OCTOBER 2017 │ TORONTO, CANADA

Change and Innovation in

Real Estate 2017

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Table of Contents

Introduction ............................................................................................................................ 2

Summary .................................................................................................................................. 2

Program Participants .............................................................................................................. 3

Keynote Address .................................................................................................................... 4

First Panel: Impatient Capital ............................................................................................... 7

Second Panel: Impact of Changing Demographics, Culture and Technology ............. 11

Third Panel: The Future of Retail ...................................................................................... 15

Fourth Panel: Specialty Users and Innovation in the Real Estate Sector ...................... 19

Fifth Panel: Toronto Perspectives ...................................................................................... 22

Attendees ............................................................................................................................... 24

Past Meeting Topics and Venues ....................................................................................... 25

2

Introduction

The Anglo-American Real Property Institute

(AARPI) was founded in 1981 to explore

global real estate issues from the perspectives

of the United States and the United Kingdom.

We have 100 regular members, half from each

country. The membership comprises

property professionals, owners, developers,

investors, advisors, lenders, accountants and

lawyers. The Institute educates and informs

its members and enhances personal,

intellectual and professional interaction

among its members.

The organization meets annually, alternately in

Europe and North America. Recent topics

have included: City Power: How will the growth

of urbanization affect the world’s real estate markets

(Seville 2012); The impact of technology on real

estate, (San Francisco, 2013); The power of wealth

and the impact of wealth dynasties on real estate

(Budapest, 2014); The impact of geo-political risk

on real estate investment (Washington, DC, 2015);

Retrofitting our cities for the 21st Century (London,

2016). The 2017 annual general meeting was

held in Toronto, ON, Canada, to discuss a

diverse range of issues affecting the real estate

sector.

Summary

The keynote address on real estate market

trends was given by Mark Gibson, a founding

partner of HFF, Inc.. Next was a panel on

capital markets moderated by Sally Gordon.

The second panel, moderated by Bridget

Rosewell, addressed the impact of changing

demographics, technology, data and climate

change on the urban environment. The third

panel, moderated by Steve Horowitz, brought

together retail CEOs, experts in retail

analytics, landlords and bankruptcy lawyers on

the future of the retail sector. The fourth

panel, moderated by Andy Martin, addressed

challenges and opportunities for specialty real

estate users. Finally, Rob Robinson led a

session on infrastructure, development and

public space in Toronto.

- Steve Horowitz

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Program Participants

Speakers & Panelists

Keynote Speaker

Mark Gibson, CEO of HFF, Inc.

First Panel: Impatient Capital

Moderator: Sally Gordon, Manager Director

at BlackRock (Retired)

David Hodes, Managing Partner at Hodes

Weill & Associates

John Mallinson, Managing Director and

General Counsel of AIG Global Real Estate

Investment Corp.

David Tang, Managing Partner, Asia for

K&L Gates LLP

Second Panel: Impact of Changing

Demographics, Culture and Technology

Moderator: Bridget Rosewell, Volterra

Consulting

Leanne Lachman, President of Lachman

Associates

David Ticoll, Distinguished Research Fellow

at the Innovation Policy Lab, Munk School of

Global Affairs, University of Toronto

Harriet Tregoning, former HUD Principal

Deputy Secretary of the Office of Planning

and Development

Third Panel: The Future of Retail

Moderator: Steve Horowitz, Partner at

Cleary Gottlieb Steen & Hamilton LLP

Jim Barkley, Of Counsel to Simon Property

Group, Inc.

Melina Cordero, Head of Retail Research,

the Americas for CBRE Retail

Robert LeHane, Partner at Kelley Drye &

Warren LLP

Catherine Marcus, Managing Director at

PGIM Real Estate

Ian Putnam, Executive Vice President, Chief

Corporate Development Officer of Hudson’s

Bay Company

Dana Telsey, CEO of Telsey Group

Fourth Panel: Specialty Users and

Innovation in the Real Estate Sector

Moderator: Andy Martin, Senior Partner at

Strutt & Parker

Colin Banyard, Chairman of Cracknore

Investment

Patrick Burke III, head of Capital Project

Management at Columbia University Medical

Center

Matt Toner, Managing Director of the CBRE

Institute

Amy Erixon, founder and head of Avison

Young's Global Investment Management

practice

Fifth Panel: Toronto Perspectives

Moderator: Rob Robinson, Chairman of

Urban Design Associates

Chris Glaisek, Vice President of Planning

and Design for Waterfront Toronto

Dave Harvey, founder and Executive

Director of Park People

Leslie Woo, Chief Planning Officer, Planning

and Policy for Metrolinx

Program Coordinators

Steve Horowitz

Susan Talley

Reporter

Janis Foo

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Keynote Address

Mark Gibson, founding partner and CEO of HFF, Inc.

Mark presented an overview of capital markets in 2017, including the following

themes:

Capital remains abundant but measured

Investor psychology is markedly different from any previous cycle; investors

are buying assets and holding on to them for a longer period of time

Reinvestment risk has eclipsed End of Cycle Risk

Remaining in cash is not an option, and commercial real estate provides

compelling risk adjusted relative return

Portfolio premiums have returned, especially for low “Cap-Ex” product

Sales of assets remain 9% off 2016 pace with debt transactions up 15%

Strategic recapitalizations/partial interest sales remain in favor

Development will remain difficult to capitalize

Conviction of fundamental demand by city/property type will determine asset

pricing

Foreign capital has declined in the U.S. but is still well above the long-term

average

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Figure 1: 1H17 Transaction Volumes Down 9% YoY

Figure 2: Non-Major Market Yields Relatively High

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Figure 3: Commercial Real Estate Benefiting from Increasing Allocations

Figure 4: Mix of Foreign Capital in U.S. Investment, Changes Due to Many Variables

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First Panel: Impatient Capital in Real Estate

Key Points

There is plenty of capital seeking return but there are variables other than interest rates that determine the direction of that capital

Foreign exchange rates, barriers to entry (e.g., government approval) and domestic competition all have an impact

Global institutions continue to allocate significant capital to new real estate investments, though investment results and conviction are declining

o Institutions remain broadly under-invested relative to target allocations

o Institutional conviction for the real estate asset class showed a significant

decline after being relatively flat the prior 3 years

China’s global outward foreign direct investment grew in 2016

Figure 5: Long-Term Interest Rates: US, UK, Canada

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Figure 6: Recent Long-Term Interest Rates: US, UK, Canada

Figure 7: Current vs. Target Allocations

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Figure 8: Actual vs. Target Investment Returns

Figure 9: Investor Confidence in Real Estate

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Figure 10: Chinese Outward Foreign Direct Investment

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Second Panel: Impact of Changing Demographics, Culture and Technology

Key Points

Nearly a billion people will be added to the worldwide work force over the next decade, mostly in urban areas

Millennials and baby boomers in the U.S. prefer to live in urban areas and small towns over suburbs with large lot houses

Developers and policymakers are not doing enough to address climate change and the fallout from climate change, including flooding and sea level rise

o Good urban design is at the heart of what it takes to mitigate climate

change, demographic change and the advent of automated vehicles

Municipalities continue to face a number of public-private planning challenges

Technology and data can improve the maintenance of existing infrastructure Figure 11: Worldwide Urban/Rural Population Mix

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Figure 12: Global Population Growth by Age Chart

Figure 13: Demographic Impact on the Housing Market

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Figure 14: Millennial Housing Preferences in the U.S.

Figure 15: Suburban Large Lot Single Family Home Oversupply

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Figure 16: Disasters Growing in Frequency and Severity

Risk in the U.S. is concentrated on the coasts

o In 2010, 123.3 million people, or 39% of the U.S. population, lived in counties directly on shoreline

o Between 1970 and 2010, population in those areas grew by more than 40%

o By 2020, population in those areas expected to grow by more than 10 million people or by more than 8%

o Shoreline counties are 6 times more dense than inland communities

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Third Panel: The Future of Retail

Key Points

Omni-channel retailing – bringing together online and brick-and-mortar retail

Customers that shop both online and in stores provide the greatest value to retailers

Technology and data are increasingly harnessed to illuminate consumer habits and enhance consumer experience; these are useful but also raise privacy concerns

Logistics sector has proliferated

The repurposing of regional malls into experiential centers poses a number of economic and financing challenges for mall owners, investors and lenders

Our legal system cannot keep up with the acceleration of technology – even with a proliferation of data, lease structures will be slow to evolve

Trend of shorter term, more flexible leases will necessitate changes in financing models in the U.S.; Europe has adapted more quickly

Debate about extent and location of excess retail space in the U.S.

o By the end of this year, more than 8,600 stores will have shuttered in the U.S. in 2017, the worst year on record

o Malls grew too quickly, at twice the rate of the population, from 1970 to 2015

o One study from retail-research firm IHL Group found that a mere 16 chains, including Radio-Shack and Payless, account for nearly half of all store closings, and that there will be a net increase in openings of more than 4,000 stores (including restaurants) in 2017 and more than 5,500 stores (including restaurants) in 2018.

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Figure 17: In-Store Mobile Device Use

Source: “How Innovative Retailers Stay Ahead of What Customers Want”, urbanland.uli.org Figure 18: In-Store Integration of Mobile Devices

Source: “Omnichannel Retail Index”, nrf.com; “How We Shop Now”, uk.westfield.com

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Figure 19: Impact of Data

Figure 20: Surplus Retail Properties: Annual U.S. Store Closures Since 2007

Source: Credit Suisse

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Figure 21: Surplus Retail Properties – Shopping Center Area Per Inhabitant

Source: We have revised this chart, originally presented in Fortune Magazine (http://fortune.com/2016/12/02/shopping-malls-trouble-data-charts/), with respect to the U.K. Our research suggests that there are between 2 and 10 square feet of shopping center area per inhabitant in the U.K., rather than 0.5 square feet as Fortune reported. The results of our research with respect to the U.S., Canada and Australia aligned with Fortune’s numbers. See, e.g., https://www.icsc.org/uploads/research/general/America-Marketplace.pdf; https://www.retailcouncil.org/sites/default/files/RCCCanadianShoppingCenterStudyFINAL.pdf; https://www.ggp.com/content/dam/ggp-digital-assets/Documents/b2b/investors/Investor%20Presentation%20March%202017.pdf/_jcr_content/renditions/original.pdf; https://www.statista.com/statistics/451485/sales-area-per-capita-in-europe-by-country/; http://www.npr.org/sections/money/2009/02/most_retail_space_that_would_b_1.html and http://eeg.tuwien.ac.at/commonenergy/gla-per-capita-shopping-center.

U.S.: 24 SQ. FT.

CANADA: 16 SQ. FT.

AUSTRALIA: 11 SQ. FT.

U.K.: 5 SQ. FT.

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Fourth Panel: Specialty Users and Innovation in the Real Estate Sector

Key Points

Real estate needs to be increasingly adaptable

o Technology changing how we use buildings

o How buildings are used is now more important than the asset itself

o As a response to climate change, buildings can be the power plants of the future (e.g., Jaguar plant in the U.K. will use energy generated from waste where the carbon dioxide could be captured through the use of micro algae)

Technological advances changing how buildings are conceptualized, designed and built

o Virtual reality has enabled prospective users to “walk” through office spaces before deciding on a layout

o 3D printing and 4D (which is 3D printing plus the dimension of transformation over time) printing have been used to create transformative materials

“The Great Acceleration”

o Seeing rapid cannibalization of technology

o Technology runs ahead of acceptance which runs ahead of regulation

The main challenge ahead is finding someone to underwrite all of these new technologies

In China, the government has largely underwritten the solar industry

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Figure 22: The Great Acceleration

Source: The Great Acceleration, by Broadgate, Deutsch, Gaffney and Ludwig (2004).

Since 1950, multiple economic parameters show high growth rates, e.g., population, GDP, energy and water use, tourism

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Figure 23: Steady growth in Internet use since 2000

Figure 24: Expected growth in data generation, 2009-2020

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Fifth Panel: Toronto Perspectives

Key Points

Toronto is experiencing a major population surge (population in 2016 was 2,731,000; projected population in 2041 is 3,400,000

As a city, Toronto is forward-thinking in its approach to innovation in transportation infrastructure, mixed use developments and public spaces

Metrolinx is overseeing $30 billion in regional transit and infrastructure investment

Waterfront Toronto, mandated to revitalize 2,000 acres of brownfield lands on the waterfront, aims to address the challenges that Toronto faces: climate change, mobility, inclusivity, economic growth, accessibility and connectivity

Park People aims to improve communities by animating and improving parks; it encourages private donors to give money to public parks (a relatively new model in Canada)

Figure 25: In the 2.5 km stretch from Bathurst Street to Lower Yonge Street, south of Lake Shore Boulevard to Lake Ontario, Waterfront Toronto is linking major waterfront destinations, creating new public spaces, and expanding access to the water’s edge.

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Figure 26: Metrolinx’s Growth Plan

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Attendees US Members

James Barkley, Simon Property

Graham Bond, Sasco Ventures, LLC

Janice Carpi, Secure Legal Title PLC

Ann Cargile, Bradley Arant Boult Cummings

Alexandra Cole, Perkins Coie LLP

Joseph Forte, Kelley Drye & Warren LLP

Sally Gordon, BlackRock (Retired)

John Hollyfield, Norton Rose Fulbright US LLP

Steven Horowitz, Cleary, Gottlieb, Steen & Hamilton LLP

Carl H. Lisman, Lisman and Leckerling, P.C.

Daniel MacEachron, BlackRock

John MacGregor, TransDevelopment Group

John Mallinson, AIG

Catharine Marcus, PGIM Real Estate

Mark Mehlman, SNR Denton US LLP

Margaret Meister, Modrall, Sperling, Roehl, Harris & Sisk, P .A

Arthur Mirante, Avison Young

Dan Rashin, Rockefeller Centre Development Group

David Richards, Steptoe & Johnson LLP

Rob Robinson, Urban Design Associates

Michael Rubin, McGlinchey Stafford PLLC

Mark Senn, Senn Visciano Canges P.C.

Donald Sheets, AlumCreek Holdings LLC

Leopold Sher, Sher Garner Cahill Richter Klein McAlister & Hilbert LLC Shannon Skinner

Susan Talley, Stone Pigman Walther Wittman LLC

David Tang, K&L Gates

David Van Atta, Hanna & Van Atta

Ira Waldman, Cox Castle & Nicholson LLP

Steve Waters, USAA Real Estate Company

Andrew Wood, Macquarie Global Fund (Retired)

UK Members

Colin Banyard, Kilbride Group Ltd

Piers Coleman, K&L Gates (UK)

Smita Edwards, Forsters

Michael Humphries, Q.C

Andrew Martin, BNP PRE

Ian Nisse, Macfarlanes LLP

Tom O’Connor, Maples and Calder

Robbie Owen, Pinsent Masons

Martin Quicke, Clyde & Co

Bridget Rosewell, Volterra Consulting

Will Rowson, CBRE Global Investors

Nick Ryden, Shepherd & Wedderburn LLPMark Senn, Senn Visciano Canges P.C.

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Past Meeting Topics and Venues

1981

WASHINGTON, DC, USA

1. Private Institutional Financing

of Real Property Development

and the Movement Towards

Equity Positions.

2. Public Incentives for Real

Property Development

3. The Impact of Taxation on

Real Property Development

1982

LONDON, ENGLAND

The Demise of the Fee Simple

1983

SAN FRANCISCO, USA

The Use of the Lease in Property

Development

1984

PARIS, FRANCE

When Developments Go Wrong,

Who Carries the Can?

1985

STRATFORD, ENGLAND

The Planning and Development

Process, Private and Public

Participation

1986

SAN DIEGO, USA

Non-Judicial Resolution of Real

Estate Disputes: The Use of

Arbitration

1987

EDINBURGH, SCOTLAND

Financing Property Investment:

New Attitudes and Methods

1988

BOSTON, USA

Legal Hazards of Hazardous

Substances: The Impact of

Environmental Controls on

Private Transactions

1989

YORK, ENGLAND

Accelerating the Development

Process

1990

SANTA FE, USA

Valuations and Investment

Analysis – End Use

1991

DUBLIN, IRELAND

The Internationalisation of Real

Estate

1992

VANCOUVER, CANADA

Trends in the Laws Governing

Real Estate and Shifts in the

Benefits and Burdens of Real

Estate

1993

OXFORD, ENGLAND

Enforcement of Creditor’s Rights

and Insolvency

1994

CHICAGO, USA

Private Participation in Public

Infrastructure Provision

1995

MADRID, SPAIN

Managing Environmental Risks in

Real Estate Transactions

1996

WASHINGTON, DC, USA

Urban Regeneration – 42nd

Street and Broadgate

Metropolitan Government

1997

FLORENCE, ITALY

Metropolitan Government

1998

WILLIAMSBURG, USA

Real Estate Investment Trusts

and Securitisation of Mortgages

1999

SAN FRANCISCO, USA

Leasing

2000

BATH, ENGLAND

Regeneration

2001

SEATTLE, USA

Globalisation of Real Estate

2002

BERLIN, GERMANY

Real Estate Disputes

2003

NEW YORK, USA

Outsourcing

2004

PRAGUE, CZECH REPUBLIC

New Urbanism

2005

BOSTON, USA

Growth of Private Equity Real

Estate – Structural or Cyclical

26

2006

BARCELONA, SPAIN

The Olympic Legacy

2007

CHICAGO, USA

Demographics and Energy Issues

2008

CHESTER, ENGLAND

The New Puritanism or What is

going on in the Property

Industry?

2009

PHILADELPHIA, USA

Risk in the Real Estate Economy

2010

OXFORD, ENGLAND

Effects of Financial Market

Reforms (financing and raising

new capital)

2011

SANTA FE, USA

Opportunities and challenges in

infrastructure

2012

SEVILLE, SPAIN

Changing demographics and the

changing effect on cities

2013

SAN FRANCISCO, USA

Technology is changing;

Changing the rules for the way

real estate is occupied and

provided; Opportunity for urban

centres; City adaptation to urban

tech; Transformative projects

bringing the valleys to the alleys.

2014

BUDAPEST, HUNGARY

The Changing Face of Capital

Flows and their impact on Real

Estate.

2015

WASHINGTON, DC, USA

The Intersection of Politics and

Property: Geopolitical Risk in

Real Estate Investment

2016

LONDON, ENGLAND

New Wine in Old Barrels?:

Retrofitting Our Cities for the

21st Century

Prospective Meetings

2018

BERLIN, GERMANY