In May, the Thiel family, which owns much of the financial district and who are embarking on an ambitious development project called 22nd Commerce Square, asked the courts to review the province’s issuance of an unprecedented exemption to Nova Centre developer Joe Ramia; the exemption allows Ramia to bypass normal city development approval processes. In June, the Heritage Trust of Nova Scotia filed a similar request with the court.
Interestingly, Ramia has not responded to the Thiel suit. But two weeks ago, through his development company, Argyle Developments, he sued the directors of Heritage Trust. The suit claims that Heritage Trust has acted “”in an unlawful manner” for daring to oppose Nova Centre.
Why sue Heritage Trust but not the Thiel family? Ramia hasn’t said. Certainly the Thiels, who have more money than god, are better positioned for a protracted legal battle than are the directors of Heritage Trust, who are mostly pensioners and working people. As Parker Donham comments, Ramia comes off looking like a bully.
But Ramia isn’t alone in the fight for his development. Last week, supporters of the Nova Centre development in downtown Halifax took out a full-page in the Chronicle Herald, lambasting Heritage Trust as Public Enemy #1. The ad, which again did not mention the Thiels, was signed by over 300 people and businesses, “a wide array of supporters such as developers, construction and property management companies, advertising agencies, lumber companies, restaurants, and clothing and insurance outlets,” according to the Chronicle Herald, whose owner, publisher, and president also signed the ad.
Saturday, Herald columnist Marilla Stephenson, who has never uttered a word contrary to the collective aims of the Chamber of Commerce and development industry, jumped on the meaningless “be bold” PR campaign now obsessing our mucky mucks, in support of Nova Centre.
These actions—Ramia’s suit against Heritage Trust, the whining full-page ad, Stephenson’s obsequious grovelling—are not the acts of people secure in their convictions and confident of their success. Indeed, they show a collective panic.
To be sure, there’s good reason for them to panic, but it has nothing to do with Heritage Trust. Let’s look at the issue from two perspectives: one macro—the repeated and nearly inevitable failure of “megaprojects”—and one micro—the collapse of the office space market in downtown Halifax.
The repeated failures of mega-projects
I draw your attention to “What You Should Know About Megaprojects and Why: An Overview,” a paper by Bent Flyvbjerg, a Danish economic geographer now working at Oxford University’s Said Business School. A decade ago, Flyvbjerg published an entire book about megaprojects; the “What You Should Know…” paper, published this year in Project Management Journal, reviews his investigations. No matter what your view of Nova Centre, you should give it a read.
There’s not enough space here to follow all of Flyvbjerg’s argument, but a few points stand out:
First, while Flyvbjerg defines a “megaproject” as generally costing more than $1 billion, it’s clear from his text that he would consider the Nova Centre one:
Megaprojects are large-scale, complex ventures that typically cost US$1 bil- lion or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people.1 Hirschman (1995, vii, xi) calls such projects “privileged particles of the development process” and points out that often they are “trait making”; in other words, they are designed to ambitiously change the structure of society, as opposed to smaller and more conventional projects that are “trait taking,” that is, they fit into pre-existing structures and do not attempt to modify these.
What matters isn’t the $1 billion, nor the “millions of people,” but rather that the size of the project exceeds the capacity of the community hosting the project. In way of comparison, California’s high-speed rail project, which Flyvbjerg suggests will probably be a failure, is projected to cost about $2 trillion, or about four or five percent of California’s annual GDP, while the Nova Centre, initially pegged at $500 million (although Ramia’s portion of the cost could grow and we wouldn’t know), or about 15 percent of Nova Scotia’s annual GDP. The California high-speed rail project was the subject of a voter referendum, and has been scrutinized by a thorough analysis in a state full of people with much experience in large projects; the Nova Centre was not subjected to referendum, and has been vetted by, well, Nova Scotians who have a history of failed megaprojects behind them.
Second, Flyvbjerg says megaprojects happen both in private industry, the finance world, government, education, and just about every other human endeavour. While it might seem unfair to compare a convention centre to a transportation (or the other examples Flyvbjerg uses, like fighter jets, dams, ICT systems, etc), the Nova Centre certainly falls within the “transformational” definitions of a megaproject—just ask Nova Centre’s supporters how they think it will transform our province.
Third, megaprojects are attractive to decision makers because of what Flyvbjerg characterizes as “the four sublimes”:
Clearly, the last three explanations all apply to the Nova Centre. Sure, comparing the Nova Centre to the Golden Gate Bridge is quite a stretch, but if you had sat in on one of the public consultations for the place, you’d know it’s not really that outrageous a comparison, at least to Nova Centre supporters calling for an “iconic” building.
Fourth, support for megaprojects becomes a sort of collective delusion, as evidence and indications that the project may have less-than-rosy results are ignored and/or ridiculed.
Fifth, megaprojects almost always fail to meet their promised return:
Success in megaproject management is typically defined as projects being delivered on budget, on time, and with the promised benefits. If, as the evidence indicates, approximately one out of ten megaprojects is on budget, one out of ten is on schedule, and one out of ten delivers the promised ben- efits, then approximately one in one thousand projects is a success, defined as “on target” for all three. Even if the numbers were wrong by a factor of two—so that two, instead of one out of ten projects were on target for cost, schedule, and benefits, respectively— the success rate would still be dismal, now eight in one thousand. This serves to illustrate what may be called the “iron law of megaprojects”: Over budget, over time, over and over again (Flyvbjerg, 2011).4 Best practice is an outlier, average practice a disaster in this interesting and very costly area of management.
Flyvbjerg goes on to address the ethical and social implications of megaprojects, and makes a stab at how to begin addressing the problem, but his point remains: megaprojects fail on their own terms, almost always.
There’s not reason to think the convention centre portion of Nova Centre will do any better, and in fact there’s a lot of reason to believe that it will do even worse, as all predicted delegate counts and economic impacts of the new convention centre are, in a word, fictional.
Still, for all the faults of the convention centre, the province did one thing right: it capped the public expense of construction costs of the convention centre part of Nova Centre at $163.4 million, with everything beyond that price Ramia’s responsibility (albeit those costs are amortized, so the real costs to the public are much higher, and the public costs for operation of the convention centre are potentially unlimited).
So taxpayers are off the hook for construction cost overruns. But what about Ramia? His books are private, so we can’t know for certain, but given the collective panic in the business community, I’m guessing Ramia is facing big cost overruns for construction, and likely the kinds of technical problems Flyvbjerg talks about in his essay, leading to construction delays.
The province gave Ramia a January 1, 2016 deadline for “substantial completion” of the convention centre and adjacent hotel, and Trade Centre Limited has already booked a convention in the new centre for January of 2016. Will Ramia meet his deadline? I’m thinking he’s worried about it, which is why he’s lashing out at Heritage Trust.
But the bigger issue is the office tower component of Nova Centre.
Bubble Bubble Toil and Trouble
That’s the name of an essay recently published by the Economic Intelligence Unit of Turner Drake, a real estate appraisal firm based in Halifax. You can read it in its entirety here. At issue is the commercial rents, and the 20-year cycle of real estate bubbles. “Atlantic Canada is particularly prone to real estate bubbles,” reads the essay:
we have witnessed a steady and unrelenting procession of them during the past four decades. The majority have been created by the provincial governments, often abetted by the Federal government. Some are the result of municipal action. There is an eagerness, urge, compulsion to divert public funds to compete with, or supplant the private sector, driven by the conviction that the latter lacks the “right stuff”. Real estate is ripe for intervention since it provides concrete evidence of “progress”. The mantra “build it and they will come” never grows stale, despite overwhelming evidence of its futility. Few sectors are spared, despite the fact that the damage, as evidenced by misdirected resources, over supply and excess taxes, lingers long after the program has been abandoned: car assembly plants, heavy water facilities, oil refineries, hydroponic greenhouses, hospitality (hotels & motels), industrial properties, call centres, golf courses, steel mills, convention centres, industrial parks, retail parks, fish plants, amusement parks; the list is endless. In a way though, these are side shows. Real estate bubbles initiated by the private sector are so brutal they often provoke country, and sometimes worldwide, recessions.
Turner Drake goes on to explain that the last real estate bubble popped in the 1990s:
…The owners of trophy buildings such as Purdy’s Wharf in Halifax cut their rents dramatically in order to capture whatever weak demand existed, forcing competing buildings to follow suit.
By 1995 industrial real estate in areas outside the major centres was literally worthless: in some cases it had a negative value. Hotels/Motels throughout the Atlantic Region plunged in value, on average by 50%. Industrial properties lost between 25% to 75% (average 44%) of their value if they were located in the Region’s largest park, Dartmouth’s Burnside Park, and between 50% and 80% of their value in other metropolitan areas. The office sector in Halifax’s Central Business District was devastated, losing about 55% of its value.
The paper goes on to give a fairly technical analysis of local rents and capitalization which I won’t go into here, but the conclusion is important:
Each month our Investment Committee investigates and analyses every shopping centre, office, hotel and multi-tenant industrial, transaction in Atlantic Canada…Office property capitalisation rates have been falling since 2004…
As investors moved from the stock market into property they bid up the price of office real estate by accepting lower returns. The price/ft.2 of building area has increase by 37%, on average, over that period: 31% is due to the fall in overall capitalisation rates…The most telling statistic however is the Leveraged Ten Year Internal Rate of Return which measures the anticipated return over the ten years post purchase. That return has been declining since 2006 despite the fact that the cost of debt is at an all time low and has nowhere to go but up.
When the market correction occurs, as it will, triggered in all probability by rising interest rates, the fall in office property values should be about 21% as measured by the adjustment in overall capitalisation rates to their long term equilibrium….All of the foregoing assumes that the Fundamental Market factors such as net rents and vacancy rates remain stable. There is no reason to assume that such will be the case. Lock in your debt long term or cash out.
It’s a long and round-about way of saying it, but Turner Drake is predicting an imminent collapse in office space rental prices in Halifax, and is urging its clients to get out of the market, immediately. Turner Drake’s analysis, by the way, fits nicely with that of two other local prominent real estate analysts who spoke to me earlier this year.
If the collapse comes before Ramia can secure long-term leases for his office tower, the entire project becomes non-viable. In that scenario, either the office tower is never built (which leads to all the property tax projections for the city going by the wayside), or it is built and Ramia’s company ends up bankrupt, with the building in receivership, and we’ll inevitably hear calls for government to bail out the project.
This is the local epitome of what Flyvbjerg wrote about in his essay: a private company’s overreach in building a megaproject. It’ll be interesting, if a little sad, to watch it play out.
No wonder everyone invested in Nova Centre—monetarily, or emotionally—is panicking.