The Canadian Commercial Real Estate Market

Published Date: 02 Nov 2017

In 2011, the Canadian commercial real estate market generated $63.3 billion in economic activity, making the sector’s economic contribution twice as large as the entire economy of the province of Newfoundland and Labrador, according to a recent report from The Real Property Association of Canada (REALpac). The report suggests that this sector supports almost 340,000 jobs, roughly equivalent to the total employment from Canada’s agricultural industry. 1

The commercial real estate market involves real property assets from retail plazas, to office buildings, to industrial warehouses, to multi-family apartment buildings, hotels and land.

Economic trends are closely linked to the commercial real estate market, and even minor daily reports in the newspaper can have an impact on supply, demand and customer sentiment. As a lagging indicator of the economy (similar to residential real estate), commercial real estate is often the last to be impacted, which conforms with long-term economic trends.

At the time of this report the slowdown in the Canadian housing market is capturing headlines, yet commercial real estate continues to perform well. Due to the economic downturn over the past three to four years, many global commercial real estate markets have been severely hit. Canada, however has managed to perform well due to a number of factors, including a strong banking system, a conservative lending structure for commercial mortgages or financing of development projects, as well as financially conservative commercial landlords who have not overbuilt the supply of properties correlated with demand. In fact in many commercial real estate markets there is actually a lack of supply, which pushes prices for properties and leases higher. Solid national employment numbers, stable government that attracts foreign investment, and a generally strong economy with a solid footing based on a global commodities like oil and potash are other reasons for the relatively small impact the economic downturn has had on this market.

This project focuses on the Canadian Real Estate Investment Trust (CREIT). A Real Estate Investment Trust or REIT is "a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate." 2 REITs originated in the United States, and were introduced to Canada in 1993. Shareholders of a REIT are referred to as unit holders.

CREIT’s most immediate competitor is H+R REIT, a Canadian based real estate trust also specializing in ownership and leasing of office space in highly urban areas of Canada. Other REITs include RIOCAN, Calloway REIT and Dundee REIT. These three REITS are more focused on large retail properties throughout Canada; large shopping malls and plazas. Their annual statements generally provide good information about their tenants and specifically who the "anchor" tenant is within a particular property.

H+R REIT’s asset base was roughly $7.5 billion at year end 2011, generating $214 million dollars in revenue. At year-end 2011, CREIT held $3.3 billion in assets and generated $335 million in revenue.

The Standard and Poor report at year end 2011 for H+R REIT and CREIT indicated that CREIT has had much more favorable rates of return on their share price over both the short and long term. The 5 year rate for CREIT is 13% compared to H+R REIT at 9%.

An opportunity can be seen in the comparative occupancy rates of the two Trusts. H+R REIT’s 2011 year-end report indicated an overall occupancy rate for all their buildings of 99.1%. CREIT’s occupancy rate was announced at 94.4% overall, however, their revenue generated through leasing as a percentage of their asset base is significantly better. If CREIT can increase their occupancy rate they can improve their overall revenue generation and further establish themselves as the more desirable investment device between the two.

The importance of integrated information systems is crucial to the commercial real estate market. Currently most commercial real estate information system functions are dedicated to accounting and investor reporting, with firms also gathering large amounts of data on their tenants.

Company Analysis: Canadian Real Estate Investment Trust (CREIT)

Overview

CREIT is Canada’s first publicly traded real estate investment trust (REIT). First listed on the Toronto Stock Exchange in 1993, CREIT trades under the symbol REF.UN. The corporate head office for CREIT is in Toronto and employs approximately 200 people.

CREIT owns a diversified portfolio of high-quality commercial real estate assets, consisting of retail, industrial and office properties, which have delivered reliable monthly distributions to unit holders, and consistent earnings growth over time.

As of 2012 CREIT had a market capitalization of approximately $2.81 billion dollars, making CREIT one of Canada’s strongest REITs. Properties are diversified across the country, with major geographic concentrations in Alberta (35%) and Ontario (29%), and include varied assets, making CREIT a diversified REIT, which is rare in the industry. Most REITs only invest in a certain asset types (for example, RIOCAN REIT only invests in retail shopping centres). The total assets for CREIT include 190 properties totalling approximately 19 million square feet, tracking at an overall portfolio occupancy of 94.4%. The asset mix across the company is approximately 50% of properties in the retail sector, 25% in office properties and 25% in industrial properties.

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Competitive Strategy and Vision

CREIT has three guiding principles: Reliability, Stability, and Growth. The company goal is to provide the following benefits of real estate ownership to investors: cash flow (a reliable monthly distribution to unit holders), some tax deferral on distributions, preservation of capital, and finally, growth in both cash flow and the investment over time. To deliver the benefits set out above, CREIT has built their corporate strategy on three major components: Acquisition, Financial Management and Property Operations

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Acquisition involves CREIT acquiring a portfolio of high-quality and geographically diverse real estate, over diversified classes (as outlined above). Financial Management asserts that CREIT operates within a disciplined framework for financial management. Finally, Property Operations involves the core strength of the business in the leasing and property management of the real estate portfolio. There are only two ways a REIT can grow cash flow: through acquisitions of new properties, thus growing the amount of tenants paying rent or by improving the operations of the existing portfolio.

Financial Background

CREIT is a going concern with over 3.2 billion dollars in assets, and in November 2012 the earnings per share was $0.93 with a dividend of $0.12 per share, with a yield of 3.6%. A graph of compound returns is outlined below:

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Current IT Landscape and Strategy at CREIT

CREIT uses a database system, and similar to most companies in commercial real estate, the adoption and implementation of new information systems technology has been slow. While CREIT was one of the first firms to issue BlackBerry devices to customer-facing staff, and was also a leader in linking cross-enterprise accounting systems in order to produce investor reports, the overall information system strategy has been slow to move, and more reactionary than strategic.

The current corporate structure for Information System is a team of five, headed by CREIT’s Vice-President of Business Processes and Systems and a Director of Information Services. This team reports directly to the Chief Executive Officer (Exhibit 1).

Information Systems is involved in all areas of the business, from the website to accounting systems that link input from leasing and output financial reports. There is also an outsourced help desk for any IT issues that may occur, like malfunctioning computer or smartphone.

Business Problem/Opportunity

The Board of Trustees has recently identified the falling occupancy rate of CREIT properties as an area of focus to improve performance. While CREIT’s major competitor’s occupancy rate has risen over the last 5 years, CREIT’s has fallen. Even in the third year of this downward trend, Senior Management staff remained complacent, with the company focus on the internal leasing team and carefully selected real estate brokers; their goal was to obtain more profitable tenants. Emphasis was placed on the percentage margin or amount above base rental rate negotiated, rather than occupancy as a metric to gauge success. Too much focus was placed on communicating with and performing for investors and not on the rent paying tenants.

CREIT has seen a much better return on equity in the lease rate percentage over the last number of years, posting $335 million in rental income generated from 3.3 billion, or roughly a 10% ROE. While this is clearly better than H+R’s equivalent $214 million on $7.5 billion or just below 3% ROE, H+R’s ROE is below traditional REIT ROE’s and should not be used as a benchmark in that regard.

The business problem before CREIT is therefore to increase their occupancy rates without sacrificing focus on rental rates over base rate. Can Information Systems provide some solutions/opportunities for CREIT and this problem?

In order to achieve this goal, two things must happen: new tenants must be found, and the percentage of existing tenants who renew their leases must also remain at least the same, if not increase. As such, a two tiered focus to achieve this objective is required.

Senior staff at CREIT agree that it is always easier (and much more profitable) to renegotiate and retain an existing tenant than to acquire a new one. With that in mind, the first area requiring consideration is the existing client base. It was during this examination that CREIT observed that many opportunities to get to know more about their existing tenants were being overlooked.

CREIT is currently using a database system created by JD Edwards, a company who have recently been purchased by Oracle. The JD Edwards system (JDE) is adept at retaining contractual terms about tenants, but is not well suited to capture information more usually associated with customer relationship management or CRM software. JDE maintains the legal names of the leaseholder, terms of the lease, lease rates and leasehold improvement amortization rates and costs, payment schedules, invoices and expiry dates. This information is critical to the administration of tenant management and accounting, but is not sufficient to provide a more rounded tenant experience. With the Board of Trustee’s mandate to increase occupancy rates, ensuring an exemplary tenant experience to increase overall lease renewal rates is a key determinant to success. CREIT management began to document the information they wanted to tabulate, with the assistance of all administrative and operational departments that they considered integral to leasing and building property management staff in their interactions with existing tenants.

A number of CREIT staff currently interacts with tenants on a regular basis; security staff, administrative and building maintenance staff, parking staff, property management and property leasing staff. Each of these departments could potentially have a different relationship with each tenant. An issue identified by building maintenance may not get communicated back to building management, especially if the problem can be rectified quickly. However, if a number of maintenance issues arise without management’s knowledge, that tenant is much more likely to consider other locations prior to their lease renewal date.

Armed with more information about the overall relationship history with a tenant, both internal staff and external commercial real estate brokers are better equipped to determine the appropriate renewing lease rate offer. Those tenants with a very good experience across all portfolios within CREIT can be offered renewing terms at higher lease rates than those whose experience may have had some concerns. Where tenant relationships may have been strained, more favorable rates can be offered to entice the tenants to stay.

In addition, no records are currently kept of previous prospects of CREIT’s property. New tenants are typically brought forward from independent brokers, or cold calls are made to business in the local vicinity of the available space in an attempt to introduce the local businesses to CREIT’s offerings. With commercial real estate leases usually contracted over 5 year terms, a record of previous prospects to canvas as it ages would be a much warmer introduction than a cold call.

CREIT’s renewal and the new business leasing success would be aided considerably by the presence of CRM software. CRM software can be configured to capture relevant details of tenant interaction at all points of the organization. In addition to simply helping with the lease renewal rates, it can be used to see trends in tenant interactions with opportunity for improvement, or simply see process redundancies that can be removed. A CRM at CREIT could deliver the right information to the decision maker, whether it be accounts receivable or property management. A CRM system will allow CREIT to integrate and use the data it stores to provide a better experience for its tenants.

IT Based Solutions

As mentioned in the problem statement, the issue of gathering data is not a problem for CREIT. Rather, current systems are not capable of providing an appropriate method to capture,retain and tabulate for recall in a useful manner tenant and property data CREIT has collected and continues to collect.

CREIT’s goals are as follows:

to establish customized communication with the clients through one-to one communication, newsletter and customized offers or promotions

to renew leases expiring in the next 12 months by working directly with each individual tenant

to stay on top of properties being vacated within the next 12 months and try to re-lease them by working with existing tenants

to manage each individual tenant’s preferences and requirements efficiently

to be able manage different types of properties and tenant details effectively

to stay on top of tenants’ current issues to provide them with better service

After our in-depth research and analysis, there appear to be three potential solutions to this business problem. The first option is for CREIT to develop a CRM application in-house that would meet all the business requirements discussed above. Another solution involves enhancing CREIT’s existing software to fulfill the newly-raised requirements of the company. The third solution involves purchasing a new CRM Package.

Alternatives

Option 1: Developing a new CRM Application In-House

Developing a new CRM type software would guarantee the requirements listed above are met. CREIT could customize the CRM application to its specific needs, and ensure information is shared and integrated across all its departments. However, developing new software is a complex task, and would likely require hiring new full-time staff to develop, implement, maintain and integrate the new CRM application with other existing applications.

The in-house development could be even more complex, time consuming, resource intensive and costly when an organization of CREIT’s size is developing a complex solution to satisfy the needs of multiple users who belong to different departments or divisions. Countless hours/days may be spent on collecting, understanding, harmonizing and prioritizing business and software integration requirements. In addition, technical requirements need to be identified to properly define the architecture, design standards of writing new code of the application to satisfy current business needs along with future technology upgrade path.

Furthermore, more time is spent in writing new code and its testing, debugging and validation to ensure business and technical requirements are met. This process will continue until the product will function according to the expectations. Once development and testing is completed, the organization should be ready to make further changes as the initial requirements, configuration and development of the application may not be "quite right" the first time. Generally, most organizations do not consider optimization of current manual processes and most of the time initial focus is automate existing manual processes without any optimization. Therefore, this re-design and re-validation would entail additional costs that may not have been realized in advance during the initial project planning.

Option 2: Using/Enhancing Existing Software

Enhancing the current applications in use is another option that may satisfy some of CREIT’s business needs. However, due to the limitations associated with the existing applications, including the fact that CREIT is using an older version of JDE ERP system that is no longer commercially available, many desired CRM features listed above cannot be added.

Making changes to the current application(s) would disturb the present workflow of the manual processes, which in turn might adversely affect the day to day business of the company. Some of the applications currently used by CREIT are developed by 3rd party vendors, and enhancing those 3rd party applications would require engaging the 3rd party vendors. Engaging external vendors to customize existing application may turn into an expensive, time consuming and resource intensive process, with all requirements still not being met due to the design and architecture limitation of existing applications. In addition, customizing 3rd party applications to this extent would prevent future upgrades of those applications generally offered by the Vendor on a regular basis. This would result in application to be obsolete in few years and will prevent CREIT from using new technology and further expansion of functionality going forward. Consequently, enhancing current applications is not a suitable approach to minimize the drawbacks of solving this current business problem.

Option 3/Our Recommendation: The Purchase of a New CRM Application

After further analysis, the purchase of a new CRM application appears to be the best option available to the company. Due to the many options of CRM applications on the market, the company has the freedom to choose the package that would exactly meet their specific and unique requirements. Since the new CRM application would be independent from the current application, it would not hinder the day to day business of the company while the transition is in process. Cost is also a factor here, and since CREIT will have many CRM vendors to consider, it will also have the flexibility to choose the one that is most affordable.

As there are a multitude of CRM applications available for use in commercial real estate, a list of criteria must be defined to better help the company to come up with a suitable solution for this problem. There are several factors that have to be taken into consideration here, including some criteria that play a more significant role in the decision-making. Ultimately, the ability to maintain a customized relationship with variety of customers is one of the key factors to solve this particular business problem.

User Interface

The proposed CRM application package has to provide specific functionalities for the user. The required functionalities include:

The ability to follow up with on-going tasks and different clients

Powerful and customizable communication functionality to establish effective communication with existing and potential clients

Tracking the preferences of the investors and tenants, and lease management abilities

On-demand and mobile accessibility

Smart searching tools

Powerful report generating tools

Track employees’ response times to tenant requests, which can be used as an HR management tool

History of tenant data that will help manage lease renewals

There are also other criteria that impact finding the optimal solution, including ease of usability, compatibility, secure sharing of information, integration capabilities with the current applications in-use, as well as the cost of the application. Based on this, there are a number of available CRM application options that CREIT should consider:

Property Base

Property Base is one of the CRM applications built on top of the "salesforce.com" cloud environment. It also includes many of the core functionalities of a commercial real estate CRM. At a cost of $89.00 per user per month, the Property Base CRM application offers the ability to follow up on workflow tasks and provides notifications. This functionality will allow the user to set up repetitive workflows, which can greatly increase productivity of the company while serving customers and clients. Notifications can be set to remind the inside sales team when a lease is expiring or a payment is past the due date. Another key feature that Property Base offers is email marketing. Customized email marketing can be an extremely important communication portal to better communicate with the clients and customers. The email marketing functionality provided by Property Base allows the sales team to manage a multichannel campaign from a single starting point. It also has a built-in email template which will give the sales a ready-to- go and consistent email style. Property Base also includes "Listing Browser/Smart Search" features. The "Listing Browser/Smart Search" feature allows the sales department to find matching properties for a variety of customers quickly and effectively.

JDE

JD Edwards Enterprise One CRM is another CRM solution which will help the company to solve their business problem. One of the major benefits of using JDE Enterprise One CRM module is the reduced risk of having compatibility issues between CRM module and the existing JDE system already in use at CREIT. However JD Edwards Enterprise One CRM mainly targets generic CRM users rather than commercial real estate companies. Many of the must have features for a commercial real estate company including "Property/Lease Management Capabilities"  and "Tenant/Investor Preference Tracking" are not supported in this application. Further, customizing a generic CRM application to satisfy commercial real estate business needs may be a very expensive task. JDE bases its prices on specific firm requirements.

Rethink

Rethink is another CRM application that is built on top of the "salesforce.com" CRM cloud computing technology. Some of the key features that Rethink offers include:

Manage Properties, listings and leases with ease

Maintain complete activity records for each property

Market and fill vacancies online

Track and manage tenants, leases, association owners, charges and payments

These features will greatly assist CREIT’s staff in establishing effective communication with the existing tenants as well as potential customers. However, the provided features remain fairly limited, and costs can range from $49.00 to $99.00 per user per month. Further, the Rethink application does not provide the ability to generate dynamic catalogues based on the data obtained on the costumers.

ACT!cre

The last CRM application solution that is proposed as a potential solution is ACT!cre. ACT!cre is a CRM application that is built on top of the ACT! platform. The ACT!cre" CRM application also targets the commercial real estate market. Some of the key features provided by this application are Property Database, Activity Reporting, Customized Dashboard, as well as a powerful search tool. The Property Database will allow the sales to quickly retrieve information regarding a specific property. The Activity Reporting allows the sales team an overview of the properties that have been leased the most number of times in the past years. Despite the fact that ACT!cre contains most of the features that a commercial real estate firm needs, it doesn’t provide some of the "nice to have" add-on features such as web/mobile integration, disappointing when one considers the $379.00 per user cost. If the CREIT team wants to have access to the application on their cellphones or tablet, the ACT!cre" CRM application may not be a suitable option.

Siebel

The Siebel CRM system offered by Oracle is another option that CREIT may use to fulfill their business requirements, and also includes an option for integration with the ERP application CREIT currently uses. However, the Siebel CRM does not specifically focus on the commercial real estate industry, and customizing Siebel CRM to satisfy CREIT’s business needs could be a time consuming and costly exercise. In addition, Siebel also has a complex pricing model and it is the most expensive CRM option when it comes to per license cost per user.

COWS Table

The COWS (criteria, option, weight, score) table below provides a detailed analysis of the each of the proposed applications based on the criteria defined.

 

CRM Application Alternatives

Criteria

Weight

Property Base

JD Edwards

Rethink

ACT! cre

Functionality (35)

35

29.25

19.6

25.8

27.9

a. Customized communication with Customers

7

5.25

4.2

5.6

5.6

b. Task Tracking/Workflow notifications

5

4

3

4

4

c. Property/Lease Management Capabilities

5

4

1.5

4

4

d. Tenant/Investor preference Tracking

3

2.7

1.5

2.4

2.1

e. On demand access

3

2.7

2.1

2.7

2.7

f. Dynamic Catalog

3

2.7

1.5

0

1.8

g. Powerful Searching/Reporting

3

2.7

2.4

2.1

2.7

h. Web/Mobile Integration

2

1.8

1

1.6

1.8

i. Powerful Dashboard

2

1.8

1

1.8

1.8

j. Others4

2

1.6

1.4

1.6

1.4

Usability/Performance

12

9.6

9.6

9.6

9.6

Minimal Price/Cost

10

6

4

5

7

Security

10

8

8

8

8

Effective sharing of information

9

8.1

6.3

6.3

6.3

Compatibility

8

6.4

6.4

6.4

6.4

Integration with JDE

8

6.4

7.6

6.4

6.4

Implementation Cost

8

7.2

7.2

7.2

5.6

Total

100

80.95

68.7

74.7

77.2

Recommendation

It is recommended that CREIT purchase Property Base CRM application. From the COWS analysis conducted above, it is clear that Property Base is the superior application when examined from a number of different perspectives, including functionality, ease of use, and affordable price.

Property Base contains all the core functionalities that a commercial real estate firm requires. The email marketing feature enables users to strategize their approach when dealing with customers, while the smart search tool helps users search for detailed information about clients, properties, and lease renewals. The cost of the Property Base application also falls into the reasonable range, and compares favourably to other applications available, particularly when one considers the number of features offered.

Property Base uses the force.com web services platform API, which is the best and most comprehensive API on the market today. This allows for fast and affordable integration to any ERP package. Even though the existing ERP software runs on a different platform than Property Base, it is possible to have an interface between the two to ensure the sync of data between the CRM application and ERP software. As for implementation costs, since Property Base is built on top of the salesforce.com CRM cloud computing technology, anticipated costs will be minimal.

According to the input obtained from the previous commercial real estate users, Property Base has exceeded their expectations in almost all the areas of a CRM application and has caused minimal issues while in use. To conclude, purchase of the Property Base CRM package is the most suitable option to meet the requirements defined by this business problem.

Return on Investment

There are two types of leasing for a commercial landlord, net new and renewal. The average downtime if a unit becomes vacant because a tenant leaves is around six months. Those six months of downtime can have a significant drag on revenue. In addition to downtime and loss of rent, there are additional costs of not retaining a tenant, including outside real estate broker commissions, marketing charges to notify potential tenants of the vacancy and possible renovation charges to the vacant suite to attract new tenants. If retention rates can be kept high by leveraging a CRM system, this will have a significant positive impact on company revenues.

Action Plan

Implementation Steps

MRP

Date

Timeline

Examine and collect data on competitors’ CRM Systems

January 2013

2 weeks

Assign a point person in the Information Systems Department to lead the CRM system implementation and create an internal team to support it

Implementation Team

January 2013

2 weeks

Develop a Request for Proposal

Put out a Request for Proposal

When RFP closes, review bids to ensure compatibility with original RFP and consider budget constraints

1 week

Provide chosen Vendor with specific metrics and milestones needed before project is considered complete, note payment schedule

1 week

New CRM system goes live at CREIT

Vendor to stay on for 6 months to train system users

Vendor

6 months