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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.)

Monday, May 15, 2017

Single-digit vacancy rates define rapidly evolving North America and U.K. industrial sectors

By Mark E. Rose (Toronto)

The industrial property sector continues to be characterized by sound fundamentals, irrespective of geography and geopolitical and economic conditions. Record-low or near-record-low vacancy rates, owing to robust demand, are placing upward pressure on rental rates. Development costs are also on the rise, due to dwindling land supply in some markets. Meanwhile, developers strive to deliver modern product to meet evolving tenant demand – increasingly driven by the retail sector and its goal to feed today’s insatiable consumer appetite. 

These are some of the key trends noted in Avison Young’s Spring 2017 North America and U.K. Industrial Market Report, which covers the industrial markets in 55 North American and U.K. metropolitan regions:

The industrial property sector’s metrics continue to impress the market as occupiers and investors alike are drawn to the sector’s stability. Though traditional manufacturing operations remain part of the industrial fabric, surging demand for online shopping – while causing disruption in traditional brick-and-mortar retail properties – has provided immense opportunities in industrial plant, distribution and warehouse assets as supply chains become increasingly complex and seek efficiencies. An increasing urban population base also means feeding the unquenchable demand of a fickle and growing consumer market that demands cost-effective, same-day delivery options.

There is one recurring statistic in virtually every market and country under our coverage – low vacancy rates. All but two markets posted single-digit vacancy at the conclusion of the first quarter of 2017. Keeping pace with demand, the development community delivered more than 218 million square feet (msf) over the past 12 months and had more than 205 msf under construction at the end of the first quarter. In increasingly land-constrained markets, developers are being forced to think outside the traditional warehouse footprint and are even contemplating multi-storey warehouses.

Of the 55 industrial markets tracked by Avison Young across North America and the U.K., which comprise almost 14 billion square feet, vacancy declined in 40 markets, remained unchanged in two and increased in only 13 during the 12-month period ending March 31, 2017.

The analysis revealed lower year-over-year industrial vacancy rates in 30 of 41 U.S. markets and seven of 11 Canadian markets. Logistics-driven demand cut Mexico City’s industrial vacancy rate by half to 3.2%, while in the U.K., the Coventry and London markets reported vacancy rates of 5.8% and 2.7%, respectively.

Tuesday, May 2, 2017

Top 10 tips to achieve a smooth leasing transaction

By Eric Horne (Calgary)

Signing a commercial lease for your business can be one of the largest financial commitments that you make. It affects the image that you project, the ease of access to your clients and the happiness of your employees. In my 10 years in the commercial real estate industry, I have seen numerous businesses make the deal process significantly harder than it has to be – or struggle needlessly – because they didn’t have an effective strategy. Below are the 10 most critical things to do in order to achieve a smooth leasing process.

Top 10 tips for tenants in commercial real estate leasing transactions
  1. Understand your rights and liabilities in your existing lease.
  2. Use a qualified agent, broker or advisor to provide value and help educate final decision-makers
  3.  Understand the market and what leverage you have.
  4.  Clearly understand your space requirements for today and for the future.
  5. Act in a timely manner during the decision-making process.
  6. Develop a strategy at the beginning of the process.
  7. Finalize your internal and external team members for this process.
  8. Give yourself adequate time to complete a deal comfortably.
  9. Consider factors beyond the financial costs and what terms are open for negotiation
  10. Make your decision with confidence.

Planning ahead and engaging the right support team are the best things that you can do for yourself and your business. I encourage any company that currently leases commercial space to review its lease. If it is within a year of expiring, start the conversations now. If you are looking to lease for the first time, my advice for you is to do your homework, get some good assistance and make a plan.

A licensed broker can help you understand the current market conditions and grow your business –without experiencing needless headaches.

(Eric Horne is a Vice-President of Downtown Office Leasing in Avison Young’s Calgary office.)

Wednesday, April 26, 2017

My take on the Trump Effect

 By Blake Thomas (Raleigh)  

For the business community, and more specifically the capital markets, 2017 began with a lot of optimism.

Much of this increase in market confidence could be attributed to the unprecedented November 2016 election of President Donald Trump and of Republican majorities on both sides of Congress. The decisive victories represented a drastic shift within the federal government, gave the Republicans a clear path to policy reform, and signaled to the world that the American people were tired of business as usual, or to be more precise, gridlock as usual, in Washington, DC. Trump’s agenda on the campaign trail and during his first few months in office has been focused on pro-business, pro-growth policies. The pillars of Trump’s Republican agenda have been centered around tax reform, a rollback of Obama-era regulations (specifically in the banking and healthcare sectors), increased defense and infrastructure spending (with corresponding cuts to entitlements and various government agencies), and revised trade policy (think: China and Mexico). The markets are now reflecting the potential impact of these policies as though reform is actually possible in Washington. But, to date, reform largely remains to be seen – outside of executive orders.

Market exuberance was evident immediately following the election results when the 10-year treasury (10-Yr UST) jumped to 2.063% on November 9 from 1.857% on November 8 – a 20.6-basis-point surge overnight. This increase in the long end of the yield curve was not driven by a massive selloff of this financial safe haven by global institutions due to some economic crisis or policy but, rather, a clear signal from investors of strong economic growth expectations.

Remember that nominal interest rates, like the 10-Yr UST yield, comprise two components: real interest and inflation, both of which are impacted by anticipated economic growth. Investors now have higher real interest rate expectations due to greater opportunity costs within the broader capital markets. Moreover, since the U.S. economy had been bouncing along the bottom for the last eight years with inflation below the Fed growth target of just 2%, it does not seem like a stretch to say that the market began suddenly pricing in higher inflation given the expectations for a faster-growing economy. More good economic news came within five days of President Trump’s inauguration, when the Dow Jones industrial average (Dow) crossed 20,000 for the first time in U.S. history. For all but a few days in late January since, the Dow has stayed above this historic mark, peaking at more than 21,000 on March 1. This equity market run-up enforces the notion that there are greater yielding opportunities for capital markets participants. And recently, another key economic indicator, the Conference Board’s U.S. consumer sentiment index, reached its highest level in 16 years.

But what do these gains mean for commercial real estate (CRE)? While the current administration is focused on promoting faster gains in the economy, there will be pluses and minuses for CRE – as well as winners and losers. Following the Reaganomics formula, tax reform should be a boon for overall economic growth by making the U.S. a more competitive environment for businesses in the global marketplace. Proposed corporate tax rate cuts should encourage companies to reinvest in their core businesses, providing additional job and wage growth as well as capital investments in plants and equipment. As such, tax reform is expected to help drive demand for CRE space and continued rent growth. However, along with these proposed tax reforms there have been discussions regarding the elimination of tax deferrals like 1031 exchanges – a move that would negatively impact CRE liquidity and affect all market participants and product types.

Rolling back banking regulations, such as the new risk retention rules of Dodd-Frank and Basil III, would increase liquidity and promote further investment and development in CRE. Although some might argue that, due to the increased regulations, fundamentals have remained in check and helped prolong this latest cycle. Infrastructure investment in roads, bridges and railroads should also provide a lift to CRE as long as commodity prices do not rise significantly due to increased demand for raw materials to support the new public works projects. This type of government spending is designed to not only address our nation’s aging and decaying infrastructure, but also to aid the president’s push to bring back manufacturing and provide additional higher-than-average paying jobs to the U.S. economy. Increased infrastructure investment and wage growth have the potential to bolster CRE values further.

The big question mark surrounds trade and immigration reform. More restrictive trade and immigration policies could undermine economic growth – with the industrial and retail real estate sectors having the most to lose. A near-term reduction in U.S. trade would likely reduce industrial space demand. Ultimately, domestic manufacturing would need to satisfy consumer demand for goods if imports fall. A reduction in imports could lead to wholesale changes in location demand as companies reconfigure supply chains and distribution for domestic fulfillment. The proposed border tax could increase the costs of retailer inventories through a tax on imports, though the U.S. dollar could strengthen and offset the impact.

In most cases, I believe that long-tenure, single-tenant net leased (STNL) retail and healthcare properties could see the smallest benefits from the current administration’s pro-growth policies due to fixed-rent escalations already embedded into pre-existing lease agreements. STNL retail and healthcare properties could even suffer valuation declines if stronger economic growth is accompanied by higher inflation and interest rates – a situation that could increase cap rate spreads and, ultimately, negatively impact reversion values.

In general, market confidence in CRE is warranted in the near term, with significant positive impacts to all product types expected. If some proposed pillars of the Republican agenda promoting wide-scale economic growth come to fruition, then office, industrial and multi-tenant retail properties should see continued healthy rent growth – a trend that would likely offset a cap-rate expansion. Tax reform already seems to have been priced into the markets, and if the administration is unable to push legislation through, a pullback in debt and equities will likely occur.

However, if tax reform is approved by Congress, then the CRE sector may see additional lift due to the removal of the uncertainty surrounding tax reform.

(Blake Thomas is a Vice-President with Avison Young’s capital markets team in Raleigh.)

Thursday, April 20, 2017

Where does sustainability fit into your investment strategy?

By Amy Erixon and Rodney McDonald (Toronto)

As weather patterns become increasingly difficult to predict, and extreme weather events begin to wreak greater havoc on buildings across the globe, the time has come for all real estate investors – not just a few developers or institutions – to incorporate sustainability into their investment decision-making process.

If you’re still wondering if such a shift in thinking is worth it, consider these facts:

More clients and tenants looking for sustainable real estate
If you operate a real estate investment management company, you likely field questions regularly about sustainability options. This situation arises because many investment funds – such as the Healthcare of Ontario Pension Plan – today have their own investment sustainability criteria that guide their investment decision-making process across diverse assets, including real estate, stocks and bonds.

Similarly, many tenants are increasingly attracted to green buildings. In a recent PGIM survey, 78% of tenants said that energy efficiency and green building operations are either important or very important to them.

Sustainability has positive impact on returns
Yes, more sustainable buildings are good for the environment – but they’re good for investors’ bottom lines, too. A 2016 study by Drs. Nils Kok and Avis Devine, published in the September 2016 issue of the Journal of Portfolio Management, looked at 10 years of financial performance data for landlord Bentall Kennedy’s North American office portfolio. The study showed that by reducing energy consumption by 14%, the company was able to increase renewal rates (5.6%), tenant satisfaction (7%), rent (3.7%) and occupancy (4%) – and decrease concessions 4% as well.

In today’s era of rapid social, economic, global and geopolitical change, it’s essential to do your due diligence when acquiring and managing an asset. While many investors and investment management companies use data to guide their decision-making process, they often continue to overlook climate data. Such an omission could be costly down the road. Using climate maps as data points today can help you protect your long-term returns – for example, by helping you to identify areas prone to flooding and take proactive measures to mitigate the financial impacts of severe flooding on your real asset portfolio.

Such foresight will not only help protect your building(s) from environmental damage in the future, but also allow you to avoid higher insurance premiums.

(Amy Erixon is a Principal of Avison Young and Managing Director, Investments. Rodney McDonald is a Principal of Avison Young and leads the firm’s consulting and project management services in Ontario. He also leads Avison Young’s Global Citizenship affinity group, implementing the firm’s corporate social responsibility, sustainability and philanthropy strategy. Both Erixon and McDonald are based in Toronto and can be reached at (416) 955-0000.)

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