At the end of May, real estate investment company Clifton Blake and builder Wilkinson Construction Services announced a merger to create a fully integrated development firm dubbed CB Wilkinson.
The new powerhouse has brought together Clifton Blake’s investing and developing experience, with $750m of assets under management, and Wilkinson’s wide-ranging construction expertise from high-rise to low-rise, residential to commercial.
Green Street News spoke with Wes Myles, CEO of CB Wilkinson, to discuss the merger and the direction the firm is taking its investment strategy in today’s tough market.
How did the merger with Wilkinson Construction come about, and what are you hoping to accomplish with it?
The combination with Wilkinson Construction was closing the gap between development and construction — the motivations of a construction manager and the motivations of the developer aren’t exactly aligned well enough, in our view.
The other reason for it is that in the world of real estate right now, a lot of the pension plans are starting to understand that they can’t internalize these sorts of operations themselves, and they’re having to move to niche asset managers to deliver real estate the way they want it.
The other less important reason, but important, nonetheless, is that we want to make sure that we’re building capability within our firm so that when a CPP or a larger pension or institutional investor decides to enter a market or decides to acquire or get involved in a certain type of asset, that we’re capable of delivering it.
Our biggest concern recently has been speed. We don’t like the speed that’s going on in the industry; it seems to sort of poke along. I understand there was Covid and there are issues with the city and bureaucracy, but there are also a lot of delays that we didn’t think were necessary, and those delays tend to be the most costly. So we wanted to try to address that directly and this is what this union is about.
From what we’re hearing, there’s huge demand for good retail space right now. How does that play into your investment strategy?
Absolutely, especially well-done retail. In the past, a lot of the condo builders — and not to take away from them, they’re highly skilled individuals and organizations — they sort of orphan off the retail and they don’t really think about it to the same extent that we do. We go the opposite way. If a good, triple-A retailer wants to be in a certain area, it’s quite likely that people will also want to live in that area.
There’s been a shift toward more rental development right now as the condo pre-construction market continues struggling. Are you expecting as interest rates start to come down and changes to the MLI Select criteria take effect for there to be a shift back to favouring condos?
I think condos will always have a place. As far as using condos to deliver a housing policy, it’s not the best idea in the world, and I think governments are starting to understand that. It’s a disparate ownership — you could own a condo and decide that you want to live there, and then the tenants tilt to the street at that point.
“As far as condos to deliver housing policy it’s not the best idea in the world and I think governments are starting to understand that”
There hasn’t been rental done in any significant way since the ’70s. So I think what you’ll find is there’s a wave of purpose-built rental coming to market, and people’s lifestyles are changing. Canadians have always been raised to buy their house and own their dirt and build wealth that way, but I find that there’s a shift in attitudes towards that.
A lot of the people who are renting from us, for instance, have different lifestyles that aren’t conducive to owning a home. I had a couple where the wife worked in New York, the husband worked in [Los Angeles] and they used Toronto as their home base. The last thing they needed in Toronto was to take care of a house and mow grass, so they wanted to be able to rent an apartment.
Investor-owned condos have typically made up much of the rental market in cities like Toronto. Are you anticipating any changes on that front?
Various levels of policy makers and investors are slowly realizing that condos aren’t necessarily a great rental product. As an example — and we’ve made this mistake a couple of times ourselves — we had several one-bedrooms with dens and not one renter was willing to pay full cost for those dens. Now, if you’re a condo buyer, sure, it’s this extra space that you’ll use for something, but in the rental business, that’s just a wasted space especially given rental rates per square foot.
“I think the purpose-built rental guys are going to have a very strong competitive advantage compared to some of these condo builders”
Further, one of the trends we’re seeing is that people are starting to recognize the difference between the two housing ownership types– a 400 sq ft box on the 40th floor is not necessarily a decent place to live. Condo developers are going to have to get a little bit smarter about their condo configurations going forward in terms of being able to hold their value relative to the rental market in the eyes of investors. I think the purpose-built rental guys are going to have a very strong competitive advantage compared to some of these condo configurations and typologies.
You mentioned delays earlier, but what do you see as the biggest barrier to getting housing built right now?
Well, certainly outside of the provincial and municipal issues — that’s the big whale in the room — is just getting things approved and through the City of Toronto. In their defense, most municipalities are very understaffed, so that’s a big problem. And then some of the policies that have worked in the past don’t necessarily work anymore.
For instance, there are some large developers here in Toronto that are taking land through land approvals with no intention of building the building — they intend on selling the approved lands off to somebody else. That unfortunately plugs up the system, so obviously there’s a policy that’s misaligned here. If you’re going to take land through land entitlement and you guarantee you’re going to put up the building, those applications should be moved to the top of the pile versus somebody speculating.
“If you’re going to take land through land entitlement and you guarantee you’re going to put up the building, those applications should be moved to the top of the pile versus somebody speculating”
The other barrier is labor access and materials. There’s not much we can do about material inflation, but there is something we can do about labor, and our issue, really, is about time. Some of the larger subcontractors have become pretty powerful within Toronto, a lot more powerful, in our minds, than construction managers and project managers, and they sort of rule the roost in terms of your schedule. So getting control of your subcontractors and third-party contractors and developing very tight relationships with them is absolutely crucial for getting a project through on time.
We’ve seen a flood of projects falling into receiverships over the last six to 12 months. Has that affected how you’re investing or caused you to be more cautious with certain developments?
In terms of our lending business, we look for really good operators and people that are well-oiled and have been at it for a while. There are guys that we’ve worked with who came up through the ’90s. Today is nothing compared to ’91, ’92, ’93 — those years were horrific. A lot of the guys that have walked through that era, or organizations that worked there, they’ve seen this before and they know how to deal with it.
I think a lot of the bankruptcy you’re seeing is from organizations that probably shouldn’t be in real estate development, and that’s part of the natural cycle to weed them out. There are a couple of good firms we’ve seen run into trouble as well, and I think it was just too many interest rate hikes coming too quickly so it came as a pretty heavy shock to the system.
In what asset classes are you seeing the most opportunity right now?
The vendors we work with generally bought their properties a long time ago, sometimes up to 100 years ago, so they’re willing to wait around to get the number they want. A lot of them don’t really want to pay tax at the moment, so we don’t really find any deals coming in terms of purpose-built rental sites, especially A-grade, purpose-built rental sites.
In fact, we haven’t seen price movement at all. In terms of opportunities, I think there are some good opportunities in some of the alternative assets like data centres, certain types of warehousing, that kind of stuff.
“The vendors we work with… they’re willing to wait around to get the number they want”
The AAA office towers downtown, they’re pretty much fully occupied. I know a guy at a private equity firm that tried to renegotiate their lease, and the landlord just said either take that price or leave — they already had a couple tenants lined up to fill it — so that sector is still staying pretty strong.
