of living in these cities is expensive. Now, with the Covid-19 crisis, companies are facing tremendous budget constraints and increasing pressures on their bottom line, forcing them to reconsider where they are located.”

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Moody’s Doubles Down On Forecast of Canadian Real Estate Prices Falling Soon – Better Dwelling

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One of the world’s largest credit rating agencies doubled down on its Canadian home price forecast. Moody’s Analytics sent clients its September update on Canadian real estate prices. The forecast reiterates they expect price declines to begin towards the end of this year. The report also names impacted cities this time, with Toronto expected to be a leader lower.

Forecast Vintages 

A quick note on reading Moody’s charts, which includes “forecast vintages.” If you’ve only looked at consumer forecasts, these might be new. They’re scenarios that vary depending on the forecasting model’s inputs. Instead of giving a forecast like, “prices will drop x%,” they give a range based on factors. These factors are fundamentals that have typically supported prices. 

The Moody’s forecast shows vintages as baseline, S1, S3, and S4. The September baseline is the scenario they believe has the highest probability. The S1 is what happens if indicators are better than expected. This would mean unemployment drops fast, and disposable income doesn’t fall much. The S3 is what happens if fundamentals are worse than expected. S4 is the worst scenario that can unfold in a reasonable amount of time. Abrupt scenarios and black swans can still be worse. It’s just those are outside of the range of reasonable expectations.

Canadian Real Estate Markets To Start Showing Weaknesses Soon

Moody’s previous forecast didn’t expect the market to show signs of weakness until Q3, and they’re doubling down. The report’s economist expects stimulus, mortgage deferrals, and interest rates to contain damage until Q3. They expect by Q3, the optimism of those programs will begin to wear thin. The reality of how meaningful the improvements are, should be apparent by then. The optimism should then fade. It’s at this point they believe prices can no longer defy employment, vacancy, and delinquency rates.

Canadian Real Estate Prices To Drop Around 7%

The firm expects all scenarios to show a drop in the near future, but how much depends on fundamentals. In the September baseline, the firm’s economist is forecasting a ~7% decline at the national level. This scenario expects unemployment at 8.56%, and a 2% drop of disposable income next year. Since the rise in disposable income was due to temporary supports, the fall is expected.

In the other scenarios, things vary from a brief drop to a very deep, multi-year decline. In the S1 scenario, there’s only a brief dip in Q1, before prices rocket even faster and higher. In S3, a slightly worse than base case, prices fall about 15%, taking them back to 2016 levels. In S4, if disposable income, GDP, and/or unemployment worsen,  prices drop about 22%, back to 2015 levels. Of course, this trend isn’t evenly distributed across Canada. However, it’s also not distributed how most might expect. 

Prairie Cities and Toronto Real Estate To Lead The Declines

The base case sees Prairie cities and Toronto real estate leading price declines. Calgary, Edmonton, and Regina lead the drop, with a peak-to-trough decline between 9 to 10%. This is a trend already apparent in the regions’ condo markets. Toronto, a little more unexpected, is forecasted to see a 9% price drop, from peak to trough. Vancouver’s drop is forecasted below the national average, with an average decline of almost 7%. The last market is interesting, since other organizations gave Vancouver much worse forecasts.

Toronto Real Estate To Experience Uneven Declines Across Regions

The base case for Toronto expects an uneven decline, with some regions harder hit. The drop across Toronto CMA is expected to be about 9%, from peak to trough. Pickering should see smaller declines, but experience minimal growth through 2025. Markham is the most surprising though, not expected to hit 2017 highs by 2025. The trend here appears to be regions short on space will recover the fastest. Although that is likely to depend on the type of housing as well.

The forecast notes pandemic uncertainty, and its potential to bring greater downside. As it gets colder, the potential of more indoor activity may lead to a second wave. The report’s economist believes this can bring even larger declines to prices. Shifting consumer behavior is also a wild card that can also push prices lower, as are any vaccine delays.

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Will development remain key growth strategy for REITs? | RENX – Real Estate News EXchange

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IMAGE: Transit City Condos, being developed by a JV led by SmartCentres REIT, at the Vaughan Metropolitan Centre just outside Toronto. Development and intensification have been key growth strategies during the past decade for Canadian REITs. (Rendering courtesy SmartCentres)

Transit City Condos, being developed by a JV led by SmartCentres REIT, at the Vaughan Metropolitan Centre just outside Toronto. Development and intensification have been key growth strategies during the past decade for Canadian REITs. (Rendering courtesy SmartCentres)

Development has been a key growth strategy for many real estate investment trusts over the past decade, but will that continue during the next 10 years?

That was the theme of a five-person panel moderated by Lincluden Investment Management real estate equities vice-president and portfolio manager Derek Warren on Sept. 23, as part of RealREIT.

“There has been some dislocation in the short-term operating metrics,” CIBC World Markets REIT analyst Dean Wilkinson said. “I think the question we’re all struggling with is: Is this a permanent structural shift in a downward direction with the underlying fundamentals of the real estate, or have we overshot?“

“Projects are getting bigger and more complex, and we’re seeing a lot of mixed-use,” said Altus Group cost and project management senior director Marlon Bray, who noted he’s being inundated with proposals. “I’ve got people sending me six, eight, 10 projects to look at in the space of two or three weeks.

“They’re looking long-term at pipelines and thinking of the future and not just what’s going to happen tomorrow.”

Transit-oriented and mixed-use development

Immigration has slowed considerably during the pandemic, but it’s starting to rise again and those people will need places to live and work.

While public transit ridership has decreased during the COVID-19 pandemic, SmartCentres REIT (SRU-UN-T) development VP Christine Côté said transit-oriented development is still desirable and should remain a focus for REITs and all levels of government.

Dream Unlimited (DRM-T) chief development officer Daniel Marinovic said a lot of critical transit infrastructure work began in the Greater Toronto Area in 2008 and, while it will be ongoing for years to come, he believes it’s a “phenomenal” long-term investment.

“I’ll continue to be a big believer in density,” said Marinovic.

Allied Properties REIT (AP-UN-T) executive VP of development Hugh Clark remains a strong advocate of the “live, work and play” concept and believes it will continue to prosper. He said mixed-use projects need amenities to help people socialize.

Grocery stores, restaurants and services and amenities catering to the daily needs of the local community will become more important additions within residential buildings, according to Côté.

“We feel strongly that value-oriented retail will continue to be strong,” she said.

Development costs

Construction costs levelled off from April through June, but have ramped back up due to supply and demand factors.

Bray attributes some of the increase to the 7,000 condominium units and 10,000 rental units under construction in the Greater Toronto Area, more than double the numbers from 10 years ago.

Bray pointed out construction costs comprise less than 50 per cent of residential development expenses.

Land can account for as much as 30 per cent, while development charges and taxes are also major costs. Development charges have increased by multiples and are always changing and hard to predict, said Bray.

Wilkinson said the saving grace over the last several years is that rent increases have “probably gone at, or at a level higher than, the inflation surrounding those construction costs. But if the script gets flipped and it goes the other way, what could happen?”

Specific issues for REITs

No more than 15 per cent of a Canadian REIT’s funds are generally allowed to be spent on development, which Wilkinson said is lower than in other countries.

The potential build-out for some Canadian REITs, particularly those with retail sites with inherent density, is larger than their current gross leasable area.

Wilkinson added that development activity isn’t included in the underlying value of a company until a building is finished. Thus, a short-term construction expenditure is a diluted effort because capital is put into something that’s not creating immediate cash flow.

There’s an increase in NAV after the completion of projects, but the public market is still focused on quarterly results instead of longer-term cycles, according to Wilkinson.

As a result, Allied is taking a prudent, market-driven approach to development and isn’t looking to expand just because it can.

Clark said the REIT may slow the launch of new projects and ensure it hits certain pre-leasing requirements before starting construction so it doesn’t put itself in a “position of strain.”

Returns for REITs are getting smaller

Clark said it’s “getting harder and harder to make some big gains, with eight or nine or 10 per cent returns on investment.” While it’s possible with some high-priced condos, those are few and far between.

Clark thinks REITs will be lucky to keep a 100- to 150-basis point spread going forward. A development yield of 150 basis points over the acquisition cap rate is much lower than the 400- or 500-point spreads of the past, Wilkinson added.

The convergence between the two figures could mean the elimination of compensation for development risk, so developers may have to start looking more closely at portfolio quality versus straight economic accretion.

“There’s value to that, but it remains to be seen how the market wants to treat that,” said Wilkinson.

Apartment rents have sagged recently due to the COVID-19 pandemic, and Wilkinson said there are concerns market rents may be just 10 per cent higher than in-place rents when apartments being built now are completed.

“The premium that was afforded to a lot of the apartment REITs was really based upon the fact that their in-place rents were 20 to 25 per cent below what was deemed to be market rent. So, they were trading at 20 to 25 per cent premiums to NAV.”

SmartCentres REIT

Côté has been with SmartCentres for 17 years, and her focus in that time has changed from building Walmarts and shopping centres to intensifying existing properties across Ontario.

“We’ve got countless master plans that are in place now and we are preparing, submitting and processing development applications for those initial phases of redevelopment across the portfolio,” she said.

SmartCentres has made applications for more than 20 development projects since the onset of COVID-19 and will submit another 20 over the next six months, according to Côté.

The REIT has more than 40 million square feet of density planned, mainly on sites it already owns, and has a long-term plan for much more than that.

Côté said SmartCentres is taking more time with new building design to increase efficiencies and make them more economical.

Despite the recent softness in rents, Côté doesn’t think the REIT’s planned purpose-built rental apartments will be switched to condos.

She believes the market will be past its short-term challenges by the time those buildings are ready for occupancy.

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