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Tuesday, July 18, 2017

Seismic structural shift in the office market isn't coming, its here...

PropertyWeek.com recently posted a very interesting article about a shift in how companies want to use office space and the impact that may have on the asset class.

I believe this article is spot on from what we’re seeing in the marketplace. However, the Seismic shift isn’t about to happen… it’s happening as I post this blog.

The phenomenon that’s occurring is that more and more large corporations want short lease terms (less than 5 years) to provide themselves flexibility in an ever changing business environment. In the past, the cultural need for private dedicated offices for employees required sizable investment in tenant finish by landlords which in turn created the need for a long lease term in order for the landlord to amortize that cost. That culture has changed due to constantly improving technology which allows people to work anywhere anytime. Consequently, employees are willing to give up their private office in exchange for improved lifestyles with less commute times and improved family time, or “me time”.

That’s a big cultural shift, and corporations are willing to accommodate their employees if it also improves their bottom-line; and, that has been happening by corporations being able to use significantly less square footage per employee. Now big companies are also seeing value in short lease terms because they potentially rid themselves of the huge cost of carrying unused space.

Companies like LiquidSpace, WeWork and TechSpace have arisen overnight in a new real estate service line to satisfy corporate America’s rapidly growing desire for flexibility (read the article to learn more).

For smart landlords who work with this new service line, this shift to short lease terms will create opportunity. In addition to the benefits discussed in the article, a bigger benefit will be improved cash flow since landlords won’t have to incur huge tenant finish costs. The tenant’s workplace design will be done with furniture to create private areas, public areas and collaborative areas and the landlord will have to provide a simple open floor plan reducing the need for the high cost of tenant finish which currently eats up the investors’ cash flow.

Special thanks to Amy Erixon, Principal and Managing Director of Avison Young Investments, who tuned me into this article and keeps our company up to date on breaking technological trends. Be sure to read her most recent white paper, Architecture of the Fourth Industrial Revolution: Distributed Networks and Artificial Intelligence – Impacts and Opportunities for the Real Estate Sector.

Thursday, June 22, 2017

Interface Carolinas event provides interesting takeaways

By Beverly Keith (Raleigh, NC)

On June 1, I was pleased to attend and participate in the eighth annual InterFace Carolinas commercial real estate event produced by France Media.

The event attracted more than 250 participants, who listened to six panels of exceptionally informed commercial real estate experts discuss the state of the market across North Carolina and South Carolina.   Mark Vitner, Managing Director and Senior Economist at Wells Fargo, was the keynote speaker and presented a top-down view of current economic trends in the Carolinas.  A few interesting takeaways included:

  • ·         Employment statistics as reported by the U.S. government can be misleading. The government counts anyone employed for only one hour in the last 30- day period as employed;
  • ·         The significant economic impact of the HB2 law’s enactment and repeal will most likely not be fully realized for another two or three years; and 
  •            Vitner forecasted GDP growth in 2017 at 2.5%, not the 3.5% that the federal government is predicting.

Additional topics covered included the state of the market, capital markets and trends in the office, industrial, retail and multi-family markets.  Not only were the speakers well informed and actively involved in their designated segments, but the networking between panel discussions was exceptional.

On the heels of ICSC ReCon, which was held in May, the retail panel included David Kelly, CIO of Wheeler REIT; Matt Klump, Vice-President of Acquisitions for RCG Ventures; Jimmy Penman, Director of Leasing at Lat Purser & Associates, Drew Gorman SVP, Acquisitions & Development at ECHO Realty, and me.

The retail topic was grocery wars and how the influx of so many new grocers is fragmenting and disrupting business as usual in the Carolinas.  With everyone agreed that Wegman’s entry to the market is a game changer, there was significant discussion on which grocers may grow their market share, establish a foothold or lose market share.  The consensus is that, while the Carolinas continue to add population at an extremely fast clip, the grocer market cannot support so many grocery choices in the market.  Some will win and some will lose, but don’t count out the homegrown favorites of Harris Teeter and Food Lion, each of which has reinforced its brand with significant upgrades and, in some cases, new stores.  Shoppers are finicky; they’ll try the new player just to return to the tried and true.

I’d like to extend a special thank you to France Media’s Associate Publisher Ryan Nixon for his leadership in organizing this exceptional event. And thank you to the North Carolina chapter of CCIM for its diamond sponsorship and Avison Young for its silver sponsorship.


(Beverly Keith is a Senior Vice-President of Retail Services based in Avison Young’s Raleigh office.)

Thursday, June 1, 2017

Understanding the role of demographic data in commercial real estate

By Kieran Smith (Vancouver)

For the first time in its 150-year history, Canada has more seniors aged 65 and over than children under the age of 15.

Federal 2016 census data released in early May shows that seniors now account for a larger piece of the population (16.9%) than children 14 years old and under (16.6%). Meanwhile, younger demographics – especially millennials – are disrupting traditional ways of doing business and engaging in leisure activities.

These developments are not exactly surprising – but they will shape our nation for decades to come.

The question now is: As government policy makers adapt to the changes, how will the commercial real estate community react?

Census data identifies interesting trends

It is hard to predict the future but strategic census and demographic data analysis can be used to enhance the transaction process.

Federal 2016 census data, recently released in May 2017, has identified some interesting trends. Demographics are changing broadly as baby boomers reach retirement age and the younger age cohort decreases in size.

Simply put, Canadians are living longer, becoming increasingly urban and shifting away from the single-family home. Therefore, housing-related issues are receiving considerable public attention.

The federal population and household data released in February 2017 received an extensive amount of media coverage in Vancouver, particularly because the information relates to housing affordability. The coverage tended to focus on areas where populations are shrinking and identifying municipalities with large numbers of unoccupied dwellings – particularly in certain transit-oriented development areas of Metro Vancouver. Whilst these issues are related to residential real estate, there is an associated relationship with commercial real estate.

Recent government policy changes in Vancouver (and BC) have been implemented to assist housing affordability for locals. The lack of affordability and focus on empty dwellings contributed to new tax rules – a 15% foreign buyers tax (2016) and a 1% vacant home tax (introduced this year). Its knock-on effect will play out over the next few years. And although these changes are aimed at residential real estate (the 15% tax doesn’t apply to commercial property), there is uncertainty over what the effect of this tax would be from a commercial perspective, from suggestions that commercial investors will be put off, or that speculators will redirect investments from residential to commercial properties. It’s still too early to draw conclusions.

Data analysis can enhance transaction process

The demographic changes highlighted by the census will influence real estate in the years ahead because long-term planning and policy decisions are based on what the aforementioned types of data show. As such, the use of census and demographic information can enhance the transaction process. First of all, data analysis can provide insight that increases the value proposition. Secondly, the statistics can help validate a broker’s local knowledge.

Getting back to our aging population, governments (local and federal) will have to put increased resources into meeting the needs of an older population. From a commercial real estate perspective, this scenario might result in a greater need for residences, hospitals and care facilities, leisure centres and retail properties that cater to seniors. Personal services and senior-specific businesses are also likely to grow.

Seniors will be less inclined to commute to local services and amenities, preferring instead to reside in higher-density residential areas. This scenario could lead to an increase in senior-specific multi-family residences that cater to empty nesters, who are increasingly downsizing from single-family homes. These changes could affect brokers – and clients – across many sectors, including multi-family, investment, office and retail.

We also need to interpret the census data to know where these changes are happening at the local level. For example, proportionally more investment in services for seniors is likely to be required in BC and Atlantic Canada compared to Alberta, where there is a high discrepancy between the proportion of population aged 65 and older.

Incorporating broader demographic and lifestyle changes

Despite the headlines generated by the census data regarding older Canadians, younger generations have also driven change to our lives and lifestyles. Millennials’ non-traditional attitudes are evident in their preferences to live in central locations versus outlying areas, rent rather than own their homes, and reside near public transit in order to reduce their dependence on automobiles. These recent trends, driven in combination with technology and millennials’ non-traditional attitudes, have begun to influence real estate, both residential and commercial. Increased urbanization, revised lifestyle preferences, the growth of disruptive services such as online retail and Uber are just some ways in which things are changing. Shared office space is gaining ground within the office commercial sector.

Whilst millennial-related stories often generate continued media interest, census data are clearly important when it comes to understanding local market demographics. By using the data wisely, brokers will broaden their market knowledge and, ultimately, clients will remain highly confident throughout the transaction process.

Results of the 2016 Canada Census are being released throughout 2017 and can be accessed at Statistics Canada’s website (http://www12.statcan.gc.ca/census-recensement/index-eng.cfm).


(Kieran Smith is the Director of Geographic Information Systems (GIS) for Avison Young’s Vancouver office, where he assists brokers and clients with data analysis, demographics and mapping requirements related to transactions.)

Monday, May 29, 2017

Why co-working space is increasingly attractive to today’s office tenants

By Carl Condon (Austin, TX)

It’s no secret that co-working is one of today’s hottest trends. To help put the dynamic growth in perspective: Only a handful of executive-suite providers existed in Austin, TX five-plus years ago, whereas today there are more than 20 such businesses in the city leasing out as much as 400,000 square feet (sf) of space.  According to Jason Saltzman, CEO of collaborative workspace provider Alley and guest writer for Entrepreneur magazine, some 70,000 co-working spaces are used globally, and Deskmag – a magazine devoted to co-working – predicts that 1 million people will conduct business out of shared space by 2018.

According to multiple reports, the most common advantages of the co-working phenomenon are: Community, connectedness, collaboration, networking, and peer-to-peer learning. While all of these benefits are true, there are four other business and/or real estate reasons why today’s tenants find co-working environments so attractive.

1. Low capex requirement

Young and/or growth-oriented companies that are focused on building their management teams and initial products may have raised early rounds of funding, but cash remains king. In a tight marketplace like Austin, where attractive traditional lease options are limited, tenants frequently sink significant dollars into such capital expenditures (capex) as design, construction, new furniture, telephone/cabling and so forth. On the other hand, co-working space providers have already invested upfront capital into their locations. While a co-working tenant may cover these costs over the term of a lease, the saving of a large upfront cost allows a younger company to use its capital on the business, whether it be for hiring new employees or building its product.

2. Scalability

Five-plus years ago, the traditional executive-suite model leased out individual enclosed-office spaces. Enclosed-office configurations made sense for both young and mature companies looking to expand their presence in a particular market, but the economics and functionality of the spaces became obsolete once the business grew beyond five or 10 people. Today’s co-working spaces are designed much more effectively, allowing for team rooms and glass walls that bring in natural light within all portions of the space. Such attention to design easily enables companies to scale upwards of 30-50 people within the same building or space, keeping relocation costs to a minimum and productivity high.

3. Flexible lease terms

In a supply-constrained market that includes older and outdated spaces alongside newly constructed product, a tenant is often required to accept a longer lease term – of up to seven years or more – for traditional space. A long-term lease is not always a good fit for a company that does not have a clear vision of where its business will be in two years. Five or seven years can feel like an eternity for technology companies undergoing constant change. However, co-working space providers are more than happy to sign three-to-12-month leases or even go month to month. That’s a significant difference.

4. Proximity to amenities

To attract and retain the best talent today, companies must offer employees more in the way of amenities, such as workout facilities, showers, and restaurants/bars within walking distance of their workplaces. Co-working spaces typically locate close to amenity-rich environments, building upon the importance of community and connectedness.

In the past, these environments mostly attracted early-stage startups and freelancers. Now, even large corporate users are getting the message. IBM recently leased an entire 10-story, 86,000-sf building from co-working space provider WeWork in New York to accommodate up to 600 employees. In terms of the space size, this deal represents a landmark co-working lease transaction. But David Fano, WeWork’s chief product officer told The Real Deal New York that major companies have exclusively taken 30 full floors in WeWork buildings. Furthermore, large companies with more than 500 employees account for 20% of WeWork’s membership.

Co-working space is not for everyone. Disadvantages include distractions, noise, potential employee poaching and the lack of a stand-alone company identity and culture. However, the aforementioned benefits are real – and hard for a business to ignore.

It is expected that more and more companies – both small and large – will consider co-working space as a potential option for their businesses.


(Carl Condon is a Principal of Avison Young based in the firm’s Austin, TX office. He specializes in office tenant representation, acting for leading corporations and local organizations alike.)

Wednesday, May 24, 2017

At the forefront of Downtown Toronto’s latest development

By Bill Argeropoulos (Toronto)

In 2012, Avison Young became the first – and only – commercial real estate brokerage firm to relocate its offices to Toronto’s burgeoning Downtown South node.

Since then, from front-row seats, our global headquarters employees have watched an unprecedented period of development unfold.  Of the 10-million-plus square feet of office space that has been delivered in Downtown Toronto since 2009, and continues to be built, nearly half is located south of the railway tracks.

I witnessed the launch of this story’s next chapter on the morning of May 17, when members of Cadillac Fairview (CF) and Ontario Pension Board (OPB) officially broke ground on their latest project, 16 York Street. (Avison Young’s headquarters is located across the street in PwC Tower, part of the Southcore Financial Centre.) With 32 storeys and 879,000 square feet, 16 York will complete the final corner at the intersection of York Street and Bremner Boulevard – culminating the redevelopment of four sites that, only a decade ago, were gravel parking lots.

I’ve seen a few development cycles in my 29 years of following the Toronto commercial real estate market, but nothing like the one that started in Downtown South in 2006 with the announcement of a new tower to be built for Telus by Menkes Developments. Ever since, I have seen an ongoing roster of organizations make the move to Downtown South – including many so-called traditional firms previously housed only in the confines of the Financial Core, such as PwC, CI Investments, RBC, RSA, Marsh & McLennan and, more recently, Sun Life and HOOPP. These organizations are now rubbing shoulders with tech giants such as Amazon, Apple, Cisco Systems and Salesforce, with others expected to follow suit.

The 16 York project demonstrates the faith that the Downtown South market (increasingly referred to as the South Core) has generated among developers. Both CF and OPB elected to commence construction before securing a lead tenant, giving the node a strong vote of confidence.

From our Avison Young headquarters vantage point, we can also watch the construction of Ivanhoé Cambridge and Hines’ massive 2.9-million-square-foot Bay Park Centre development, which is following on the heels of 16 York. Home to CIBC’s new headquarters of up to 1.75 million square feet, Bay Park Centre will straddle the railway tracks, bridging the Financial Core and Downtown South office nodes.

Given all of this activity, only a handful of remaining sites can accommodate future downtown office development, which the market will be watching closely as we work our way through this cycle. Once these sites are fully utilized, the natural progression will be to push development eastward along the waterfront. Stay tuned for further updates and announcements as the ongoing development wave carries us into the next decade.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)


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