In what appears to be a sign of confidence that Alberta’s economy is making a comeback, investors spent a record amount on commercial real estate in the province’s largest city during the first four months of this year.
Calgary’s commercial real estate sales in Q1 2022 topped $1.6-billion, according to The Network research firm. While this can largely be attributed to the $1.2-billion sale of downtown’s iconic Bow skyscraper, the chart-busting quarter was preceded by “a dramatic increase in sales through the third and fourth quarters of 2021,” states The Network’s report, released in April.
Adding to higher sales is a “significant increase in leasing activity for commercial property in Calgary,” says Justin Mayerchak, executive vice-president and partner at Colliers’s Calgary office.
Calgary is in the midst of an industrial real estate boom.
— Adam Grisack, director of valuation and advisory services at Colliers Canada
After enduring seven years of economic lethargy linked to the struggling energy sector, only to be further pummelled the last two-years by the pandemic, “Calgary has finally seen two consecutive quarters of positive absorption of office space,” says Mr. Mayerchak.
The vacancy rate is still the highest of Canada’s 10 major cities, at 28 per cent. But in this city, which has more office space per capita than any other in the country, vacancy has “compressed considerably” – to around 10 per cent – in higher-classed buildings. Occupancy for downtown AA space recently crossed the 13-million-square-foot mark for the first time in recent record.
“A 10-year high in oil pricing is sparking optimism in the energy sector and, by extension, Calgary’s downtown office market,” states Colliers’s Q2-2022 Downtown Office Market Report. “For the first time in several years, Colliers has seen companies in the energy sector looking to increase their overall office footprint, stepping away from the downsizing witnessed over the past few years.”
Meanwhile, Calgary’s industrial property market is “absolutely on fire,” says Mr. Mayerchak. Vacancy rates fell 50 per cent in the past year and now hover around 3.5 per cent – the lowest since 2014. Major players such as Amazon, Lowe’s, Home Depot, Canadian Tire and Walmart have made billions worth of investments in the province as they expand their industrial spaces.
According to Adam Grisack, director of valuation and advisory services at Colliers, “Calgary is in the midst of an industrial real estate boom.”
In a recent article published on Real Estate News Exchange, Mr. Grisack wrote: “Increasing job numbers have sparked renewed optimism in the city, making Calgary an attractive destination for businesses.”
After posting the second-strongest annual economic gain among the 10 provinces in 2021, the Conference Board of Canada projects that Alberta will lead the country in economic growth in both 2022 and 2023.
This optimism has driven more people to the province. According to Statistics Canada, Alberta welcomed 16,690 newcomers in the third quarter of 2021, the most in nearly seven years.
One of Calgary’s largest owners of multifamily buildings is reaping strong returns. Mainstreet Equity Corp., with 3,229 units in dozens of holdings, achieved 12-per-cent growth in Q1 2022, its fourth consecutive quarter of double-digit revenue increase.
The company expects more growth ahead. “Canadian oil production was the highest on record in 2021, and energy companies reaped their largest-ever revenues over the year – $158-billion,” states Bob Dhillon, president and chief executive officer of Mainstreet, in the company’s Q1 2022 report. “We believe this will help propel an influx of migration, extending the positive trend we have seen in recent months.”
Even with the global movement away from oil and gas, Mr. Dhillon remains optimistic about Calgary’s future. That’s because “Calgary’s economic foundation is becoming increasingly diversified,” he asserts, and this is another draw for workers.
During Calgary Economic Development’s annual Report to the Community event, which took place virtually on April 28, the city’s mayor, Jyoti Gondek, spoke of Calgary emerging as a global hub for innovation in energy transition.
“Shifting our narrative and securing Calgary’s position as a leader in the energy transformation may be the most important thing we do for our city’s economic future,” said Ms. Gondek.
Calgary was recently recognized as a cleantech “ecosystem to watch,” ranking in the top 30 out of nearly 300 cities by the international innovation research firm Startup Genome, the mayor noted.
Greg Kwong, executive vice-president and regional managing director at CBRE’s Calgary office, recalls that only a handful of years ago, “people were saying, ‘I don’t know if I could ever go back there,’ ” referring to Calgary. After all, in 2017, the Conference Board ranked Alberta’s economy third last in Canada.
“Now, you talk to any major economist from any financial institution and all their numbers point to Alberta having Canada’s strongest growth for the next 12 to 18 months,” he says.
“But I’d go further,” he adds. “I’d make that five to 10 years.”
Along with its soaring economy, the city’s low cost of living will continue to draw new business, says Mr. Kwong.
Calgary’s average home price, currently a record high of $605,000, according to the Calgary Real Estate Board, is still less than half of Vancouver’s at $1,374,500, or Toronto’s at $1,254,400.
It’s the same for commercial real estate: According to CBRE, office lease rates in Calgary cost $16.55 per square foot compared to $39 in Vancouver and $28.15 in Toronto. Industrial space is also nearly half the price compared to those two cities.
Mr. Kwong says Vancouver’s university graduates tell him they can’t afford to live in that city. “So, they’re moving here. In fact, [of] the last six people I’ve hired – three are from Vancouver.”
Canada’s average annual salary – $66,800 according to most recent StatCan figures – is not enough to save for a starter home in Vancouver, Mr. Kwong says.
“We’ve got smart, ambitious young people who are moving here. Those people don’t just sit in their heads. They’ll start businesses. They’ll work for people. They’re going to create.”
And when major businesses set up new locations, adds Mr Kwong, “they’re looking at two factors. One: Can they open up shop and hire 5,000 people? Two: What are the overhead costs? Then they look at everything else: logistics, support services, quality of life. But if they can’t find the staff and operating costs are too high, you get precluded from a lot of site searches.”
Mr. Kwong says that record spending on commercial real estate this year attests to investors’ “confidence in the long-term economy.”
These investors, Mr. Kwong concedes, are also following two adages, “that have always proven successful in real estate. Location, location, location; you’ve heard that many times.
“The other is, of course, buy low, sell high.”
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BC real estate: 40% of Cullen Commission focuses on sector – Pique Newsmagazine
Despite being unable to determine the exact impact money laundering has on home prices, the real estate sector is of top concern to the Commission of Inquiry into Money Laundering in B.C.
Of the 101 recommendations Commissioner Austin Cullen made in his June 15 final report, 40 are directly related to real estate, and several others are ancillary, such as proposals to strengthen anti-money laundering (AML) policies within financial institutions and the asset forfeiture legal regime, as well as greater controls on notaries and lawyers, who process transactions.
Despite the apparent problems in the industry, Cullen poured cold water on prior attempts to peg a precise price increase on homes due to money laundering.
While his executive summary states, “money laundering is not the cause of housing unaffordability,” he clarifies within the report that he examined whether it is “the” cause or “a main” cause — as it may be perceived publicly. Cullen found no such proof but nevertheless concluded the real estate sector is vulnerable.
Cullen said the reasons for increases in housing costs “are many, and they are complicated.” He cites housing supply and demand and interest rates as more proven factors.
Cullen examined the 2019 expert panel report of professors Maureen Maloney, Tsur Somerville, and Brigitte Unger titled Combatting Money Laundering in BC Real Estate, which did prescribe a figure for money laundering in real estate — about a 3.7% to 7.5% increase in prices. But Cullen noted that the estimate came with caveats and uncertainties. The model the panel used was “an exercise in speculation and, ultimately, guesswork,” said Cullen.
Cullen took time to separate what he perceives as a common mistake in the public discourse — that foreign investment and money laundering go hand in hand.
Cullen relied on the Canada Mortgage Housing Corporation’s conclusion foreign investment was not a significant driver of real estate prices in Vancouver, based on home ownership data from 2010-2016.
He noted, however, that defining foreign investment can be difficult and “witnesses disagreed about whether foreign investment plays a significant role in Vancouver’s housing prices.”
Simon Fraser University professor Joshua Gordon and University of B.C. professor emeritus David Ley testified how foreign capital can explain the decoupling of local incomes to home prices in B.C. However, such capital may not show up as direct foreign investment in home ownership data; instead, it is foreign money transferred into homes owned by newly established residents or via beneficial ownership structures that can obscure the real picture.
“It became clear as the evidence developed before me that there is disagreement in the academic community about what should be considered ‘foreign ownership.’ Is it limited to beneficial ownership by persons or entities based or resident outside Canada? Or does it extend to purchases made largely with funds earned outside of Canada?” asked Cullen, to which he replied to his questions that “resolving these complex issues is somewhat outside the ambit of my mandate.”
Cullen noted Gordon’s position that it is difficult to determine the origins of foreign capital and, with respect to China, the money being transferred is often escaping capital export controls set by the Chinese government.
He dispelled the notion that foreign investment, particularly from China, is money laundering. And Cullen expressed concern that, in his view, public discourse had reached such a conclusion.
Cullen noted racist stereotyping of investments in real estate originating from China, as University of B.C. professor Henry Yu testified to, must be weeded out from “legitimate policy questions relating to foreign ownership of real estate in the province.”
Cullen concluded that he could make no conclusive finding on money laundering or foreign investment, however defined, is a “primary cause” of home price increases in B.C. and steps to address money laundering should not be viewed as a “panacea for housing unaffordability.”
Ultimately, more study is required on the matter, concluded Cullen.
Ron Usher, general counsel for the Society of Notaries Public, said the conclusions may frustrate some members of the public, however they are not surprising given it is difficult to track money laundering.
“I think people were understandably very interested in that. But I think it’s appropriate for him to say, ‘We just don’t have information.’ Well, of course, we don’t because, you know, people don’t tick a box on a form saying, ‘I got this money from money laundering or a predicate crime,'” said Usher, who followed the daily testimony over two years as an intervenor.
Recommendations run deep into real estate sector
Despite not finding answers to such a significant question in the public discourse over the past 10 years, Cullen lays bare 40 recommendations for the real estate industry, now regulated by the 2021-established B.C. Financial Services Authority (BCFSA).
His recommendations suggest that real estate licensees are largely uneducated on AML measures and that both managing brokers and sub-brokers require education “focusing on the detection and reporting of fraud and money laundering in the industry.”
Cullen also recommends the BCFSA, a government regulator, put in place measures for better data collection and that it implores real estate licensees and notaries to record source of funds information should the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) not do so on a federal level. He also wants BCFSA to mandate AML programs at each brokerage as a licensing condition.
Seventeen recommendations directly relate to mortgage brokers, who are overseen by the Registrar of Mortgage Brokers within the BCFSA.
Cullen wants brokers to have extended criminal record checks and more clearly defined responsibilities, including new reporting mandates under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Cullen also recommends all legal owners of mortgage charges are reported and that this information be available through the public land titles registry of the Land Title and Survey Authority. Presently, one is unable to conclusively determine, from flings, all of the owners of a registered mortgage charge.
Cullen is also calling for greater penalties and repayment of profits from proven unscrupulous brokers.
As for real estate licensees, Cullen has recommended employees of developers be brought within the licensing scheme. Today, many developer representatives effectively sell homes (“pre-sale” units) without any regulatory oversight.
Cullen also identified some legal matters to resolve, such as how courts cannot refuse to enforce debts made with funds of suspicious origin. As such, he recommends a source of funds declaration in foreclosure proceedings, at the judge’s discretion. This recommendation stems from Cullen’s examination of numerous foreclosure filings by alleged money launderer and casino cash provider Paul Jin.
Meanwhile, sunshine policies are a prominent set of recommendation for Cullen, namely by populating the B.C.’s Land Owner Transparency Registry with historic data within three years. He also recommends the Land Title and Survey Authority have a clear and enduring AML mandate, including the ability to “more readily” share data with other agencies.
Finally, with all such measures, Cullen recommends the Ministry of Finance analyze how such changes may impact housing prices.
Cullen thirsty for more data
Cullen emphasizes in his report the need for a beneficial ownership registry for both real estate and corporations, with the latter requiring a pan-Canadian approach. Contrary to some witnesses he heard from, such as journalists and Transparency International Canada, Cullen says a small search fee ($5) for beneficial ownership land titles is acceptable if government deems it so for operational purposes. However, Cullen suggests no such fees exist for a beneficial ownership registry of corporations. No fees should apply to law enforcement and regulators, noted Cullen.
With respect to data, Usher said tools such as land title registries, which are “secure and reliable,” are increasingly being used by government agencies. He said Canada Revenue Agency could more easily track land purchases these days to weed out tax evasion and money laundering.
“It’s easy to come up with lots of rules,” said Usher.
“What we really need is a formal process of a notice of acquisition of real estate for CRA and a notice of disposition of real estate for CRA for every transaction.
“We need to get the right information from the right people at the right time,” said Usher.
MiB: Jonathan Miller on Residential Real Estate – The Big Picture – Barry Ritholtz
This week, we speak with Jonathan Miller, who is CEO and co-founder of the real estate appraisal and consulting firm Miller Samuel. He is an adjunct associate professor at Columbia University’s graduate school of architecture and planning. he also serves on the Mayor’s Economic Advisory panel and the New York State Budget Division Economic Advisory Board. His research and analytics powers the back end of some of the larger real estate brokerage firms.
We discuss the pullback in real estate demand due to rates almost doubling; contact volume is down, and has been trending that way since March. The collapse in inventory is also to blame, as has the fall in affordability.
During most real estate slowdowns, sales activity slows immediately, as inventory rises. But prices tend to take a few years to reflect the new market, awaiting seller capitulation. Miller hopes we might see a faster adjustment given the recent big runup in home equity.
He also explains why it is so challenging to convert urban office towers into residential buildings. Big cities like New York and San Francisco find themselves with a surplus of office buildings that are running about 2/3rds empty, while there are acute shortages of residences at most price points.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
Be sure to check out our Masters in Business next week Perth Tolle with founder of Life + Liberty Indexes, index provider and sponsor of the Freedom 100 Emerging Markets ETF. The first-of-its-kind strategy uses personal and economic freedom metrics as the primary factors in its investment process. Prior to forming Life + Liberty Indexes, Perth was a private wealth advisor at Fidelity Investments in Los Angeles and Houston and had lived and worked in Beijing and Hong Kong, where her observations led her to explore the relationship between freedom and markets.
Jonathan Miller Favorite Books
Fins: Harley Earl, the Rise of General Motors, and the Glory Days of Detroit by William Knoedelseder
The Reckoning by David Halberstam
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