rics americas property world fall 2009

MEXICO IN TIME OF CRISIS TOWN PLANNING IN ITALYCANADA’S REAL ESTATE MARKETS

PROPERTY2009 | FALL EDITION | RICSAMERICAS.ORG

AN INFORMATION RESOURCE FORRICS MEMBERS AROUND THE GLOBE

ARE WE THERE YET?COMMERCIAL REAL ESTATE’S LONG ROAD TO RECOVERY.

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RICS Property World | Fall 2009

ContactsPublishing and advertising managed by:RICS Americas [email protected]

Editorial Board:Tony Grant, FRICS Simon Taylor, FRICS Matt Bruck, RICS Americas Managing Director

Readers:James Arrow, MRICS Don Dorchester, FRICS Maureen Ehrenberg, FRICS Alistair Lamb, MRICS Clive Lowe, FRICS M. Barden Prisant, FRICS

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Managing Editor: Will Safer, RICS Americas Communications Associate

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front cover © Katja Wickert

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Contents

5 Are We There Yet? Marc Louargand, FRICS

9 Toward Sustainable Finance: The Trouble with Asset Values Dennis Webb, FRICS

12 Site Specific Art: Where Real Estate and the Art World Intersect Beverly Schreiber Jacoby, FRICS

15 Ten Principles for Sustainable Property Underwriting & Valuation Scott Muldavin, FRICS

19 Canada’s Real Estate Markets Sheila Botting, FRICS

22 Mexico in Time of Crisis Oscar J. Franck Terrazas, MRICS

25 The Challenge of Real Estate Investment In Italy Marzia Morena, MRICS

27 The Value of Continuous Program Assessment Alexia Nalewaik, MRICS

29 Concern in the Caribbean: Strategies for Surviving the Economic Crisis Steve Rajpatty, MRICS

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Economic Overview


Are We There Yet?Marc Louargand, FRICS, cautions that even while the rest of the economy appears to be recovering, the commercial real estate market will likely lag behind.

As we exit the middle of 2009 we are still contending with a global recession that has had a negative impact on property markets.

The outlook for the near term is not better. Given the lagging nature of property market responses to the broader economy, things will probably get worse before they get better. What will it take for things to turn around? Where are we going in terms of occupancies, rents and values? What forces will combine to shape the fortunes of the property market for the next few years?

The Global Recession

We are still in a global recession that began at the end of 2007. The World Bank forecast contemplates negative GDP change in OECD countries of -4.2 percent with a negative 4.8 percent in non-OECD countries for the full year 2009. Developing countries, which typically have relatively high GDP growth rates, are forecast to come in at only 1.2 percent in 2009. OECD countries are forecast to have a modest recovery in 2010 with GDP growth of 1.2 percent. Some of the world’s more robust economies have been hit hard. Korea recently raised its GDP forecast from -2 percent to -1.5 percent. Singapore has released a -4 percent to -6 percent GDP forecast and Brazil is forecast to be -1.1 percent. Only India and China of the BRIC

countries are expected to have positive growth although at lower rates than in past years.

In the United States, the signs are still mixed but many economists are calling for a positive GDP change in the third or fourth quarter of 2009. There are a few positive signs in leading industries. The Book-to-Bill Ratio in Semiconductors rose to .74 in May compared to .47 in January. The Book-to-Bill ratio compares current sales (Book) to shipments (Bill). When the ratio is at or above 1.0 it signifies a healthy electronics market. By comparison, the May 2008 ratio was .86. Things are improving but we still have some distance to go. By contrast, the Book-to-Bill ratio in Japan in May was .40. The OECD reports that leading indicators for most economies pointed up or signified a trough in May 2009. The current recession has been more severe and pervasive than the two previous ones. Job loss in the United States and elsewhere far exceeds the experience of the last two downturns. In order to understand the reaction of the real estate market to the broader economy we need to focus on job loss and job creation.

Jobs and the Recovery

Readers may recall talk of a “jobless recovery” in the early 2000s. In fact, all recoveries are

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Economic Overview

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Economic Overview


“jobless” as seen in figure 1, Recent Post-Recession Employment Recovery. It took 48 months to regain peak employment in the United States after the 2001 recession, until February of 2005. The percent of job loss in the current recession has been significantly sharper than it was in the 2001 recession, which bottomed at 97.9 percent of peak employment. As of June 2009, the United States had fallen to 95.3 percent of peak employment. It took four years to replace those jobs in the 2001 recession; it will likely take much longer to recover this time. What does it mean for property markets? Figure 1 shows that the previous employment recoveries follow a trend upward from a trough after “bumping along the bottom” for an extended period, about ten months in both cases. This recession is significantly different in both the extent and the speed of job loss in the United States.

Will the recovery resemble past history or not? Employment contraction is far more widespread this time around and that may be something of a silver lining. Traditionally, firms take advantage of a recession to trim costs, remove deadwood and delay rehiring in the recovery as long as possible in order to restore their balance sheets. Given the sharp reduction in jobs, it is possible that firms will find they have a capacity problem early on in the recovery and that they must begin rehiring sooner than

they anticipate. Even if so, it will take an extended period to make progress back toward the peak employment we saw last in 2007. I expect that we will again have a flat bottom for an extended period as we enter a period of mixed results. Some will be rehiring while others are still cutting. How does that affect real estate?

There did not appear to be any significant capacity shortages in the property markets during the last expansion (with the possible exception of hedge fund office space in Greenwich, Conn.). Thus, the property recovery will follow the jobs recovery. For now, the office market remains weak in the United States, United Kingdom and elsewhere with rising vacancies and declining rents. Retail occupancies are suffering as well as retailers go dark in marginal locations or shut down entirely. Regional and super-regional malls are harder hit than in previous downturns while smaller shopping centers suffer as well. Given consumers’ new propensity to save in the face of asset deflation and reduced circumstances, retail will likely take substantial time to come back.

Multi-family properties have seen increased weakness but on a relative basis their fundamentals remain better than other property types. Multi-family will also enjoy the earliest firming of fundamentals as job creation brings household formation almost

simultaneously. Based on behavior by recent graduates, it also appears that there will be a meaningful pent-up demand for apartment rentals that can only be unleashed by job creation.

The office sector has a modest over-capacity at present. Whether it gets worse before it improves will be determined by firms’ ability to retain their current staffing levels and remain viable. In the United States, credit markets appear to be turning back toward

I expect that we will again have a flat bottom for an extended period as we enter a period of mixed results.a semblance of normalcy with the exception of the possibility of a CIT bankruptcy, which could have a major impact on several industries that rely on factoring and franchise finance. Expect the market to remain weak for 18 to 24 months. Robust office markets typically require vacancies to fall below 14 percent in the United States while several forecasters are estimating that vacancies will be approaching 17 percent by year-end. Of course, in individual markets the numbers vary widely with some moving into the mid-20s already. But these numbers tend to be in traditional growth markets (with the exception of Detroit) that have shown the capacity to grow jobs at 5 percent to 7 percent per year in recoveries. The U.K. market looks to be in somewhat better shape in terms of the level of vacancy but the relative importance of financial services in the City and the West End could make for an extended recovery period.

The pieces are in place for a slow recovery in the jobs market, which means that real estate fundamentals will remain weak for an extended period and will embark on a slow recovery when the job market begins to rise off its bottom.

How have the decline in fundamentals and changes in the capital markets combined to affect values? The two critical variables are risk premia and leverage ratios.

Return of Risk

Risk premia have returned to asset pricing. During the recent bubble, buyers made little distinction between the bluest of blue chip properties and those in historically volatile and risky markets. Why was that? Some would argue that it was because the investor was not bearing any risk. The lenders were taking it all. Yet the lenders’ rates did not reflect meaningful risk premia either. A cynic might note that the originating lenders were not bearing any risk either since they were slicing

and dicing the paper into increasingly remote derivative claims. Since the ultimate buyers of those claims were comforted by agency ratings that implied low risk, it appeared that a miracle had occurred and that risk was banished from the marketplace. Today the miracle of the disappearing risk has been debunked as just another illusion. The expression of risk is found in the spread of required yields over Treasuries or Gilts or other putatively risk-free instruments. Transaction data from the past two quarters has begun to show a rise in both cap rates and spreads.

Cap Rates

During the recovery from the 2001 recession, which was accompanied by a modest excess supply of real estate due to economic contraction, Real Capital Analytics reports that the average cap rate for institutional transactions was 8.74 percent during the period January 2001 to December 2005. During the same period the average 10 year Treasury rate was 4.43 percent. The real estate cap rate spread averaged 430.7 basis points during that time. Why were spreads so high? Why was the real estate risk premium nearly 100 percent of the Treasury yield? In the 1980s real estate cap rates had negative spreads to Treasuries. Why? Because investors assumed that the high inflation rates of the period would be reflected in increasing revenues and values if they persisted. During the recovery from the 1990 recession, which was accompanied by a massive excess

Months to Recover Peak Emplyment Bureau of Labor Statistics; Saltash Partners LLC; Establishment Data

Figure 1: Recent Post-Recession Employment Recovery

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Economic Overview


Sustainability—Finance


Toward Sustainable Finance: The Trouble with Asset ValuesDennis Webb, FRICS, argues for applying concepts of long-term sustainability to financial processes—essentially telling the truth about value—as short-term asset valuation models continue to feed economic turmoil.

Sustainability as a concept is routinely applied to the natural world but routinely ignored with respect to the financial environment. A

large portion of the population has developed an awareness of conservation principles and at least some respect for nature but financial beliefs are so embedded in our thinking that we regard them as given, and have allowed institutions to develop based on (what are now obviously) unsustainable premises. The oceans are rising slowly but financial consequences are descending upon us at a frightening rate.

The root of both aspects of sustainability is short-term thinking. Our short-term notions of asset value have fostered unreal perceptions of individual wealth and growth, and enabled enormous financial distortions. Short-term thinking creates a historic myopia and a kind of vacuum in which greed can have a field day. Most recently, otherwise stable assets were allowed to enable extremely unstable derivative securities, with (by now) well-known implications for global financial markets.

The good news is that we do have institutional financial structures that can be adapted to

create healthy perceptions of value in a big way. The bad news is that adoption of anything that has tried to get in the way of what had been a very profitable false reality was wholly resisted by existing institutions. The speed with which a clearly unstable system has imploded has been surprising, but so has the extent of global cooperation and the proliferation of new ideas. I am quite optimistic over the long term, since there may now be an opening for new understanding and a collective interest in telling the truth. There is hope for Capitalism II.

Wages of conventional wisdom

Short-term notions of value have become embedded in our conventional wisdom, to the point that our collective belief system regarding asset value has moved into a sort of fanciful parallel universe. This collective fantasy has fostered unreal perceptions of individual wealth; one unfortunate, immediate consequence of which is the pain of foreclosure now being experienced by a great many borrowers worldwide. The full measure of its consequences is far greater than foreclosures, however, as our collective sense of loss has

supply of finished product, cap rates traded between 9 percent and 10 percent. Why? Because the specter of inflation had been banished by then. Investors priced property to reflect its inherent risk, returning to a spread roughly equal to the Treasury rate. From early 1992 to the end of 2000, Treasuries traded between 5 percent and 6 percent. During 1998, Treasury rates pulled back into the 4 percent range and cap rates followed, dipping into the 8 percent range — but bounced back into the nines when Treasuries returned to the 5 percent range in 1999. The failure of Long Term Capital and the

It could take as many as five years to regain the jobs lost to date.Asian crisis created a flight to the safety of Treasuries and real estate benefited as a result. But rates came back up in 1999 and remained in the same range until 2002 when the Federal Reserve began its fight against the specter of deflation. Cap rates fell along with Treasuries as liquidity flooded the world’s capital markets. The inevitable end to the property pricing bubble has come, evidenced first by a dramatic drop in transaction volume as investors avoided creating a reportable value against portfolios of higher book values. Transactions have begun to come back, perhaps driven by foreclosures or liquidations in pursuit of delivering. Recent cap rates have returned to the 9 percent and even the 10 percent level according to Real Capital Analytics. Where will they go next?

There appear to be two possible paths for cap rates and pricing in the next two to five years. What could drive them back down and what could sustain them at elevated rates?

Falling Cap Rate Scenario

A return of expectations for high inflation accompanied by improving fundamentals in space markets could combine to lower cap rates dramatically on a relative basis. Recall that property traded at negative spreads to Treasuries during the high inflation years. We had reasonably sound fundamentals in most space markets during those years so investors had a reasonable expectation of being able to raise revenues along with inflation. But remember that the nominal cap rates were low during that period only by contrast to the very high risk-free rates that failed to completely reflect expected inflation. Will the Treasuries and Exchequers of the world have the discipline to head off incipient inflation from massive liquidity infusions? If we see a Japanese-style policy emerge with long-lived low reference rates, we may see falling cap rates again. Another enabler of falling cap rates was enjoyed in the previous cycle — low interest rates accompanied by high loan-to-value ratios. A 90 percent LTV at 5 percent interest means a 6 percent cap rate yields 15 percent to the equity. The likelihood of this arrangement obtaining in the foreseeable future appears dim.

Rising Cap Rate Scenario

We have already seen a few transactions with markedly higher cap rates. They are likely to remain high if not go higher if space market fundamentals remain weak and inflation remains dormant. Since we are in a balance sheet recession, it’s likely that deflationary forces will remain at work in the short run. If so, we should expect some continued decline in values as cap rates adjust upward to a new equilibrium in the 8 percent to 10 percent range. Realize that the cap rate adjustment is occurring while fundamentals weaken and leverage declines — or disappears altogether in some sectors or markets. The combination is likely to bring value declines on the order of 40 percent or more. Based on the institutional return indices in the United States and the United Kingdom, it appears that value declines on the order of 40 percent are a reasonable expectation and in fact have been booked in the case of publicly traded real estate securities. Coincidentally, a shift from a 6 percent cap rate to 10 percent delivers a 40 percent decline in value for a constant income stream. While transaction volume has remained scant, the implications are clear for value. In the case of open-ended funds that are required to revalue quarterly, already we see more than 30 percent declines in the past year.

While fundamentals will continue to weaken for some time, the shift in cap rates will create most of the revaluation.

Which will it be?

It likely will be both. Persistent high cap rates for a period of at least 12 to 24 months, followed by cap rates falling on a relative basis to Treasuries. The initial phase of recovery will see few if any jobs created, thus investors will lack confidence that they will be able to fill empty space in the short run so they will rely on in-place revenue and be subject to reduced leverage opportunities. At some point, however, the massive liquidity created by stimulus packages around the world will escape the liquidity trap and inflation will come roaring back. Monetary policy response will lead to higher reference rates from central bank actions or from investor pricing.

It could take as many as five years to regain the jobs lost to date. But expectations of a recovery will allow investors to look forward to better cash flows. Investors have shown in previous cycles that they are willing to pay a small premium to have their assets in portfolio when good times return. So after a period of persistently high cap rates investors will come back into the market in sufficient volume to put downward pressure on cap rates and force them to price inflation into their expectations rather than into the cap rate.

In each cycle, animal spirits rise to deny its very existence. Perhaps some memory of the current trauma will remain to inform our decisions during the coming recovery. •

Dr. Marc Louargand, FRICS, CRE

Principal Saltash Partners LLC Saltashpartners.com

[email protected]

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become enormous. Perceptions that were outrageously optimistic have turned depressingly pessimistic, and what might have been experienced as a normal return to a relative stable, long-term trend, is instead being viewed with much hand-wringing and grief.

Were individuals really richer, or was the experience guaranteed to be fleeting? Did stable assets really become unstable? Were the foundations of risk analysis realistic and appropriate? Much of the blame for the collapse of the fanciful parallel universe is aimed at the entirely unexpected, widespread/systemic nature of the decline in property values. However, a closer examination of asset pricing reveals that we have not been telling ourselves the truth, and that a decline was inevitable.

What is it with asset prices, anyway?

Real Property assets are among the most stable and least volatile fixed assets over the long term, normally exhibiting a reasonably consistent historic trend over time. Even at present, a portion of a property’s value is, indeed, quite stable; its long-term value is reasonable predictable, and not strongly subject to unexpected events. However, another portion is more directly affected by short-term (unsustainable) conditions, which can conspire to inflate or deflate value well beyond an expected range, and exposure to unexpected events can become great. When this happens on a wide scale—when short-term and long-term value components are conflated and confused—a bubble or depression can begin to feed on itself. A positive feedback loop amplifies the value trend in both directions. Property owners experience themselves as unreasonably rich or poor, and derivative securities that are designed to rely on property’s fundamental stability can become severely impaired.

Unexpected events do not typically affect the long-term trend, as suggested by Robert Schiller’s inflation-adjusted home price index, shown in the chart for the postwar period. The aggregate U.S. data shows that long-term values have been reasonably stable; further, local market values for all property types normally follow cycles that are reasonably well understood. Under such

conditions, asset values can indeed be used to underpin long-term loans and investment, and these observations would argue for high ratings in their associated credit derivative instruments.

The short term is another story, as short term pricing is highly vulnerable to unexpected events. Unsustainable capital market conditions and (local) natural disasters, to name just two, can cause short-term pricing behavior to diverge considerably from the underlying long-term trend. Is short-term pricing a suitable benchmark for long-term decisions? It still may be, so long as any deviation from the long-term trend is identified and understood. The outsized risk exposure comes when deviations are not understood; when short-term “frothy” pricing is used as evidence of market value for long-term decisions. The reverse problem arises when prices (of property or derivative paper) are depressed, or when markets fail, impairing the short-term market value of collateral. In either case, the consequences of poorly understood asset values are not trivial.

Are valuers actually helpful?

What happened to the checks built into the property finance system? One such check involves market-value appraisals. Did banks and investors rely on appraisals? If so, did they help, hurt, or do anything useful at all? Appraisals are generally intended to make sure that the collateral has sufficient value to support the loan, but the market value premise is only a snapshot in time. The appraisal typically considers property, its local environment and capital market conditions with reference to other (comparable) transactions and current investor (or home buyer) behavior. This is largely a policing function, where a neutral party (valuer/appraiser) offers an opinion of value that may or may not match the transaction price. But assuming the transaction is consistent with others… what if the entire market has been moved by external conditions, such as easy money, lax lending standards, and other short-term conditions that have big pricing effects. What good does it do the long-term lender to know that a transaction price matches a market skewed by short-term conditions?

For example: What if a lender had made a single-family mortgage loan in 2005 based on a two-value appraisal? Say short-term conditions support a current market value of $650,000, but also that this value demonstrates a divergence from the long-term trendline based on property type and market area, and another value was concluded at $400,000. The lender is now faced with a much more firm underwriting basis than with the $650,000 value alone. There are actually two collateral assets, one valued at $400,000 and one at $650,000 — $400,000 = $250,000 (hardly a small difference). A long-term loan can reasonably rely on the $400,000 value, and its expected long-term growth rate. Of course, the growth rate could change, and the value could again be subject to short-term conditions at any future date. Nonetheless, the long-term based value would present less risk of loss than the short-term (current) value. The $250,000 difference between the two is clearly a riskier component of current asset value, and could be underwritten as such.

What about the reverse situation? What is an appropriate price reference when the market is temporarily depressed? What if the long-term value is $400,000, but the market will only pay $280,000, due to oversupply or any number of other current, short-term conditions? The $120,000 below-trend value is also due to short-term conditions. The lower value is meaningless in the long-term, but does reflect an impaired ability to sell now. A recovery to $400,000 will occur at some point, although its timing is uncertain. The market may even fail entirely (as for certain types of bank-held derivative securities). It’s the ability of the holder to wait that gives the assets value under these conditions. This is not so different from various commonly-observed impairments, attributable to ownership (undivided interests held by two or more parties, for example), or physical impairments (such as toxic contamination). Impairments are generally cured over time, with the property trading at less than its “stabilized” or long-term value during the impairment period.

It would make sense for valuers to go beyond their current/traditional policing function, and parse their opinion into short- and long-term components. It does no good for valuers to bail out of opining on such issues, on the basis that they should not be involved in underwriting decisions. Valuers are the ones in a position to analyze and understand what is and is not a stable and reliable value. This is not a simple undertaking, to be sure, but an essential step toward establishing popular and institutional awareness of sustainable value.

The Germans are convinced

Just such a method for appraising commercial property under conditions approximating the long-term was established in 1996 by German Pfandbrief mortgage banks for collateral used with highly rated covered bonds. Under this system, valuers provide opinions of “Mortgage Lending Value” (MLV), defined as: “The mortgage value of a property is the value that can be expected with a high level of surety, derived from the historic perspective of market events at the time of the valuation, on the basis of the durable characteristics, and which will be achieved in normal property transactions over a long period in the future.” The mortgage banks using this system of valuation may lend over the threshold allowed by a property’s MLV, but the excess cannot be used as security for covered bonds. Thus, a two-tier risk/cost structure for loans, which is exactly appropriate as

an institutional structure for countering the destabilizing effects of frothy property markets. Its methods are an approximation for getting at a long-term value, and have apparently worked quite well. MLV is now included as part of International Valuation Standard 2, but has apparently not been adopted by any other countries or institutions.

Expanding the role of asset-level valuation

Existing risk-management tools are divorced to a large degree from the underlying assets, making broad assumptions about growth rates (6-8 percent into perpetuity?!), which have been known by valuers to be absurd. The problem is that apparently no one (on Wall Street) thought to ask, confirming that conventional wisdom has been driving their myopic risk analyses. Recognition of MLV, or some other standard that parses short- and long-term perspectives, would provide a much more secure reliable foundation for the higher-level tools used by institutional risk analysts.

The current MLV standard makes a substantial effort to achieve long-term values for income-producing properties, adjusting cap rates, rent levels etc., but so far appears to be less effective with respect to single-family and other owner-occupied and non-income-producing types. However, valuation technologies have continued to advance since the standard was established and they could be brought to bear on the issue by the valuation profession. Such an analysis of the effect of time on value is currently in use for many property and ownership conditions. Examples include highly developed statistical methods (for examining and tracking broad markets), real estate damages (which demonstrate recovery to normal pricing levels over time), marketability impairments (risk of a forced hold) and other methods. Valuers have the tools to parse between short- and long- term conditions, and deliver value opinions based on these premises. Of course, developing uniform methods and training programs will take some doing; but is there really an alternative?

Conclusions

The notion of financial stability should, by now, be ready for prime time. The question is… Are we really committed to adopting a long-term mindset? If so, someone needs to attend to the long-term value trends if we are to a) substantially reduce the effects of unexpected events, b) provide some counterbalance to the positive feedback system which encourages both ever-escalating asset values on the one hand, and the collective malaise and liquidity impairments that depress values. If not the valuer (who has been generally marginalized into the role of policeman), then who? Who really understands the assets? If we want to build a sustainable financial system, we may have less fun when bubbles begin to soar but will endure far less grief when they come back to earth. Continuing our historic myopia will not serve the sustainability needs that the future demands. I do believe that what will serve us long term, as an achievable and maybe even transformational goal, is widespread understanding of the truth about value. •

Dennis A. Webb, ASA, MAI, FRICS Primus Valuations

Primusval.com [email protected]

Figure 1: U.S. Inflation-Adjusted Home Prices

Year


Art & Real Estate


Art & Real Estate


Site Specific Art: Where Real Estate and the Art World IntersectBeverly Schreiber Jacoby, FRICS, explains why site specific art must be valued not only by its intrinsic qualities but on the merits of the location.

If the real estate world operates according to the truism “location, location, location,” the same motto does not necessarily apply

in the art world. This insight informs one of the key distinctions between valuing real and personal property. Exceptional circumstances apart, buildings and structures do not typically move; personal property, by definition, is movable. At the intersection of these two kinds of property is site-specific art.

The term, “site-specific” is, ironically, not specific enough for a careful discussion. It describes everything from new, commissioned work designed for a specific space initiated at the early planning stages, to a piece acquired for a pre-existing or contemplated site. It can embellish, enhance or even disguise architectural details or structural imperfections.

The relationship between the work and the structure to which it is attached affects the art work’s value and, therefore, is a consideration

when valuing the work, but there are many factors to consider. The valuation process begins with questions such as: Is the work of art an element of the structure or is it an independent object? Is it possible for the work to exist and retain its value in a different location? Can professionally removing it be accomplished without damage? How does the site or structure contribute to the value of the object? Would the object lose value if removed from its site? Might it gain value, particularly if it becomes accessible to more viewers elsewhere? And, finally, does the work impact the value of the real estate?

The next step in valuing these works is to determine the method of valuation. When valuing fine art for donation, estate, gift, financial or insurance purposes, it is customary to use the Comparative Market Data approach. Value is based upon past prices for similar works by the same artist, or similar works by another artist of equal standing and related reputation. Current and recent comparable

sales of similar properties are sought from appropriate markets where transactions involving similar items occur with regularity.

When it comes to site-specific art however, depending upon the purpose of the valuation, it might be appropriate, indeed necessary, to consider also the Cost Approach. Value would be based upon the cost of duplicating or re-creating an identical piece. When the method of construction or materials used is replicable, the artist is alive, approves and is willing to re-make an identical piece, the Cost Approach method should be considered. Artists who specialize in large-scale and site-specific works may not enjoy robust secondary markets if their practice consists of permanent installations that may take months and years to complete. As a result, there may be few appropriate comparables.

Actually, the artist may not need to be alive for originals to be re-fabricated. Sol LeWitt (American, 1928-2007), the conceptual artist who stressed the idea behind his work over its execution, died in 2007, but during his lifetime his wall drawings were executed by trained studio assistants. One of the motivating factors surrounding the long-term retrospective of LeWitt’s work in Adams, Mass., at Mass MoCA was the explicit intention that the large exhibition would facilitate the training of a new generation of executants to carry on with his practice. During medieval and Renaissance times, when masters belonged to guilds and academies, it was understood that the studio would continue to work from the master’s models after his death. Therefore, the approach of LeWitt’s studio is not much of a departure from centuries-old practices. For an artist of such renown, with a decades-long roster of public and private sales, researching price point data combined with estimating time and labor costs would enable one to arrive at a strong basis for valuation.

Infrastructure, transportation and official projects in the United States often include commissioned, new public art work through

“Percent for Art” legislation and policies. For example, New York City’s Metropolitan Transit Authority (MTA) has applied a portion of its Capital Program funds to commission permanent works of art as part of the rehabilitation of subway and commuter rail stations. Projects up to $20 million dollars budget one (1) percent; projects greater than $20 million dollars spend one-half (½) percent. Tunnels, escalators and disability access components are excluded from the formulae. Key to successful designs are sturdy materials, such as mosaic, tile, or glass, as well as low maintenance costs and imagery pertinent to the location. A year ago MTA arts managers initiated a pro-active program that calls for twice yearly inspections and condition reports on more than 200 pieces installed throughout the system to identify and prioritize maintenance issues.

Mega projects, such as the new $530 million dollar new South Ferry Terminal in lower Manhattan to replace the old one damaged on 9/11, are showcases for new art. The terminal boasts floor-to-ceiling glass walls silhouetted by the outlines of trees titled

“See it Split, See it Change” by Doug and Mike Starn (American, 1955- ). Paid $1 million dollars for the four-year project, the artists acknowledged they lost money if labor and time were included. Experimenting with the properties of fused glass with their German fabricator took a year. The Starn twins’ auction

prices on the secondary market for resale are very limited and prices are comparatively modest. However, the particulars of this commission made it a unique engagement and inspired the artists to undertake other projects on a monumental scale.

Site-specific commissions promote the possibility of working on a hitherto unimagined scale, adapting and transferring work to different media, and enabling artists to reach large, new audiences on a daily basis. For example, another notable new MTA commission is Sol LeWitt’s work at the 59th Street-Columbus Circle subway station. Entitled MTA Whirls and Twirls, the mural will consist of ribbons of color ceramic tiles traversing the entire south wall (floor to ceiling) of the Intermediate Mezzanine Landing at the transfer point between the IND and IRT Lines. Additionally, there will be two porcelain tile floors entitled Compass (57th Street) and Compass (58th Street) on 57th and 58th Street mezzanines. The project is scheduled to be installed in 2009. Sandra Bloodworth, Director, Arts for Transit (MTA), noted that MTA commissions “are diverse in every way while upholding the goal of speaking to the riding public. From emerging artists to very well-established artists, such as Roy Lichtenstein (42nd Street Station), the works are valued accordingly.” The MTA self-insures, but its art is covered separately.

During the 1980s when New York City was a less safe and friendly town, when there were few public art or other opportunities for young artists to work on a monumental scale, Keith Haring (1958-1990) discovered that tarps, fences and walls worked as handy supports for large scale paintings. In 1987 he executed a joyous and high-spirited mural on a cinderblock wall in a children’s community center gymnasium on Pitt Street (Acrylic paint on cinderblock wall; 20 x 20 feet; 6.10 x 6.10 m). “The Lower East Side Boys Club Mural” was one of eleven public murals Haring executed during the 1980s in New York and around the world. The successful “rescue” and removal of the intact, undamaged mural from the Lower East Side Boys Club by professional riggers, conservators and gallerists before the Pitt Street building was demolished in 2008 was widely heralded in the media. Authenticated and supported by the Keith Haring Estate and Foundation, “The Lower East Side Boys Club Mural” can be installed as a self-standing or structural wall and is ready to be transported world-wide, protected in a steel-casing. As Stuart Alan Levy, a private art dealer in New York, observed, “If an object is structurally sound, can be appreciated as a work of art, and can be relocated to an appropriate alternate venue, there shouldn’t be any loss of value because it is moved. It could end up in a location even more prestigious than it was originally.”

Levy, a member of the Fund for Park Avenue Sculpture Committee, which partners with the New York City Parks Public Art Program, is familiar with site-specific pieces from participating on a committee of citizens with art-related expertise that organizes temporary installations of sculptures along the Park Avenue malls, or medians. As with the MTA, it is imperative that materials are able to withstand New York’s seasons. Size is also a constraint; sculptures need to be at least fifteen feet tall to be visible during the milder weather when the trees on the malls are leafy. While the committee handles paperwork associated with permits and approvals from various New York City bureaus and covers liability, other costs

“MTA Whirls and Twirls” Compass (57th Street) and Compass (58th Street) (2009) Sol LeWitt, 59th Street-Columbus Circle, A, B, C, D, 1 lines, MTA New York City Transit.

Commissioned and owned by Metropolitan Transportation Authority Arts for Transit.


Art & Real Estate


Sustainability—Property Underwriting & Valuation


associated with the temporary viewings, including fabrication, insurance, advertising, installation and publicity are typically handled by the artist, gallery or patrons, including collectors and foundations. The committee relies upon the artist or gallery to assign insurance values. Robert Indiana, Deborah Butterfield, Barry Flanagan, and Fernando Botero, are among the acclaimed artists who have been honored with Park Avenue Mall exhibitions.

At the other extreme, unlike the Keith Haring Boys Club mural, which has become more valuable after removal from the Pitt Street building, there is the unfortunate saga of Richard Serra’s (American, 1939- )”Tilted Arc,” a 12 x 120 foot slab of curved Cor-Ten steel, commissioned through the U.S. General Services Administration’s (GSA) percent-for-art program in 1979 for Federal Plaza in lower Manhattan. Installed in 1981, it presided uneasily over the plaza until 1984 when serious controversy arose and an unsuccessful campaign to relocate it commenced. Public debate and litigation ensued. Serra declared that since the sculpture was site-specific, to remove it was equivalent to destroying it. A professional panel appointed by the National Endowment for the Arts (NEA) to examine the question agreed, voting that removal would destroy ‘Tilted Arc’s’ artistic integrity and intent. Nevertheless, after a lengthy political and legal process, the sculpture was dismantled in 1989.

The following year the Visual Artists Rights Act of 1990 (VARA) codified into U.S. federal law an artist’s moral rights concerning the integrity of his/her creations, among other provisions. Further, VARA maintains that injury to the object constitutes injury to an artist’s reputation. While VARA does not protect the placement of site specific sculpture, some state statutes do. The best time to explore and negotiate complicated issues concerning potential future scenarios regarding site specific commissions would be at the planning stage.

To conclude on a happier note, let us cite an imposing mural in ten panels

“America Today,” executed in 1930-32 by the American Regionalist painter, Thomas Hart Benton (American, 1889-1975) for the New School of Social Research in Greenwich Village. The work was purchased privately in 1981 for a seven figure price by AXA Equitable, completely restored and successfully reinstalled in the lobby of the firm’s New York headquarters. Jazzy and throbbing with energy, the figures and scenes unsentimentally yet heroically evoke American civic and industrial life at a dramatic moment in the nation’s history. On permanent view in the busy lobby of a major corporation in midtown,

Benton’s masterpiece probably enjoys greater visibility today than it may have during its sojourn in a university building.

Whether a work or project represents a site-specific commission or the relocation of an existing piece, successful outcomes do not happen accidentally or quickly. Rather, they are the product of often lengthy, usually intense, even fraught, collaborations deploying an army of talented specialists, from artists, architects, fabricators and conservators, to attorneys, regulators and officials to engineers, riggers, and lighting designers, among other diverse experts whose technical skills and good-will are essential to producing a happy result. Beyond that, issues of maintenance, risk management and security are not an afterthought and, ideally, these needs are foreseen and budgeted for during the advance planning process. What a bonus when passers-by, occupants, artists, critics and tourists like the work, become familiar with it and take it to heart as part of their everyday landscape. •

Beverly Schreiber Jacoby, Ph.D., FRICS

President, BSJ Fine Art Bsjfineart.com

[email protected]

Ten Principles for Sustainable Property Underwriting & ValuationScott Muldavin, FRICS, presents ten key principles of sustainable property underwriting and valuation devised by the Green Building Finance Consortium (GBFC).

Historically unprecedented change in regulator, space user and investor demand for sustainable property necessitates

refinement of existing real estate underwriting and valuation methodologies. Within this context of change, the Green Building Finance Consortium (GBFC) was founded to develop underwriting and valuation methods and practices to enable private sector commercial and multi-family property investors to evaluate “green” buildings from a financial/fiduciary perspective.

This article presents ten key principles of sustainable property underwriting and valuation arising from the Consortium’s research and preparation of its foundational book being released in the coming months: “Underwriting Sustainable Property Investment.”

The book presents the foundation for underwriting including financial modeling and analyses, valuation, and risk and compliance

related due diligence. Guidance is provided on the role of sustainable definitions in underwriting, cost-benefit analyses, first cost considerations, green leasing, and underwriting potential benefits, beyond cost-savings, from improved energy performance and enhanced space user health and productivity.

The book’s Chapter IV: “Sustainable Property Performance,” assesses those sustainable features and strategies that have posed the greatest risk, and/or underperformed expectations, based on a survey of experienced consultants, developers, investors, and corporate real estate practitioners, a review of case studies and literature, and other sources. A new framework for property performance assessment is presented outlining five key categories of performance — process, features, buildings, market, and financial — that need to be measured, and how each type of performance assessment contributes to the underwriting and assessment of risk.

“The Lower East Side Boys Club Mural”

Alkyd paint over white alkyd base on cinder block wall; acrylic varnish, 20’ x 20’ © 1987, Keith Haring © E

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Ten Principles of Sustainable Property Underwriting and Valuation

While each sustainable investment decision will differ based on the property type, type of investment (retrofit, new construction, tenant improvement, etc.), geographic market, and sustainable features and strategies employed, ten key principles of sustainable property underwriting and investment have emerged from our research that provide important insights to guide all underwriters and valuers in their work.

Principle 1: No Fundamental Change in Underwriting and Valuation Practice Necessary

Sustainable properties do not require fundamental changes in traditional underwriting or valuation practice. However, underwriters, acquisition analysts, valuers and others will need to collect new information, employ new analytic techniques, and adapt capital request presentations to properly address some of the special considerations of sustainable properties that affect financial performance and value.

Principle 2: No Single Definition of Sustainability is Sufficient

Existing green building certifications like LEED®, BREEAM, CASBEE, GreenStar, or Green Globes™ measure environmental outcomes,

not financial outcomes, and thus cannot be the sole basis for underwriting from a financial perspective. Practically, investors will also be confronted with underwriting properties with varying sustainable features, performance and green certifications.

Most importantly, from a financial perspective, to determine which certification and assessment systems are important for specific property, the underwriter/valuer must evaluate how regulators, users and investors utilize and rely upon different assessment systems or tools, and the specific sustainability thresholds to achieve benefits from each group.

Principle 3: A New Performance Framework is Necessary to Support Sustainable Property Investment Decision-making

Property performance must be measured and evaluated on multiple levels to better support financial analysis and valuation of sustainable property investment. Five types of performance are most important: process performance; feature performance; building performance; market performance, and financial performance.

This framework highlights the importance of separating the different elements of sustainable property performance in order to properly evaluate financial performance. Our research shows that process performance drives the success of sustainable features and systems, which, in turn, determine building

performance. To assess potential financial implications of a building with a specific level of sustainable performance, one must next measure the market response (regulators, space users and investors) to the building’s sustainable performance. Keeping the data and types of performance separate helps to assess the fit and relative importance of information.

GBFC’s Sustainable Property Performance Framework also provides a structure for underwriters to use in their efforts to mitigate risks. Since most significant sustainable property investment decisions will be based on forecasted building performance (energy use, occupant performance, development costs, etc.) underwriters are, or should be, focused on reducing uncertainty and risk related to the forecasted performance. As has been proven in our research, risk and uncertainty around building performance can be significantly mitigated through underwriting of sustainable processes and features/systems.

Principle 4: Sustainable Property Investment Can Create Significant Value

While operating cost savings achieved through reductions in energy, water, maintenance, waste, insurance and other costs get the most attention, it is the significantly increased demand by regulators, space users, and investors since 2007 that drives value.

Regulators across all levels of government and national boundaries have embraced the property sector as “low hanging fruit” in the battle against climate change. Incentives are increasing and regulations are becoming broader and deeper, moving toward mandates in many areas. Space users are increasingly influenced by sustainability. Government tenants, vendors to sustainability leaders, companies with direct ties to the sustainability industry, and companies now able to capitalize on the enterprise value benefits of their sustainable real estate investment are leading the movement toward sustainable space. Institutional investors are leading the industry, with most new development being built at sustainable levels and significant work being done to assess and upgrade existing portfolios.

Increased demand by regulators, space users and investors positively influences revenues (rents, occupancies, tenant retention, regulatory incentives, etc.) and risks (capitalization and discount rates). These positive revenue and risk benefits, in combination with operating cost savings, outweigh enhanced risks and costs, many of which can be mitigated through improved contracts, integrated design, commissioning and other processes and practices.

Principle 5: Determining “If” Sustainable Investment will Enhance Value at Property Level Requires Micro-Level Analysis

Simply put, a valuation or due diligence analyst must determine whether the strong “general” arguments (outlined in Principle 2 above) supporting enhanced value for sustainable property investment apply to a particular property given planned sustainable features and strategies, the property type, the geographic region, expected occupants, market conditions, etc.

The process is inherently qualitative, with the valuer conducting numerous quantitative “sub-analyses” to generate support for the qualitative selection of key financial inputs like rents, occupancy, absorption rates, tenant retention, sales prices, expenses, etc.

Fortunately, as stated in Principle 1, fundamental valuation and due diligence practice is up to the challenge. The industry will be well served to embrace the qualitative nature of real estate analysis and do it better, rather than holding out for the “killer” statistical study that will, once and for all, prove the enhanced value of sustainable property investment. Over the last three years, statistics-based academic studies, cost-benefit studies, and business-case analyses have laid the foundation for why sustainable properties can be more valuable, but now the industry needs to invest in the data and analytic techniques necessary to support property-specific decisions.

Principle 6: Cost-Based Decisions are Inherently Flawed

Financial models and decision-making practices that generate results based primarily on initial development and operating costs, like the most commonly used Simple Pay-Back or Simple Return on Investment (ROI) models, are inherently flawed because they fail to consider revenue or risk. The limitations in these models have always existed but due to the dramatic increases in regulator, user and investor demand for sustainable properties during the last few years, failure to consider revenue and risk implications has become more critical.

Simple Payback, Simple ROI, and related cost focused models can still provide useful information for decisions between different strategies or features (type of lighting systems or bulbs, material or product selection, etc.) and many sustainable decisions can be made utilizing these techniques, but as the level of investment and sustainable outcomes desired increases, analyses that do not factor in revenue and risk implications will result in inferior financial performance for properties.

Principle 7: Sound Sustainable Property Financial Analysis Requires Consideration of a Discounted Cash Flow Model

Fortunately, the most widely recognized financial model for evaluating real estate investments—discounted cash flow analysis (DCF), is well suited to address the financial implications of sustainability. Discounted cash flow analysis provides a conceptual framework and model that enables the user to integrate quantitative and qualitative analysis to measure sustainable property financial performance. Most importantly, it provides the means to translate the “intermediate” sustainable property cost and benefit outcomes like health or productivity benefits, expedited permitting, or lower operating costs into financial measures like rate of return or net present value traditionally used by real estate capital providers. Revenue and risk are integrally part of the approach.

The challenge is to assess the applicability of the general argument outlined above for a specific property. In this regard, even if the decision-maker does not execute a full DCF model, understanding the logic and linkages inherent in a DCF model to

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Real Estate & Economy—Canada


accurately articulate potential implications of sustainable property attributes on financial performance can significantly framework, it is easy to under- or over-estimate the magnitude and even the direction of potential financial performance implications.

Principle 8: Six Distinct Steps are Necessary to Sustainable Financial Analysis

These steps are:

1. Select financial model, 2. Evaluate subject property “sustainability,”3. Assess costs/benefits of “sustainability,” 4. Evaluate the financial implications of costs/benefits, 5. Determine financial model inputs, and 6. Risk analysis and presentation. Failure to implement each

step can result in leaving out key issues, misallocation of the importance of key issues, and other problems.

In selecting financial models, valuers must employ Sustainable Sub-Financial Analyses. Sustainability Sub-Financial Analyses are those analyses and models that provide quantitative insight/data that is typically combined with other information and analyses to aid valuers/financial analysts in their specification of key financial assumptions in a DCF analysis, or related Traditional Real Estate Financial Model.

The critical point in understanding Sustainability Sub-Financial Analyses is that in most cases these analyses do not result in specific data inputs that you can input directly into a DCF analysis. For example, in many cases, potential health cost savings as a result of sustainable property investment will accrue directly to an owner-occupant. However, for an investor-owned building, the key issue in estimating the financial impacts of potential health cost savings is to look at how tenants value such potential benefits, and then how they value these benefits in the context of all the other benefits and factors that enter into their selection of space. Accordingly, any quantitative health cost “sub-financial” analysis is only a contributing factor to the development of financial inputs for a DCF, or related analyses. However, such analyses, if independently done and appropriately presented, can significantly influence the investment decisions and resulting property financial performance.

Clearly understanding costs and benefits resulting from sustainable property investment is critical, but cannot be the end of the analysis. Once these benefits are known, the next key step is to assess how the market (regulators, space users and investors) are likely to respond to these sustainable outcomes — resource use, occupant satisfaction, sustainable certification, etc.). The final step is to determine key financial inputs like rents, occupancies and capitalization rates factoring in all the sustainable and non-sustainable factors influencing the property’s financial performance. It is important to understand that sustainability will always be one of many issues to consider and cannot be evaluated accurately in isolation.

Canada’s Real Estate MarketsSheila Botting, FRICS, looks into why the Canadian economy and commercial real estate market are proving more durable during the global financial crisis.

Global economies abound with dismal but improving news — high unemployment, low GDP, weakened consumer spending,

reduced demand albeit improving, unbelievable debt, significant stimulus monies, restrictions on capital and for real estate, few if any transactions. Canadian real estate delayed its entry into true recessionary conditions but fell early in 2009. That said, compared with other countries, Canadian vacancies remain reasonable, rents although softer are solid and bankruptcies and mortgage defaults remain nominal. New office buildings with green features are leasing at solid rates. Analysts continue to be amazed at the durability of Canadian markets during this recession.

Across investment and leasing markets, participants have delayed major decisions, instead opting to “wait for the bottom” and remain on the sidelines. Well capitalized vendors are holding on for better times, while prospective purchasers await deal-making opportunities. In a rising market, “market proof” is required to corroborate ascension to a higher plateau. A declining market requires an intuitive approach by investors. Canadians are conservative by nature and prefer to wait rather than rush toward decisions. Recent economic signals show GDP will bottom at -2.9 percent for 2009 and economists forecast 2010 GDP in the 2.6 percent range commensurate with U.S. indicators (Figure 1).

Several factors contribute to Canada’s resilience including stable and conservative financial institutions and lending practices, a diverse economy, competitive investment returns and real estate markets based on solid fundamentals. Once the economy rebounds, a strong foundation exists for a stable real estate future in Canada’s commercial markets.

World Economic Forum Claims Canada has Soundest Financial System in the World

Canada’s leading position through the economic downturn can be attributed to the strength and stability of its banking system. With banks worldwide — particularly in the United States — experiencing record losses, closures, and government support, Canadian banks have posted profits in recent quarters. A year ago, the World Economic Forum dubbed Canada as having the soundest financial system in the world.

More recently, Canada’s four largest banks increased their ranking among North American financial institutions to become the 7th to 10th largest banks as measured by assets. Led by the Royal Bank of Canada (RBC), which has tripled assets during the past decade, TD Canada Trust, Scotiabank, and Bank of Montreal (BMO) remain the top performing Canadian banks.

Principle 9: Sustainable Properties Need to Improve their RAP

A more sophisticated analysis and presentation of risk (RAP) is particularly critical to sustainable property investment. This is due partially to the additional risk possible due to new processes, products, systems, construction techniques, contractors, and other service providers as well as the substantial positive risks related to reducing the potential for functional and economic obsolescence due to regulator, space user and investor change, among other factors.

While many detractors of sustainable property investment say tenant or investor demand, or other risk issues cannot be “quantified,” valuers and underwriters cannot ignore well-recognized and documented trends. For example, failures to address “outsourcing” and other market changing trends in the past led to many bad investments and failed valuations by industry professionals. Risk does matter and decision-makers need better organized and documented risk analysis to make proper decisions.

Principle 10: Sustainable Property Underwriting is More than just Financial Analysis and Valuation

Decisions on sustainable property investment are based on more than just financial pro-formas and valuation estimates. For lenders and investors, the borrowers and project sponsors need to be fully underwritten as to their experience, net worth, track record, and other factors. For new construction projects, construction risk must be analyzed and mitigated through insurance and various forms of surety. Construction and property management agreements, franchise agreements, leases, and other contracts need to be evaluated. Corporations need to evaluate occupancy costs, but also must assess the role and contribution of the real estate to their overall enterprise strategies, and insure flexibility to respond to future market change.

Conclusion

Underwriting and valuation of a specific sustainable property requires a disciplined approach to assess the applicability of the compelling general arguments supporting enhanced value from sustainable property investment. The methods and practices needed will vary based on the property type, geographic region, type of decision (retrofit, commercial interior, new construction, etc.) and type of decision-maker (lender, investor, corporation, etc.).

Fortunately, traditional real estate underwriting and valuation practices are well suited, with refinement, to this task. The ten principles discussed above, along with the more detailed work of the Green Building Finance Consortium can assist in improving underwriting and valuation to enable private sector investors to maximize their financially supported sustainable property investment. •

Scott Muldavin, CRE, FRICS Executive Director

Green Building Finance Consortium Greenbuildingfc.com

[email protected]

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Some of the disparities in performance between U.S. and Canadian banks can be attributed to the fundamental differences in the banking systems. Canada tends to have more restrictive lending and capital boundaries, a concentrated number of institutions, nationwide branching, and less leveraged capital. These fundamentals allow Canadian institutions to respond and diversify nationwide. Geographic diversification also acts as a method of mitigating investment risk, which is especially important when balancing the resource and tourism sectors in the west with manufacturing and financial services in central Canada.

Nationally Diverse Real Estate Markets

Canada is geographically the second largest country in the world with almost 10 million kilometers squared (or 3.85 million square miles), with the longest coastline and longest border with another country, the United States. Yet Canadian urban centers and indeed its real estate markets stretch along the Canadian/U.S. border and combined are only the size of New York City’s markets. Canada’s major markets are shown in Figure 2.

Canadian Industrial Markets

Industrial real estate is the largest asset class with some 1.5 billion square feet across the major markets. The Greater Toronto market is the third largest market in North America (behind only Chicago and Los Angeles) and holds approximately half of Canada’s industrial space. Toronto is the manufacturing backbone of Canada and is dominated by the automotive industry, producing roughly one in six North American automobiles. Toronto also serves as the regional and national inland distribution hub. Other large industrial hubs include the Port of Vancouver and inland Calgary hubs for western Canada along with Montreal and Halifax in the east.

Canada’s industrial markets provide portfolio stability due to their mature and diverse nature. Figure 3 shows that industrial vacancies have consistently remained in the 4 to 7 percent range, consistently below U.S. markets since 2000 as new supply has been balanced by market demand. Contributing reasons for the historically strong and stable performance of industrial real estate investment include:

• broad-based user/occupancy structure; • relatively low cost of re-tenanting and retrofitting space;• and positive long-term industrial market leasing

performance and prevailing low vacancy rates. Canadian Office Markets

Canada’s office markets total approximately 414 million square feet of space. Again, Toronto is the most significant Canadian market with 163 million square feet, comprising the fifth largest market in North America. Toronto is the financial capital of Canada and dominated by banks and financial institutions along with their service providers including legal, accounting and other professional services, as well as being home the nation’s primary stock exchange. Government and health care are also significant space users.

Montreal, Calgary, Vancouver, and Ottawa (the nation’s capital) are other large Canadian office markets, each with unique occupancy characteristics and demand drivers.

During the peak of 2005 and 2006, unprecedented low vacancy rates, high levels of demand and rising rental rates spurred new construction across Canada. As a result, there is a considerable new development underway in Downtown Calgary (more than 8 million square feet) and Downtown Toronto (more than 3 million square feet), most of which will be completed between the second half of 2009 and year-end 2011. While traditionally tight office markets have softened, the new supply anticipated during the next several years will undoubtedly place downward pressure on achievable rents as landlords seek to retain tenants in the face of rising vacancy. In Toronto, a range of tenants are moving from older downtown towers to the newer “green towers” that offer competitive operating costs and sustainable environments.

Globally Competitive Investment Returns

Canadian investment returns have remained competitive globally and have therefore attracted numerous international investors seeking solid risk-adjusted returns. Similar to global trends, Canadian real estate has faced increasing capitalization rates and decreasing values during the last year, as well as a sharp decline in transaction activity. That said, Canada tends to have a disciplined and stable real estate investment environment compared with international markets. This stability is in part due to a high concentration of ownership among pension funds and major investors that is particularly focused on downtown office and major retail assets. Furthermore, Canada’s lending and new development practices have limited new supply to largely reflect demand within most markets.

Total annual real estate returns during 2005 and 2006 reached highs in the 17 percent to 21 percent range as owners enjoyed considerable capital appreciation. This range dropped significantly to just 1 percent to 7 percent in 2008. As of June

2009, all asset types continued to experience year-over-year declining rates of return due largely to an erosion in value.

Given the above, a key investment strategy among many institutional players has seen a shift from income-producing assets during the peak years of 2005-06 to buying debt. Long-term investors continue to seek low-risk investments to balance their portfolios. Prospective vendors have only recently begun to acknowledge the new reality of higher capitalization rates. As well, financing for real estate has diminished substantially. As a result, investment volumes are down significantly from those seen pre-2008, and, overall, deals are taking longer to consummate. Prevailing purchaser sentiment suggests that capital is once again looking to commercial real estate markets for investment opportunities.

Across investment and leasing markets, participants are delaying major decisions, instead opting to be patient and wait to take advantage of opportunities. As a result, Canadian markets are well positioned for acquisition opportunities based on sound fundamentals, along with an opportunity for value improvements when markets rebound. •

Sheila Botting, FRICS, FCMC, AACI (Hon)

Senior Managing Director Canada, Capital Markets Cushman & Wakefield Ltd.

Cushwake.com [email protected]

Office Industrial

Inventory (sf) Vacancy Rate Inventory (sf) Vacancy Rate

Vancouver 46,453,294 6.9% 181,087,548 4.2%

Calgary 52,960,967 10.2% 103,282,241 5.3%

Edmonton 23,879,721 6.9% 95,051,577 2.5%

Toronto 162,830,064 6.6% 834,970,979 7.1%

Ottawa 36,171,011 6.5% 22,364,490 4.4%

Montreal 82,446,396 8.9% 277,144,076 8.2%

Halifax 9,411,007 9.3% 6,465,783 8.7%

Major Market Summary 414,152,460 7.6% 1,519,432,804 6.5%

See more in-depth graphs for inventory, vacancy and returns at ricsamericas.org/property-world

Figure 1: Markets Decline—US & Canadian Recession (GDP)

BMO Nesbitt Economic Research

Figure 3: Industrial Vacancy Rate

Cushman & Wakefield (Q2 2009)

Figure 4: International Investment Yields

IPD Multinational Index

Figure 2: Canada’s major real estate markets Cushman & Wakefield (August 2009)


Real Estate & Economy—Mexico




Moreover, he stated that the plants in Mexico would not be a part of the bankruptcy procedures. GM has been quite a profitable market leader in Mexico for more than a decade and as a result its dealer and production network may remain nearly unchanged in that country.

According to Mauricio Kuri, General Motors of Mexico (GMM) spokesman, the company foresees a production increment by the second half of 2009. Others, perhaps much more optimistic, talk of the possibility of seeing more GM plants open in Mexico in the near future, and the same can be said for Ford, even Chrysler, and Volkswagen which plans to invest $400 million in a new assembly plant in Puebla and see an additional $600 million invested by 2010.There are many advantages offered by Mexico to continue to retain and attract industry. Among them:

• The current Peso-U.S. Dollar exchange is strong, currently floating around 13.5 x 1.

• The easy and cost-competitive communications and transportation between Mexico and the United States.

• A much lower cost of industrial real estate and industrial space lease compared to the costs in the United States. Mexico’s average market rent for quality industrial manufacturing space averages

around $4.95/SF per year, compared to [an average rate of nearly twice as much for in locations North of the border] $9.75/SF (average) per year in southern Texas or Southern California.

• Substantially lower labor costs prevail in Mexico. For example, a salary for a basic auto worker in Mexico is $4.25/hour, including benefits. Compare this with the latest “reduced” wages of a GM basic worker, which is about $28.00/hour (excluding benefits, estimated at approximately $6.00/hour). With salaries such as these, Mexico can compete even with China, in offering a strategically close location, and cultural and business practice similarities (it is very rare to find a Mexican executive who is unable to speak fluent English). Furthermore, the production quality level of the Mexican plants is reportedly higher than their counterparts in China.

How important is the auto industry for Mexico? Simply put, it is fundamental. Automobile and auto parts production constitute 14.4 percent (equivalent to $42 billion) of the total country exports and 18.5 percent of the manufacturing exports. More than 75 percent of the automobiles manufactured in Mexico are exported to the United States. Foreign investment in Mexico’s auto industry averages

Economic Activity 2007 2008 2009 F 2010 F

GP Nominal (US$ millions) 1,022,706 1,085,599 844,650 933,924

Real GDP (real annual change %) 3.3 1.4 -6.3 1.7

International Reserves (US$ billions) 80.137 82.0

Inflation (average %)

Headline 3.8 6.5 3.8 3.9

Core 4.1 5.7 4.0 3.7

Financial Markets Interest Rates (%)

Bank Funding 7.50 8.25 4.50 4.50

28 day Cetes (Federal Treasury Certificate) 7.44 7.94 4.47 5.02

28 day TIIE (Interbank Equilibrium Interest Rate) 7.93 8.68 4.83 4.87

10 year Bond (average) 8.04 8.28 6.40 7.20

Exchange Rate with USD (average) 10.86 13.67 13.00 12.40

Public Finances

Fiscal Balance (% of GDP) 0.0 -0.1 -1.8 -1.8

Financial Requirement of the Public Sector (FRPS, % of GDP) -1.1 -2.1 -2.8 -2.8

External Sector

Trade Balance (US$ billions) -10.1 -17.3 -16.2 -18.5

Current account (US$ billions) -8.3 -15.7 -16.3 -19.8

Oil (Mexican mix, DPB, EOP) 61.7 84.4 70.8 73

Mexico Country Risk Facor (EMBI+) J. P. Morgan 175 bb Uncertain*

Figure 1: Mexico Economic Forecasts 2009–2010 Data Source: BBVA Bancomer Economic Research Dept. and data from O. Franck Research June–October 2009

(EOP = End of Period, DPB = Dollars Per Barrel) *Tendency depends on the pending of 2010 Fiscal Package

Mexico in Time of Crisis:The Impact of GM’s Bankruptcy on Mexico’s Industrial Real Estate and Economy

Oscar J. Franck Terrazas, MRICS, assesses the impact of General Motors’ bankruptcy on Mexico’s industrial and commercial real estate—and economy overall.

After the dust settles from automotive giant General Motors’ bankruptcy the fallout may come to benefit Mexico.

Under the pre-planned, negotiated bankruptcy, where GM is ridding itself of the heavy union and debt chains that pulled it to nearly irrecoverable depths, GM will close 13 plants. Undoubtedly, the ones to be shut down will be the ones that are less productive. The most successful plants will remain open and active, especially the plants located in Mexico and Canada. In fact, the four plants that GM has in Mexico are among the best performing plants for the company worldwide.

(with whom Obama has deep obligations), the billions of dollars that the U.S. Treasury would have had to assign to keep GM afloat would have come with an additional price tag: the closure of foreign GM plants before any United State closures, notwithstanding the performance issues of some of the U.S. plants. Under that scheme, it would have been likely that many of the 13 “laggard” plants that GM is closing would have remained in operation. By taking the path of a prearranged bankruptcy, General Motors frees itself from most of its shackles that have hindered the company during the course of the last few decades, including uncompetitive labor costs, unsustainable retirement plans, too many dealerships, non-profitable brands, a mountain of debt, and so on.

At the same time, under the chapter 11 format, President Obama is able to wash his hands of the UAW political compromises, the Treasury provides the funding needed for GM to re-invent itself while passing the bill to the taxpayers, and in the end President Obama may come out as the hero.

When addressing the first round of questions when Chapter 11 was announced, new GM CEO Fritz Henderson made it clear that the plants in Canada and Mexico would remain in operation.

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The concern among those in the auto industry in Mexico and of the large industrial real estate portfolio managers was that if GM had avoided bankruptcy by striking a deal with the Obama administration and the auto union workers

How important is the auto industry for Mexico? Simply put, it is fundamental.




Real Estate & Economy—Italy


Assoimmobiliare, DS&P Studio Legale Associato and the Gesti.Tec Lab of Milan Polytechnic have recently launched a

joint project: the creation of the Osservatorio Permanente sulla Pubblica Amministrazione Locale (PAL — the Permanent Observatory on the Local Public Administration), an agency intended to map and analyze in depth the methods and the time requirements for Public Agencies to pass town-planning implementation instruments.

The Permanent Observatory idea was devised by attorney Riccardo Delli Santi (DS&P Studio Legale Associato) and Professor Oliviero Tronconi (Gesti.Tec Lab — BEST Department — Milan Polytechnic). As these two professionals were discussing the major issues burdening real estate investments in Italy, they decided to design and coordinate a project aimed at analyzing the status quo in some of the most important Italian Local Public Administrative Agencies. They were deeply convinced that the Local PAs play a decisive role in town transformation and redevelopment processes.

According to Gualtiero Tamburini (President of Assoimmobiliare) the time-consuming and confusing procedures followed by the Local Public Administrations in Italy, as compared to other countries, is a well-known burden since, in the list prepared by the World Bank every year on the “openness to business” score, Italy ranks much lower than one would expect, especially considering that its development stage allows it to be part of the G8. Not all LPAs present the same challenges, though, and Rome and Milan are more advanced in their procedures than other cities in Italy.

The role of the Italian Public Administration

Since its action is required during the planning stages of a project, the Local Public Administration (LPA) is the link in the property development chain that most influences the feasibility of real estate investment.

The project survey analyzed the town-planning and building procedures

The Challenge of Real Estate Investment In Italy Marzia Morena, MRICS, details the role played by Local Public Administrations in Italian town transformation and redevelopment processes.

about $2 billion per year since the 1990s. However, Mexico’s auto sales have decreased 30 percent in 2009, due to the prevailing world economic meltdown and the United States’ auto crisis.

General Motors in Mexico

General Motors has a much stronger profile and market share in Mexico than in the United States. GMM has been leader of the Mexican market for the past 13 years. GM has been in

Mexican manufacturing exports to the U.S. underwent a 22.7% decline through the first quarter of 2009.Mexico since 1935 and was employing 6,522 hourly workers and 626 salaried workers in four plants before a 12 percent cut announced last August. General Motors also buys 30 percent of all the auto parts manufactured in Mexico. During 2008, GM purchased $11 billion dollars on parts.

If GM had been “bailed out” without a Chapter 11 proceeding, it would probably have had shocking consequences, including the likely closure of its plants in Mexico. This would have had a domino effect, taking down many of the Mexican auto parts manufacturers and would have had a severe impact on the industrial real estate market, which is already under intense pressure from the economic slowdown.

GM has now a unique opportunity to correct its course, becoming a much leaner company, focusing on a few core brands, creating new models that will appeal to the American consumer and be competitive quality-wise and price-wise with foreign brands. GM is also now free to reach an agreement with the UAW, which has displayed a willingness to become a part of the solution, allowing the remaining plants in the United States to be truly competitive and a major long-lasting source of employment.

Mexico’s Economic Outlook

Mexico’s economic crisis bottomed up during the third quarter facing a 10.3 percent decrease of its economic activity; the worst since the Great Depression. One should remember that in addition to the global economic crisis, Mexico had to contend with the influenza H1N1 epidemic, which seriously affected the tourism trade (at its peak of decline, hotel occupancy rate was at 25 percent), one of Mexico’s top income sources. Foreign remittances from workers abroad have also substantially diminished as work opportunities did as well.

Mexican manufacturing exports to the U.S. (Mexico’s number one customer), underwent a 22.7 percent decline through the first quarter

of 2009, accentuated by Mexico’s oil export platform which is in a downward trend. Core inflation has risen from a 3.5 percent average in 2007 to an estimated 4 percent at the closing of 2009. In the first five months of this year, 309,000 formal employment posts were lost and more than one million jobs lost since the peak of October 2008. The employment fall is one of the greatest concerns in this recession.

Real Estate Synopsis

Despite the global economic slowdown, 2008 was a good year for the housing industry and commercial real estate, maintaining its absorption and rental level close to their historical highs. 2009 is a year of challenges and opportunities, as the industry players began implementing precautionary measures months ago. In the low- and medium-income housing sectors new construction has significantly slowed down, decreasing inventories. Providing this trend persists, we can anticipate a prompt recovery.

The construction industry lost momentum, having a negative expansion toward the last quarter of 2008 (an annual -1.1 percent), leaving major challenges for 2009. INFONAVIT, the National Institute Housing Fund, will provide an estimated half a million mortgage loans in 2009, planning to increase this number in 2010, playing a central role in the stimulation of the construction industry. In its 2009-2013 plan, INFONAVIT will introduce important changes, including the creation of the “Green Mortgage” for sustainable housing.

The real estate market for coastal cities, where foreign buyers were the core business, has been the most affected. In addition to the real estate crises in the U.S., which drastically affected sales to foreign buyers, the security factor has played a major role in the severe decline of this once highly profitable segment.

Rents for good quality industrial building space are under pressure, so the current national average rent of $4.80-per-square-foot/year may decrease slightly in the short term and lease conditions may become more flexible. For the longer term, rents may go back to a yearly growth of around 3 percent, as demand for quality industrial space increases, triggered by the economic recovery and foreign manufacturers seeking to remain competitive by establishing operations in Mexico.

Mexico has proven in the past its high resiliency and ability to recover from deep recessions and the former instability of the Peso. Fortunately for Mexico, people, businesses and industrialists learned in the past to function with little or no credit, creating a strong cash culture. So we expect to see Mexico bouncing back sooner, rather than later. Mexico’s shorter route to recovery will be made possible by its strong international reserves, and moderate fiscal and budget government policies. •

Oscar J. Franck Terrazas, MRICS Managing Director

Integra Realty Resources-Mexico Irr.com

[email protected]

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Real Estate & Economy—Italy


Construction Assessment


The Value of Continuous Program Assessment: A Construction Owner’s PerspectiveAlexia Nalewaik, MRICS, advocates for involving the auditor on a continuous basis to ensure construction projects stay on budget and on schedule.

For organizations that receive public funds for capital improvement programs, an annual audit is often mandatory. One owner has taken

the process a step further, involving its auditor on a year-round basis and thus embracing continuous organizational evolution. Through on-going review and comment, the audit staff facilitates the process of continuous quality improvement, allowing progress to occur on a real-time basis.

The Los Angeles Community College District is one of the largest community college districts in the country, educating more than 200,000 students every year. The nine campuses of the District serve students in more than 36 cities, covering an area of approximately 900 square miles in Southern California. The District currently is undertaking the largest public sector sustainable building effort in the United States. The Proposition ‘A’ Community College Facilities Construction and Repair Bond Program was approved by voters in April 2001 to provide $1.245 billion in improvements to District facilities. That bond was later supplemented by Proposition ‘AA’ (May 2003), Proposition ‘J’ (November 2008), and State funds for a comprehensive capital program totaling $6.1 billion.

The State of California Proposition 39 requires an annual independent performance and financial audit for all school capital programs receiving public

bond funds. According to Generally Accepted Government Auditing Standards (GAGAS), performance audits involve “a determination of the economy, efficiency, and effectiveness of government organizations, programs, activities, and functions, in addition to their compliance with laws and regulations” (Davis, 1990). The District has expanded that definition to include a comprehensive operational program evaluation against corporate and industry standards, which assesses how and to what extent the program achieves its goals. This assessment provides a deeper appraisal of the District’s capital program activities than can be obtained from conventional internal and statutory financial audit, looking not just at historic expenditures but also at the present and future of the program. LACCD’s auditor compares actual operations to established policies and procedures, at the same time comparing both of those to industry-wide performance standards and traditional capital project expectations.

Throughout the entire operation, the participants maintain “…a questioning attitude as to why operations are conducted as they are.” (Dittenhofer, 1971) The team examines capital expenditures to assure controls are functioning, while at the same time assessing nonfinancial aspects such as organizational structure, planning and decision making, communication, staffing, reporting, and more. It has been noted that

implemented in the largest Italian municipalities. It studied the efficiency of permit-granting procedures by analyzing:

• the time requirement and the method applied to issue town-planning and building permits;

• the charges for primary and secondary urbanization works;• the monetization of standards;• the process of gathering and organizing the

necessary documents to define a project (the technical implementation rules — NTA, the tables in the overall development plan — PRG, etc.);

• and still more general information concerning the three-year plan, project financing procedures and the activity of Town Renovation Companies.

The survey produced the Rapporto 2008 (Osservatorio Permanente sulla Pubblica Amministrazione Locale (PAL) “L’efficienza dei processi concessori. Rapporto 2008,” Il Sole 24 Ore, Milano, 2008), the first product of the Observatory designed as a reliable information tool for the real estate community, and also as a tool to bring investors closer to Public Administrators.

The aim is to encourage a dialogue and a preparatory discussion for the development of our territories and of the whole country, as a system on the one hand and to encourage LPAs to share best practices on the other.

The Observatory is pursuing an annual, constant and permanent research effort on this topic, for the information to be consistently more relevant, reflecting future developments in the practices adopted by the Public Administration Agencies.

The efficiency of permit-granting procedures

Italian Local Administrators are unable to meet the expectations of international operators. We believe a local government that operates in a transparent way and is able to inspect town-planning and building files in a timely way is distinctly more attractive to international capital investors. This would turn a situation of mistrust into an opportunity, both for the operator, who can maximize returns, and for the local government, which will be able to collect higher fees from private operators.

The primary responsibility to lead the improvement-development process lies primarily with the LPAs. The towns that are able to plan their development and improvement must prepare marketing tools to inform investors about their goals and opportunities.

According to Professor Tronconi, this process is a basic first step to pool the resources in a territory and to stimulate shared expectations. This is the decisive element that allows Public Administrators first to inform and, later, to attract direct domestic and international investment.

Among such investments, real-estate investment plays a decisive role in renovating the fabric of a city, in improving its functionality, and its architectural and urban quality. Any investment, and real estate investment is no exception,

requires careful planning of all the variables and, more specifically, of the time element: a postponement may turn a promising investment into a non-performing one.

But being able to activate investments also means providing potential investors with reliable information about the time it takes to issue permits. Without this “assurance,” investors will likely not consider investing in a project since they might run the risk of seeing their efforts thwarted and the financial resources sunk. The ability of the LPAs to provide information and certainties about time requirements to issue the compulsory permits is therefore a decisive element to attract investments to a specific territory.

The uncertain time requirement for the approval of licenses and permits, and the lack of clarity concerning the consequences of unforeseen events that may arise during the administrative process, are already the most likely source for a lack of confidence by potential investors, not only foreign ones, who would otherwise be happy to invest in Italian real estate.

Creating leaner bureaucratic procedures is, therefore, among the top priorities for the LPAs to attract investors to their territory, and to prove that they are able to manage the bureaucratic town-planning and building procedures in an efficient and effective way.

The latest World Bank Openness List reports a remarkable worsening, with Italy being moved down from the 59th rank to the 65th. The 65th rank on the “ease to do business” list is outdone by the 83rd ranking in the “management of building permits” parameter (and, for Italy, this ranking comes second only to the fiscal parameter), where the average time required to issue a permit is estimated at 257 days. The target for Osservatorio Permanente sulla Pubblica Amministrazione Locale for the future is to prepare a similar list of our Public Agencies and explain the reasons for the various time requirements recorded, with the aim of stimulating an honest competition among them.

The results of the study

Overall, as a result of the Osservatorio’s activity, LPAs around the country are becoming more sensitive to their influence and impact on development in Italy. •

Marzia Morena, MRICS

Polytechnic of Milan, Italy BEST Department

Polmi.it [email protected]

Check out more advanced analysis of the study results, including detailed charts and survey data, atricsamericas.org/property-world

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Construction Assessment


Construction—Caribbean


operational audits of public entities have often “been performed by non-accountancy consulting firms, indicating a definite shift from audit in the financial sense to audit of the operations and management performance of companies” (Lane, 1983). Where the audit has been performed by a traditional accounting firm, the team may include specialty consultants with deep expertise in project controls and capital program management.

Since the District’s bond program inception in 2001, audits by three firms have yielded 157 improvement opportunities, balanced by a lengthy list of good practices. The impacts from the performance audit over the years have included the evolution of contract language, streamlining of the program team, simplified reconciliation with the finance department, more frequent team communication, commissioning process improvement, and change management. Items that needed improvement in previous years have been listed as good practices in subsequent years, representing continuous improvement on the part of the District staff and Build-LACCD expanded team.

What owner or project culture is best suited to engaging an auditor as a continuous participant in the capital program life cycle? The following characteristics apply:

• “Strong commitment by the executive;• Independence…to avoid the perception of undue bias;

• Willingness to address tough questions and challenge the status quo;

• Clear goals and accountability for results — focus on performance and productivity;

• Talented staff of management and technical experts as well as auditors;

• Access to outside experts to bring new perspectives and knowledge;

• Ability to create partnerships — public and private experts working in tandem to improve operations;

• And identification as an agent of change…promoting a culture oriented toward superior performance, high-quality services, and cost consciousness.” (Clark, 1993)

The Los Angeles Community College District meets these criteria, and more, acting as a change agent and catalyst in public sector construction. •

Alexia Nalewaik, MRICS, CCE, MSc Principal

QS Requin Corp. qsrequin.com

[email protected]

and Larry Eisenberg, MPAExecutive Director, Facilities Planning & Development

Los Angeles Community College District LACCD.edu

Concern in the Caribbean: Strategies for Surviving the Economic CrisisSteve Rajpatty, MRICS, writes in the July-September 2009 issue of Caribbean Construction Digest that maintaining the status quo in Caribbean construction is not a program for success.

Job security is one of the greatest concerns for those employed in the construction industry today. During the prolonged construction

boom over the last decade, many became accustomed to a fairly comfortable lifestyle, with only moderate concern for the future. Today, the very real threat of unemployment is not an easy matter to deal with. More importantly, nothing intensifies the fear of unprecedented unemployment levels throughout the Caribbean than our leaders’ inability to be proactive in

be one of the toughest challenges they will face during their careers, the question for us is, how do we deal with these challenges ourselves?

The Problem

According to available data, the United Kingdom has disposed of a record number of jobs for the first time in 12 years. Similarly, the United States unemployment rate rose just above 9 percent as of autumn 2009. We have seen Obama’s bold stimulus package and several other plans articulated by leaders of the more developed nations. Unfortunately, the Caribbean, as a single market, has not yet taken proactive steps to deal with the eventual mass unemployment within the construction industry. Whilst many of the region’s academic thinkers (economists, financial and market gurus) have voiced their opinions on the situation, the fact remains that the implementation of any solution must be driven by the government. With several construction firms reporting very little activity within recent months, thousands of construction workers will be facing the breadline if solutions are not identified and implemented soon. However, the ‘fly in the ointment’ lies in the

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Providing Advice to Leadership onRegional Planning and Urban Development Issues

R l E t t E iHemson Consulting Ltd.

30 Saint Patrick StreetToronto, Ontario, Canada

www.hemson.com

For information contact:John Hughes, FRICSRussell Mathew, MRICS+1.416.593.5090

Growth ManagementMunicipal Finance

Real Estate Economicsconfronting the economic crisis. As we watch even the most accomplished leaders from around the globe tackling, what may very well

The road to a successful future and a vibrant construction sector will not be an easy one.


Construction—Caribbean

30 Find extended articles, charts and more online ricsamericas.org/property-world

observation that there appears to be a construction leadership vacuum among governments throughout the Caribbean region.

This may be due to the fact that although governments are meant to manage the economic, political, social and domestic affairs of their economies, this does not necessarily mean that they are equipped to deal with the business threats and opportunities that exist within the macro environment. Their political agenda might not be in sync with sound business principles and practices. Indeed, this problem is even more complex when considered within the context of the construction industry. Even with an abundance of local talent and capable contractors, our governments have a history of turning to “foreign experts” for advice, thereby resulting in underutilized resources at the local level.

If we are to weather this storm then expert opinion, implementable strategies, suitable management principles and reform plans applicable to the current construction climate must be sourced from within the Caribbean region, simply because our future ultimately depends on us. Where then do we start?

Implementation Issues

According to numerous stakeholders within the industry the sector cannot survive on short-term projects to sustain their workforce in the medium and long-term. When asked to identify solutions, a senior official at a leading consulting firm (architects and engineers) suggested that the region introduce small to medium infrastructure type projects to be implemented over the next one to three years. Projects should focus on improving the road network to facilitate the transportation demand, water supply to rural districts through the construction of small desalination plants (1 million gallon tanks), educational facilities to better serve our growing demand to provide for our younger generation. There also must be eco-environment protection and eco-tourism policy because of our growing need to protect our environment. The Caribbean has been labeled as an eco-tourism destination.

The challenge, however, lies in the implementation of these projects without incurring the cost and time overruns we have accepted until now as the norm.

Solutions

There are many reports about proposed cutbacks meant to deal with the current crisis. Consequently, some estimate that a sizable portion of the Caribbean’s construction workforce will become unemployed in the short term due to governments’ defensive strategy and lack of development initiative. This may be compounded by the fact that some governments are “inflexible” in that they have their own political agenda and are only prepared to address recommendations made by favored international consultants, who in many instances do not understand our very different economies and cultures.

Where is our sense of national pride and desire for employment sustainability?

If we are to continue depending on foreign labor and expertise in an effort to improve our construction methods then we must

find a way to integrate our local workforce with the foreign experts. Sharing knowledge creates an environment where people begin to operate more efficiently and effectively.

Equally important is the fact that we don’t have to continue believing that our local professionals and contractors would always exceed their budgets and schedules and that their quality would almost certainly be a sour issue. While it remains difficult to manage both cost and quality at the same time, we must also understand that this is not only the job of the Project Manager, Engineer, Architect or Quantity Surveyor. Quality is everybody’s business. Similarly, the same can be said of cost and time. Hence, improvements in project performance may only arise if all involved in the delivery process become quality, cost and time focused.

The Way Forward

The road to a successful future and a vibrant construction sector will not be an easy one. There is no doubt, however, that serious decisions need to be made soon if we are to reach our destination. To get there, we need to continue to allow international companies to operate freely to some extent. At the same time our governments cannot continue to say that our domestic supply of labor cannot meet the regional demand because the quality and quantity of our work are considered unreliable.

The crux of the issue is that with the increasing complexity and uncertainty of the business world, practically all worthwhile plans and strategies necessitate substantial human, organizational and governmental change. Perhaps, the time is ripe for our leaders to find a formula for integrating our local workforce with foreign ones. On the other hand, governments should insist that contractors develop workplace learning activities. A very real example might be where a construction worker be taught to read and write so that when the construction site closes down he may be able to perform another task or he may be better prepared to seek further employment along the same lines. This will certainly work for those most expected to be affected by the redundancy stigma.

It is time that we have a vision about where we want to get to and then get everyone to come along with us on that eventful journey. Remember, politics is all about trying to persuade others to come ‘round to your point of view. Perhaps it’s time we try getting the construction sector to be a part of the growth and developmental plans for our economies. Our biggest challenge, though, lies in the fact that the key to our future success lies in integration not separation. •

Steve Rajpatty, MBA, MSc, MRICS, MAPM, MCIOB, FCMI, AACEM, AMAI,

Chartered Quantity Surveyor & Chartered Builder Chairman & CEO

Associated Services (Caribbean) Ltd. Asltt.com

[email protected]

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