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OCTOBER 2017 │ TORONTO, CANADA
Change and Innovation in
Real Estate 2017
1
Table of Contents
Introduction ............................................................................................................................ 2
Summary .................................................................................................................................. 2
Program Participants .............................................................................................................. 3
Keynote Address .................................................................................................................... 4
First Panel: Impatient Capital ............................................................................................... 7
Second Panel: Impact of Changing Demographics, Culture and Technology ............. 11
Third Panel: The Future of Retail ...................................................................................... 15
Fourth Panel: Specialty Users and Innovation in the Real Estate Sector ...................... 19
Fifth Panel: Toronto Perspectives ...................................................................................... 22
Attendees ............................................................................................................................... 24
Past Meeting Topics and Venues ....................................................................................... 25
2
Introduction
The Anglo-American Real Property Institute
(AARPI) was founded in 1981 to explore
global real estate issues from the perspectives
of the United States and the United Kingdom.
We have 100 regular members, half from each
country. The membership comprises
property professionals, owners, developers,
investors, advisors, lenders, accountants and
lawyers. The Institute educates and informs
its members and enhances personal,
intellectual and professional interaction
among its members.
The organization meets annually, alternately in
Europe and North America. Recent topics
have included: City Power: How will the growth
of urbanization affect the world’s real estate markets
(Seville 2012); The impact of technology on real
estate, (San Francisco, 2013); The power of wealth
and the impact of wealth dynasties on real estate
(Budapest, 2014); The impact of geo-political risk
on real estate investment (Washington, DC, 2015);
Retrofitting our cities for the 21st Century (London,
2016). The 2017 annual general meeting was
held in Toronto, ON, Canada, to discuss a
diverse range of issues affecting the real estate
sector.
Summary
The keynote address on real estate market
trends was given by Mark Gibson, a founding
partner of HFF, Inc.. Next was a panel on
capital markets moderated by Sally Gordon.
The second panel, moderated by Bridget
Rosewell, addressed the impact of changing
demographics, technology, data and climate
change on the urban environment. The third
panel, moderated by Steve Horowitz, brought
together retail CEOs, experts in retail
analytics, landlords and bankruptcy lawyers on
the future of the retail sector. The fourth
panel, moderated by Andy Martin, addressed
challenges and opportunities for specialty real
estate users. Finally, Rob Robinson led a
session on infrastructure, development and
public space in Toronto.
- Steve Horowitz
3
Program Participants
Speakers & Panelists
Keynote Speaker
Mark Gibson, CEO of HFF, Inc.
First Panel: Impatient Capital
Moderator: Sally Gordon, Manager Director
at BlackRock (Retired)
David Hodes, Managing Partner at Hodes
Weill & Associates
John Mallinson, Managing Director and
General Counsel of AIG Global Real Estate
Investment Corp.
David Tang, Managing Partner, Asia for
K&L Gates LLP
Second Panel: Impact of Changing
Demographics, Culture and Technology
Moderator: Bridget Rosewell, Volterra
Consulting
Leanne Lachman, President of Lachman
Associates
David Ticoll, Distinguished Research Fellow
at the Innovation Policy Lab, Munk School of
Global Affairs, University of Toronto
Harriet Tregoning, former HUD Principal
Deputy Secretary of the Office of Planning
and Development
Third Panel: The Future of Retail
Moderator: Steve Horowitz, Partner at
Cleary Gottlieb Steen & Hamilton LLP
Jim Barkley, Of Counsel to Simon Property
Group, Inc.
Melina Cordero, Head of Retail Research,
the Americas for CBRE Retail
Robert LeHane, Partner at Kelley Drye &
Warren LLP
Catherine Marcus, Managing Director at
PGIM Real Estate
Ian Putnam, Executive Vice President, Chief
Corporate Development Officer of Hudson’s
Bay Company
Dana Telsey, CEO of Telsey Group
Fourth Panel: Specialty Users and
Innovation in the Real Estate Sector
Moderator: Andy Martin, Senior Partner at
Strutt & Parker
Colin Banyard, Chairman of Cracknore
Investment
Patrick Burke III, head of Capital Project
Management at Columbia University Medical
Center
Matt Toner, Managing Director of the CBRE
Institute
Amy Erixon, founder and head of Avison
Young's Global Investment Management
practice
Fifth Panel: Toronto Perspectives
Moderator: Rob Robinson, Chairman of
Urban Design Associates
Chris Glaisek, Vice President of Planning
and Design for Waterfront Toronto
Dave Harvey, founder and Executive
Director of Park People
Leslie Woo, Chief Planning Officer, Planning
and Policy for Metrolinx
Program Coordinators
Steve Horowitz
Susan Talley
Reporter
Janis Foo
4
Keynote Address
Mark Gibson, founding partner and CEO of HFF, Inc.
Mark presented an overview of capital markets in 2017, including the following
themes:
Capital remains abundant but measured
Investor psychology is markedly different from any previous cycle; investors
are buying assets and holding on to them for a longer period of time
Reinvestment risk has eclipsed End of Cycle Risk
Remaining in cash is not an option, and commercial real estate provides
compelling risk adjusted relative return
Portfolio premiums have returned, especially for low “Cap-Ex” product
Sales of assets remain 9% off 2016 pace with debt transactions up 15%
Strategic recapitalizations/partial interest sales remain in favor
Development will remain difficult to capitalize
Conviction of fundamental demand by city/property type will determine asset
pricing
Foreign capital has declined in the U.S. but is still well above the long-term
average
5
Figure 1: 1H17 Transaction Volumes Down 9% YoY
Figure 2: Non-Major Market Yields Relatively High
6
Figure 3: Commercial Real Estate Benefiting from Increasing Allocations
Figure 4: Mix of Foreign Capital in U.S. Investment, Changes Due to Many Variables
7
First Panel: Impatient Capital in Real Estate
Key Points
There is plenty of capital seeking return but there are variables other than interest rates that determine the direction of that capital
Foreign exchange rates, barriers to entry (e.g., government approval) and domestic competition all have an impact
Global institutions continue to allocate significant capital to new real estate investments, though investment results and conviction are declining
o Institutions remain broadly under-invested relative to target allocations
o Institutional conviction for the real estate asset class showed a significant
decline after being relatively flat the prior 3 years
China’s global outward foreign direct investment grew in 2016
Figure 5: Long-Term Interest Rates: US, UK, Canada
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Per
cen
t
US 10-Year T UK 10-Year CA 10-Year
8
Figure 6: Recent Long-Term Interest Rates: US, UK, Canada
Figure 7: Current vs. Target Allocations
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Per
cen
t
US UK CA
9
Figure 8: Actual vs. Target Investment Returns
Figure 9: Investor Confidence in Real Estate
10
Figure 10: Chinese Outward Foreign Direct Investment
11
Second Panel: Impact of Changing Demographics, Culture and Technology
Key Points
Nearly a billion people will be added to the worldwide work force over the next decade, mostly in urban areas
Millennials and baby boomers in the U.S. prefer to live in urban areas and small towns over suburbs with large lot houses
Developers and policymakers are not doing enough to address climate change and the fallout from climate change, including flooding and sea level rise
o Good urban design is at the heart of what it takes to mitigate climate
change, demographic change and the advent of automated vehicles
Municipalities continue to face a number of public-private planning challenges
Technology and data can improve the maintenance of existing infrastructure Figure 11: Worldwide Urban/Rural Population Mix
12
Figure 12: Global Population Growth by Age Chart
Figure 13: Demographic Impact on the Housing Market
13
Figure 14: Millennial Housing Preferences in the U.S.
Figure 15: Suburban Large Lot Single Family Home Oversupply
14
Figure 16: Disasters Growing in Frequency and Severity
Risk in the U.S. is concentrated on the coasts
o In 2010, 123.3 million people, or 39% of the U.S. population, lived in counties directly on shoreline
o Between 1970 and 2010, population in those areas grew by more than 40%
o By 2020, population in those areas expected to grow by more than 10 million people or by more than 8%
o Shoreline counties are 6 times more dense than inland communities
15
Third Panel: The Future of Retail
Key Points
Omni-channel retailing – bringing together online and brick-and-mortar retail
Customers that shop both online and in stores provide the greatest value to retailers
Technology and data are increasingly harnessed to illuminate consumer habits and enhance consumer experience; these are useful but also raise privacy concerns
Logistics sector has proliferated
The repurposing of regional malls into experiential centers poses a number of economic and financing challenges for mall owners, investors and lenders
Our legal system cannot keep up with the acceleration of technology – even with a proliferation of data, lease structures will be slow to evolve
Trend of shorter term, more flexible leases will necessitate changes in financing models in the U.S.; Europe has adapted more quickly
Debate about extent and location of excess retail space in the U.S.
o By the end of this year, more than 8,600 stores will have shuttered in the U.S. in 2017, the worst year on record
o Malls grew too quickly, at twice the rate of the population, from 1970 to 2015
o One study from retail-research firm IHL Group found that a mere 16 chains, including Radio-Shack and Payless, account for nearly half of all store closings, and that there will be a net increase in openings of more than 4,000 stores (including restaurants) in 2017 and more than 5,500 stores (including restaurants) in 2018.
16
Figure 17: In-Store Mobile Device Use
Source: “How Innovative Retailers Stay Ahead of What Customers Want”, urbanland.uli.org Figure 18: In-Store Integration of Mobile Devices
Source: “Omnichannel Retail Index”, nrf.com; “How We Shop Now”, uk.westfield.com
17
Figure 19: Impact of Data
Figure 20: Surplus Retail Properties: Annual U.S. Store Closures Since 2007
Source: Credit Suisse
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(Proj.)
Nu
mb
er o
f C
losu
res
18
Figure 21: Surplus Retail Properties – Shopping Center Area Per Inhabitant
Source: We have revised this chart, originally presented in Fortune Magazine (http://fortune.com/2016/12/02/shopping-malls-trouble-data-charts/), with respect to the U.K. Our research suggests that there are between 2 and 10 square feet of shopping center area per inhabitant in the U.K., rather than 0.5 square feet as Fortune reported. The results of our research with respect to the U.S., Canada and Australia aligned with Fortune’s numbers. See, e.g., https://www.icsc.org/uploads/research/general/America-Marketplace.pdf; https://www.retailcouncil.org/sites/default/files/RCCCanadianShoppingCenterStudyFINAL.pdf; https://www.ggp.com/content/dam/ggp-digital-assets/Documents/b2b/investors/Investor%20Presentation%20March%202017.pdf/_jcr_content/renditions/original.pdf; https://www.statista.com/statistics/451485/sales-area-per-capita-in-europe-by-country/; http://www.npr.org/sections/money/2009/02/most_retail_space_that_would_b_1.html and http://eeg.tuwien.ac.at/commonenergy/gla-per-capita-shopping-center.
U.S.: 24 SQ. FT.
CANADA: 16 SQ. FT.
AUSTRALIA: 11 SQ. FT.
U.K.: 5 SQ. FT.
19
Fourth Panel: Specialty Users and Innovation in the Real Estate Sector
Key Points
Real estate needs to be increasingly adaptable
o Technology changing how we use buildings
o How buildings are used is now more important than the asset itself
o As a response to climate change, buildings can be the power plants of the future (e.g., Jaguar plant in the U.K. will use energy generated from waste where the carbon dioxide could be captured through the use of micro algae)
Technological advances changing how buildings are conceptualized, designed and built
o Virtual reality has enabled prospective users to “walk” through office spaces before deciding on a layout
o 3D printing and 4D (which is 3D printing plus the dimension of transformation over time) printing have been used to create transformative materials
“The Great Acceleration”
o Seeing rapid cannibalization of technology
o Technology runs ahead of acceptance which runs ahead of regulation
The main challenge ahead is finding someone to underwrite all of these new technologies
In China, the government has largely underwritten the solar industry
20
Figure 22: The Great Acceleration
Source: The Great Acceleration, by Broadgate, Deutsch, Gaffney and Ludwig (2004).
Since 1950, multiple economic parameters show high growth rates, e.g., population, GDP, energy and water use, tourism
21
Figure 23: Steady growth in Internet use since 2000
Figure 24: Expected growth in data generation, 2009-2020
22
Fifth Panel: Toronto Perspectives
Key Points
Toronto is experiencing a major population surge (population in 2016 was 2,731,000; projected population in 2041 is 3,400,000
As a city, Toronto is forward-thinking in its approach to innovation in transportation infrastructure, mixed use developments and public spaces
Metrolinx is overseeing $30 billion in regional transit and infrastructure investment
Waterfront Toronto, mandated to revitalize 2,000 acres of brownfield lands on the waterfront, aims to address the challenges that Toronto faces: climate change, mobility, inclusivity, economic growth, accessibility and connectivity
Park People aims to improve communities by animating and improving parks; it encourages private donors to give money to public parks (a relatively new model in Canada)
Figure 25: In the 2.5 km stretch from Bathurst Street to Lower Yonge Street, south of Lake Shore Boulevard to Lake Ontario, Waterfront Toronto is linking major waterfront destinations, creating new public spaces, and expanding access to the water’s edge.
23
Figure 26: Metrolinx’s Growth Plan
24
Attendees US Members
James Barkley, Simon Property
Graham Bond, Sasco Ventures, LLC
Janice Carpi, Secure Legal Title PLC
Ann Cargile, Bradley Arant Boult Cummings
Alexandra Cole, Perkins Coie LLP
Joseph Forte, Kelley Drye & Warren LLP
Sally Gordon, BlackRock (Retired)
John Hollyfield, Norton Rose Fulbright US LLP
Steven Horowitz, Cleary, Gottlieb, Steen & Hamilton LLP
Carl H. Lisman, Lisman and Leckerling, P.C.
Daniel MacEachron, BlackRock
John MacGregor, TransDevelopment Group
John Mallinson, AIG
Catharine Marcus, PGIM Real Estate
Mark Mehlman, SNR Denton US LLP
Margaret Meister, Modrall, Sperling, Roehl, Harris & Sisk, P .A
Arthur Mirante, Avison Young
Dan Rashin, Rockefeller Centre Development Group
David Richards, Steptoe & Johnson LLP
Rob Robinson, Urban Design Associates
Michael Rubin, McGlinchey Stafford PLLC
Mark Senn, Senn Visciano Canges P.C.
Donald Sheets, AlumCreek Holdings LLC
Leopold Sher, Sher Garner Cahill Richter Klein McAlister & Hilbert LLC Shannon Skinner
Susan Talley, Stone Pigman Walther Wittman LLC
David Tang, K&L Gates
David Van Atta, Hanna & Van Atta
Ira Waldman, Cox Castle & Nicholson LLP
Steve Waters, USAA Real Estate Company
Andrew Wood, Macquarie Global Fund (Retired)
UK Members
Colin Banyard, Kilbride Group Ltd
Piers Coleman, K&L Gates (UK)
Smita Edwards, Forsters
Michael Humphries, Q.C
Andrew Martin, BNP PRE
Ian Nisse, Macfarlanes LLP
Tom O’Connor, Maples and Calder
Robbie Owen, Pinsent Masons
Martin Quicke, Clyde & Co
Bridget Rosewell, Volterra Consulting
Will Rowson, CBRE Global Investors
Nick Ryden, Shepherd & Wedderburn LLPMark Senn, Senn Visciano Canges P.C.
25
Past Meeting Topics and Venues
1981
WASHINGTON, DC, USA
1. Private Institutional Financing
of Real Property Development
and the Movement Towards
Equity Positions.
2. Public Incentives for Real
Property Development
3. The Impact of Taxation on
Real Property Development
1982
LONDON, ENGLAND
The Demise of the Fee Simple
1983
SAN FRANCISCO, USA
The Use of the Lease in Property
Development
1984
PARIS, FRANCE
When Developments Go Wrong,
Who Carries the Can?
1985
STRATFORD, ENGLAND
The Planning and Development
Process, Private and Public
Participation
1986
SAN DIEGO, USA
Non-Judicial Resolution of Real
Estate Disputes: The Use of
Arbitration
1987
EDINBURGH, SCOTLAND
Financing Property Investment:
New Attitudes and Methods
1988
BOSTON, USA
Legal Hazards of Hazardous
Substances: The Impact of
Environmental Controls on
Private Transactions
1989
YORK, ENGLAND
Accelerating the Development
Process
1990
SANTA FE, USA
Valuations and Investment
Analysis – End Use
1991
DUBLIN, IRELAND
The Internationalisation of Real
Estate
1992
VANCOUVER, CANADA
Trends in the Laws Governing
Real Estate and Shifts in the
Benefits and Burdens of Real
Estate
1993
OXFORD, ENGLAND
Enforcement of Creditor’s Rights
and Insolvency
1994
CHICAGO, USA
Private Participation in Public
Infrastructure Provision
1995
MADRID, SPAIN
Managing Environmental Risks in
Real Estate Transactions
1996
WASHINGTON, DC, USA
Urban Regeneration – 42nd
Street and Broadgate
Metropolitan Government
1997
FLORENCE, ITALY
Metropolitan Government
1998
WILLIAMSBURG, USA
Real Estate Investment Trusts
and Securitisation of Mortgages
1999
SAN FRANCISCO, USA
Leasing
2000
BATH, ENGLAND
Regeneration
2001
SEATTLE, USA
Globalisation of Real Estate
2002
BERLIN, GERMANY
Real Estate Disputes
2003
NEW YORK, USA
Outsourcing
2004
PRAGUE, CZECH REPUBLIC
New Urbanism
2005
BOSTON, USA
Growth of Private Equity Real
Estate – Structural or Cyclical
26
2006
BARCELONA, SPAIN
The Olympic Legacy
2007
CHICAGO, USA
Demographics and Energy Issues
2008
CHESTER, ENGLAND
The New Puritanism or What is
going on in the Property
Industry?
2009
PHILADELPHIA, USA
Risk in the Real Estate Economy
2010
OXFORD, ENGLAND
Effects of Financial Market
Reforms (financing and raising
new capital)
2011
SANTA FE, USA
Opportunities and challenges in
infrastructure
2012
SEVILLE, SPAIN
Changing demographics and the
changing effect on cities
2013
SAN FRANCISCO, USA
Technology is changing;
Changing the rules for the way
real estate is occupied and
provided; Opportunity for urban
centres; City adaptation to urban
tech; Transformative projects
bringing the valleys to the alleys.
2014
BUDAPEST, HUNGARY
The Changing Face of Capital
Flows and their impact on Real
Estate.
2015
WASHINGTON, DC, USA
The Intersection of Politics and
Property: Geopolitical Risk in
Real Estate Investment
2016
LONDON, ENGLAND
New Wine in Old Barrels?:
Retrofitting Our Cities for the
21st Century
Prospective Meetings
2018
BERLIN, GERMANY
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