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Thursday, April 19, 2018

Steering the Future of Mass Transit

By Rand Stephens (Houston)

Mass transit in major metropolitan areas may be reaching a fork in the road. Over the last few years, ridership has declined in both rail and bus services across the country. Factors such as lower gas prices, increased telecommuting, rising car ownership, and of course, Uber and Lyft have all contributed to this national trend. Commuter cities, including Houston, are now faced with either continuing to invest in their current transportation infrastructure, or, preparing for a variety of scenarios and outcomes that include fast-approaching technology such as autonomous buses and driverless ridesharing vehicles. 

Although Amazon has not publicly stated why they dismissed Houston for their second headquarters, its dismissal has spurred an internal reflection of what this great city has to offer and what can be improved upon. Lack of digital talent and relative lack of public transportation are two factors that many believe kept Houston off the shortlist. ­Our last blog addressed the first claim. This month, public transportation is our focus.

Rapidly-changing transportation technology is headed towards a disruption in the transportation industry that can translate into huge opportunities down the road. Arizona’s relaxed driving laws has put them at the forefront of driverless testing with companies such as Google’s Waymo and Intel’s Mobileye. Keolis, a transportation company, has already begun public transit service on open roads in Nevada, and Transdev is launching operations of their autonomous shuttles on open roads this year. The advancements are happening fast and furious. How will public transportation agencies respond?

Investing in traditional modes of public transportation and infrastructure is pointless when the future of transportation is shifting towards driverless technology. Houston Metro recently spent $2.1 billion dollars on the expansion of the Houston light rail system, including new park-and-ride lots and new buses for “controversial dedicated lanes along Houston’s posh Post Oak Boulevard.” (“Metro drawing up long-term Houston regional transit plan”, Houston Chronicle, Feb. 17, 2017)  The Woodlands Express is also planning to add new routes to accommodate increased population growth and increased job dispersal. Yet, ridership is down for both The Woodlands Express (18.7% decrease from the daily average in 2014) and for the Houston Metro  (7% decline from last year for all mass transit). In fact, nationally, the trend is the same, with 31 of 35 major metropolitan areas in the U.S. reporting a drop in public transportation ridership. (“Falling transit ridership poses an ‘emergency’ for cities, experts fear”, Washington Post, March 24, 2018)  Alternative forms of mobility are undoubtedly a factor, and mass transit systems should embrace the innovations and get onboard the transportation revolution.
   To remain relevant, transit agencies must have a vision for the future, including the role that driverless technology will play.”   - Lauren Isaac, Director of Business Initiatives for the North American Operation of EasyMile
When you’re the fourth largest city in the country, with a population of 2.4 million, you’re going to have traffic issues. However, Houston’s freeways overall are very well-designed with multiple lanes that are spacious and have lots of access roads for convenient turnarounds. This makes it perfectly positioned to support a system of ACES (Autonomous, Connected, Electric and Shared) vehicles. The technology for them to communicate with each other is already here. (“Self-Driving Taxis, Electric Trucks Arrive in 2019”, Houston Chronicle, Nov. 21, 2017)  The fact that Houston does not have a heavily equipped mass transit network may turn out to be a blessing. It is an opportunity for transit agencies to keep their eye on the road and work toward producing pilot programs and plans that re-imagine public transportation. The traditional public transit business model has already been disrupted. It seems senseless to continue investing in what will soon-be an outdated infrastructure…even if it means we lose an Amazon HQ2 in the process. 

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

Tuesday, March 20, 2018

Stay Innovative Houston

By Rand Stephens (Houston)

Innovation has always been a part of the American spirit and the driving force of the U.S. economy. From the lightbulb to the Internet, from the Model-T to the autonomous vehicle, and from the telephone to the cellphone – we are a nation of continuous technological advancements. Technology comes in many forms and it is booming right here - in Houston, Texas.

Houston is a cutting-edge city where science, academia and industry can collaborate to take the next giant, innovative leap. Yet, many are still lamenting over Amazon passing over Houston for their HQ2 and blaming it on a shortage of digital tech talent. In fact, Houston has an abundance of tech talent that is being absorbed by the energy, healthcare and aerospace industries.  Perhaps that kind of competition for tech-savvy professionals is too much for Amazon.  

Recently, Greater Houston Partnership President and CEO Bob Harvey indicated that Houston’s lack of digital talent may be why it didn’t make Amazon’s short list for HQ2.  “While we are the number one market in the country for STEM (Science, Technology, Engineering and Math) talent, we need to bolster our pipeline of digital tech talent that is relevant to tomorrow’s digital economy,” stated HarveyThat statement is half true.  Houston is the STEM hub of the nation. It should focus on staying innovative in the industries that make this the energy capital of the world and the home of the largest medical complex in the world – two of the five major industries that drive the U.S. economy.  Instead of trying to fit a square peg in a round hole, Houston should remain centered around its natural strengths – energy, medicine and aerospace.  It does not need to be the next Silicon Valley. Innovation is essential for the medicine, energy and aerospace sectors to continue to thrive in the future.
“Houston is arguably now the country’s most important emerging city, with the largest job growth of any major metro area. Not only can engineers make money there, unlike in Silicon Valley, they can also afford to buy a house.” -

The energy industry is technology dependent, and it is no surprise that Houston is ranked 5th on the list of Top Ten Cities in the World to be anEngineer by Engineering Opportunities.comIt is the only U.S. city to make the list. Houston is the trailblazer for every element of the oil and gas industry such as exploration, production, transmission, marketing supply and technology. In fact, new energy technologies such as horizontal drilling, hydraulic fracturing and deep water offshore technology originated here or are based here.

The Texas Medical Center (TMC) is at the forefront of advances in health sciences with 5,700 of the world’s top medical researchers in the areas of genomics, clinical research, regenerative medicine, immuno-therapeutics and health I.T.  It is home to both the largest children’s hospital and the largest cancer hospital in the world.  There are so many medical advancements and breakthroughs to come out of the TMC such as performing one of the first heart transplants to developing the MasSpec Pen, a device that allows surgeons to analyze tissue while it’s still in the body and to be more precise about what to preserve during cancer surgery
Approximately 658 acres available for development in Ellington Airport.
Best uses:  Office - Aviation - Institutional - Industrial
Houston is also an aerospace mecca that attracts the nation’s top high-tech professionals for space technology and aviation industries.  It is home to the Lyndon B. Johnson Space Center, the center for human spaceflight training, research and flight control for the U.S. and NASA’s largest research and development facility.  Down the road is Ellington Field, a multi-purpose commercial and general aviation facility and a joint reserve military base to all five of the military branches, as well as the Texas Air National Guard.  In 2015, the Federal Aviation Administration awarded the Houston Airport System a launch site license, making Ellington Airport the 10th commercial spaceport in the country that can be a potential launch and landing site for suborbital, reusable launch vehicles. 
Leaders from the medical and energy industries have been in discussions to launch a data science institute to develop groundbreaking research and keep Houston competitive in the tech world.  Brilliant idea!  Houston has top-tier universities and medical schools including Rice University, University of Houston, Texas A & M University, Baylor College of Medicine and University of Texas Medical Branch that produce the best and the brightest STEM workforce in the country.  Tying academic partnerships with the energy and the health sciences industries to establish a data science center will keep Houston as the STEM hub for decades to come.  Yet, early last year, a plan by the UT System to do just that was shut down. (“Texas Medical Center, Houston’s energy industry in talks on data science collaboration”)  The proposed location for the data center would have been on 300 acres south of downtown.  However, William McKeon, president and CEO of the Texas Medical Center is now teaming up with Jeff Shellebarger, President of Chevron’s North American exploration and production, to put the consortium in a neutral location, since the proposed UT system was met with much criticism. (“Texas Medical Center, Houston energy cos. considering data science consortium)  If this collaboration of academia and industries does result in a data science center that makes Houston the intellectual epicenter, the economic outlook for the fourth largest city in the nation will continue to be strong and the opportunities for commercial real estate will be promising, as well.

People from all over the world relocate here to take advantage of the abundant opportunities that this diverse city offers.  But, even the most robust industries can have threats.  Staying innovative in energy, health sciences and aerospace is essential for Houston to continue to be the leader of the major drivers of the U.S. economy.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

Sunday, March 11, 2018

Avison Young achieves Platinum status with Canada’s Best Managed Companies program, recognized for overall business performance and sustained growth

By Mark E. Rose (Toronto)

After competing against some of the nation’s top firms in all business sectors, we are thrilled to announce that Avison Young has achieved Platinum status with the Canada’s Best Managed Companies program by retaining our Best Managed designation for seven consecutive years.

The past seven years have been a period of tremendous growth for Avison Young. Throughout it all, our employees in Canada, the U.S., Mexico and Europe have set new standards for leadership, innovation and execution while giving back to the communities in which we operate.

This award also gives us third-party confirmation that our values, our unique Principal-led ownership structure, our collaborative culture, and our client-centric approach are making a difference in the commercial real estate industry. We thank Deloitte and the other award administrators for recognizing us as one of Canada’s Best Managed Companies for the seventh consecutive year, and we salute all new and repeat winners.

Sponsored by Deloitte, CIBC, Canadian Business, Smith School of Business, TMX Group and MacKay CEO Forums, the Best Managed program recognizes Canadian-owned and managed companies for demonstrating strategy, capability and commitment to achieve sustainable growth.

We are truly honoured to be recognized as a 2018 winner of this prestigious business award, and we celebrate the achievement with our clients, partners and employees around the globe.

Mark Rose is Chair and CEO of Avison Young

Tuesday, March 6, 2018

Calgary retail real estate investment market remains resilient

By Kevin Morgans (Calgary)

In 2017, we witnessed another year of continued strength in the Calgary retail real estate investment market. 

Despite headlines throughout the year that cast a concerning shadow over the fundamentals of Canada’s retail market, a closer look at Calgary retail sales transaction data and, more particularly capitalization rates (cap rates), reveals quite a different story.

Even as bond yields rose through the course of 2017, most notably between June and September, cap rates for retail properties continued to compress. Whereas in mid-year 2016 cap rates were in the sub-6% range, cap rate guidance for pricing of those retail assets today would likely be 75 basis points (bps) lower. In several cases, cap rates compressed, moving in the opposite direction of bond yields, which would typically move somewhat in parallel with one another, given the bond yield’s role as a primary determinant for borrowing rates for commercial debt.

Demand for retail in Calgary and surrounding submarkets has largely been driven by local private investors in recent years, with a few notable exceptions that reveal an emerging trend of investors entering our market from Vancouver and Toronto. These two major markets have seen property demand and values escalate to ranges that, only a few years ago, would have been unthinkable. Today, Vancouver and Toronto rank as two of the most rapid price-growth investment markets in North America, over the last two to three years.

The result of the extremely competitive bidding environment to acquire investment properties in these markets has led several investors, ranging from institutions to private individuals, to reconsider Canada’s alternative major investment markets. Although many investors were hesitant on Calgary in particular and Alberta in general after the global oil-price collapse began in 2014, the hyper-competitive environments in Vancouver and Toronto are leaving few other options. Calgary has offered, and continues to offer, a substantial yield premium in comparison to these two larger markets.

In 2018, with several REITs looking to reduce exposure to retail in an effort to re-balance the property-type weightings of their portfolio, we anticipate that private investors and private equity funds will find opportunity through acquisition of recycled REIT assets. The continued stability of Calgary’s retail market, evidenced by vacancy rates remaining low and lease rates continuing to grow, show the market’s resilience against macroeconomic fluctuations. The signals of progress in Calgary’s early economic recovery include Alberta’s and Calgary’s positive GDP growth forecast, rising employment, which is now above pre-downturn levels, and country-leading retail spending data.

Looking forward, we anticipate that rising interest rates may cause a mild rise in investment cap rates, although rising demand for investment properties coupled with demand from outside investors will likely temper escalation in yields.

(Kevin Morgans is a Principal specializing in Investment Properties in Avison Young’s Calgary office.)

Wednesday, February 28, 2018

Edmonton downtown office market undergoes unprecedented transformation

By Corey Gay and Antoni Randhawa (Edmonton)

Edmonton’s downtown financial district is in the midst of an unprecedented development period that is reshaping the office market.

The transformation is being driven by the introduction of 1.8 million square feet (msf) of class AAA office space over a three-year period between 2016 and 2018. The phased integration of three towers – Enbridge Centre, Edmonton Tower and Stantec Tower – has prompted a flight-to-quality scenario with tenants vacating primarily class A space to take advantage of the new developments. The increase in office inventory partly contributed to the increase in vacancy to 15.3% from 12.9% in downtown districts between Dec 31, 2016 and Dec 31, 2017. Compounding the effect was the recessionary period felt throughout the Alberta economy in the wake of the 2014 oil-price decline. In general, the city-wide trend saw vacancy levels consistently increase throughout 2016 and the first half of 2017. The most recent two quarters are showing signs of stability after many of the city’s submarkets experienced modest positive absorption.

There were a handful of transactions in the Edmonton central business district in 2017 – most notably, the sale of 9Triple8 Jasper and HSBC Bank Place. Both buildings are the same age and within two blocks of each other. However, on a per-square-foot basis, they sold for dramatically different prices. The 9Triple8 Jasper property sold for $342 per square foot (psf). HSBC Bank Place sold for $108 psf.

This price difference has prompted the question: What is the market value for an office building in downtown Edmonton?

The 9Triple8 Jasper tower was completely redeveloped, starting in 2015 to a LEED Gold standard. The total renovation cost was $22 million ($124 psf). The building was 9.1% vacant at the time of sale.

On the other hand, HSBC Bank Place was 58% vacant when it was sold. In order to get HSBC Bank Place to the same occupancy level as 9Triple8 Jasper, a costly and time-consuming re-leasing and renovation program will be required. This investment would likely make up a large portion of the $234-psf spread in sale price.

So, to answer the question… well, the market value of a downtown Edmonton office building depends on a number of variables and, therefore, requires answers to more questions – namely, what is the current occupancy in the building? When was it last renovated? How extensive were the renovations? Is it a LEED-certified building?

Going forward, we expect to see a wide range of prices, as landlords who have reinvested in their buildings will be rewarded through higher rental rates, higher occupancy levels and strong prices. Landlords who have not made these reinvestments and kept up with their peers will be faced with compounding challenges of lower rental rates, lower occupancy levels and difficult decisions about their assets. To that end, in the last few months both Centre West ($55 psf) and the former Enbridge Tower (approximately $100 psf) have been sold to purchasers who intend to convert these assets to non-office uses.

(Corey Gay and Antoni Randhawa are members of Avison Young’s capital markets group based in Edmonton. Gay is a Principal of Avison Young and office, industrial and retail property investment sales specialist. Randhawa is an analyst/sales assistant who complements Gay’s advisory services.)

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