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Experts weigh in on why the real estate market north of the border remains immune from what's ailing U.S.
TERRENCE BELFORD

From Tuesday's Globe and Mail

October 23, 2007 at 6:34 AM EDT

The U.S. real estate market is heading into turbulent waters in 2008 but, unlike years past, that won't rock the boat in Canada, according to a major real estate report.

While the annual report, released late last week, warns that the U.S. real estate industry "will be walking on egg shells for a while" and anticipates "a long overdue correction," Canada is likely to avoid both scenarios.

"Interviewees remain positive about side-stepping any serious impacts of a possible U.S. correction," the report says. "All property sectors share positive prospects, especially industrial and retail."

The report, titled Emerging Trends in Real Estate, was prepared by the U.S.-based Urban Land Institute and PricewaterhouseCoopers and is based on interviews with real estate executives in both countries.


Blake Hutcheson, president of CB Richard Ellis, says Canada appears to have shown better stewardship over its economy

So what has changed?

A decade ago, observers suggest that when the United States real estate market developed a cold, Canada caught pneumonia; that was how mightily U.S. trends influenced Canadian markets. But now the Canadian real estate market has developed immunity from what's ailing the U.S., observers say.

It comes down to some fundamental differences between the economies of the two countries, says Blake Hutcheson, president of CB Richard Ellis Ltd. and one of the report's Canadian sources. He suggests that in areas where we are naturally rich, such as energy and resources, we benefit from huge global demand, which fuels both the economy and demand for all forms of real estate.

At the same time, Canada seems to have proved a better economic manager than the United States, Mr. Hutcheson says. "All those years of significant federal surpluses have given consumers confidence and that confidence shows up in spending," he says - spending on homes, on retail goods, and on business expansion.

The downside is that in those areas where Canada is one small part of increasingly interdependent North American business activity, such as capital markets, we are already being hit with the fallout. The U.S. credit crunch is expected to make money to refinance existing projects or fund new ones either unavailable or more expensive, Mr. Hutcheson says. "In the past, it might have taken up to six months to affect us. This time we started to feel the impact in about two minutes."

Sheila Botting, senior managing director of Canada for the capital markets group at Cushman Wakefield Lepage and another interviewee, says that, during the past 60 to 90 days, the effect of the U.S. credit crunch has been seen in secondary and tertiary Canadian markets - smaller cities, such as Winnipeg.

"In the past, properties there have traded almost on par with major centres when it came to capitalization rates," she says. "Now, the cost of financing is starting to rise and with it cap rates. In some cases, money may just not be available for refinancing some projects or financing new ones.

"It is not serious as yet, but certainly bears watching."

On the plus side, Canada's economy continues to tick along; energy demand remains high and the soaring dollar brings benefits to importers and any company looking to make capital purchases, which are almost always priced in U.S. dollars, says Edward Sorbara, principal in Sorbara Group of Vaughan, Ont., a major industrial sector developer. He, too, was interviewed for the Emerging Trends report.

"One of our saving graces is that the Canadian economy is much simpler than that of the U.S.," he says. "Also, we only have four big cities - Montreal, Toronto, Calgary and Vancouver - and almost all major real estate projects across the country are held by a small group of very professional, very well-funded pension funds, institutions and companies."

He points out that 85 per cent of the office space in Toronto's financial core is in the hands of five large companies and Canada's eight major industrial developers have the resources to supply all the country's needs for factories, warehouses and distribution centres if necessary.

"We have become much more conservative than our neighbours to the south," he says. "We learned lessons from the meltdown of the 1990s. The result is there is no wild rush toward speculative building. We create to meet proven demand."

In major centres, an added benefit is the money currently available to upgrade existing commercial buildings to more energy efficient standards, says Chuck Stradling, executive vice-president of BOMA Toronto, a division of the national organization Building Owners and Managers Association.

"We have $60-million available in Toronto alone," he says. "With rents for office space rising by double-digit levels and vacancy rates extremely low, that means more and more building owners are upgrading properties. They know if they renovate, if they become 'green' and energy efficient, they can both fill their buildings and charge rents that provide a quick return on their investment."

In short, Canada's combination of natural resources and solid conservative management seems to have created a buffer against some of the problems affecting U.S. real estate, observers say.

"The strength of the markets will vary from city to city and province to province depending on the underpinnings of local and regional economies," Mr. Hutcheson says. "but, all in all, Canada has much brighter expectations than the United States for 2008."

*****

Where the trends are

Where will the smart money be going in Canadian real estate next year?

The Emerging Trends in Real Estate 2008 report, issued last week by U.S.-based Urban Land Institute and PricewaterhouseCoopers, suggests five of what it calls "best bets" for Canada:

All commercial property categories - office, retail, industrial and residential - in any of Canada's high-growth energy markets, particularly Edmonton and Calgary. Demand for oil is expected to continue strong globally and that will fuel the need for almost anything with four walls and a roof.

With office vacancy rates in low single digits in all major markets, demand for office space is outstripping landlord's ability to satisfy it. The result is certain to be rising office rents and solid sustainable returns.

Buy infill sites wherever you can. Many Canadian cities have stopped growing out and have started to grow up. Shortages of land ready for development have placed the focus for new projects, especially residential and retail, on existing infill sites. Old apartment structures are making way for new condos; brownfield sites are becoming malls or new residential communities.

Develop condominiums in Toronto, especially near subway stops. With 100,000 new immigrants every year, Toronto's demand for residential properties will likely remain strong. But low mortgage rates will be key: It seems to be monthly carrying costs, not purchase price, that drives this market.

Invest overseas: The indisputable fact is that Canada is a limited real estate market, especially at current purchase prices. Major pension funds and development companies have already caught on to the need to look further afield for opportunities. You will now find Canadian pension funds building shopping centres in Brazil and residential projects in China.

Terrence Belford

*****

Prospects for cap rates

Capitalization rates are predicted to rise over the next year, led by central city offices, whose rates are seen rising 38 basis points.

Cap rate July, '07 Expected cap rate Dec. '08
Regional malls 6.03% 6.29%
Apartments:
High income 6.07% 6.35%
Central city office 6.29% 6.67%
Power Centres 6.43% 6.74%
Apartments:
Moderate income 6.66% 6.88%
Warehouse industrial 6.77% 6.93%
Neighbourhood/
community centres 6.89% 7.17%
R&D industrial 6.98% 7.19%
Suburban office 7.03% 7.33%
Hotels: Full service 8.15% 8.46%
Hotels:
Limited service 8.31% 8.42%

SOURCE: EMERGING TRENDS IN REAL ESTATE 2008 SURVEY

http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=3db8c898-ce50-455e-83ba-c2c5997d86cc

The average price of a single-family home in Calgary has dropped for the third consecutive month and in October was more than $53,000 less than it was in July when it hit a record $505,920.


"Prices have come off in my mind 10 to 15 per cent in most parts of the city," he said. "It's going to take a long time to get out of this high inventory situation.............................

Glut of single-family homes crowds market

Mario Toneguzzi, Calgary Herald

Published: Friday, November 02, 2007

The number of active listings in the city remains high and is the biggest factor affecting the local real estate market, said Ted Greenhough, of Re/Max Realty Professionals.

"Prices have come off in my mind 10 to 15 per cent in most parts of the city," he said. "It's going to take a long time to get out of this high inventory situation.

"So I would expect the market to remain relatively depressed for the next few months."

Quote:

---

Originally posted by jayaram
Prospects for cap rates

Capitalization rates are predicted to rise over the next year, led by central city offices, whose rates are seen rising 38 basis points.

Cap rate July, '07 Expected cap rate Dec. '08
Regional malls 6.03% 6.29%
Apartments:
High income 6.07% 6.35%
Central city office 6.29% 6.67%
Power Centres 6.43% 6.74%
Apartments:
Moderate income 6.66% 6.88%
Warehouse industrial 6.77% 6.93%
Neighbourhood/
community centres 6.89% 7.17%
R&D industrial 6.98% 7.19%
Suburban office 7.03% 7.33%
Hotels: Full service 8.15% 8.46%
Hotels:
Limited service 8.31% 8.42%

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Very soon we will hear same stories here too.......

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http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/11/03/MN10T5DS5.DTL&ref=patrick.net

Ask any real estate appraiser: Being badgered to overstate home prices is a fact of life, they'll say.

"We get pressured every single day to inflate our values," said Dan Tosh, principal at Tosh & Associates, an appraisal firm in Brentwood. "We get people telling us we'll never work again, or they won't pay us because we won't play ball."

New York's attorney general sued a leading appraisal management firm Thursday, saying it had knuckled under to a big bank's pressure to pump up home prices. The practice might have helped fuel the current mortgage crisis and the dramatic home price appreciation of the past few years.

Many real estate experts say appraisal inflation is pervasive in an industry in which pressure to close deals is all-consuming.

"This makes things such as Enron and WorldCom look small by comparison," said Ted Faravelli, executive director of the California Association of Real Estate Appraisers and principal at San Jose's T.E. Faravelli & Associates, an appraisal firm. "It was an epidemic."

In a nationwide survey released early this year, 90 percent of 1,200 appraisers said they had felt "uncomfortable pressure" to adjust property values. Mortgage brokers were named as the most common culprits, followed by real estate agents, consumers, lenders and appraisal management companies. The increase in pressure was dramatic compared with that found in a similar survey in 2003, when 55 percent of appraisers reported feeling pressured.

"Pressure on appraisers reaches pandemic proportions," said David Hutton, senior editor at October Research Corp., the Ohio company that conducted the study. "The New York lawsuit ... may be just the tip of the iceberg."

Appraisers are hired by mortgage brokers, bankers, real estate agents and home buyers as independent experts to give an informed analysis of a home's market value. Home loans, for both sales and refinances, rely on appraisals to assure lenders that the home is enough collateral for their money.

Appraisers, who make a flat fee of anywhere from $200 to $500 for a job, do a walk-through of a house and research recent local sales of comparable properties and then write a report on their opinion of the home's market value. Appraisers are licensed by the state and must complete relevant coursework and accumulate sufficient experience to earn the highest level of licensing.

Why would financial or real estate professionals lean on appraisers to hit higher numbers for homes values?

"It's called compensation; it's called money," Faravelli said. "Mortgage people (brokers and lenders) work on commission. If the deal doesn't get closed, they don't get paid. If the appraiser gets in the way of their money, they'll find someone else."

As home prices spiraled up during the most recent real estate frenzy, con artists found plenty of ways to skim off the top. Inflated appraisals were one of the tools in their arsenal.

"In the mortgage fraud cases we're uncovering, the linchpin of most of the fraud is a doctored or questionable appraisal," said Tom Pool, a spokesman for the California Department of Real Estate. "It's a fairly common scam for properties to be overvalued and then purchased at an inflated price, with the difference coming back to the real estate broker or others involved in the scam."

For instance, in a $500,000 home sale, unethical mortgage brokers or real estate agents could lean on an appraiser to give a price estimate of $600,000. A lender would then fund a mortgage at that amount, the home seller would get the $500,000 price, and the scam participants would pocket the $100,000 difference.

Regulators say it is difficult to clamp down on the practice without a smoking gun.

"We know what happens; we know appraisers are pressured, intimidated, coerced, but we can't take an action typically because we can't prove it," said Anthony Majewski, acting director of the California Office of Real Estate Appraisers, the state agency that oversees the profession. "If someone has a piece of paper that says, 'I need $550,000 on this deal or else,' that's pretty good evidence" - but extremely rare.

The case filed in New York may have a smoking gun: The attorney general's office uncovered e-mails from the appraisal firm First American eAppraiseIT that appeared to discuss pressure from lender Washington Mutual to pump up prices.

A California law signed and implemented just last month makes it a crime for anyone with a vested interest in a real estate transaction to try to coerce an appraiser.

"I have heard numerous claims about the insidious practice of appraisal inflation," the bill's sponsor, Sen. Michael Machado, D-Linden (San Joaquin County), said in a statement. "More recently, inflated appraisals have been identified as a contributing factor to the subprime mortgage meltdown California is currently experiencing. I introduced SB223 to stop the practice, once and for all."

Similarly, federal legislation is pending that would toughen penalties for those who try to manipulate appraisals. Rep. Paul Kanjorski, D-Pa., introduced a bill last month to promote appraiser independence.

Still, enforcing the new laws may be difficult for the same reasons Majewski cited: actual proof of coercion is difficult to come by. Appraisers say that requests to fudge the numbers are generally couched in code language.

"They say things like, 'What are you willing to do for us to do business?' - wink wink, nod nod," Faravelli said.

He said his own appraisal business has suffered because he refuses to be what unscrupulous mortgage professionals call "a team player." He has switched the bulk of his practice to working as an expert witness in mortgage-fraud cases.

Similarly, Tosh of the Brentwood appraisal firm said: "We struggle to stay alive, we can't get work with a lot of people because we refuse to do what they tell us."

Both men had numerous stories of clients who abruptly dropped them after they refused to change an appraisal.

"One of the major complaints we hear from appraisers is there are veiled and sometimes not-so-veiled threats that if you don't hit this number for us, we're not going to pay you or use your services again," said Pool from the Department of Real Estate.

That explains why some appraisers cave in to the pressure: Those who won't cooperate, don't get work.

Faravelli said that appraisers who gave in have told him they figured the rapidly rising market would cover their tracks anyway. "The pervasive attitude was, 'I know it's not worth this amount today, but six months from now at the current rate of appreciation I'll be covered so it's OK,' " he said.

When appreciation hit the wall and stalled out early this year, fake appraisals suddenly became more apparent. People with risky mortgages who could no longer keep up with rising payments started to default on their loans. As foreclosures multiplied, mortgage holders were left stuck with homes worth considerably less than the amount lent on them. While market forces obviously depressed prices, if they were artificially high to begin with, that widens the gap.

Pumped-up appraisals "create what I call phantom equity," Faravelli said. "Appraisals are arguably the easiest part of the entire process to tweak. After all, it's just an opinion, and everyone has one."