April 22, 2009

Economic downturn could be right time for brownfield remediation, industry insiders say

SAUL CHERNOS

correspondent

There’s no question the economy is in rough shape.

However, some brownfield industry insiders say the time may be ripe for launching successful remediation projects.

“If you have the money there are going to be good deals,” Andrew Himel, managing partner with the Kilmer Brownfield Equity Fund, advised at the recent Canadian Brownfield Urban and Industrial Land Development conference (CanBUILD) in Toronto.

“During the boom times, people sitting on lousy sites had very high price expectations and it was hard to move them,” Himel said.

“We’re sensing a different attitude in the marketplace, now, particularly among corporations. They’re trying to free up more cash because that will help them get more credit.”

Himel said remediation projects often take two to four years to complete, which allows some time for the economy to recover.

“A typical project takes two to four years to bring on the market. The marketplace may bounce back by then.”

Opportunistic investors should be able to find worthwhile properties but will likely need some cash in hand to convince lenders that deals can be closed, Himel said.

“Some banks will probably lend on brownfield projects, but I don’t think they’ll lend during the remediation phase — it’s too risky and isn’t a big enough business for them to hire the types of people they would need.”

Kilmer, a private equity investment fund, acquires and redevelops brownfield sites, typically in the $5 million to $15 million range. “We buy them, clean them up, bring them to a record of site condition, and then we sell them,” Himel explained. “We don’t do vertical development on our sites.”

Angus Ross, a consultant on environmental and reinsurance issues and a member of the Canadian Brownfields Network’s executive committee, agrees that brownfield redevelopers who are solvent and are either well financed or have access to outside financing stand to benefit once property values recover.

“We’re looking at much more realistic assessments of the true value of land right now,” he told Daily Commercial News. “With the real estate bubble, and the values going up, it didn’t matter if your land was contaminated and was going to cost a million dollars to clean up.”

However, Ross said developers who already have financing in place are the ones who stand to benefit. “Because of liquidity issues it’s going to be difficult to raise the money necessary to take advantage of these potential good deals.”

Fred Serrafero, vice-president of development and construction with Fram Building Group in Mississauga, said that low-rise sales have decreased since the start of 2008 and the condo market appears stalled, yet he expects ongoing planning and development needs will help push brownfield development forward, particularly in urban areas.

“Whether we’re in a recession or not, over the course of time there will be more intensification both in the large centres and to a certain extent in the medium-size towns. The trickle-down effect starts in the big cities like Ottawa and Toronto and then you see it in medium-size centres. Kitchener-Waterloo is experiencing a rebirth, and we’re seeing it in Barrie.”

Serrafero added, however, that new Ontario environment ministry brownfield regulations, currently being drafted, could hamper private-sector remediation. “If you make the regulations stricter ... it does create an impact on brownfields redevelopment.”

Tom Smith, vice-president of development with Smart!Centres, a national retail developer based in Vaughan, anticipates a slowdown, even with brownfields.

“It will parallel the level of activity within the overall economy,” Smith said. “Now that the market has backed off, there’s less demand and competition for sites in general, so there will perhaps be a tendency not to deal with the more difficult sites if you have a choice.”

An exception, he added, might occur in highly-concentrated markets where brownfield sites might be the only land available.

“If you’re going into built-up areas and there’s an opportunity to reuse a site that was a previous industrial use with some contamination, and that’s your only choice, and that’s the market you want to be in because you have tenants who want to be there, then that project could go ahead.”

Kevin Shipley, a partner with XCG Consultants in Kingston Ontario, said he’s seen some drop-off in the active pursuit of brownfield projects.

“People are somewhat nervous about the economic situation,” Shipley said. “Brownfield sites have the added complication of contamination and the unknowns associated with that. It’s just one more obstacle when real estate is already slow.”

Shipley says he knows of some developers who have access to private investment capital, and some of them have been waiting for lower property prices and are now buying properties.

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