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Exploring Canada
Comparing Eastern and Western Provinces

For several decades, commercial real estate investors from across the globe pretty much ignored Canada in favor of its neighbor to the south. But, over the past several years, investment in Canada's commercial property markets has boomed.



"Compared to other geographies around the world, Canada is a well-priced market," says Katherine Lee, managing director of GE Real Estate Canada. "Canada's economy is relatively stable and real estate fundamentals are sound. Canada is a good geography to invest in terms of economic and real estate returns and we're starting to see opportunistic funds look our way."

In 2007, $14 billion worth of Canadian real estate changed hands - a 64 percent increase over 2006, according to Jones Lang LaSalle. Cross-border investment in Canada increased 83 percent year to year to $4.2 billion.

This year, GE Real Estate Canada hopes to invest more than $2 billion - comprising debt and equity - in the Canadian property market, Lee says, but the actual transaction volume is anyone's guess. "There's a high level of uncertainty in the market today because of the current capital dislocation," she explains.

Although Canada's real estate market has not been impacted by the U.S. downturn, real estate investment activity this year is not expected to reach 2007's levels, experts forecast, primarily because of concerns about the global economy.

"Real estate is taking a pause from a 14-year run," says Blake Hutcheson, chairman and president of CB Richard Ellis Ltd. in Toronto. "People are uncertain about a recession and debt is increasingly harder to find because everybody is waiting to see what will develop and nobody wants to look like a fool."

At the same time, global investors continue to hunt for deals in both Eastern and Western Canada, where the growth dynamics are vastly different, yet appealing in their own way.

Growing western economies
From 2004 to 2007, Canada's gross domestic product averaged 2.9 percent annually, compared to 3 percent for the U.S., according to recent data from the Canadian government. GDP growth of 2.5 percent is expected this year, and 3 percent in 2009, according to the Conference Board of Canada. At the end of 2007, the country's unemployment rate was 6.1 percent.

Last year, Canada's four western provinces -- Alberta, British Columbia, Saskatchewan and Manitoba - had stronger economic growth than the more populated eastern half of the country. Late last year, the Conference Board of Canada, based in Ottawa, released a study that ranked Saskatoon, Saskatchewan as number one on its list of Canadian cities' with the highest GDP growth.

Saskatoon, with its population of 208,300, had 4.7 percent GDP growth due to its position as producer of half of Canada's major export crops and owner of nearly two-thirds of the country's recoverable potash reserves. Even more impressive, it is the world's largest exporter of uranium.

Behind Saskatoon, the Conference Board's list named Calgary, Winnipeg, Edmonton, Regina (Saskatchewan) and Vancouver - all in western provinces. It's the first time the authoritative Board measured that earthquake-like shift in economic tectonic plates from east to west in its 54-year history.

For example, Calgary, with a population that only recently nudged over the million mark, has GDP growth that exceeded the Greater Toronto Area with its 5.5 million residents. Toronto, the country's leading financial, commercial and manufacturing powerhouse, had GDP growth of 2.7 percent, followed by Quebec City, Halifax, and Ottawa-Gatineau. Montreal, with a 2.1 percent gain, was last on the list.

"From west to east people are extremely happy to a little less happy in terms of real estate development and investment," Hutcheson notes, adding that British Columbia and Alberta have fared better economically than other provinces.

Both British Columbia and Alberta have oil and gas deposits. In fact, Alberta has the world's second largest oil reserves with 178 billion barrels. In Alberta, "the euphoria has become self-fulfilling, with consumer spending priming the pump and a level of optimism that continues to surge," Hutcheson says.

Downtown Calgary, for example, has nearly 9 million square feet of Class A office space under construction currently, with developers ready to pull the trigger on millions of square feet depending on the fortunes of the provincial oil and gas industry and its need for more corporate space. In contrast, Toronto has just 3.1 million square feet of office space under way in downtown Toronto.

In fact, Calgary's city council was recently forced to consider freezing five residential and commercial projects on the city's outskirts for a year because it doesn't have the manpower in its planning department to handle the flow of projects and can't cope with the billions of dollars in infrastructure the city needs to service these projects.

In Vancouver, the 2010 Olympic Winter and Paralympic Games have a number of spin-off benefits, most notably improvements in permanent transportation and other infrastructure.

Meanwhile, GE Real Estate Canada has its eye on Calgary, Edmonton and Vancouver. "We're looking to grow in these markets because their economic and real estate growth fundamentals are strong into the foreseeable future," Lee says. To date, the company has been actively providing financings of commercial real estate and selective acquisitions in Calgary and Edmonton.

"For GE, it's always been a matter of pricing risk properly," Lee explains, adding that prices for commercial property in Western Canada have increased substantially over the past couple of years. "We recently looked at buying a large number of commercial assets in Alberta, but ended up declining because the Alberta market was extremely heated and we weren't certain of its long-term momentum."

Eastern provinces improve
While the economic gap between western and eastern Canada is likely to widen if the west continues to ride a tsunami-like wave of abundant and exportable natural resources, the eastern Canadian provinces still have plenty of economic firepower.

GE Real Estate Canada is one investor that is confident in eastern Canada real estate markets. About half of the company's portfolio is located in the country's eastern provinces, Lee says, with its largest presence in office, industrial and multifamily. And, in August 2007, GE acquired a portfolio of Dundee REIT's office and industrial properties located in Ontario, Quebec and Newfoundland for approximately C$2.4 billion (US $2.3 billion).

"Since acquisition, our portfolio has improved in terms of occupancy and leasing activity - the real estate is performing better than we originally budgeted, even during this period of market uncertainty," Lee says.

In the province of Ontario, Toronto continues to hold onto its position as the financial center of the country. Ottawa, Canada's capital, is also an attractive office market because it is driven by the Government's demand for space.

With the Canadian dollar hovering at par with the U.S. dollar, Quebec's biggest city, Montreal, is slowing in areas like manufacturing due to to cheaper imported products. However, Montreal is benefiting from relatively newer industries including information technology and biotechnology.

In just a few weeks, Bell Canada's new 840,000-square-foot national headquarters on Nun's Island will welcome 4,000 employees from other, older Montreal buildings. Experts expect the excess space will be absorbed pretty quickly. Other projects in Montreal include a 28-story office building in downtown with a price tag of C $150 million that will be developed by SITQ, a Montreal-based international real estate developer, and Hines Interests Limited Partnership.

In general, the eastern provinces are recovering some of their lost economic traction, says Sandy McNair, president of Toronto-based InSite Real Estate Information Systems Inc. "The east [provinces east of Manitoba] have firmed up quite a bit," he says. "Ottawa office space is tight and Toronto is getting quite tight. Even Montreal, which has been treading water for quite a while [in real estate terms] has firmed up quite a bit, although the city doesn't have a lot of organic growth."

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