Stacking the Odds Against a Commercial Real Estate Crash

Kenneth Chan of the Daily Hive reports Vancouver's new tallest office tower, and Canada's greenest, officially opens:

Construction officially reached completion on The Stack in late 2022, and an official opening celebration and ribbon cutting ceremony was held today.

Located mid-block at 1133 Melville Street, just west of Thurlow Street within downtown Vancouver’s Central Business District, this is now Metro Vancouver’s tallest office building, with a height of 530 ft containing 37 storeys.

The Stack is also one of the region’s single largest office buildings, carrying a total floor area of 550,000 sq ft of premium AAA-calibre office space.

Ernst & Young (EY) is the building’s anchor tenant, with its corporate logo sign installed at the top of the tower to signify its major presence. Other tenants include BDC, Blakes, DLA Piper, Canacoord Genuit, Fluor, and Plenty of Fish.

Most of the building’s leasing was secured over the past year, which provides an example of the trend of companies shifting from older, lower quality buildings to new high-quality buildings with a range of amenities, especially with workplace wellness and quality being a key consideration in the post-pandemic strategy for attracting employees back to the office.

“We’re not quite complete in terms of leasing, but I like our odds, and I think reflecting on this building today, you’d agree,” said Blake Hutcheson, president and CEO of Ontario Municipal Employees Retirement System (OMERS), during the event. OMERS’ real estate investments are managed by its wholly owned development division, Oxford Properties.

Hutcheson, who was previously the head of Oxford, recalled flying to Vancouver in 2010 to consider the acquisition of the potential future development site at 1133 Melville Street, which was at the time occupied by an old 10-storey building with a parkade in the bottom half of the structure and 50,000 sq ft of office space in the upper levels. This previous building, he says, was “the ugliest building in Western Canada.” The Stack is now co-owned by Oxford and CPP Investments.

Construction on The Stack first began in 2018, and its previously scheduled completion by early 2022 was delayed due to the pandemic.

About 3,000 people were involved in the design, planning, and construction processes, and the resulting product has the floor area capacity to provide a workspace for up to 3,000 people.

“We are incredibly grateful for your investment, and your buoyancy and excitement with being part of Vancouver. We want your investment, and we welcome your investment,” said Vancouver city councillor Sarah Kirby-Yung today.

“Prioritizing our economy is the mechanism for providing good quality jobs, supporting innovation, and lifting up the opportunities of Vancouverites.”

Last week, Oxford Properties put out a press release stating North America's first new Zero Carbon office tower The Stack officially opens:

Oxford Properties Group (‘Oxford’), a leading global real estate investor, developer and manager, today officially opened the doors of The Stack at 1133 Melville Street. The opening represents a landmark in the commercial real estate industry’s journey to decarbonization by being the first office tower to attain the Canada Green Building Council’s Zero Carbon Building - Design standard certification and the first high-rise commercial tower in North America built to zero carbon standards. The Stack is co-owned by Oxford and CPP Investments. 

An official opening ceremony is being held today for over 200 guests including representatives of the companies that will call The Stack home such as BDC, Blakes, DLA Piper, Canaccord Genuity, EY, Fluor and Plenty of Fish, in addition to local business leaders. Designed by Vancouver-based and internationally renowned architect James K.M. Cheng, the 37-storey, AAA-class 550,000 sq ft office tower is situated in a premium location in downtown Vancouver and enhances the city’s skyline with its unique twisting, stacked box design. 

By achieving zero carbon status, The Stack also plays an important part in the progress of the City of Vancouver and Province of British Columbia’s 2030 zero-carbon goals. The Stack was able to achieve this status through its implementation of innovative features that minimize both carbon emissions and energy intensity, including low carbon building systems and a high-performance triple-pane glazing system. The Stack also deploys smart building technology to provide insights on energy management, optimize building performance and enable preventative maintenance. On-site renewable energy is achieved through a rooftop photovoltaic solar panel array that will generate 26,000kWh of energy annually.  

“The Stack is leading the real estate industry to new levels of sustainability and reflects Oxford’s commitment to integrating ESG best practices throughout our assets,” commented Andrew O’Neil, Vice President of Development, Oxford Properties. “We’re incredibly proud to deliver a building that creates economic and social value for the city of Vancouver, and actively contributes to our partners and customers’ ESG goals. By being the first to achieve a Zero Carbon high rise office building, we can use the insights and learnings from this project across our portfolio and share best practices with the wider industry as we collectively tackle decarbonization as one of the most pressing issues of our times.” 

Employee experience and wellness are also at the forefront of The Stack’s design, with architectural elements such as operable windows for natural ventilation, several outdoor terraces and a landscaped pocket park that features a public art installation by Lawrence Paul Yuxweluptun. To foster active transportation and promote wellness, The Stack features a 5,000 sq ft fitness centre, 250 bike parking stalls and health-club quality end-of-trip facilities for those who want to bike, jog, or walk to work. Popular local restaurant Nook will provide destination dining for the building’s customers and the community with a 5,000 sq ft location on the first floor. In addition, with its 6,000 sq ft rooftop terrace available to all building occupants, The Stack’s customers can take in unobstructed panoramic views of English Bay, Stanley Park, Burrard Inlet and the North Shore Mountains from 530 feet in the air. The rooftop terrace is also available for the building’s occupiers to reserve to entertain employees and clients with signature corporate events against the backdrop of one of the best views in Vancouver. 

“With its architectural prominence, unrivalled suite of amenities and breathtaking views, The Stack redefines the workplace experience in Canada,” commented Ted Mildon, Vice President, Office Leasing and Operations at Oxford Properties. “We have long foreseen the evolution of the office from simply being the ‘production floor’ where employees congregated to complete tasks into a destination that creates employee engagement, and drives collaboration, learning and mentorship for high performing teams. We’re seeing in cities across the globe that providing employees with a high-quality workplace experience has been an integral part in successful ‘Return to Office’ programs for firms looking to unlock the benefits of in-person collaboration. 

“We have enjoyed enormous recent leasing success with The Stack, with the majority of the building’s leasing being secured over the past 12 months. This is further evidence of our ongoing conviction that high quality, highly sustainable office buildings in the best locations that are focused on the employee experience and wellness will continue to outperform.” 

“In addition to the building’s achievements in sustainability and the workplace experience, we have also received a lot of compliments from our neighbours as to how well this project is fitting into the community, and how much they appreciate the Lawrence Paul Yuxweluptun sculpture and the pocket park connecting to the existing network of mid-block passages and plazas,” commented James K.M. Cheng, Principal, James K.M. Cheng Architects. 

Oxford boasts a well-established commitment to sustainability and decarbonization, having achieved a 37 per cent reduction in its portfolio carbon intensity in 2021 (vs 2015 base year), surpassing its public goal of a 30 per cent reduction in carbon intensity by 2025. Oxford achieved this by pioneering ground-breaking new developments that raised the bar on sustainability, investing in data and analytics to set hourly carbon targets for its properties, and implementing human solutions that encourage sustainable active transportation by a building’s occupiers. 

Oxford counts several landmark and award-winning development projects among its portfolio, including Vancouver’s MNP Tower and Riverbend Business Park, Manhattan’s St. John’s Terminal (subsequently acquired by Google), The Center Potsdamer Platz in Berlin and Toronto’s Park Hyatt redevelopment. 

To learn more about The Stack, visit:

It's Wednesday, hump day, and I felt like covering  this story because it goes to show you that when you own AAA real estate assets that meet the high demands of sustainability from corporate clients, you attract great anchor tenants and other tenants too that sign long-term leases.

There's a real schism going on right now in real estate between modern, zero carbon office towers and older rundown office buildings.

Just to underscore this point, Fortune recently published a comment from Bloomberg on how US banks will hemorrhage $250 billion because of the cratering office real estate market, according to an investor who cashed in on the 2008 housing crash:

Kyle Bass said the US banking industry will lose hundreds of billions of dollars from exposure to the office market amid shifting workplace trends and elevated interest rates.

“Banks in the US will lose $200, $250 billion in office over time here,” Bass, founder of Hayman Capital Management, said in an interview with Bloomberg TV Monday. “And there’s about $2 trillion of equity in the banks so it’s like a 10% hit to US banking equity.”

Office space is the main sector that will report losses in the commercial real estate market, while industrial and multi-family will remain strong, said Bass, who’s known for his successful bet against subprime mortgages before the 2008 financial crisis.

Bass has predicted that older and lower-quality office buildings in the US will need to be razed to reset the market. He’s not alone in that view. Canadian investor Vincent Chia is buying up proprieties only to tear them down and profit from the land.

Elevated interest rates and tight lending conditions are making it even more difficult for property developers. While Bass doesn’t expect the Federal Reserve to raise interest rates much higher, he expects wages to remain strong.

“We are going to have a sticky situation with wages and we are going to see the economy coming down in the next six to eight months,” he said.

Kyle Bass loves talking up his book but he's spot on, older office buildings are in big trouble and in many cases, developers are buying their loans for pennies on the dollar to tear them down and profit from the land.

Three years ago, in the midst of the pandemic, I warned there is a paradigm shift going on in real estate.

It's still going on, a lot of low quality office towers can't attract tenants in the post-pandemic world and this crisis will only intensify as rates stay higher for longer and a deep global recession takes hold.

But nobody ever pays attention to my warnings, people believe in fairy tales of "soft landing" and that all offices will return to pre-pandemic days.

Not going to happen, that much I can assure you of.

Developers and investors are getting smart, introducing mixed-use properties, focusing on sustainability and amenities, but certain segments of real estate face a long, tough slug.

Higher rates for longer and a deep global recession will impact all real estate except for for some recession-proof niche sectors (student housing, life sciences properties, medical offices).

Some sectors like logistics, multi-family and data centers will continue doing well but it's going to be tough in office real estate where distressed loans are surging nationwide.

Of course, some experts think Canada isn't as exposed to the wave of CRE defaults hitting the US:

Though Canada’s commercial real estate market picture isn’t much rosier, Clayton says it would be tougher for office landlords to take the same strategy. Canada’s lending market is more conservative, he adds, noting there’s a smaller number of lenders and these types of loans have more recourse. Borrowers would lose some of their other capital or assets and it would be harder for them to find lenders to help dig them out of the hole.

Still, considering Canadian pension funds are typically allocating 12 to 15 per cent of their portfolios to real estate, there could be cause to worry about the potential effects of these defaults on their portfolios and returns. In Canada, the national total commercial office vacancy rate remained around 13 per cent at the end of the second quarter of 2023, according to a report by Colliers International Group Inc., with 84.4 million square feet of vacant commercial office space across the country.

Many pension funds saw these hurdles coming and have stayed away — to some extent — from office and retail, focusing instead on multi-family, industrial and even so-called alternatives, such as self storage and data centres, says Clayton.

“The pension fund community, by and large, is fairly conservative when it comes to leverage, so they can absorb a lot more [risk]. Many — especially the astute Canadian [pension funds] that have capital  — have the ability to behave strategically and take advantage of some of this opportunity.”

As well, there’s significant government support in Canada, both federally and locally, for some of the bigger environmental, social and governance value-add investments through funding entities such as the Canadian Infrastructure Bank, as well as green subsidies through municipalities, adds Clayton, noting Calgary are both offering subsidies to investors that buy office buildings and want to convert them to residential use. “I think there’s a lot of mitigates that will prevent . . . [widespread] distress in Canada versus the U.S.”

Rather, he’s seeing a flight to quality in the commercial office real estate market. The risk of default is in some class B and C offices that are struggling because of the economic environment, he adds, and that’s being reinforced by the uncertainty of demand. While workplaces are still figuring out the evolution of hybrid working, ESG regulations are also coming into play. As a result, he expects many building owners of older office assets will see diminished demand coupled with large capital expenditure requirements coming down the pike.

“A lot of folks really want to put this on the demand side, but . . . it’s [also] just a normal supply issue. Toronto brought on . . . 11 million square feet [of office space] just before COVID and now, in a downturn, it’s actually slowly firming up . . . that the class A stuff is spoken for. Five years from now, we probably won’t be building quite as much as we did and demand will slowly be picking up.”

There is a lot going on real estate, smart developers and investors know how to buy assets on the cheap and revitalize them or sell the land, or sit on the land waiting to develop multi-family or mixed use properties when the economics make sense.

I just see a secular shift going on in real estate and it will take some time to work through it.

Canada's pension funds saw the writing on the wall before the pandemic hit.

The pandemic only accelerated this trend.

In related news, OMERS recently put out a press release stating by 2030, it is is targeting a 50% reduction in portfolio carbon emissions, growing green investments to $30B, and seeking credible net zero plans for our top 20 most carbon-intensive portfolio companies:

September 8, 2023 (TORONTO) – OMERS, one of Canada’s largest defined benefit pension plans, today released our Climate Action Plan (CAP). Building on our ongoing work to become a leader in sustainable investing, the CAP outlines our approach to achieving net zero carbon emissions in our portfolio and operations by 2050.

“Climate change is one of the most pressing issues of our time, with a significant impact on the risk-return profile of current and future investments. We believe that well-run companies, including those with thoughtful and credible plans to address the impacts of climate change, will perform better, particularly over the long term. Our Climate Action Plan sets out our foundational approach to climate, as we navigate the varied and complex risks and opportunities to our investment portfolio,” said Michael Kelly, OMERS Chief Sustainability Officer.

The CAP describes the actions we are taking on our pathway to net zero by 2050, which are in alignment with the Paris Agreement and the latest climate science. It details our approach to managing risk and realizing opportunities across all our asset classes, grounded in our three-pillared approach to Sustainable Investing:

  • Integration – of climate change factors into investment decision-making;

  • Collaboration – at the financial systems level to improve information and resources, and;

  • Engagement – with portfolio companies through their decarbonization initiatives.

We have already committed to reducing our portfolio carbon footprint by 20% by 2025 and 50% by 2030, and have demonstrated progress with a 32% reduction to date from our 2019 baseline. In addition, OMERS and Oxford Properties have raised $2B in green and sustainable bonds to support investment in green and social assets.

The CAP outlines further commitments which include:

  • Growing our green investments to $30B by 2030 (last reported at $19B as at Dec. 31, 2022);

  • Creating a $3B transition sleeve enabling investment in high-carbon assets in need of funding for targeted decarbonization;

  • Collaborating for change with like-minded investors, public policy makers and other key stakeholders to evolve the tools and standards required to better assess climate risk and opportunity, and;

  • Setting a net zero commitment for our own internal operations, in alignment with our portfolio goals.

Our actions are underpinned by our strong governance model and risk management framework. OMERS will report annually on its progress against the goals laid out in the Climate Action Plan as part of our regular Task Force on Climate-Related Financial Disclosures (TCFD) aligned disclosures.

More information on our approach to climate change can be found in the climate change section of our website. 

Lastly, the Ontario Chamber of Commerce recently presented the 2023 lifetime achievement award to OMERS CEO Blake Hutcheson:

(TORONTO – September 18, 2023) – As part of its 41st annual Ontario Business Achievement Awards (OBAAs), the Ontario Chamber of Commerce (OCC) is proud to announce Blake Hutcheson, President and CEO of OMERS, as the 2023 Lifetime Achievement Award recipient. Every year, the Lifetime Achievement Award is presented to a person who has demonstrated outstanding leadership throughout their career and made a significant and positive impact on the province and beyond.

“We are honoured to have Blake Hutcheson as the esteemed recipient of this year’s Lifetime Achievement Award,” said Rocco Rossi, President and CEO of the OCC. “Blake’s outstanding achievements are a testament to his exceptional leadership, unwavering dedication, and philanthropic endeavours. He has and continues to make a lasting impact in Ontario throughout his career.”

Hutcheson’s commitment to fostering sustainable growth and development in the real estate industry has been marked by numerous achievements and contributions. Named one of Canada’s Top 40 Under 40, his expertise and strategic vision have propelled him to positions of influence and impact, including having served as CEO of CBRE Canada and Latin America, CEO of Oxford Properties Group, the Chair of the Canada Real Estate Forum and the Chair of Build Toronto, among others.

“I am fortunate to know and have learned from some truly amazing mentors, colleagues and partners, both in business and in life, who have been integral to the journey leading me to where I am today. I am truly humbled and honored by this recognition here at home, from an organization that does such excellent work to advocate for and advance the success of our incredible province,” said Mr. Hutcheson.

The OBAAs are the most distinguished industry celebration in the province, recognizing business success. The televised Lifetime Achievement Award episode will celebrate Hutcheson’s inspiring career as an Ontario business leader and trailblazer. Beyond his accomplishments in the business world, he has been actively involved in community organizations and initiatives working to build a sustainable future for all. He has been awarded both the Right to Play Corporate Hero Award and the B’nai Brith Canada Award of Merit for his community work and philanthropic efforts.

Watch the 2023 OBAAs on Saturday, October 14 at 3:30 pm ET on TLN TV – now on free preview across Canada. The televised Lifetime Achievement Award episode will highlight Hutcheson’s career, showcasing the incredible potential of Ontario’s homegrown talent and solutions in addressing sustainability challenges.

This year’s OBAAs are supported by our Series Presenting Partner, CN and Broadcast Partner, TLN Media Group. The Lifetime Achievement Award Episode Partner is Bruce Power. To learn more about the broadcast and our partners, visit the OBAAs website.

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About the Ontario Chamber of Commerce
The Ontario Chamber of Commerce (OCC) is the indispensable partner of business and Canada’s largest, most influential provincial chamber. It is an independent, non-profit advocacy and member services organization representing a diverse network of 60,000 members. The OCC’s mission is to convene, align and advance the interests of its members through principled policy work, value-added business services and broad engagement to drive competitiveness and economic growth in the province.

OMERS is a jointly sponsored, defined benefit pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over half a million active, deferred and retired members. Our members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers, and originating and managing a diversified portfolio of high-quality investments in public markets, private equity, infrastructure and real estate.

I congratulate Blake for receiving this well-deserved award and knowing him, he's very modest but he truly is an exceptional leader who through his business and philanthropic endeavors, has made a lasting impact in Ontario and Canada.

Alright, quite a comment for hump day, I need to relax more and blog less.

Below, "I think the banks in the US will lose $200 billion, $250 billion" in the office sector of the commercial real estate market, Hayman Capital Management founder and CIO Kyle Bass says on "Bloomberg Markets. "