Sunday, May 24, 2015
By Amy Erixon, Toronto
This last February marked 10 years since the Kyoto Protocol came into effect (it was originally signed 18 years ago). The purpose of the treaty is to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”, in other words to do something about those climate change contributors which are under the control of mankind. The treaty launched an effort by the UN to measure the 1990 “baseline” emission levels, by country and put in place a framework for voluntary commitments by member nations to reduction of their greenhouse gas emissions. 165 Nations are signatories, including Mexico and virtually all the rest of the world. The US under George Bush, never ratified the treaty and Canada, under Stephen Harper renounced membership in 2012.
There are signs that the times are changing. A week ago the Conservative led federal government of Canada (still led by Stephen Harper) announced a new goal to reduce emissions from current levels by one-third by 2030, primarily through a plan to put in place new regulations on emissions from the oil and gas sector. This comes on the heels of an announcement earlier in the week that the Province of Ontario intends to cut its emissions 40% by 2030 from 2005 levels, which came a week following the shocking upset of the Conservative majority government in Alberta by an upstart candidate pledging to withdraw the application for the Keystone Pipeline, and address Alberta’s greenhouse gas emissions more aggressively.
Global leaders in this area are light years ahead of the Canadians and Americans. Germany, for example currently averages 27% of its power from renewables and hit a record on May 11 - 75% of the country’s power consumption that day was produced from “green” sources. Germany’s target is 80% emission reduction by 2030 through a combination of renewable power and conservation efforts (all new construction in Germany must be net zero after 2020). It is Brazil that is the world leader in reduction of emissions, having reduced deforestation by 70% over the decade - an impact more than three times greater than taking all the cars in the US off the road for a year. Trees are the earth’s superfood – they use carbon as they grow and sequester CO2 in the ground.
It is harder than it looks.
How governmental authorities “count” carbon is complex and is a matter for debate. For example concrete, one of the most carbon intensive building products to produce has lifetime energy reducing attributes such as heat retention and long term endurance, reducing waste. When applying emission rules to property, many factors need to be taken into consideration: construction techniques in addition to materials; a transportation footprint (how materials were delivered to where they were used); operating metrics (such as heating and cooling) and attributes (how do workers arrive and what do they do in the building); as well as life cycle considerations (useful life, demolition and refurbishments). Direct emissions include fuel combustion by the property and its fleet vehicles and equipment (whether leased or owned). Purchased electricity, heat or steam has a point of origin footprint which varies depending on how the power was produced (green sources or carbon based). Indirect emissions include those produced in manufacturing materials used and consumed during construction and operation, employee commuting, on-site operations of tenants, waste disposal as well as useful life of building components. This is a complex calculus indeed, but it is being done.
Carbon controls are in place in one half of all US States, and most Canadian Provinces, and it looks safe to assume such legislation is quickly becoming mainstream in North America. While the California Cap and Trade initiative appears to be gaining momentum, the 10 state Northeastern Regional Greenhouse Gas Initiative is showing signs of distress. Moderate Republican Governor Chris Christie recently announced New Jersey will be pulling out as the marketplace is administrated unevenly and is not creating enough revenue to support the state’s commitment to the production of green energy. Massachusetts has pulled out for similar reasons. A discussion of the merits of Cap and Trade vs. Carbon Tax was the subject of Part 2 of this series, published in April of this year.
To date only one Canadian Province is on track to achieve Canada’s original 2020 goal: Nova Scotia. Through decommissioning of its coal fired plants in recent years, Ontario has achieved a present level 9% below 1990 levels, roughly on par with New Jersey’s progress using the same initiatives. Other than California, which is on track to product 35% of its energy from renewables by 2020, most westernmost states and Provinces - despite numerous initiatives, still have current emission levels above 1990, largely due to very high population and employment growth.
The real estate community has embraced energy efficiency certification, such as Energy Star, BOMA BESt, GreenGlobes and LEED™ but these initiatives tackle the component parts with different methodologies and scoring, and collectively have not done enough to meet 2020 targets. Efforts are underway to develop a tenant certification program, and the likely next steps may include certification of construction methodologies as well. Avison Young made the decision last year to become a GRESB reporter, recognizing the comprehensive roadmap this protocol offers for both energy and greenhouse gas reporting as well as numerous other aspects of corporate social responsibility and governance. After 30 years of regulation and innovation in transportation and power industries great improvements in those industries’ emissions have been achieved. We think it’s time that buildings contribute their share.
Monday, May 11, 2015
By Mark E. Rose (Toronto)
I recently delivered Avison Young’s Q2 2015 audiocast message, discussing commercial real estate trends in Canada, the U.S., U.K. and Germany http://www.avisonyoung.com/media-room/ceo-video-audiocasts . A couple of days ago, I shared with you some of the Canadian trends. Today, I would like to share some of the U.S., U.K. and German market findings.
Starting with the U.S....
As a preview to Avison Young’s Spring 2015 Canada, U.S. and U.K. Industrial Market Report, to be released this week, the 9.2-billion-square-foot (bsf) U.S. industrial sector demonstrated strength in all of our firm’s major markets year-over-year. In spite of a sharp uptick in development, rents are rising and demand for class A product has been broad based. As a result, several markets report a return to landlord-friendly conditions, or nearly so.
Specific report highlights include the following:
· Atlanta has 17 million square feet (msf) under construction, half of which is being built speculatively.
· Detroit’s industrial market continues to improve, and vacancy dropped to the single digits, falling by 170 basis points (bps) year-over-year to 8.4%.
· Industrial powerhouse Los Angeles reported a sub-4% vacancy rate – its lowest level in over a decade – and has 18 msf under construction.
· The 10.5-bsf U.S. office market reports similar improvement, with overall vacancy falling below 11%, compared with 11.5% one year ago.
U.S. development on the rise
Although 2015 overall U.S. commercial real estate development remains well below historical averages, it rose sharply in the past year. As of first-quarter 2015, there was 116 msf of office inventory under construction. Given the strength of the growing U.S. economy and the level of preleasing in projects under construction, we expect a nominal impact on the vacancy rate from the expanded development pipeline.
U.S. investment sales off to strong start
Investment sales in the U.S. are off to a strong start in 2015. Through February, total volume exceeded $88.4 billion and was on pace to surpass the 2014 figure. Office sales alone accounted for 25% of the two-month total. Foreign investor interest in U.S. real estate continues, with cross-border sales year-to-date accounting for more than $26 billion. Thus far, Singapore has invested $8 billion, leading all other countries by far. Canada is second with $4 billion; however, Canada leads acquisitions of office properties year-to-date.
U.K. recovery puts pressure on London properties
Now, let’s take a look at the U.K. market, where Avison Young has offices in London and Thames Valley.
The U.K. economic recovery continues, but it is placing new pressures on property markets – especially in London and England’s South East, where the issue now is about managing growth effectively. This trend is clearly demonstrated by press headlines about rental growth and new rental “highs” across the region.
In the Central London office market, the West End is now the most expensive location in the world. In its St. James submarket, a series of deals are expected to cement the £150 per square foot (psf) yearly rental rate as the new benchmark rent, although small suites have hit as high as £185 psf. The previous record rent was £140 psf, set in 2007.
We are also seeing the revival of Regent Street shopping, which has attracted affordable luxury brands due to the availability of large units. The next phase of this trend will be the move of key international retailers south of Piccadilly and into Lower Regent Street.
Motorway location carries premium
For industrial occupiers, being inside the M25 orbital motorway carries a premium, with grade A property securing monthly rents up to £13.75 psf (Park Royal) and Heathrow hitting £13 psf for the first time at the end of 2014. In our opinion, rents will increase by a further £0.25 psf over the next 12 to 18 months.
In the U.K. investment market, where much rides on confidence, many overseas buyers may take a wait-and-see approach. Like it or not, we live in interesting times.
German debt market highly liquid
To wrap up, here are a few key takeaways from Germany, where Avison Young now has offices in Frankfurt, Munich and Duesseldorf.
The German economy is strong, with record low unemployment and inflation rates and higher wage increases than in previous years. Meanwhile, the 10-year government bond rate is at an all-time low, and the debt market is highly liquid.
German investment volume remains strong
Consequently, first-quarter 2015 investment dollar volume remained as strong as it was in the first quarter of 2014, reaching almost €10 billion, with 42% of that total driven by foreign investors. There is a shortage of trophy-class product, and cap rates for retail and residential core product are in the 2.5% to 4% cap rate range. Office cap rates are in the 4.5% to 5.5% range, and industrial has the highest yield compression year-over-year, with cap rates between 6% and 6.5%.
German industrial spec development climbs
The industrial market is strong throughout Germany with increasing speculative space development. However, the office leasing market is weaker than in previous upswing cycles, as tenants tend to stay in current locations and extend existing occupancy. Speculative office development is low. In seven major German cities, the residential market is on fire, fuelled by population growth and ultra-low refinancing costs. The retail market also remains strong, supported by wage increases and low inflation.
Thank you for reading. Please listen to the full Q2 2015 Audiocast here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts
Posted by Mark E. Rose, AY Toronto at 12:29 AM
Friday, May 8, 2015
By Mark E. Rose (Toronto)
I recently delivered Avison Young’s Q2 2015 audiocast message, discussing commercial real estate trends in Canada, the U.S., the U.K. and Germany. http://www.avisonyoung.com/media-room/ceo-video-audiocasts I would like to share some of the findings with you here.
Starting with Canada...
While we forecasted that the Canadian commercial real estate sector was going to face some headwinds heading into 2015, no one expected the sudden exit of Target from Canada – which led to the closure of 133 stores and put more than 17,500 employees out of work.
While the full impact has yet to be realized, it extends beyond the millions of square feet of vacant retail space across Canada, and also spills over into the office sector. Specifically, the closure affects Target’s former corporate head office location, which comprises more than 180,000 square feet in Mississauga, ON. In addition, the countrywide closure affects three massive distribution centres in Milton, ON; Cornwall, ON; and Balzac, AB, which each comprise more than 1.3 million square feet in the industrial/logistics arena.
Early indications are that existing retailers or new entrants into the Canadian market are already coveting Target's strategic assets. Large-format retailers such as Wal-Mart and Canadian Tire and others will be given a great opportunity to reposition in many markets.
Interestingly, Target’s demise hasn’t deterred others from setting up business in Canada. Recent examples include DSW (Designer Shoe Warehouse), which is opening six new stores averaging 20,000 sf; and COS by H&M, which is opening up to three Canadian locations.
Low oil prices and a lower loonie
Low oil prices and a low Canadian dollar are seen as both a blessing and a curse – and will certainly have an impact on the commercial real estate sector, and may ultimately redistribute or rebalance provincial prosperity levels.
Avison Young recently published a white paper, which you can find on our website, on the oil and gas sector’s impact on Alberta’s commercial real estate market: Avison Young releases white paper: Oil and gas sector’s impact on Alberta’s commercial real estate markets – Short-term volatility will eventually give way to stability .
Following up on the white paper, we – like the entire Canadian energy industry – will be watching closely as new Alberta Premier Rachel Notley executes her government’s oil and gas policies. Notley led the socialist New Democratic Party to a startling win in the May 5 provincial election, ending a 44-year Progressive Conservative dynasty. Notley has promised to raise corporate taxes to 12% from 10% and review the province’s oil and gas royalty rates. An increase in royalties could cause Alberta’s energy producers to adjust their investment plans, and a reduction could affect commercial real estate sectors across the province.
Canadian investment sales expected to decrease
On the investment real estate front, even though first-quarter sales figures continue to trickle in, if Toronto’s first-quarter 2015 performance is any indication, the overall results are expected to be down from year-end 2014 and from one year ago. Toronto investment sales totals were down 28% quarter-over-quarter and 48% year-over-year. However, cap rates remain compressed in Toronto, below pre-recession levels. Toronto is Canada’s largest real estate investment market and serves as a gauge for the country as a whole.
Vacancy tight in Canada’s industrial markets
On the industrial front, I want to give you a glimpse of some of the highlights from our upcoming spring industrial report, which will cover 43 markets and more than 11 billion square feet (bsf) in Canada, the U.S. and U.K.
In Canada, the industrial markets are characterized by tight vacancy, a growing development pipeline and strong investor demand. Single-digit vacancy rates persist across the country, with 7 of the 11 Canadian industrial markets recording levels below the national average, which settled at 4.4% in the first quarter of 2015 – that’s up 20 basis points (bps) year-over-year.
With vacancy rates at such low levels and in anticipation of pent-up demand, developers have responded in earnest. More than 17 msf of industrial product was under construction as of first-quarter 2015. That’s double the construction volume witnessed in the same quarter one year ago. In our view, the industrial sector will continue to benefit from the strengthening U.S. economy, and if the low Canadian dollar persists, will receive a much-needed boost for its retooled manufacturing sector, especially in the provinces of Ontario and Quebec.
Please watch for my next blog in a couple of days on U.S., U.K. and Germany commercial real trends. You can also listen to my full Q2 2015 audiocast here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts
Posted by Mark E. Rose, AY Toronto at 4:34 PM