real estate investment decisions

A primer for real estate investment decisions

Industry insiders review an expansive agenda for capital expenditure
Wednesday, December 14, 2016
By Barbara Carss

Climate volatility, energy costs and a growing backlog of required capital expenditure are projected to drive real estate investment decisions in the near and long term. Industry insiders recently charted how Canada’s building stock will need to adapt to changing times in two thematically linked seminars at The Buildings Show in Toronto — tallying a fairly ominous list of challenges, but also identifying upside potential to leverage existing strengths and ongoing technological advances.

“Canada has some of the most resilient cities in the world,” observed Doug Webber, vice president, sustainability and energy, with WSP Canada Inc.

This reflects a country with a wealth of resources, including a large share of the global fresh water supply, and where most major population centres are located well away from potentially vulnerable coastal areas. Nevertheless, increasingly frequent and severe weather related events have policy makers and frontline implementers planning and preparing for the inevitable next one.

Starting with this ‘what if’ scenario, Webber and his WSP co-presenters explored some current and pending considerations for developing, repositioning and maintaining building and infrastructure assets into the future. In a separate but largely complementary session, Peter Willmott, a seasoned commercial real estate professional now teaching at Seneca College, and Bill Roth, managing partner of the consulting firm, Roth Integrated Asset Management Strategies, tracked the industry’s evolution since the previous boom and subsequent down cycle in 2008-2009, and pointed to some trends and patterns that bear watching.

Climate change adaptation

Stating the obvious to set the context, WSP senior consultant Adrian Lightstone backed it up with data analytics to illustrate the increasing likelihood of extreme weather. Rising temperatures are visually changing the shape of the graphs that plot historical trends and distorting traditional calculations of so-called 10-year or 100-year storms.

“Climate change means: the climate changes,” he said. “The mean temperature curve is shifting and, along with it, the probability curve. The tails of the probability curve are getting wider.”

Or, in other words, significant storms once viewed as a 10 per cent (10-year) or 1 per cent (100-year) possibility over the course of the year can now be expected more often. Toronto recorded an average monthly rainfall of 66 millimetres in the period of 2000-2009 and is projected to reach a monthly average of about 170 millimetres by 2040. However, that’s not expected to fall in consistent, steady increments.

“We have downpours now that we never used to see,” Webber noted. “There are going to be longer droughts and then these deluges.”

In turn, the built environment will need flexibility for both extremes and more day-to-day weather variability. ‘Location, location, location’ is taking on new connotations, while Canadian climatic quirks, like freeze-thaw cycles, that already stress buildings and infrastructure could become even more common.

“One consideration will be: are you in a floodplain?” Webber added. “I think Calgary now knows.”

By nature, long-term fixed assets are at something of a disadvantage when the status quo shifts. “Cities are particularly vulnerable to climate change because they are not mobile,” said Jeff Seider, vice president with WSP’s strategic consulting group — an observation that circles back to the presenters’ premise that it is important raise questions and start testing solutions as early as possible.

“It’s a matter of being able to adapt,” Seider submitted. “How do we plan and put in place a structure that is supportive of that?”

Market realities

In keeping with those needs, Peter Willmott outlined how real estate operators could have something of an experiential edge. A product that fundamentally exists to give shelter is inherently in tune with the environment — even if over-reliant on mechanical systems to moderate its effects. Meanwhile, volatility is practically embedded in the industry’s business model.

“There have always been market adjustments. This will always be the way our market will go,” Willmott asserted. “We all survive it, but we have to recognize that it does happen on a regular and reoccurring basis.”

Survival tactics from the last downward adjustment now reverberate in a stock that suffers from deferred maintenance and loss of skilled trades during the ensuing inactivity, but has also been reenergized with a new influx of owners/investors. The 2008 financial crisis sidelined traditional lenders just as many buildings from the earlier 1980s’ building boom were reaching an age when upgrades and system replacements were required.

Pension funds and REITs stepped in to claim some lucrative Class A office towers and retail malls, but, Willmott recounts, other building types, particularly industrial, teetered more toward obsolescence. “A lot of these buildings built in the late ’80s were not 100-year buildings,” he said.

“There are some great examples of renewed investment in existing buildings, but nowhere near what’s needed,” Roth concurred. “Until you get a ribbon cutting for a roof replacement or a boiler, it’s always going to be sexier to build a new building.”

Change agents

A convergence of more 100-year storms and fewer 100-year buildings is not completely dire, but it will demand some reinvestment, some culling of stock and more aggressive commitment to curbing carbon emissions. Webber cautioned against self-congratulation for achievements thus far — i.e. a 6 per cent reduction in carbon equivalent over the past 20 years — given the remaining distance to Canada’s national target.

“In the next 34 years, we need to drop 74 per cent,” he said. “We’re not making the level of change that we need to hit this target.”

Steadily rising energy costs could be one of the key agents of change. As an added incentive, an overtaxed electricity grid requires upgrades and expansion.

“There’s a massive amount of risk out there,” Roth said, in making a case for net zero buildings, while Webber likewise endorsed renewable energy and emerging electricity storage technologies. He foresees the not-so-distant day when new development will include on-site generation.

“We’re at a tipping point right now where you would do this as a business decision,” he said. “Thirty years out from now, self-generation at your facility is probably cheaper (than grid-connected supply).”

Technology now provides the means to model what’s achievable, track actual performance and pinpoint where gains can be made. Roth traced the industry’s growing comfort with and reliance on software, leading to a more sophisticated understanding of its applications.

“Ten years ago, a lot of people picked the software first. It was: let’s go out and buy a piece of software and figure out what to do with it,” he recalled. Today, software is more likely chosen to meet needs mapped out in strategic capital plans. However, its role in facilitating transparency still makes it a powerful pace setter.

“People will have more information,” Roth said. “There is not going to be any hiding.”

Barbara Carss is editor-in-chief of  Canadian Property Management.

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