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Monday, October 16, 2017

Expo 2017: Thoughts from a regular attendee

By Robin White (Toronto)

I attended Expo Real again this year in Munich (October 4-6). It is a regular stop on my travel calendar, and in my opinion one of the better venues for transacting business.

For those who have not been there, picture a cluster of major aircraft hangars on the periphery of town, all populated with exhibitor booths of varying shapes and sizes. Exhibitors range from cities (i.e. municipal governments) to investment and asset managers to brokerages to banks to professional associations to a variety of service providers, all competing for the attention of a hoard of attendees --  reportedly more than 41,500 this year. A sea of dark suits clambering over each other in an effort to be on time for half-hour meetings that have been set up in the various booths within the complex. Sometimes if the weather is good, as it was this year, meetings can be rescheduled outside, where seats have been set up in a courtyard setting.

In typical German fashion, the discussions are extremely efficient. A half hour does not allow for much small talk. After initial pleasantries, it time to get down to business. Introductions dispensed with, it is time to see if there are opportunities that might fit, services that can be provided, or further meetings that need to be set up. It is fascinating what can come out of such meetings when everyone knows there is only a limited time frame for discussions.

After a full day meeting with dozens of contacts, and bumping into several others on the way to such meetings, it is time to chill at the Munich or Düsseldorf stand and savour some excellent German beer while reviewing some of the takeaways from each meeting. It is a terrific setting to build networks that may grow into meaningful relationships. 

And the overall summation of this year's expo? Very positive feedback from European investors with respect to the future of European real estate, especially in Germany. Not quite so bullish on North America. Lots of discussion on whether there will be housing corrections in Toronto and Vancouver. Are interest rates heading up? Will there be any capital growth in commercial real estate in Canada next year? Hedging costs are a significant dent in investor returns, especially in the U.S. 

Having said all of this, major investors will continue to seek out investment opportunities in North America as part of their overall global allocation to real estate. But they are likely going to be more wary, especially given the global geopolitical environment that we currently face.

Major investors will require up-to-the minute advice when it comes to seeking out suitable opportunities, and the best advice is provided face to face. Expo allows this interaction to happen in the most efficient manner, and as such will continue to be on my calendar. I am already planning for next year!

(Robin White is Chair of Avison Young’s capital markets group and a founding Principal of the firm. During his career, which began in 1977, he has co-ordinated the sale of more than $5 billion worth of commercial real estate and completed several significant lease transactions, including several high-profile office buildings and industrial properties.) 

Toronto’s red-hot downtown market reached another milestone with overall availability and vacancy falling to historic lows

by Bill Argeropoulos (Toronto)

The Greater Toronto Area (GTA) office leasing market remained robust throughout the third quarter of 2017 as demand once again outstripped supply, resulting in a continuation of the downward trend in the region’s overall availability and vacancy rates. Heading into the year’s final quarter, a wide gulf in market dynamics (both tenant options and pricing) persists between the landlord-favouring Downtown and Midtown markets and the tenant-favouring suburban markets. Noteworthy during the quarter was Amazon’s search for a North American location for its second headquarters, which captured the attention of the Toronto market. A unified proposal is being prepared, with Amazon’s final decision not expected until sometime in 2018.

All five office districts contributed to the GTA’s positive third-quarter performance as occupied space increased by 827,000 square feet (sf) – with demand evenly distributed between downtown/midtown and the suburbs. As has been the case for much of the year, class A buildings captured the lion’s share of the growth. The GTA’s overall availability rate inched closer to single-digit territory, falling 60 basis points (bps) quarter-over-quarter to 10.4%, and is down 80 bps year-over-year. Already in single digits, GTA vacancy declined 40 bps to a nine-year low of 6.8% and continues to nudge down toward historic lows not seen since the beginning of this century. 

Toronto West accounted for all the GTA’s new supply during the third quarter, comprising three buildings totalling 107,000 sf – bringing the year-to-date GTA-wide tally to 11 buildings and 1.9 million square feet (msf), of which 78% is leased. More than three quarters of the new supply (by office area) has been delivered in the downtown market. To keep pace with demand, construction is confirmed or underway on a further 26 office buildings amounting to 6.7 msf (49% preleased). The under-construction tally is now at its highest level since third-quarter 2008, when 7.1 msf was underway.

Toronto’s red-hot downtown market reached another milestone with overall availability (6.4%) and vacancy (2.7%) falling to historic lows – backed by a solid performance, this time, by class A buildings in the Financial Core and Downtown South. Large-block requirements for immediate occupancy are virtually non-existent, with little (or no) relief in sight for at least 24 to 36 months – keeping upward pressure on rents. Downtown’s robust growth is anchored not only by the traditional FIRE sector, but a growing interest from creative companies in the technology, advertising and media industries, which are attracting a steady diet of venture capital.

On the development front, though not on the scale of Ivanhoé Cambridge and Hines’ CIBC Square (2.9-msf) construction and lease announcement (with CIBC for up to 1.75 msf) last quarter, Allied Properties REIT and Westbank have preleased 100% of the office space (146,000 sf) in their mixed-use development at 19 Duncan St. to Thomson Reuters for its Toronto Technology Centre, scheduled for completion in 2021. In other news, global management consulting firm Boston Consulting Group chose CIBC Square (phase 1 / 81 Bay St.) for its future Canadian headquarters (85,000 sf), while Cadillac Fairview renewed international business law firm Torys LLP (183,000 sf) at its TD Centre complex. Meanwhile, First Gulf began marketing The Shift – a 24-storey, 460,000-sf office tower at 25 Ontario St. – near its recently completed Globe & Mail Centre. 

Demand for shared office and co-working space has spread to Toronto’s Midtown Bloor office node. Having opened its first location in Downtown West and with a deal imminent in the Financial Core, WeWork finalized a 36,300-sf lease at 33 Bloor St. E. Not available until mid-2018, Midtown’s largest block (180,000 sf) remains at 121 Bloor St. E. Nevertheless, Midtown is still tight, with overall availability and vacancy of 6.2% and 3.7%, respectively.

The suburban market contributed to the GTA’s positive third-quarter performance, with decent occupancy gains in each of Toronto North, East and West – sufficient to lower overall suburban availability and vacancy to 14.5% and 10.9%, respectively. While losing tenants to downtown is an ongoing concern for some landlords, the suburbs continue to secure their share of the GTA’s leasing activity. In Toronto North’s North Yonge node, CIBC renewed 141,000 sf at 5650 Yonge St., while Minto Group inked a 40,000-sf deal to relocate from 90 Sheppard Ave. E. to 4101 Yonge St. In Toronto East, Sony Canada finalized a deal for 40,300 sf at 2235 Sheppard Ave. E. in the Consumers Road node, vacating 145,000 sf at 111 Gordon Baker Rd. in the Highway 404 & Steeles node. In Toronto West’s Airport East node, Aecon Group explored the market but renewed at 20 Carlson Ct. (97,000 sf). These transactions and others are a testament to major users’ appetite for well-located and affordable suburban office product in the GTA.  

These are some of the key trends noted in Avison Young releases Third-Quarter 2017 Greater Toronto Area Office Market Report

(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.)

Sunday, October 1, 2017

Healthy economy and property fundamentals buoy Investment activity in Canada

by Bill Argeropoulos (Toronto)

Investment in the Canadian commercial real estate sector is buoyed by a relatively healthy economy that is the envy of the G7 countries and a commercial property market that continues to see varying, but largely healthy, fundamentals across the country’s regions and asset classes.

With record amounts of capital still seeking a home, investors continue to find ways to buy into Canada’s finite investable commercial real estate sector. Capital from domestic and foreign investors continues to be largely directed towards Vancouver and Toronto, while the other major markets are also seeing their share of activity.

On the vendor side, capital recycling continues in order to reduce debt, upgrade asset quality and diversify investments geographically. Surplus capital that can’t be placed domestically often finds its way south of the border, as Canada has retaken its place as the primary source of foreign investment in U.S. commercial real estate. Canadian institutional buyers, such as Ivanhoé Cambridge, Oxford Properties and the Canada Pension Plan Investment Board – on their own or in joint-ventures – were active during the first half of 2017 across major U.S. markets, including Chicago, Los Angeles, New York, San Francisco and Washington, DC, with office properties being the most notable assets purchased.

Domestically, among the top-ranked transactions by dollar volume in Canada’s six major markets, office assets were the most numerous, followed by retail and multi-family. Office transactions ranked among the top five in all markets except Edmonton, comprising a combination of partial-interest, single-asset and portfolio sales.

Notable First-Half 2017 Canadian Investment Market Highlights:

  •  Following a record $28.4 billion in commercial real estate investment sales in 2016, Canada’s six major markets had first-half 2017 sales of almost $19 billion – up $4.3 billion, or 29%, compared with the first half of 2016. Investors coveted office and retail assets, which combined for more than $10 billion in trades, or 55% of the first-half investment tally. 
  • Vancouver ($7.8 billion/41% share) outpaced Toronto ($6.5 billion/34% share) with investment proceeds surging 75% year-over-year as vendors sought to capitalize on strong demand and peak pricing. With the exception of Ottawa (which saw investment activity plunge 57%), the remaining markets – Calgary, Edmonton and Montreal – all recorded increases year-over-year, and each exceeded the $1-billion mark. 
  • Supported by notable $200-million-plus transactions, office was once again the top investment sector with $5.3 billion in sales – an increase of 16% year-over-year – and captured 28% of total dollar volume. Toronto and Vancouver made up almost three-quarters of the national office total as investors poured nearly $2 billion into each market, mirroring the results registered one year earlier. 
  • Disrupted by e-commerce, the retail sector was a close second with $5.1 billion in transactions (27% share) as first-half investment more than doubled year-over-year. This result was bolstered by tremendous interest in Vancouver, which saw its country-leading retail investment total nearly quadruple year-over-year to $3.1 billion. Toronto was a distant second, with $1.3 billion in volume. 
  • First-half investment in industrial product came in at $3.3 billion (17% share) nationwide – up 35% year-over-year. All markets recorded growth in transaction volume with the greatest sales total in Toronto ($1.7 billion/53% of the national total). Accelerating industrial market drivers continue to be tenants’ demands for modern, high-ceiling logistics and fulfilment centres, and for facilities close to major urban centres for last-mile delivery service. 
  • The multi-family sector was not far behind with $3.2 billion in first-half transactions (17% share). Perhaps the most restrained markets by scarcity of available product, Ottawa and Toronto registered declines compared with first-half 2016; meanwhile, sales in Vancouver increased 146% to more than $1.5 billion, leading the country. 
  • Finally, the least-traded asset class was ICI Land as $2.1 billion worth of properties changed hands during the first half of 2017. Year-over-year, this was the only sector to record a decline in sales (-11%) as dollar volume decreased in all markets with the exception of Montreal. 
  • Average capitalization (cap) rates were marginally lower across all markets and all five asset types (with the exception of suburban class A office, which was flat) compared with one year earlier. Multi-family assets commanded the lowest yields – closely followed by retail – while overall rates showed the greatest compression year-over-year in Vancouver and Toronto. 

Almost three months into the second half of the year, we have already seen more than $3.5 billion change hands in Canada, including the likes of the 1.1-million-square-foot (msf) Constitution Square office complex in Ottawa for $480 million and Dream Office REIT’s estimated $1.4-billion office portfolio sale in Toronto, as well as a half-interest in Scotia Plaza.

 These are some of the key trends noted in Avison Young’s Fall 2017 North America and Europe Commercial Real Estate Investment Review

(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.)

Monday, September 25, 2017

The future of retail

By Nadine Melo (Atlanta)

For the past year and a half, we’ve been inundated with stories detailing the demise of retail.

But their accuracy is open to question.

Several published articles have painted a picture of large retailers going bankrupt and being unable to maintain sales as they scramble to compete with their digital peers. In fact, the latest acquisition of Whole Foods by Amazon – traditional retail’s proverbial grim reaper – has seemingly exacerbated this fear; yet, a myriad of data indicates that bricks-and-mortar retail stores are here to stay.

According to a July IHL report, there has been a total net increase of 4,080 stores in 2017, including traditional retail locations and restaurants. The report is based on a review of more than 1,800 retail chains with more than 50 U.S. stores in 10 retail vertical segments.

Even specialty apparel retailers, the most affected retail segment, will see 1.3 chains opening new stores for every chain closure – and the reason is quite simple.

Although people are choosing to forgo lines at the stores and shop online, the act of shopping is intrinsically a human experience. The idea that the Internet is going to supplant the physical need for space is erroneous, and that's because people want to gain the experience of touching an object before they make a purchase.

E-Commerce companies, for example, are looking for bricks-and-mortar space not to open a full-fledged department store, but to provide customers with a showroom experience. In other words, customers can come to a store, test preferred items, order said items at the retail location and then have them shipped to their homes. National bricks-and-mortar retailers like Nordstrom, Best Buy and Target have followed suit with similar strategies to remain competitive.

Most, if not all, retailers are using the Internet to diversify their marketing initiatives by opting to use omnichannel strategies. This diversification enables the savvy retailer to think beyond simple product placement and focus on consumer behavior. For example, Best Buy has taken a note out of Amazon’s book and has brought back the “traveling salesman,” in which a salesperson comes to your house and has you try out new products from the comfort of your home. The change in tactic helped Best Buy increase its domestic sales 4.9% in the second quarter of 2017 according to Chain Store Age.

Additionally, a large amount of industrial property absorption is occurring across the U.S. and globally as retailers look for industrial space where they can store products and fulfill online orders for delivery within 24 hours. In Atlanta alone, according to Biznow, about 13 million square feet (msf) of warehouse space has been leased by tenants like Tory Burch, Variety Wholesaler, and Duracell and another 10 msf of big-box warehouse space is currently under construction.

This is not the first time that the face of retail has changed. In the past, it was Sears who initially changed the game with the introduction of the catalogue, leading to the opening of the first department store. Then Walmart came along with its low and discounted prices, and today it's Amazon causing disruption. Amazon has impacted retailers by forcing them to abandon traditional modes of production, distribution and advertising to reach customers.

Therefore, what we are seeing is not the death of retail real estate – but, rather, its evolution.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her Atlanta office’s capital markets group.)  

Sunday, September 10, 2017

Strong demand lifts Calgary retail property values

By Kevin Morgans, Walsh Mannas and Ryan Swelin (Calgary)

Demand in Calgary’s retail real estate investment market continues to strengthen even as values approach all-time highs, capitalization rates compress and lease rates and occupancy levels remain strong.

Through large institutional-quality asset sales and small private-to-private transactions, Avison Young has been one of the most active groups in brokering retail asset transactions in the Calgary market.  This activity has kept us at the forefront of this trend line and allowed us to track the investment metrics changing quarter-over-quarter and almost week-over-week. The strong demand has led to multiple-bid scenarios, putting more upward pressure on property values as groups compete to control assets.  We have also seen interest come in from investors in Vancouver and Toronto as they pursue risk-adjusted returns not available to them in their home markets.

Since major enclosed malls and regional power centres rarely come to market, investors’ focus has been on strip centres along main thoroughfares and mature neighbourhood centres. The centres that have traded recently are all well-performing assets with multiple opportunities to increase returns through such value-add strategies as façade renovations, pad development, re-tenanting, long-term site redevelopment and/or densification.

One key factor in the upswing has been a consistent, record-breaking rise in Alberta’s monthly retail sales. As indicated in the graph below, sales have broken the previous record of $6.72 billion set in October 2014 every month this year (as of June 30) since March, with June sales reaching $7.15 billion. 

This is not to say that there is not pain being felt in Calgary’s retail market.  Downtown retail correlates directly to the strength of our office market, which still sits with a vacancy level at heights not seen in decades.  Restaurants and bars that once catered to the downtown crowd have been the most obvious casualties with a number of new entrants and landmarks closing their doors this year.

We predict that the remainder of 2017 will see retail real estate investors continue to chase well- positioned assets with more opportunistic buyers taking a serious look at downtown and inner-city opportunities to really try and add some value.

Kevin Morgans, Walsh Mannas and Ryan Swelin are Vice-Presidents in Avison Young‘s Calgary office and co-lead the capital markets group in Calgary.

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