Month: April 2021

The hospitality industry has taken a beating during the COVID-19 pandemic and there’s sure to be a slew of hotels hitting the market either immediately or in the immediate aftermath of the global health crisis. However, in a city like Toronto, where available land is scarce, it could create unique opportunities to retrofit buildings that don’t survive the pandemic.

“Speculation is that these hotels are nowhere near a viable proposition and they’ll have to look at repurposing,” said John Miolla, vice president of operations at Koler Builders. “I’ve caught wind of a few of them. Owners/operators are sitting on assets that aren’t generating revenue. Repurposing them is one way to change that.”

Demolitions are expensive, but it’s entirely possible to salvage a building’s structure and gut the interior. In fact, The Britt by Lanterra Developments, a 41-storey, 727-unit luxury condo in Yorkville, used to be Sutton Place, one of Toronto’s most storied hotels that opened in 1967. Before that, the old Four Seasons on Avenue Rd., also in Yorkville, was successfully retrofitted.

“They took 35 storeys-worth of hotel and flipped it,” said Miolla. “They gutted the entire building and stripped the old electrical and mechanical systems, old drywall and partitions, so all that was left were vertical structural elements and horizontal floor plates, and they turned it into a viable alternative to a hotel. Obviously it’s been done and has merit.”

Miolla added that converting hotels into condos isn’t especially difficult considering that both are residential in nature. Demolitions are costly, but by retrofitting, the interior of the remaining structure can be tweaked.

“It’s like renovating a house—you have a box in which you can add on a few extra square feet to units if you want,” he said, “and include modern standards, like a new AC and heating systems.”

Hotels aren’t the only buildings suffering economically that could benefit from repurposing. Toronto’s office towers are largely barren again now that the city is in the third wave of the pandemic, and while most workers are expected to return to those offices permanently one day, not all of them will. Moreover, Toronto has over 27.5 million sq ft of office space in the development pipeline, and surplus space will doubtless reduce valuations, rents and general economic viability.

“Office space may have more significant impact because COVID has forced us into a situation we didn’t experience before, which is working remotely. Now people don’t need to go to offices, so there will be a glut of offices. The Bank of Nova Scotia dumped a bunch of floors because they don’t need the space,” said Miolla.

“Post-COVID, we have to look at ways to stagger business hours, do more remote work, or if you have an office, you have to provide larger, nor smaller, spaces because we have to respect social distancing.”

According to Sunny Sharma, who uses his Certified Commercial Investment Member designation to determine best uses for properties, says building conversions are economically sound strategies for both hotels and disused office buildings.

“In light of higher and better uses to accommodate greater needs, sellers are taking advantage of their assets and maybe even reducing the cycle with conversions versus new builds. The timeline is shorter when buying and retrofitting a building, so there’s a lot of upside as long as the population keeps growing,” said the head of the Sunny Sharma Commercial Team and co-owner of Century 21 Leading Edge VIP Realty.

“There’s probably an environmental benefit by not having to tear down a building to deliver a product sooner. If the owner has dead use on their property and they found another use, it would benefit them too.”

But Miolla isn’t convinced retrofitting buildings for different uses is as easy as it sounds, adding that the brick and mortar component is the easy part.

“Swaying cities and politicians who say certain properties are zoned for different purposes will be difficult, because going through the rezoning process could be the hold up.”

Banking regulator aims to make it tougher to get an uninsured mortgage

With several Big-Five bank CEOs calling for regulatory action to slow the red-hot housing market, it didn’t take long for the Office of the Superintendent of Financial Institutions (OSFI), the governor of federally regulated financial institutions, to respond. In a news release, OSFI proposed an increase in uninsured mortgages’ qualifying rate to the higher of the mortgage contract rate plus 200 basis points or 5.25% as a minimum floor.

Based on posted rates of the country’s six largest lenders, the current threshold is at 4.79%. Before the pandemic, the posted rate was widely considered too high relative to much lower contract rates. Remember, Canada’s six largest lenders under OSFI’s jurisdiction set the posted rate each week when they submit to the Bank of Canada the so-called “conventional five-year mortgage rate.” It has increasingly born little relationship to actual contract rates.

OSFI, once again, shows itself to cozy up to the Canadian banking oligopoly. Keep in mind that delinquency rates on the Canadian banks’ mortgage books are very low—both in historical terms and compared with financial institutions in the rest of the world. OSFI couched this proposal in terms of “the importance of sound mortgage underwriting.”

In the release, OSFI said, “The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of a change in circumstances, such as the reduction of income or a rise in mortgage interest rates. As mortgages are one of the largest exposures that most banks carry, ensuring that borrowers can repay their loans strongly contributes to the continued safety and soundness of Canada’s financial system.”

The comment period ends on May 7. OSFI reported that it would communicate the revised B-20 Guideline by May 24, with an implementation date of June 1, 2021.

This all but ensures that the current boom in home buying will accelerate further in the spring market—providing an impetus for borrowers to get in under the June 1 deadline. OSFI’s move will trigger an even hotter spring housing market as demand is pulled forward just as it was before the January 1, 2018 implementation date of the current B-20 ruling.

This will not impact non-federally regulated financial institutions such as credit unions, mono-lines and private lenders, nor does it immediately impact insured-mortgage borrowers.

The federal government is in charge of mortgage qualification for insured mortgages. CMHC and the finance department could well follow OSFI’s lead in tightening qualifying rules for insured loans.

Bottom Line

It is noteworthy to remember that on January 24, 2020, OSFI indicated that it was reviewing the benchmark rate (or floor) used for qualifying uninsured mortgages. At that time, the thought was that the widening gap between the posted rate and the contract mortgage rate was too large and that OSFI and the Bank of Canada would publish a mortgage rate weekly that would better reflect the contract rates. The new qualifying rate would be that contract mortgage rate plus 200 basis points. This consultation was suspended on March 13, 2020, in response to challenges posed by the COVID-19 pandemic.

The COVID-19 pandemic might feel like a never-ending nightmare—especially in light of its third wave sparking an additional round of lockdowns—but some semblance of normalcy is, indeed, on the horizon. When that happens, some safety protocols that have been adopted since March of last year will be permanent.

According to Melissa Burton, consulting practice leader for Arup Canada, an engineering advisory firm that specializes in the built environment, the way companies and their employees interact with office space will be different in the aftermath of the pandemic.

Queuing up

Social distancing is likely to remain a reality for some time to come, and the more noteworthy manifest adaption in the post-COVID era will be how workers queue up to enter office buildings, including elevators.

Entering the building, says Burton, will require a staggered approach, otherwise queues would stretch around city blocks and conjoin other buildings’ queues. Hundreds of people lining up all over, say, downtown Toronto will exacerbate, not reduce, the spread of pestilence. Using pedestrian modelling software called MassMotion, precision can be established in determining everything from washroom protocols to “hotspots.”

“There’s also an office use strategy: how can you better position some facilities in the office to maintain appropriate social distancing? It shows how to use operational strategy in office space, like automatic doors to enter into a washroom and establishing ways to socially distance entry into, and exiting from, the washroom,” Burton told CREW. “It’s agent-, or user-, based and you typically have people moving around in the software, which, according to the research, gives representation to agents on how to replicate moving through a space. It also identifies ‘pinch points,’ or hotspots, on the office floor you occupy, and when you identify hotspots you can craft a solution to mitigate them because you can see where your areas of concerns can be.”

Staggered entry facilitates social distancing through a contracted volume of entrants at any given time and, as mentioned, it avoids entwining lineups to other buildings on the street.

“If you’re an individual or company that owns or rents floors—let’s say floors 27-35—in an office tower and you want to understand how you will be able to bring people back to work, you need to share elevator space with all other floors,” said Burton. “Queuing protocols are set up for staff to enter into buildings, which includes their times of entry. Instead of everybody arriving at 9 AM, why not stagger entry times into the building?”

HVAC

The benefits of improving HVAC systems aren’t tangible, but implementing UV filtration into a building’s HVAC system increases natural

airflow.

“Mitigation and adaptation can help you provide a safer work environment for employees and allows you to move back to the capacity that you want.”

Technology

Technology will be the most positive of changes to come out of the pandemic because, says Burton, companies have exceptionally integrated remote working tools. While working from home is sure to continue post-pandemic, Burton expects technological innovation to suffuse the office environment too.

“I certainly think office spaces are going to become (more) technically savvy, where we can accommodate people who work one or two days a week remotely and environments that have large screens, interactive white boards, areas employees can white board and collaborate with people in person or remotely,” she said.

“Places will steer themselves to become collaborative spaces and that’s one of the things we don’t have by working from home. We have technological tools to use that abet collaboration and creativity, but when we get back to office we’ll want to carry on and ensure we can stay collaborative.”

Insuring a cottage can be costly, but there are ways to lower premiums.

For starters, says LowestRates.ca’s CEO Justin Thouin, installing a backup power generator at the cottage can help owners secure more favourable insurance policies.

“Install a monitor alarm system because it reduces burglary losses, fire, temperature fluctuations like frozen pipes, and this will lower the premium,” Thouin told CREW. “Power outages are common, so install an emergency backup power generator to make sure the alarm system, freezer and pumps keep working in case of a power outage.”

Thouin added that winterized cottages also ensure better policies because insurance companies will be more inclined to believe the owners will visit year-round rather infrequently. Moreover, purchasing cottages as primary residences, as many Ontarians did last year, will qualify the cottage for regular home insurance.

“The more often you live in a place, the less complicated it becomes to insure a place. If you live at a cottage all the time, it’s not viewed as cottage insurance, it’s viewed as home insurance and the usual considerations of home insurance apply,” he said.

However, insurance coverage becomes complicated by the fact that most cottages tend to neither be close to fire hydrants nor fire halls. Insurance companies consequently reckon there’s higher probability of fire ravishing a property.

“If the property is within 300 metres of a fire hydrant, you could cover it for $1 million in fire loss, but if not and the nearest fire hall is more than 13 km away, it can only be covered for $500,000,” said Thouin. “According to Royal LePage, the average waterfront recreational property is worth over $800,000, so $500,000 isn’t enough. It’s important to shop around with different insurance companies because, while 13 km is the magic number for distance from a fire hall, for some companies it can be up to 20 km.”

To qualify for secondary insurance, owners must visit their cottages once every 60 days because a frequently visited property suffers fewer, and less costly, damages.

“You can have someone check the property for you if they report a detailed log with each visit,” said Thouin. “Then it resembles principal coverage.”

Seasonal coverage, on the other hand, is far less extensive and only covers named perils, meaning individual risks like fire, vandalism and damage caused by animals.