Knowledge Leader - October 2011


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Knowledge Leader - October 2011

  1. 1. Knowledge Dexus: Global PartnershiPLeader social MeDia: ceos Who tWeet co LLiers i n ternationaL business class: propert y mag azine savvy travel tiPsfa LL 2 0 1 1 The Shard lonDon’s neW icon
  2. 2. 20 36contents 244 outlook 20/20 20 out with the new, top U.s. retailers are migrating north. in with the old By James smerdon ontario’s perimeter development is revitalizing outlying communities.6 spotlight By saraH eadie and cHeryL reid-simons chicago’s illinois center two; corporate finance series report; U.s. parking rates; 24 business Partners Q&a with Karen J. Whitt. A local partnership between DEXUS and Colliers International Australia goes global.10 b2b By JoHn WoLcott High oil prices and hotels don’t mix. By JoHn B. corgeL and Jamie Lane 28 behind the scenes credit suisse’s daniel tochtermann has a12 Working space passion for real estate. Small energy-efficient fixes can mean big By micHeLLe santos savings. By Jeff Bond 34 Follow the leader Which ceos are tweeting? and should you14 bank notes follow suit? By aaron BLanK The Federal Reserve is testing banks. By Kc conWay 36 Personal biz 4 Travel smart when doing business overseas.16 london bridge By anniKa HippLe is Going up London’s skyline is changing dramatically 40 in Focus thanks to a tower of glass known as New technology is bringing together talents, the shard. resources and ideas. By rUtH BLoomfieLd By doUg fryewww.knowledge-leader.Com cover pHoto ©seLLar groUp Colliers international spring 2009 | 1
  3. 3. voLUme 5 u nUmBer 3From the KnowledgeEditors’ Leader co LL i ers i n t er n at i o n a L propert y m ag a z i n eDesk david BoWden dyLan tayLor EXECUTIvE MANAgINg EDIToRS dylan taylor and david Bowden editor in BetWeen tHe Lines teresa Kenney associate editors Christine Schultz, Lex Perry, Aaron FinkelsteinColliers international is honored to be one of four joint sole agents named tothe London Bridge Quarter development, particularly because we feel the project’s art directorsignificance extends beyond the visible impact it will have on the skyline. amy Wallace Not only does the London Bridge Quarter contain The Shard—one of the most proJect managerstriking buildings in Europe—but the project as a whole is a bold step in the ongoing Heidi pageredefinition of London, one of the world’s greatest cities. This unique vertical communitycompellingly illustrates the power of international cooperation and the willingness to contriBUting Writersdiscover innovative solutions to seemingly insurmountable problems. Aaron Blank, Ruth Bloomfield, Jeff Bond, KC Conway, Inspired by this international alliance, the Fall issue of Knowledge Leader takes a global John B. Corgel, Sarah Eadie, Doug Frye, Annika Hipple,perspective, looking at major trends in commercial real estate worldwide. Our cover Jamie Lane, Michelle Santos, Cheryl Reid-Simons,story on London Bridge Quarter’s iconic new skyscraper reveals how The Shard has James Smerdon, John Wolcottcontinued to rise through hard economic times, and how British developer Irvine Sellar proofreaderturned his vision into reality with the help of resources from around the world. Other features include: Jim thomsen • A profile of DEXUS Property Group, a leading integrated real estate brand advertising saLes in Australia, and its blueprint for international expansion through local Jenna Badu-antwi partnerships; This magazine is published by • A look at a new report that projects the impact of global oil prices on the hospitality sector; and, colliers international • An interview with Credit Suisse’s top real estate exec, Daniel Tochtermann. Closer to home, our Outlook 20/20 column examines the economics behind the U.S.retail invasion of Canada. KC Conway, Executive Managing Director of Real EstateAnalytics for Colliers, examines plans for stress testing of the banking industry in BankNotes. You’ll also find articles on global travel tips, CEOs and social media, and FSEnergy’s visionary plan to reduce energy consumption in the built environment. As always, we hope that Knowledge Leader both informs and inspires you to greatersuccess in your own business. To order more copies, learn about advertising options or subscribe to Knowledge Leader, visit Bowden Dylan TaylorChief Executive Officer | Canada Chief Executive Officer | USAColliers International Colliers International Tiger oak Publications 1518 First Avenue S., Suite 500 Seattle, WA 98134 Knowledge Leader is published three times annually by Tiger oak Media, Inc., with offices at 1518 First Ave. S., Suite 500, Seattle, WA 98134; 206.284.1750. © Tiger oak Media, Inc. All rights reserved. PoSTMASTER: Send address changes to: Knowledge Leader, Colliers International, 601 Union Street, Suite 4800, Seattle, WA 98101. Publications Mail Agreement No. 40064408. Return Undeliverable Canadian Addresses to: Express Messenger International, P.o. Box 25058, London, oN N6C 6A8. printed in Usa.2 | knoWleDGe leaDer faLL 2011 knowledge-leader.Com
  4. 4. outlook 20/20 H ot to pic s m a Kin g H e a d Lin es to day in late 2010, target announced it was Strong loonie expanding into Canada One of the most compelling factors for U.S. retailers to open stores north of the Canada- U.S. border is the value of the Canadian dollar relative to the U.S. dollar. As the Canadian dol- lar strengthens, it’s increasingly worthwhile to establish Canadian stores rather than sell only to Canadian customers online or in the United States. For some U.S. retailers, Canada is the largest, closest, and/or most similar market to the U.S. market, and represents a logical move to maintain revenue growth. While not all retailers are compelled by the same macro-economic factors, the exchange rate plays some part in the spate of recent announcements of U.S. retailers opening shop in Canada. As recently as 2004, Canada’s retail sales per capita were US $8,000 com- pared with approximately US $12,000 per capita in the United States. However, with the appreciation of the Canadian dollar, per capita retail spending in Canada now approximates the U.S. By itself, this would certainly attract new interest in the Canadian retail market, but when one considers that the available retail space in Canada (on a per-capita basis) is sub- stantially less than that in the U.S., it becomes even more attractive. Compared to the U.S. retail market, Canada represents a bounty of untapped potential. The United States has 38 square feet of retail floor area per capita, compared to only 24 square feet in Canada. This means that Canadian retail- ers’ average productivity is CA $530 of sales per square foot compared to only US $320 south of the Canada-U.S. border. If American retailers can maintain the same cost structure and operational efficiency in Canadian stores as they do in U.S. stores, there is the potential for significantly greater profitability.Target Market Drew Keddy, Vice President of Colliers International in Canada, leads the firm’s retail practice and notes that Canada is considered a very attractive destination for high-end retailers. “Canada is uniquely positioned incanadian economy LUres internationaL retaiL interests. terms of market attractiveness to retailers.By James smerdon Our economy has bounced back faster than other markets around the world and our cur-target Corporation’s late-2010 announcement of expansion into Canada leaves Kroger, rency continues to strengthen. These factors,Walgreens, and CVS Caremark as the only top-10 U.S. retailers who have not publicly announced coupled with high sales per square foot andplans to open stores in Canada. Target’s acquisition of up to 220 Zellers stores continues to be a relatively low rent rates, create perfect condi-huge story in Canadian retail, and could be part of the biggest story in North American retail for tions for international players to expand theirthe next decade. presence here.”4 | knowledge leader faLL 2011 knowledge-leader.Com
  5. 5. Sell to Canadians in Canada largest u.s.Establishing stores in Canada could also keep retailersCanadian shoppers north of the border instead by revenue (2010)of being lured to the U.S. by sales, outlet stores 1. Walmartor other incentives used by retailers to enticerecession-weary shoppers. In Canada, total retail 2. Krogerspending increased by a comfortable 5 percent 3. targetfrom 2009 to 2010, and retailers have not, by andlarge, had to dramatically cut prices to maintain 4. Walgreenssales volumes. U.S. retailers view the Canadian 5. Home depotmarket as an opportunity to sell merchandise at 6. costcofull sticker price—or in many cases, at higherprices—than they do in the U.S. 7. cvs caremark For a U.S. retailer not currently in Canada, 8. Lowe’sexpansion north can be a logical next step in itsgrowth strategy. With an exchange rate that now 9. searsfavors the Canadian dollar, Canada is only slightly 10. Best Buysmaller than California in terms of total retail mar-ket potential. For U.S.-based retailers that havelocations or supply chains close to major Canadian years will likely see a period of declining profitpopulation centers, the move to establish stores in margins for large Canadian retailers and revenueCanada is an easier decision. It’s estimated that growth for retail property owners, as increasedmore than 70 percent of Canada’s population lives retailer competition impacts both parts of thewithin 100 kilometers (approximately 62 miles) retail economy differently.of the Canada-U.S. border. Many U.S. retailers Some of the major brands rumored or confirmedcould supply a first phase of Canadian expansion to enter the Canadian market include:using existing supply chains, which significantlyreduces the investment and risk associated with • Marshalls (Part of the TJX Companies,entering the Canadian market. which already operates Winners and HomeSense stores in Canada and has fiveCompetition Affects Retailers and stores in the Toronto region.)Owners Differently • J.C. PenneyTarget has attracted a lot of attention with its • Topshopgoal of 200-plus stores and CA $6 billion in • J.Crewsales in Canada within six years. In comparison, • Kohl’sLoblaw Companies had sales of CA $31 billion • Dick’s Sporting Goodsin 2010, while Walmart had sales of CA $15 bil-lion. However, at $6 billion, Target will generate the next Wavetriple the spending relative to the Zellers stores Canadians can expect to see some of their mostthey will be replacing. This extra spending is not familiar national chain stores disappear as for-likely to come from induced demand (conversion eign retailers look for opportunities to set up Walmart, Home Depot and Costco were amongof saving to spending). shop north of the border. Some retailers will face the largest U.S. retailers by revenue in 2010. Much of the spending that Target will attract in a decreased market share as U.S. retailers gainCanada will be transferred from other competing prominence in Canada, while others will becomeretailers. For Canadian retailers and property prime targets for acquisition as American retailers maintain economies of scale entering Canada forowners, the impact of Target’s migration will look to move into the market quickly and easily, the first time, the Walmart and Target approachlast well beyond the initial store openings. Com- rather than on a store-by-store basis. of buying a chain with similar location and sizepetitors will invest in new locations and existing With the Canadian retail sector pushing for- preferences has many advantages, includingstores will undergo renovations to establish mar- ward at a sustainably healthy rate, demand for establishing a banner across the country quickly,ket position. Once Target stores are open, there space in shopping centers and street fronts will launching operations in familiar and tested retailcould be additional acquisitions of Canadian continue to get tighter, resulting in an increase in locations, and acquiring existing leases that havebrands that cannot compete head-to-head with lease rates, particularly in growing urban markets. lower base rates than what they would pay if theyWal-Mart and Target. In general, the next five For retailers that need greater numbers of stores to signed brand-new leases. K lknowledge-leader.Com Colliers international faLL 2011 | 5
  6. 6. spot l ig h t tHe people, plaCeS illinois Center two in Chicago’s east loop anD eventS SHaping tHe inDuStRy >UniqUe ProPerties submarket is currently 83.8 percent occupied. chi-toWn toWer Commonwealth reit has retained Colliers International, Chicago to market and lease 233 N. Michigan Avenue, a 1.1-million-square-foot Class A office tower in Chicago’s East Loop submarket. originally constructed in 1972, the 32-story office building is part of the 4.66 million-square-foot Illinois Center at michigan avenue and Wacker drive. also known as illinois Center Two, it is currently 83.8 percent occupied by major tenants including the U.s. department of Health and Human Services, United Healthcare, Clear Channel Communications, Motorola, and Young & Rubicam. commonWealth reit’s purchase of 233 n. michigan continues a recent trend of increased activity throughout Chicago’s central business district. “The first half of 2011 has seen a flurry of investment sales in Chicago, either through outright sales or debt restructuring, which has resulted in increased opportunity for a change in third-party leasing,” said Drew Nieman, principal of Colliers International, chicago. c o s ta r6 | knowledge leader faLL 2011 knowledge-leader.Com
  7. 7. > trends> in the news Parkingcorporate Rates Holdfinance Steady CORPORATE FINANCE SERIES Corporate Lease Accounting #6 AT ISSUE: The threat of imminent corporate lease accounting changes has The joint FASB/IASB task force is attempting to eliminate theseries been lingering for the past eighteen months, certainly since well existing SFAS13 “bright line” tests, which currently provide before the FASB/IASB joint task force issued its August 2010 a roadmap for lease classification and allow for financial Exposure Draft. Today, the most common questions are: engineering by corporations. > When will the new rules be finalized? THE NEW JOINT TASK FORCE’S COURSE OF ACTION: the more things change the more they > What will be the final resolution of the most controversial The FASB and IASB received substantial constructive feedback Exposure Draft elements? on its original August 2010 Exposure Draft. The result has been > What are the expected effective dates of the proposed a material course correction on certain conspicuous elements of stay the same—at least when it comes new standards? the Exposure Draft, including definition of “lease term,” landlord > What should we do now to prepare for the new rule capitalization requirements and accounting for certain contingent changes? rentals, to name a few. Please note that NO elements of the to parking rates. according to colliers new proposed rules have been codified. As such, all elements of If recent history is any indication, nobody can predict with the proposed new lease accounting rules are subject to further absolute certainty the answers to any of these questions. We can, change, adaptation and re-adaptation. international’s national central Business however, provide a summary of recent discussions and guidancein the latest installment of its popular cor- for corporate executives and real estate service providers. Colliers has received feedback that the Exposure Draft has been substantially modified from its original version. In fact, the FASB/ District Parking Rate Survey, despite REVIEW OF FASB / IASB OBJECTIVES: IASB boards have publically stated that deliberations surroundingporate finance series, Colliers International It is important to remember the general reasons behind the lease accounting changes: the lease accounting Exposure Draft are ongoing and should be completed during the third-quarter 2011, with a revised exposure draft publication shortly thereafter. This type of delay and revisedaddresses questions about corporate lease > increase the transparency within corporate financial statement reporting; and > enhance the comparability of similar companies and like approach is not uncommon for the board. Most recently the FASB realized a similar fate relative to its Revenue Recognition standards. In that case, the task force reissued its exposure draft a general improvement in economicaccounting changes following last summer’s transactions. The FASB and IASB endeavor to create a common lease standard to incorporate the substantive changes resulting from public comments and further review of the standards application. In any event, we know for certain that the full new standard publication conditions, most parking garage ownersrelease of the Financial Accounting Standards to ensure assets and liabilities arising from lease contracts are uniformly recognized within corporate financial statements. Assets shall be classified based upon a corporation’s right-to-use will NOT occur this summer and the timing for implementation will be delayed well beyond the original expectation of FYE 2012. and operators did not increase parking rates during the last 12 months. a handful the leased property, whereas lease liabilities shall be classifiedBoard (FASB) and the International Account- based upon a corporation’s obligation to pay Standards Board (IASB) joint task force’s 1 of 2 of cities saw double-digit increases, but inLease Accounting Exposure Draft. Due to a most markets parking rates held steady,delay in the new standard issuance, questions the future capital structure of the company. rose marginally, or dropped by just a fewplague the real estate industry, including While advocating a strategic approach to percent.when the final rules will be released, what financing determination, Colliers recom- According to the survey, the five mostdate the proposed standards will take effect mends a cautious approach to investment expensive parking districts (as representedand what steps can be taken now to prepare in systems and technology. These new rules by median rate) in the United States arefor the changes. will definitely add complexity to the finan- Midtown Manhattan ($541.00), Lower The lease accounting changes are being cial statement reporting process. In order to Manhattan ($533.00), Boston ($438.00),drafted to increase the transparency within track lease obligations more effectively and San Francisco ($375.00) and Chicagocorporate financial statement reporting and allow corporations to efficiently implement ($289.00) per month. The five leastenhance the comparability of similar compa- lease accounting disclosure requirements, expensive are Reno ($45.00), Phoenixnies and like transactions. The goal is to create companies with many real estate and equip- ($50.00 USD), Bakersfield ($55.00),a common lease standard to ensure assets and ment leases will need to invest in systems and West Palm Beach ($56.00), and Memphisliabilities arising from lease contracts are uni- technology which are currently in formative ($57.00) median rate per month. For moreformly recognized within corporate financial stages. It is widely believed that the boards information, contact Chief Economist Rossstatements. will provide ample time for recognition of the moore at According to the FASB/IASB boards, delib- new lease accounting standards. Therefore,erations surrounding the lease accounting without a specific and detailed understandingExposure Draft are ongoing and should be of these final lease disclosure requirements,completed during the third quarter of 2011, which will affect the coding and formulationwith a revised exposure draft publication of these systems, Colliers recommends carefulshortly thereafter. Therefore the timing for consideration of capital commitments. Beforeimplementation will be delayed as well. investing capital and committing valuable Colliers advocates a strategic approach to the resources in new systems, processes and tech-current corporate financing determination. nologies, Colliers proposes “procrastination”Today’s decision-drivers must fully incorpo- surrounding tactical implementation of therate the most likely lease accounting precepts. new lease accounting standards.By proactively understanding such factors and To receive a full copy of the finance seriesincorporating the prospective rules into the report, email Bret Hardy, CPA, Executivelease-versus-buy decision matrix, your com- Managing Director of Corporate Finance forpany will intelligently influence real estate Colliers International, at Bret.Hardy@colliers.decisions that will have a lasting impact on com.knowledge-leader.Com Colliers international faLL 2011 | 7
  8. 8. spot l ig h t> q&AEXECUTIvE INSIgHT WITH:Karen J. WHittU.s. president & cHief operating officer |reaL estate management servicescoLLiers internationaLkaren whitt oversees Colliers International’s property managementteam. Whitt ensures consistent service across the organization and col-laborates with brokerage and investment sales professionals nationwideto provide integrated real estate solutions. During her more than 20years’ experience in the industry, she has been a national leader inproperty management, handling office, retail and mixed-use for insti-tutional clients, including TIAA, ING UBS, and Principal Financial.She is based in Washington D.C.if you could have dinner with any Favorite business book? Biggest accomplishment so far inbusiness leader, who would it be Who Moved My Cheese? by Spencer Johnson. your career?and why? The value in this book for me is the reminder Really, my biggest accomplishment is handlingI’m on the road several days a week, so if I had that everything is always changing, and you the day-to-day challenges, and making sure toan open dinner slot I’d choose to be home with have to be innovative and stay ahead of the enjoy the small husband and thirteen-month-old baby, and crowd.invite Oprah Winfrey. She’s smart, she’s not who is your role model?afraid to take risks, and she’s genuine. I just what do you see as new industry My mom. She taught me to think outside thewouldn’t tell her I didn’t watch her show. trends to note? box, never accept status quo and, most impor- Property management organizations will tantly, to put others first. Knowing there arewords to live by? become true partners with their clients, rather many solutions has made solving problemsJust do it...but do it right. than just providing service. This may result in much easier throughout my life. performance-based management fees to trulywho were your mentors? align the interests of clients and management how are you involved with yourMy first boss after college, Barb Kocmur of firms. community?Janez Properties in San Diego, who showed My husband and I have provided a fosterme how to handle challenges with grace; Marc what did you want to be when you home for more than 200 locally rescued dogsDeLuca of Clarion Partners, who taught me were young? in addition to the four special-needs dogs thathow to deliver value to clients (as he does every A teacher. Both my parents were teachers… are part of our household. The animal rescueday); and Dylan Taylor, who exemplifies trust and of course, I wanted summers off! organization we work with, Lucky Dog (www.and integrity, and shows us that you can lead, provides adoptiononly if people follow you. What was your first job? matchmaking and foster care in the Metro D.C. I was a lifeguard at the local pool. (Saved two area. Last year alone, Lucky Dog kept 1,400 kids in three summers.) dogs out of high-kill shelters in the South. K l8 | knowledge leader faLL 2011 knowledge-leader.Com
  9. 9. b2b B Usin es s to B Usin es s tip s Gas, Food, Lodging muCh like oil and water, high oil priCes and hotels simply don’t mix. by John b. Corgel, ph.d., and Jamie lanea report released by PKF Hospitality the health of the macro economy to sell their normal levels, individual consumer and busi-Research (PKF-HR) in Spring 2011 reveals products—guest rooms, food and beverage ness spending power is reduced, which in turna direct economic relationship between oil services and meeting rooms—oil prices should has a negative multiplier effect throughout theprices and the U.S. lodging industry. The be a serious concern for hotel managers, inves- economy in general and the lodging indus-special report, entitled Oil Prices and Lodging tors and developers. try specifically. Based on our study, oil pricesRisk, notes that the U.S. lodging industry will “As the price of oil has shot up and then down above $125 a barrel exceed ‘normal’ levels andsee minimal disruption if oil prices reach $125 over the past few months, many U.S. hoteliers would have an increasingly negative effect onper barrel in 2011. However, if prices surge have worried about the impact that oil prices hotel operating performance.”to $150 per barrel, the recovery that U.S. could have on their business,” notes R. Mark The PKF-HR’s Hotel Horizons® econometrichotels are currently enjoying could be severely Woodworth, president of PKF-HR, an affili- demand model relies on economic data fromcurtailed. ate of Colliers International. “Our analysis Moody’s Analytics to project future hotel Since the U.S. lodging industry depends on found that when oil prices increase beyond demand levels. In describing the microeconomic10 | knowledge leader faLL 2011 knowledge-leader.Com
  10. 10. Revenue per available room (RevPAR) gains OIL PRICE IMPACT ON observed in the beginning of 2011 will not continue in either of Moody’s oil-price-spike U.S. LODGING INDUSTRY scenarios. These high oil prices have the poten- REVPAR FORECASTS tial of halting the economic recovery; given lodging’s dependence on macroeconomic health, the report expects declines in economic ANNUAL CHANGE IN REVPAR production to flow through to lodging demand. 10% In the $150 per barrel scenario, the 2 percent 8.9% RevPAR increase in 2012 will be entirely driven 8% by a 2 percent increase in demand as average 7.1% daily rate (ADR) levels remain flat. As inflation 6% 5.5% powers forward, ADR fails to keep up, which 5.0% 4.6% results in real ADR declines. 4% This trend is generally seen through all 1.9% types of locations and chain scales. PKF tested 2% which location segments are more susceptible to an increase in oil prices. Historically, oil 0% prices have had a 99 percent correlation with 2011F 2012F gas prices and, since hotels are travel des- tinations, one could assume an increase in March 2011 Hotel Horizons® Baseline Forecast the price of getting to the destination could $125 Oil Price Scenario potentially decrease demand. Not surprisingly, hotels with drive-to business, including inter- $150 Oil Price Scenario state, suburban and resort hotels, may see the SOURCE: PKF HOSPITALITY RESEARCH first impacts of increased oil prices. Declines are then expected to migrate to fly-to resort locations once other hedging strategies—effect of oil prices, Moody’s states: forecasts in which oil prices increase to either including taking the train or reducing other “The most visible channel through a high of $125 or $150 by the fourth quarter vacation expenditures—run out. which higher crude oil prices affect the 2011. The baseline scenario ($98 per barrel To test this theory, PKF inserted Moody’s U.S. economy is higher transportation for 2011) reflects Moody’s modeled funda- $150 oil price scenario into models for each costs. An increase in crude oil prices mental price of oil ($93.53) coupled with location. The results show the average Rev- raises the price of gasoline and diesel. a premium of approximately $5 to account PAR change for 2011-2012. The two bars for Higher crude oil prices also raise the cost for the supply uncertainty. This baseline sce- each location represent the baseline forecast of heating oil and propane, which are nario also assumes the Libyan conflict will be (blue) contrasted with our hypothetical $150 used by households in the Northeast and resolved over the course of the year. oil price scenario forecast (red). The location Midwest to stay warm during the winter. According to Moody’s Analytics, a surge in segment expected to see the bulk of the dam- When petroleum prices rise, consumers the price of oil to $150 per barrel would trig- age is resort, where RevPAR could fall from have less money to spend on other goods ger a mild recession, which is traditionally an average increase of 12.3 percent down to or services, save, or pay down debt. Every defined as two successive quarters of nega- 3.7 percent. These results confirm that loca- $1 increase in the price of crude oil raises tive gross domestic product (GDP). In the tion segments exposed to leisure/destination gasoline prices by 2.2 cents per gallon and $150-per-barrel scenario, Moody’s forecast travel demand could see the largest declines in cost consumers about $3 billion over the of real GDP growth falls by a maximum of future growth. course of a year.” 2.6 percent, resulting in the loss of 4.5 mil- As long as oil prices continue to stay high, lion jobs by 2012. they remain a concern and warrant continual Another cause for concern for the industry The econometrically-based Hotel Horizons® monitoring. While the scenarios presentedis the continued threat of political instability demand model relies primarily on changes above have a low probability of occurrence,in oil-producing nations that could constrain in real personal income and total payroll many of the drivers will have a greater influencesupply, and increased demand from developing employment. By introducing Moody’s oil- in our models as situations abroad unfold.nations emerging from the global recession. spike scenarios for economic growth into To download a complimentary copy of the Concerned with the direction of oil prices these models, the next five years begin to Oil Prices and Lodging Risk report, visit April 2011, Moody’s created two economic look vastly different. K lknowledge-leader.Com Colliers international faLL 2011 | 11
  11. 11. working spaCe sm a rt d esig n fo r t H e Wo rK pL ace as new York’s energy needs spiked this summer amid one of the worst heat waves on record, David Kuperberg, CEO of FS Energy, knew that a good portion of that energy was simply being wasted. The founder and CEO of Cooper Square Realty (a FirstService Corporation subsidiary and the largest residential property management company in New York City), Kuperberg says he has documented that many of the city’s buildings are terrible energy hogs. For the good of the environment and the good of his customers, he wants to make buildings more energy-efficient. According to the Green Building Council, buildings in the United States are responsible for producing 39 percent of the nation’s greenhouse gas emissions. The average building’s energy consumption also accounts for as much as 25 percent of a building’s annual operating expenses. “When you put those two figures together, it’s clear that reducing emissions by reducing energy consumption is the way to go,” Kuperberg says. “As property managers, our goal is to increase asset values for our clients. In this economy, one of the best ways to do that is by reducing operating expenses. By reducing consumption, we reduce costs and greenhouse gas emissions; that will increase asset values.” Changing an Industry Together with the management team at FirstService, Kuperberg began developing a plan to change some of his clients’ resistance to retrofitting their properties for greater energy David Kuperberg efficiency—which soon grew into a more comprehensive initiative to champion the cause of conservation in the real estate industry. According to FirstService President and ChiefConservation’s Operating Officer Scott Patterson, saving energy, cutting costs and reducing a company’s carbon footprint was simply the right thing toSilver Lining do. “We saw it as a responsibility,” Patterson says. “Through our Residential Management division and Colliers International, we are by far the largest manager of properties in North America and are in a unique position to impact energy consumption in the built environment.fs energy is cHampioning tHe caUse of energy We needed to act on it.”conservation and HeLping tHe reaL estate indUstry From these initial discussions was born inevoLve in tHe process. By Jeff Bond 2008 FS Energy, a division of the property12 | knowledge leader faLL 2011 knowledge-leader.Com
  12. 12. management leader that aims to cut building shows building owners how much they are a building’s lighting system, can pay foremissions through retrofits, equipment paying for energy compared to similar buildings themselves in energy savings in less than oneupgrades and maintenance changes. New York next door or down the street. And he notes year. Another popular measure is to convertCity was the first city in North America to roll that the largest potential for reducing energy dirty oil-heating systems to gas. The Cityout the new plan, starting with the approxi- consumption is in retrofitting buildings, most of New York is promoting the conversionmately 450 buildings that Cooper Square often by replacing old and inefficient equipment by passing ordinances restricting certainoversees. with newer products. types of oil-heating systems. Following FS The immediate goal for the energy division However, the menu of energy-saving retrofits Energy’s example, city officials passed Localis to reduce energy costs and consumption is long and includes some very simple fixes. Law 84, requiring buildings to benchmarkin its New York properties by 25 percent by So far, FS Energy has helped improve energy their energy usage and enter the results in the2013. Such a reduction would save more than efficiency through the implementation of 26 Environmental Protection Agency’s Energy$30 million for FirstService clients and reduce separate projects. Energy-saving measures Star database annually.carbon emissions by up to 111,000 tons— have included everything from replacingequivalent to taking 110 buildings offline or a building’s heating and air-conditioning Changing the Status Quoremoving nearly 22,000 cars from New York’s system to developing cheaper procurement While the initial cost of some of the retrofitsstreets. and maintenance systems to upgrading is not inconsequential, FS Energy has worked Patterson stresses that the company isn’t lighting systems. out three different options for paying for thefocused on making money from this initiative. The division’s unique combination of skills retrofits that shouldn’t cost tenants a dimeIn fact, the development of the new division in procurement, negotiating contracts and and would save building owners money in thehas actually cost the company time, money retrofitting properties has saved their clients long run.and manpower. But he believes it is the right millions of dollars in just the first few years. The first option is for a building’s ownershipdirection—one that will bear fruit for the FS Energy helped New York’s famed Plaza to pay for the upgrades out-of-pocket and thencompany and its customers in the future. Condominiums save more than $500,000, collect the savings. The second is for ownership which will be realized over a two-year period. to take an unsecured loan from one of theDeveloping a Database Another property, University Towers, has banks that FirstService has made an agreementThe first step toward this goal was to create a already seen cost reductions of $200,000 per with to help fund these projects. The banksunique database of detailed information on year, and FS Energy was able to save St. James are paid back with the energy savings resultingevery building’s current and historical energy Towers more than $330,000. from the retrofits, and the building’s tenantsconsumption, which can be used to identify To no one’s surprise, many buildings in New don’t pay any extra fees. Kuperberg says thatboth strengths and weaknesses in a building’s York are extremely energy-inefficient, relying in many cases such loans are paid off in onlyenergy usage. With this database, FS Energy on old equipment or even steam from the a few years.can accurately compare the energy usage city’s electricity generating plants to heat the The third method is only available to certainacross its entire management portfolio. So far, properties. Tenants of such buildings have no properties and requires FS Energy to actuallythe division has given Energy Report Cards control over the temperature in their units. pay for the retrofit. The company would paywhich list energy usage to more than 350 of its “In many buildings in New York, the itself back with the resulting energy thermostat is literally your window,” Kuperberg In this age of enlightened environmental “We aren’t in a position to make decisions for says with a laugh. “You have to open the window awareness, FS Energy’s idea of retrofittingthe buildings’ owners,” Patterson says. “But, as to let in cooler air to adjust the temperature in properties at no cost would seem like athe knowledge leaders in this area, we are in a your apartment. Some of the buildings are so no-brainer. However, Kuperberg says he stillposition to put forth the facts to our clients and energy inefficient that energy savings projects struggles at times to talk building owners intohelp them realize the potential savings.” produce investment returns over 20 percent.” making the necessary changes. Ironically, their Kuperberg says this benchmark information In fact, some basic fixes, such as upgrading attitude is that the deal is too good to be true. But he says attitudes continue to evolve and> an increasing number of property owners are seeing the light. Some basic fixes, such as “The most important thing people should realize is that it pays to be energy-conscious,” upgrading a building’s lighting system, can pay for Kuperberg says. “And I’m not talking about just tangentially by attracting more tenants. themselves in energy savings in less than one year. I’m talking about saving money. The bottom line is buildings can do well financially by doing good.” K lknowledge-leader.Com Colliers international faLL 2011 | 13
  13. 13. bank notes co m m erci a L fin a n cin g n e WsPass or Failgovernments are pUtting tHeir BanKs tHroUgH a series of stresstests. BUt is it enoUgH to Ward off anotHer financiaL crisis?By Kc conWayFollowing the collapse of Lehman Brothersin 2008, the United States Federal Reservebegan to put the nation’s top 19 financialinstitutions through a series of economic andcredit stress tests known as the SupervisoryCapital Allocation Program (SCAP). Thesetests are an effort to create a firewall against anadvancing financial crisis. As the commercial real estate (CRE) risk spe-cialty officer to the New York Federal Reserveat the time, I was engaged in these tests and,more recently, have been teaching CRE stresstesting to bank examiners in advance of whatwill become an annual event for both U.S.and European banks. I believe stress tests willbecome the modern-day symbol that a finan-cial institution is well-capitalized—much likethe FDIC insurance logo did after the GreatDepression. Without a passing grade, a bankwill likely find it difficult to attract capital forexpansion, and its lending activities will beconstrained. In December of last year, U.S. banks submit-ted their “capital plans” which updated theresults of the original 2009 SCAP. All but one testing exercise of 91 banks in 20 countries. And Australia had one bank miss the 5 per-of the original 19 institutions—Bank of Amer- in the past six months, both the U.S. and Europe cent core Tier 1 capital ratio.ica—was deemed well-capitalized and cleared have put banks through a second round of stressto increase its dividends. As a result, the largest tests. In Europe, the latest tests revealed: Europe is considering a TARP-like programU.S. banks have been drawing down their loan that would inject as much as one trillion Eurosloss reserves into earnings to pay higher divi- • A total of eight banks failed or fell below to insure deposits in all EU banks except thosedends. It has been an egregious draining of the the capital threshold of 5 percent, with in Greece, Portugal and Ireland. The intentionTARP money out of the banks while the hous- an overall shortfall of $2.5 billion (EUR) is to create a firewall to contain the spread ofing and mortgage crises have worsened. It’s hard or $3.5 billion (USD). the sovereign debt crisis—much like the understand how the December 2010 updated • As many as 16 more European banks will did with TARP—making the bailout palatableU.S. bank stress tests could justify such a need to bolster capital after their core to Germany, which has opposed any more sup-release of the allowance for lease and loan losses Tier 1 ratio dropped below 6 percent— port for Greece.(ALLL), calling into question the integrity of or just above the assessment’s 5 percent Stress tests assess the impact of movementsthese subsequent stress tests. pass-mark. in relevant economic variables (gross domes- In the spring of 2010, Europe embarked on a • The failing banks were located predomi- tic product, unemployment, home prices, etc.)much broader and more comprehensive stress- nantly in Spain (five) and Greece (two). on the liquidity and credit quality of a bank’s14 | knowledge leader faLL 2011 knowledge-leader.Com
  14. 14. > part of a bank’s risk management practices, not Stress tests assess the impact of a regulatory mandate. And the process needn’t be complicated or expensive. movements in relevant economic variables on Stress testing starts with an assessment of the the liquidity and credit quality of a bank’s assets. availability, accessibility and accuracy of infor- mation. It then involves identification of the resources within the bank that have the skill and independence to assemble and analyze theassets. And, in turn, the impact on a bank’s cap- A majority of U.S. banks still struggle to roll information to make a forward-looking judg-ital position can be measured to determine if it up loans within lines of business and across ment about the adequacy of a bank’s capitalholds sufficient capital to weather a storm. This geographies to then stress them to sensitivity to withstand market volatility. The key to theprocess relies on one huge assumption: that the analysis. During the 2009 SCAP, it was an whole process is familiarity with what infor-banks are able to provide sufficient line-of-busi- arduous process to collect line-of-business and mation is available, how it is accessible, and ifness and loan-level detail to subject the bank’s loan-level information from banks in order to it is timely and independent.assets to sensitivity analysis. conduct a consistent stress test. The process can be as simple as identifying The objective of the stress tests is threefold: It is a common misconception that the regula- the 20 largest loans in the bank that account tory community knows all that is going on in for 100 percent of the bank’s Tier 1 capital and • Psychological: Stress tests were created a bank because of its routine onsite exams; or subjecting only those loans to a series of sensi- primarily to calm the markets and con- that the banks provide granular data on their tivity analyses. Or it can be as easy as requiring vince the public that more Lehman-type loans and operations through what are known a sensitivity analysis at the end of an externally failures or 1933-style banking crises as “call reports.” In my opinion, the regulatory prepared appraisal of the two or three most were not looming. community did an atrocious job of monitoring influential variables in an asset’s valuation, • equalizing: Prior to the SCAP, the the banks in the decade leading up to this finan- and then electronically capturing them into U.S. and European banks had never cial crisis. They allowed CRE concentrations, the ALLL forecast process. been analyzed across a myriad of met- for example, to explode without appropriate Stress testing should be mostly about com- rics simultaneously under a uniform set enhancements to risk management practices or mon sense and prudent banking practices, but of economic scenarios. The stress tests additions to capital. And they failed to assess it has become cover for the regulatory regime were designed to correct this regulatory bank’s IT systems to ensure banks were capable to diffuse their failings in the decade leading failing. of conducting line-of-business and loan-level up to the financial crisis, and justification for • Corrective: Stress tests were designed sensitivity analysis on an electronic, rather than paralyzing regulation. to identify how much capital a large manual, platform. The objectives of the stress tests have been financial institution might need if the As a result of this regulatory failing, and the mostly psychological to date, in an effort to U.S. or Europe remained in a recession data deficiencies highlighted in the original calm the market. However, they are moving in over a protracted period of time, as well SCAP, an interagency data collection effort a direction that will become more substantive as how much capital would be needed was initiated in 2010 to assess banks’ capabili- as line-of-business and loan-level data collec- to create a firewall to halt an advancing ties for providing more detailed and consistent tion from the banks improves and becomes financial crisis. loan-level information for future stress tests. It more automated. was an eye-opening experience for the Board All we need now is a logo to display in bank From a macro-level perspective, stress tests of Governors and heads of the OCC and FDIC windows adjacent to “FDIC Insured” thathave succeeded in meeting these objectives. to realize how little information the bank “call says, “Stress Tested with a Well-CapitalizedThe market has rebounded, and banks have reports” provide—and how much a manual Rating.” K lnot closed or failed at anywhere near the pace process it still is for banks to capture basicbetween 1930 and 1933 or the savings and information needed to calculate a probability Executive managingloans crisis of the late 1980s. of default (PD) and loss given default (LGD). director of real estate The question is, however, do we have fewer The absence of sensitivity analysis conducted analytics, prior tobank failures today because of stress testing, or by banks at loan origination, and subsequently joining Colliers Inter-are the stress tests masking the true underlying during the life of the loan, is shockingly poor. national, KC Conwayproblems in our banking system? The answer Today, as I teach CRE stress testing to bank was the commerciallies in a deeper understanding of what is going examiners and bankers, I remind them that real estate risk spe-on behind the scenes in the banks and with the stress testing is really all about determining the cialty officer for theregulatory process. adequacy of bank capital. It should be a systemic Federal Reserve.knowledge-leader.Com Colliers international faLL 2011 | 15
  15. 15. London London’s skyLine Bridge is changing dramaticaLLy thanks to a tower of gLass known is as the Shard. By ruth BLoomfieLd going16 | knowledge leader faLL 2011 knowledge-leader.Com
  16. 16. the shard is the centerpiece of the £2 billion mixed-use development, London Bridge quarter. w when millions of international athletes and spectators descend on the United Kingdom next summer for the 2012 Olympics, the famous skyline of London will have a new global landmark for them to admire. The Shard, a narrow and elegant glazed tower, is Western Europe’s tallest building, and has become a source of some fascination to Londoners. Its allure is partly its sheer scale: at 1,016-feet tall and the equivalent of 95 stories high, The Shard is breathtaking by U.K. standards. Also, it’s designed to be an iconic public building, already being described as London’s answer to Paris’ Eiffel Tower or New York’s Empire State Building. Finally, there’s the rarity value. The recession has put a series of other major developments in the City on ice, yet during the worst of economic times The Shard defiantly continued to rise. In fact, The Shard is the centerpiece of the hugely ambitious £2 billion (approximately $3.26 billion U.S.) mixed-use development, London Bridge Quarter (LBQ). The tower itself will house a five-star Shangri-La hotel and spa, office space, restaurants and exclusive apartments. It is estimated that approximately 12,500 people will work at London Bridge Quarter when it is complete. The LBQ project also includes a new 10,000-square-foot public piazza, a redesigned and expanded London Bridge Station and bus terminal, and a 17-story, 600,000-square- foot headquarters building named The Place. Like The Shard, The Place is designed by renowned Italian architect Renzo Piano, recipient of the Pritzker Architecture Prize, the American Institute of Architecture Gold Medal, the Kyoto Prize and the Sonning Prize. Piano’s other renowned designs include the Centre Georges Pompidou in Paris; the New York Times Building in Manhattan; the Menil Collection in Houston, Texas; the Kansai Airport in Osaka, Japan; and the Modern Wing of the Chicago Art Institute. The man behind the London Bridge Quarter is self- made property developer Irvine Sellar. His involvement in London Bridge’s reinvention began pragmatically, with the purchase of an investment property in the area, the Southwark Towers—a bland 1970s building, at the ©seLLar groUp time leased to accounting firm PricewaterhouseCoopers. Initially, he had no grand design to erect a record-breaking tower; in fact, he was attracted to the site specifically because it had a long-term quality tenant.knowledge-leader.Com Colliers international faLL 2011 | 17
  17. 17. But then the U.K. government—usually fell silent—including high-profile skyscraper Sellar, will elevate the station to the highesthighly resistant to modern design in historic projects with nicknames like the Helter Skelter, standards of international transport design toareas—made it known that it would be the Cheese Grater and the Walkie Talkie. cater to the 54 million passengers that floodamenable to high-quality, high-density But Sellar pushed on. As a result, he is through every year.projects near transport hubs. The concept of currently in the enviable position of launching If its proposals are approved—and it isthe London Bridge Quarter was born. two landmark buildings at a time when there is almost inevitable they will be—then the To build The Shard as a linear development a grave shortage of Class A office space in one five-year project will start in 2013 as part ofwould eat up around 30 acres and be of the world’s most attractive business locations. a £5.5 billion plan to enhance the efficiencymonstrously expensive. The solution, decided The Shard is already attracting interest from a of mainline train services which thread fromSellar, was to build upwards. wide range of potential occupiers, both domestic the station and across South East England. He decided to give Piano his first U.K. and international. Part of its appeal is that it London Bridge is also served by 15 bus routescommission because he was impressed by his will be multi-let, and occupiers will be able to and two subway lines, with speedy links tointernational body of work. Inspired by the lease as little as 4,000 square feet of space to as the West End and the City, London’s central18th century landscape paintings of Italian much as 200,000 square feet. business and financial district.artist Canaletto, Monet’s paintings of the Sellar believes the lower, larger floors with Piano has described The Shard as a “verticalHouses of Parliament, and the masts of tall 33,000-square-foot floor plates will appeal to city” because its unique mix of offices, homes,ships that once plied the Thames, Piano’s multi-national companies such as financial hotel, spa and shops means that residents anddesign was approved in 2003 by the U.K.’s services or energy-related businesses; the upper workers need barely leave the site, whether theyformer deputy prime minister John Prescott, floors will attract a diverse range of occupiers, want a cocktail, a coffee, a facial or a new pair ofwho proclaimed the project architecturally from media businesses and hedge funds. The shoes. But the truth is they may want to, as the“exceptional.” Place, meanwhile, is seen as a perfect prestige formerly industrial stretch of the South Bank Funding was then secured from a consortium headquarters building. between London Bridge and Waterloo has beenof Qatari banks, and the project became a truly The future tenants of London Bridge Quarter undergoing an extraordinary renaissance sinceinternational venture: the work of a British will also be able to take advantage of some major the millennium. pHotos ©seLL ar groUpdeveloper, an Italian architect, Middle Eastern improvements to the already bustling transport Growing up in north London, Sellar wasfinanciers, and Dutch company Scheldebouw, hub. Network Rail, the body which runs the always aware of London Bridge, but admitswhich supplied countless unique panes of glass. U.K.’s national public transport network, has there was little reason to go there during his In 2008, however, Lehman Brothers just applied for planning consent to rebuild formative years. “Of course I knew the area.collapsed and London plunged into a property London Bridge Station itself, which, combined Everyone knows London Bridge, it’s a globalmeltdown. Building sites all over the capital with the new concourse being constructed by address—one of the brand names of London,”18 | knowledge leader faLL 2011 knowledge-leader.Com
  18. 18. the shard has been described as a “vertical city” because of its unique mix of offices, homes, hotel, spa and shops.he said. “But it was more of an industrial area,like much of the Thames at that time.” That reputation has changed significantly,and South Bank is now regarded as one of the Mark Mcalister, head of Citycultural hearts of London. Agency for Colliers International in The Tate Modern, housed in a former power London, likens the launch of Lon-station, is now probably the United Kingdom’s don Bridge Quarter to anotherleading contemporary art gallery, attracting “new” business quarter, Canarymillions of visitors each year. In fact, it has Wharf—now approaching its twen-become so popular that it is currently in the tieth anniversary.throes of a major extension which will see an Like London Bridge Quarter,extraordinary pyramid-shaped annex by the Canary Wharf is a magnet for inter-architect Zaha Hadid built beside it. national business, and originally The Menier Chocolate Factory is becoming one had as its centerpiece a landmarkof London’s leading “Off Broadway” theaters; tower: One Canada Square.and Borough Market, once a dirty warren of The Shard dwarfs the 770-footwholesale stalls, is now an absolute treat for One Canada Square, but McAlis-gastronomes, stuffed with charming cafes and ter believes London Bridge Quarterstalls full of artisanal produce which can be has something more important overbought direct from the farmland of England. Canary Wharf: location. LBQ is And if this were not enough to tempt occupiers much closer to both the City and thefrom traditional office locations in the West End West End and is already blessed with a great infrastructure.and the City, once The Shard and The Place are In fact, even without a landmark building, the South Bank is now exerting a pull on majorcomplete, Sellar has his eyes firmly set on adding companies. “The tenants already benefiting from the South Bank renaissance includeto the nascent London Bridge Quarter. Time Warner, Shell and PWC. So The Place and The Shard represent the final piece in “We have other properties here and we will the puzzle,” notes McAlister. “All major corporations will consider these buildings, andextend London Bridge in ways which will with total occupancy costs much lower than the City and West End, such relocations willcomplement what we have already done,” be good value. For Canary Wharf tenants they can save themselves the extra commute,he says. “It is the nucleus of a new district of conservatively estimated at 30 minutes a day.”London.” K lknowledge-leader.Com Colliers international faLL 2011 | 19
  19. 19. ontario’s perimeter Development is transforming the urban landscape of suburban communities with projects like Breithaupt Block in Kitchener, shown before (opposite page) and after, as a computer-generated rendering (this page). Out with the New, IN with the Old. In OntarIO, develOpers are revItalIzIng OutlyIng cOmmunItIes by renOvatIng hIstOrIc buIldIngs and revIvIng neIghbOrhOOds. by sarah eadIe and cheryl reId-sImOns20 | knowledge leader faLL 2011 knowledge-leader.Com