Difficult business of property values


rtaylor@herald.ca @CH_RogerTaylor

The Chronicle Herald – January 6, 2016 Edition

When it comes to property valuations in Atlantic Canada these days, it is difficult to determine fair value.
That’s the view of property expert Michael Turner, CEO of Turner Drake & Partners Ltd. in Halifax.
He says investment-grade office buildings in Halifax are particularly tricky to put a value on. In some ways, Halifax’s downtown office market seems to have peaked, he says, yet there are investors still willing to snatch up properties.

For example, Slate Office REIT of Toronto acquired a portfolio of 14 commercial properties in Atlantic Canada, including the Maritime Centre in Halifax, from Fortis Properties Corp. of St. John’s, N.L, for a total price of $430 million last May.

Turner still has trouble figuring out that deal because he considers the Halifax office market to be swamped with supply and the market in St. John’s to be damaged from the downturn in the oil sector.

Typically, office towers these days seem to have a lifespan of about 25 or 30 years, he says. Those who acquire older structures, such as the Maritime Centre, must also be prepared to spend a lot of money on major renovations, if not a complete repurposing of the property, he says, like a conversion from offices to apartments.

Despite what traditional valuations seem to indicate in all investment property categories, Turner says, there seems to be a strong market for just about every type, ‟which is quite remarkable.” The overall demand for industrial property in Atlantic Canada has peaked, he says, and the office category is overachieving.

‟I think some of the banks are getting a little bit nervous unless (the office building is) full; they’re not interested if they’re not. That has been my experience anyway, at least with the smaller buildings.” Turner speculates there could be several reasons for the continued strength in real estate. One may be uncertainty in the stock market, so investors continue to turn to real estate because the alternatives are not very attractive.

‟People have short memories too, I guess. The property markets can go down quite dramatically, as they did in 1990,” he says, adding that most people investing today weren’t in the workforce the last time the real estate market collapsed.

In many respects, the strength of the market also depends on the types of properties, he says. Location is also a factor, and office space outside the downtown continues to attract tenants and investors.

During a conversation with a competitor, Turner says, he asked if there had been any recent property transactions that made sense, and the answer was no.

The current market is similar to 1989, when none of the deals seemed to make sense, says the longtime real estate consultant, counsellor and broker. The difference this time is there doesn’t seem to be panic by property owners.

Most properties at that time were owned by pension funds, he says. To attract tenants, they cut rents, and the resulting drop in revenue meant the value of a building in downtown Halifax declined by as much as 40 per cent in 1990. There was a bandwagon effect, Turner says, with landlords continuing to trim rents.

Today, he says, ‟you would hope (owners) would be a little more sophisticated than that. And 1990 too was partly driven by the banks because . . . everybody who piled into real estate like the pension plans and the forerunners of the REITs, the closed-end funds, they all tried to bail out of them when the crash came, flooding the market.”