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Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.
Welcome to Altus Insights Podcast Series with Ray and Marlon, hosted by me Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada.
Marlon Bray: So Ray's away on vacation, so today's podcast has two guest contributors. I know what you're thinking. When does Ray actually do any work? It's a question we've been asking ourselves for a long time, and the conclusion is he just Jack all around here. So today we're gonna be discussing risk in the current market, especially with the volatility and how you can mitigate that in a development project.
We have a returning esteemed guest from the US with Faris, who adds up our advisory team on the land developer side from Pennsylvania. And another guest who's a lot less esteemed, who's joining us from Scotland in an actual pub is Jack, our development management team for North America. Actually, usually he lives in Calgary, but today's in Scotland to watch the powerhouse of world football.
I know what you're thinking Man U, Real Madrid, Rangers. Nope. Inverness Thistle. It could be cut often fast. Playing in front of 700 Wild fans are gonna beat Celtic in the weekend, in the cup final. And he has a thing for really terrible cocktails like our, just like our other fake scottsman. Colin Doran, who was also not born in Scotland.
Gents, do you wanna do a quick introduction to yourselves? You wanna go first? Faris?
Faris Rehman: Yep. I'm Faris Rehman, I'm based in us and taking care of development advisory for the group. It's been busy start for me lately and hopefully looking forward to a robust start towards the end of the, to the end of the year.
Right to the next year.
You wanna go, Jack?
Jack McGowan: Yeah. Hi, Jack McGowan.
I'm based in Calgary and I look after project management services across Canada.
Marlon Bray: So we live in contradictory times, demand for housings at an all time high. But developers across north America are struggling with a constantly changing environment. And that can be from the entitlement approval stage, interest rating crisis, supply chain challenges, labor shortages, construction costs, sustainability, climate change to list is almost endless.
So we've got two experts to date on risk. We know risk is huge. How are we gonna navigate the depths of hell? Referring to somewhere like Toronto, the relative paradise is Texas, or the rain of the West coast with Seattle and Vancouver, and then the snow of Calgary. So in the chat before the podcast, Jack, you'd mentioned that you often see five key risks that you're always looking at in any development of project.
Do you want us, walk us through those.
Jack McGowan: Sure. The first one I guess, is risk identification and assessment. So you've gotta, you've gotta look at what you're doing and where you're doing it and identify that risk so that you can try. Then number two, to try and mitigate that risk with contingency planning, et cetera.
Then most clients will be looking to transfer that risk from themselves to the people who deserve that risk, which is. The people who are doing the work, et cetera. And so then that, that leads into the risk avoidance. So the clients trying to avoid that risk by passing it on to the people who should be having that risk at the time.
And then finally, risk monitoring
and control where you would monitor the risk during the project, and then you would try and control those those outcomes and mitigate any,
any risks that do come up.
Marlon Bray: So if we work, if we work on those assumptions, the, the, the five key risks and the way we go about it, what advice would you give to an individual company?
Or a developer or a person with a development site in terms of first steps to avoid those risks or mitigating. And how would you see the difference between private and public sphere changing that? Ferris, you wanna go first as we got the introduction from Jack? Absolutely.
Faris Rehman: Thanks Jack. For the, for the brief outlook of what we should be expecting in this tight time in this time that we are living in right now.
You very well put on all those major items. But when you go to the nitty gritties of those, they change from project to project and develop to developer and market to market. Obviously we are living in we, we have these, this change is such a constant issue right now in e in every segment of what we, you, you just mentioned in terms of those highlighted like on the, on the, on the larger picture.
So right now we are living in this obviously construction, spiking construction costs and the liquidity crunch, which is, which we are facing. And we are, we will be hearing a lot about it too. So financial slow payments obviously could be an issue too down the road. Not right now, but again, these are issues.
We typically hear, and we are hearing right now too. The other side is the operational or the project risk as well. So scheduled delays And delays, lack of funding, for example, thing, things of that nature, which is, which is happening too. And then on the larger economic picture, you have your inflation then you have your escalation.
And then likely the recession factor in which is which, which is a talk, but it's not being, it's a muted discussion, but it's, it's happening as, as we know. On the legal and contract side, obviously there is a, there's a risk factor too. How to mitigate that risk is the next thing. Like how to how can the con like the developers, subcontractors and subcontractors can, can safeguard their interests basically by having some specific clauses in this change time that we are in right now to save God their interest.
And then obviously the predictive estimating and any use of robust Artificial intelligence per se, and the, and the use of data, how to analyze your internal data and how to predict it in this. And, and it all depends on the input factors too. And, and that is the key, in my opinion, in, in this risk identification per se, which is the biggest thing that we have to identify the risks on, on larger scale.
And then you can focus on, you gonna narrow down on your project particulars per se. So I'd let Jack add to add something to that too.
Jack McGowan: Yeah. So obviously if you're looking at going into a different area from where you're still understanding
everything about your marketplace, suddenly you've gotta consider a number of things like the regulatory framework that you're stepping into, making sure that you understand what you're stepping into and how that is product delivering that you're gonna be delivering in that market.
The environmental, environmental
considerations you're gonna be. Pretty certain that if, if you're moving into a new area, those considerations, whether it's the, the,
The government regulations that are changing in those environmental considerations, you're gonna have to take that into account building codes and standards change from province to province, state to state, and also from if you're moving from Canada to the US or whatever in those markets, that would be a big consideration that you're gonna have to look at.
Project financing and procurement is also very different in those. Areas from, say for instance, from Montreal to to Calgary, it's quite a different model how you're gonna fund that and who's gonna be in those areas. And also cultural and social factors that's quite a step in a direction.
Marlon Bray: So you've jumped ahead, answered the next question, not really addressed the actual question, which is, I have a new developer, I've got a site saving an area I know.
What's the first advice you'd give to mitigate the volatility in the market right now, Jack? So say a client comes to you, says, can you guys help me out? What is it you are telling that new client they need to do when they're looking at a site?
Jack McGowan: Understand the market. I think you've gotta understand the market where
you, in the new area that you're going into, that's what you're
Faris Rehman: asking.
Is it Marlon?
Marlon Bray: Kinda. Cause you run about if you're moving from location regularly, but if you were to start development today and so you know the market, what do you do to make, get your risk so you don't get screwed when you get into construction, you're not gonna have problems getting through the approval process cuz clients can understand the market.
Say, I'm in Calgary, I know the market, but how do I get that development from an idea in my head? Mitigate all of these volatility risks. I see. And hopefully end up in five years with a project that's finished,
Jack McGowan: Planning, I would imagine identification of those risks is critical, as I said before. How you, how you then move that on to getting your project going ahead would be depending on how
you mitigate those risks.
Yeah.
Marlon Bray: Yeah. So, okay. We spoke about moving around. So I'm a developer from the US when I come to Canada, or I'm a developer that wants to go from Canada, heading in south. We spoke about some of the regulatory changes, but how hard is it to do that, do you think? And how do you manage the risk of going into that new environment that you completely don't know now?
So you are a, you know how development, you know the whole process, you know how it works. I think we had a discussion about boots on the grounds and stuff in the previous, the previous discussion. What's the best way to go into a new market and make sure it succeeds in terms of making sure you get your risk covered and you got the right structure in place to get it done.
Faris Rehman: Certainly, I mean, I can add to that I can add to that because first, first of all, like you, you gotta know the market, which, which you're getting into, and you gotta know your product very well too. What you're trying to put as a developer or as a, as a, as a team that you, you know your product better than anybody and obviously you're going to a new market.
It might not be the same product or the same. Same requirements for that local market that you're used to. For example, a developer coming from Canada to US would be, would be expecting a lot of, lot of factors. First of all, the market is very different here too. As Jack had mentioned earlier your regulatory environment is very different.
And it's very state to state conditions per se, coming from Calgary or, or, or, or from there to Florida, for example, or Texas. You, you'd be, you'd be up for a big climate related issues that you might be dealing with, which, which again translates back into your regulatory environment, you, your billing codes your local local, local product.
How, how you are trying to position that. So it all depends on your market marketing data. So marketing data is the first key, which is very readily available in the US and that is one of the first stopping point of any developer who comes here. Which is your job, GIS system based which profile, which provides you profiles and trends of the overall market.
And then you can focus on your niche product. Let's say if you're going for a multifamily senior living mix use. It gives you trends, the trends overall on the micro macro conditions as well. So if that is your starting, you gotta, you gotta have that information before you go in for any, for example,
Typically that we, we get across people at the land development stage.
Obviously land acquisition is the first stage that is. And then again, knowing the local people as well. So you have to think locally, but act globally as we, as we say in our, in our do at at times, particularly when you are, when you are developer working overseas and in in US, Canada, or, or, or, or in an international player.
So you gotta team up with a national firm who has local presences. That's what I tell everybody. That is the key, you know?
Marlon Bray: Yeah. Jack on Fri. Yeah. On Friday, Jack, we, we, we had a meeting discussing some of the project management approaches and stuff like that. And one of the things you were, you guys were a huge advocate on, on the planning side, is actually coming up with a project specific plan that addresses the risks, addresses the delivery, and sort of captures some of the stuff Barry said about boots on the ground, knowing the market, doing the data.
How do those project plans sort of work in helping you? You know, I, I've got a new development, I've got a plan ahead for it. How would that plan help you create sort of a roadmap that deals with what Ferris has said, but also helps 'em move through a project knowing where they're going next.
Jack McGowan: I, I think just jumping back to your question about moving into a different area as well one of the successful models that we've seen is when people do go into new markets, they joint venture with someone in that marketplace who can provide that advice.
And that's, that's what we see as a very
successful model. And when you see
people coming into the Calgary market but then the, the project plan that you're talking about is in consultation with the client. You, you go through everything that will affect you on that project with the local knowledge
and bringing their knowledge of what their product is so that it can fit the market.
Every, every project has to fit the market it's going into. And if, if obviously if the client isn't tailoring that for the local market that he's going into, it's gonna be a little bit difficult to be successful in that order, right?
Faris Rehman: So on the speculative side, we talking about speculative billing per se versus versus billing, which, which you will be selling, for example.
Where we have buyers already, or, or so we see a lot of speculative billing as well in the us. Particularly be it any sector multi-family, be it warehouses, be it except the healthcare and the, and the, like, a real u end user based products. In general you will see a lot of speculative billing and it, and it works well.
But again, there are so many other external factors that that can affect those projects. When you're speculating rebuilding these and most developers as we. They are speculative builders anyways, right?
Marlon Bray: Yeah. So we work at Altus . We understand change and how implementation and resistance can often get way more complicated .
How important is it to deal with that change and that change management if you're looking at going into new markets and whatnot, is that gonna be a massive challenge actually changing your whole mindset as a company, as you move into a different province, a different state, a different country even.
Jack McGowan: Yeah, I think that you know, we're, as office, we're actually looking at heading into new markets as well, and you know, we,
you know yourself. You've been a long time, you've looked at this change a number of different times, and sometimes it's been successful and other times it's not. And it comes down to the commitment of the company for that change, making sure that the resources are provided for that change and that the product that you're actually bringing for that new market.
Is actually what fits that market. There's no point, you know, if, if, if you're a child fisherman, there's no point
in bringing the wrong flight at the wrong time of year. You need to make sure it's project specific and it's very tailored to what you're trying to do at that time in the marketplace. So you have to be very sure on that.
Marlon Bray: Jack just outlined some of the challenges you see with change management. Management. What do you, what are your thoughts on those Faris.
Faris Rehman: Well, one thing I see in terms of the change management, it all depends. A, as a, as a starting point, data is the key to, to all of us. And at, at Altus, we take, take pride in that, that we are, we have large data, large amount of data.
Now it, it all depends on how you, how we manipulate that data for, for the benefit of the client and present them the best case scenarios and the worst case scenarios too. So I think going forward data is becoming central. Artificial intelligence and the, and the inputs to the project management and the, in the feasibility and pre-construction phase, that's becoming more, more of a profound change that we have to adapt.
And it's happening very fast too. As I, as we, we talked to people, I was recently at a busy place and met a lot of people throughout the country and, and, and this is happening. And, and, and we should be bracing that. And companies like Altis have a, I'd say we have a leverage or a lot of other clients. In how we can, we can address those clients' issues and provide them with more, more of a, more of a scenario planning per se.
Marlon Bray: so big data and stuff, everyone likes to talk about that. But in terms of project management, managing risk development, management, how important is experience or boots on the ground versus data? Isn't data just the starting point? You still need that experience and that those boots on the ground and that senior advisory.
Process to move through support?
Faris Rehman: Absolutely, absolutely. So from a development team perspective, like every, every development team has two major components where you have your development development team at the beginning, and then you have your construction team, which, which implements those. So there, there is the, the alignment of those teams at the beginning of the job and how you proceed and, and team up with the local players and align your project goals with the, with the overall.
Profitability and your risk profiles, et cetera, for the job. And then again, knowing the local market is very important. For example, like a project could have significant cost offsite costs, for example, which, which may or may not be in anywhere. Utility costs could be huge nowadays too for, for the, for the sites.
For example, your environmental risk, as Jack had mentioned, and your local regulatory soils, soil conditions could be huge cost as well. So having those, that information upfront. Through the local teams and local players who know the market well than anybody and, and have been working in those markets for a longer time could be of a great input to you to to mitigate those risks and see if that that project is even feasible or fits in your fits your ability at all.
Jack McGowan: So I just had a good thought on that though. You were talking about experience though, you know. When we are looking for experienced people in the marketplace, you know, you want someone who gets up in the morning and 80% of what they see in that day was seen before.
Therefore, whatever challenges they get, I mean, that's what clients be looking for, people on the ground so that there's anything coming out. We've actually dealt with it before, so it's just the case of bringing that muscle memory back in and making it work for those times. So that's no important.
Marlon Bray: I have a question, Jack, actually, slightly off topic though.
Obviously you've worked all over the world to a degree and you've been in the Middle East. How do you find the, the approach to risk and whatnot in North America is compared to, say, the Middle East or the other areas you've actually had experience in?
Jack McGowan: Yeah, it, it does vary in the different marketplaces
in, in the Middle East.
I guess the government pipe is, is a bit different cause it's It's a very long range 30 year plan where they're developing whole area, coming with a lot of,
so you do find that they're more, they're more accepting of risk, of building change in the middle of the business, for instance, as opposed to.
Say Calgary in the middle of 2000 17, 18, 19, when a recess there people were not developing. It was quite a, it was quite a period for development and people, there's development going on, but it wasn't robust. It could have been. And so I, I do think that the, the model for risk in the Middle East is, is quite a bit more aggressive.
Then it, it would be, and maybe the tolerance of whether it makes money or not is, is less so in the Middle East, the building, we did a number of different hotels. Of course we're gonna make money, but you know, the scope and size of being big and just bizarre.
Marlon Bray: So is that a floor in North America? Because obviously I'd say Canadians are probably the most risk adverse. Our zoning reflects that. Our approach to building reflects that.
I would say the US is somewhere in between the Middle East and Canada, and different states have different risk acceptance and different, more entrepreneurial approach. Is it a flaw when we know we have a housing problem in Canada, in the US that we are so risk adverse and we have a lack of willingness on both the government side to push private help, mitigate that risk and just get it done?
Jack McGowan: I think so. I, I think so. I, I, I think that we need to be a little bit braver in building larger projects that really do change the landscape of where we're working. And I get very excited when we're doing, when I've been involved in these really large projects that really make a difference to the area in the city that we're building as opposed to in Calgary or, or Edmonton or the prairies like that.
Where it does seem to be a little bit less exciting to have. I'll probably get in trouble for saying that, but
Marlon Bray: No, I think that's fine.
Jack McGowan: No, I, I think also we've got we've got a huge housing problem across the country, and yet we still don't seem to be able to make the big decisions that that should change that, you know, let's, let's just spend the money, get the stuff built, and we, we know that.
CM HC. And the government money hasn't really trickled down to these affordable housing project experience. I'm hearing
a little bit of above. So there's just not enough housing for people.
Marlon Bray: And Faris when you sit down in the US obviously you mentioned earlier on there's a a lot more speculation in the housing market down in the US.
You're not having to get 70% of deposits before you go flying golf and stuff, cuz that's our way of mitigating risk up north. But in, in the US do you think it's more entrepreneurial that maybe, you know, Canada could learn a little bit from the us Maybe US could learn a little bit about risk avoidance after the meltdown in 2009, but
Faris Rehman: no I think the, the issue in us is mainly the funding in, in the markets.
So the lax, the markets are the more the speculative trends in the construction industry. Robustness we have seen, And now lately, since the 2018 Dodd and Frank Bill, when it was lax for for the major banks so the regional banks picked up and we saw a lot of, lot of, lot of billing in c r e particularly sector and, and that that is impacting the overall banking sector and it's impacting the lending right now, which is again, slowing down your construction progress.
Particularly on the multifamily side, which is more lender finance as well. So it, it, it, it's, it should be a combination. I think when I came from the US side, I saw, mostly I saw is like, it's a, it's, it's a little bit of risk takers here. Yeah. Compared to, compared to anywhere that I, particularly from Canadian perspective, because I worked there too, and it's, it's a good thing to do that.
But I think banks have a lot of pe everybody has learned their lessons in 2008 and it has been more reasonable and manageable market. However, COVID upturned a lot of, lot of that. And we are seeing that the office sector, as we know we all know it, it is under a lot of, lot of stress rate now, and it is impacting the lending industry in general and the lending for the new projects in particular, which are developer finance projects.
So I'd say a housing is an issue across the board here to the United States. We know we are lagging behind quite a bit on that and to affordable housing being a big issue too. Any major market ego and the cost of this greening of economy is, is, is having a big impact as we all know too, particularly. In some market is much severe than others.
But we have, we are blessed that way that you can go to South, for example, and, and continue to grow and you follow the, the pop and, and the, and the population trends are in that direction. So construction follows that. So we'll somehow mitigate that. But however, the overall issues across the board as you're seeing in Canada or anywhere else, are pretty much the same here too.
Marlon Bray: Yeah, and I think the challenge is, is to the earlier point, that's why I was asking Jack. I think the Middle East might not have it perfect, but the fact that government's willing to take risks, I suppose that's the difference in governance as well, that willingness to take risk, generates growth, that in essence, In the long run works out for the good of everybody, even despite the risks.
Whereas I find Canada is ultra-conservative in takes to taking risks and then the US depending which state you're intends to be a little bit restricted. And that's why we see these massive challenges in places like California with housing and whatnot. It's that different approach to governance.
Whereas if we went out to our, if you looked at Texas, it would have a much different challenge than even Calgary in Alberta does. And it, I would argue Calgary in Texas, very similar sort mindset. Approach things. They have a much different issue than you have in say, Toronto, So Jen, so thank you for today, you guys, it was a pleasure talking to you. Thank you Gents, for your contribution today and look forward to talking to you guys again soon.
Faris Rehman: Thank you, Marlon.