Canadas Lesson

Traveling through Canada this week for various Emerging Trends events, it’s striking the differences in the condition of the financial and real estate markets between this culturally conservative nation and the United States. While the U.S. continues to stagger through unremitting doldrums, Canada has been an island in the storm of global economic meltdown. In particular, its real estate investors have been sleeping well. Can you imagine not one commercial real estate loan greater than $10 million has defaulted here coming out of what was a rather mild recession? Not one. The major office market vacancies all stand well under 10 percent mostly in mid single digits, retail vacancies settle below 5% nationally, apartment markets are even tighter than in the U.S. too, ditto industrials despite the ongoing travail to the south with the country’s biggest trading partner (us). Only hotels may be weaker—held back by continuing softness in U.S.-related business and tourist travel.

Canada benefits from some aces in the hole—notably rich stores of natural resources, including oil and gas, as well as commodities and hydro power, all highly sought after by other countries including us. But unlike its neighbor to the south, Canada learned from hard lessons suffered in the early 1990s North American property market depression (then the worst since the 1930s). That’s when major real estate players here (remember Campeau and Olympia & York) overleveraged and overpaid for investments helping send the Canadian economy into a tailspin of debt. As a result, government regulators stepped up oversight and reserve requirements. Borrowers were required to have significant equity stakes in investments and development projects. Home buyers either must make significant down payments on houses and condos or pay for mortgage insurance in case of default. Construction lenders require not only significant condominium presales, but also insist on hard dollar commitments from purchasers—25 percent down in many cases.

Canadian developers grumble at significant government development charges and fees related to intensification policies to limit sprawl. The high costs deep six some projects and bureaucratic red tape delays others. But between lender scrutiny and government involvement markets have not been overbuilt. Long-term land investors, meanwhile, have done extremely well in infill areas around the nation’s major cities—prices are escalating as builders recalibrate by building high-rise condominium and mixed-use projects to serve substantial move back in trends from suburban markets—encompassing both young adults and empty nesters. Indeed the country is experiencing an unprecedented resurgence in urbanization and center city residential growth. Toronto is above and away the largest condo market in North America (including New York), and Vancouver and more recently Montreal are not far behind in ramping up new residential tower projects.

The Canadian government largely has its fiscal house in order and the country’s banking system has avoided any hint of sovereign debt crisis. Foreign investors try to pour capital into the country, but are frustrated by the lack of opportunities. The country’s big public pension funds and large REITs dominate ownership of trophy office, mall, and industrial properties and show no interest in trading away stellar income producing assets. How would they replace them? Instead they manage these properties carefully to maintain high occupancies and effectively work with lenders and the government to limit new supply. Again, any developer would need significant equity in a project to have any chance of landing construction financing. Funny money CMBS and CDO gambits never saw the light of day here either.

Now Canadian investors weren’t making 25 percent and 30 percent annualized returns like some American property traders were in the middle of the past decade—instead they were clicking along at more modest upper single digit and low teens performance. And with low interest rates in play, they continue to make very attractive income plus returns today without having suffered major losses, let alone any wipeouts. Canadian REIT stocks rank as some of the best securities investments in world markets. And the country has avoided any whiff of a housing crisis.

So what’s wrong with carefully considered regulation and even a dose of red-tape? Or do you prefer a more “free” market anything-goes approach which somehow has its own seemingly larger price tag? And oh Canadians pay a lot more in taxes than we do too, but somehow they’re doing better… a lot better.

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A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.