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Wednesday, July 23, 2014

Tenants, Talent and Transit

By Rodney McDonald (Toronto)

On June 17, 2014 I moderated a panel session at the Bisnow Creative Office Summit in Toronto.

The panel included five other leaders from Toronto's commercial real estate industry.

During our one-hour morning session, in front of an industry audience of 200 people at the Shangri-La Hotel, we discussed a range of topics within the creative office theme: what are creative office tenants looking for, how are developers enticing them into their portfolios; and will we see more creative office tenants in downtown office towers.

Yes, we will see more creative office (and other office) tenants in downtown towers, as well as other types of downtown buildings. Why? Tenants are chasing talent.

In the past, office location was determined by the CEO's needs, executive team needs, or some business need. Office labour was relatively abundant and not particularly specialized. Employees were expected, and willing, to travel to wherever the job was located, and often stayed for life.

For many office tenants, especially large office tenants, those days are gone. In a recent meeting, one large company representative said to me, "our office labour force is shifting from clerical workers to knowledge workers."

Knowledge workers are now a key driver of our economies. In some cases, we are relying less on natural and manufactured capital and more on human capital to create value. Creating a smartphone app and selling it to millions of users for $1 does not require very many natural resources or a factory or warehouse of manufactured capital; it does require some smart people who can think creatively and innovate, combined with financial capital. With human capital now a greater factor in value creation, and boomers retiring, tenants are chasing young talent.

In Toronto, the young talent lives downtown in condominiums. In the past ten years, since 2004, over 23,000 high-rise condo units have been built in 69 buildings in downtown Toronto. Today, another 22,000 high-rise condo units are in pre-sales or under construction in 53 buildings - almost as many units as in the past ten years combined. Rapid urbanization is not just a Toronto trend, it's a global trend, a subject for a blog of its own. The point is, young people in Toronto live downtown, they want to walk or take public transit to work, and office tenants are having to adapt.

A sample of office tenants that have moved or consolidated operations in downtown Toronto over the past five years include (in alphabetical order): Apple Canada, Coca-Cola, Deloitte, eBay, eOne, Google, LinkedIn, Oracle, Postmedia, Randstad, SNC-Lavalin, Tata Consulting, Target Canada, and TELUS. This movement and consolidation is also happening in other cities that have been historically more suburban. Just two examples: 1) in Vancouver, Amazon has taken 90,000 sf in the new TELUS Garden tower downtown; 2) in San Francisco, Salesforce.com will lease more than 700,000 sf in the new 1.5 M sf 61-storey Salesforce Tower (formerly known as the Transbay Tower) - a new landmark for that city - next to the Transbay Transit Centre.

Transit is another key part of this story. In many cities traffic congestion has become an acute issue, with long commute times impacting the productivity of people and the economy. The Toronto Region Board of Trade says that congestion is the biggest threat to the long-term competitiveness of the Toronto region's economy and gridlock is costing the Toronto region $6 Billion annually in lost productivity. (Imagine if every office tenant in Toronto had a flexible work strategy that allowed employees to work from home one day each week, and companies coordinated this effort to spread it out over five days. It would be a 20% drop in traffic each day, plus a ready-made business continuity program when unexpected weather or other disruptions occur.)

In addition to chasing talent, tenants are also chasing transit. In Toronto, KPMG is the anchor tenant in the first office tower at Vaughn Metropolitan Centre - the new subway terminus of the University branch of Toronto's Yonge-University subway line. In Burnaby, British Columbia, the office buildings closer to the SkyTrain now rent faster. In Winnipeg, Manitoba, although there is no subway or light-rail, transit was still a factor in Manitoba Hydro deciding to locate its new LEED Platinum office tower on a downtown site that provides bus access to over 90% of the city - prior to Manitoba Hydro's move downtown approximately 95% of office staff commuted via personal vehicle; today, over 65% take transit to the office.

At Avison Young, we know know and live these aspects of young talent and transit. Our global headquarters in Toronto is located downtown in a LEED Gold office building with secure indoor bicycle storage, shower facilities, and direct access to Union Station - Canada's busiest passenger transportation hub - allowing our people to easily travel to work by subway or GO Train. Many of the young people - the Gen Y's - in our downtown Toronto office live in downtown condo towers and walk or take the subway or streetcar to work (and do not own a car). Some of the Gen X's in our office take the subway or Go train - the office location was one of the factors in my decision to join Avison Young last year (I have a 15 minute subway ride to the office). Some of the Boomers walk, take the subway, or the Go Train to the office each day. On top of this, there is the element of flexible work - with the technology most of us have at our fingertips, an Internet connection, and files in the cloud, it is possible to work from anywhere - I was not in the office when I wrote this blog.

When you consider all of these factors together - human capital as a driver of value more than ever before, the growth and shift to knowledge work, where young talent lives, congestion and transit, and flexible work enabled by Internet-based IT - it demands that office tenants think holistically and strategically and apply integrated decision-making.

There is a lot of talk about Workplace Strategy today. This is important and we often help clients with this aspect of strategic thinking - to create a physical workspace that is a fit for your company's culture and work process. Since the factors needing consideration stretch beyond the physical workspace, in addition to a Workplace Strategy, we often recommend our clients create a broader Real Estate Strategy. We also recommend that the Real Estate Strategy be aligned with your business strategy and your sustainability/CSR strategy.

As you chase talent, Avison Young can help you think about the big picture from a real estate perspective and help you implement a winning strategy.




Wednesday, July 2, 2014

Secret Recipe? The Driving Force for the Tenacious Texas Job Market

By Rand Stephens (Houston)

It has become common knowledge that the Texas job market is unmatched in its tenacity. Countless statistics can be quoted, but let’s be candid about what is really going on.  For example, I recently heard that a golf tournament's Calcutta pot at a country club in Midland/Odessa, TX, the epicenter of the Permian Basin, was over $600,000.  This harkens back to the area’s glory days in the 1950s when there were more millionaires per square mile than anywhere else in the country.  This is also far removed from the 1980s oil crash, when the local banks in the area were offering a new toaster or an oil rig as an incentive for opening a new bank account.

The Permian Basin is definitely experiencing renewed growth due to fracking technology, but Texas is bustling from El Paso to Beaumont.  When driving Houston’s industrial areas, one facility and yard after another is full of machinery, pipes, fabricating materials and cranes as demand for oilfield services has become so prevalent.  In addition to the energy industry, another major contributor to Houston’s employment success is the Texas Medical Center, which has now hit 10 million visitors per year. Facilities are expanding and the demand for medical professionals is on the rise. 

In the state capital, every major tech company is establishing a presence and expanding thus rightly garnishing the name, Silicon Hills. Austin has been heavily influenced by West coast culture and, as a result, has created a unique city culture that is all its own.   

While Houston is the global center for the energy industry and Austin a technology hub, Dallas is the center for the southwest region and is experiencing strong growth in distribution and financial services.

Think-tank members from the East and West Coasts have been visiting Texas to discover the “secret recipe” for job growth and sustainability.   It is simple and a formula that other states are starting to emulate:  Texas politicians let the private sector lead the public sector…not the other way around.

Wednesday, June 4, 2014

Houston’s CBD Shows Signs of Softening

By Rand Stephens (Houston) 

The Houston commercial real estate market has thrived in recent years due to record job growth and a surge in oil and gas exploration. We have seen market rents soar, vacancy rates drop and absorption rates increase significantly. Lately, however, there have been indications that Houston’s Central Business District (CBD) office leasing market is softening.

Our research shows that there are 109 full floors of office space currently available to lease in the CBD. The vacancy rate for office properties in the CBD has remained between 9-10 percent since the beginning of 2011. It has edged up slightly from 9.2 percent to 9.8 percent in this time frame. In addition, absorption rates are staying considerably low in comparison to Houston’s strongest submarkets.

The slight increase in vacancies and decreasing absorption rates has not affected asking rents, however, which have appreciated. At the same rate, development activity has picked up and the investment market has remained active.

In contrast to the CBD, The Woodlands and Katy Freeway West (the Energy Corridor) submarkets have gained considerable strength over the last 3 years. The vacancy rate for the Energy Corridor submarket has dropped to 3.6% and 4.9% for The Woodlands.

“Surveying the Houston submarkets, the Energy Corridor and The Woodlands began to truly outperform the CBD in the first quarter of 2013. This is when Devon vacated 560,000 sf at Two Allen Center,” notes Avison Young’s Texas Research Director, Jeannie Tobin.  She continues on to say, “Since that time, there has not been notable leasing activity in the CBD like the other top submarkets in Houston.”

There are a few major events that will contribute to the continued softening of the CBD over the next few years, including: Hines proceeding with the 815,000 sf development at 609 Main without a lead tenant; the construction of Crescent’s 584,000 sf property at 6 Houston Center; lastly, Shorenstein’s repositioning of 800 Bell into class A office space when Exxon vacates in 2015.  First floors will deliver in the last quarter of 2016 and the entire building by the end of the first quarter of 2017.

As companies focus on consolidating their office space into campus-style environments in the outer areas of the city, and development activity increases, we expect the vacancy rates in Houston’s CBD to continue to rise. Regardless of the softening trend in the CBD office market, we do predict the overall Houston market to remain solid.


To view full research referenced, please visit: https://www.dropbox.com/s/aymnnb3fkp2dyfk/CBDResearch.pdf

Monday, May 5, 2014

Increasing flow of Canadian dollars into the United States seeking investments in commercial properties

By Mark Rose (Toronto)

As a Chair and CEO leading a Canadian-based global real estate services firm and someone who lives in two countries, I have the privilege of reporting on North American trends from a global perspective.  Therefore, when I was preparing the Avison Young Q2 2014 Audiocast, I wanted to address the increasing flow of Canadian dollars seeking investments in commercial properties in the United States.

What did I learn?

Canadian investment in U.S. real estate is way up! It surged to $12 billion in 2013 from $9.5 billion in 2012an increase of more than 25%. For several years now, Canadian investors — both institutional and private — have been gobbling up U.S. commercial properties at break-neck speed. 

Canadians, as a whole, have been the most active foreign investors in U.S. real estate every year since 2010, and were never far behind in the years before that. In fact, Canadian investors represented nearly one-third of the aggregate $90.6 billion that international buyers invested in U.S. real estate from 2010 to 2013.

Numerous factors behind surge
Now, numerous factors have driven the surge in Canadian demand. Among those is the relative value of U.S. real estate, given depressed prices during the Great Recession that we are just now exiting.

Also, Canadian property markets are smaller, and there simply was more Canadian capital pursuing attractive real estate assets in its home market than there were such assets available for purchase.

Hence, that capital has been actively looking south of the border. Case in point: Canada-based Artis REIT weighted its $533-million portfolio of 2013 acquisitions 60% to Canada and 40% to the U.S. During one of its recent analyst calls, Artis indicated it will place a heavier weighting to the U.S. in 2014 acquisitions.

Now, it is risky to generalize on the motivation of Canadian investors because there are countless types of investors — insurance companies, pension funds, high-net-worth individuals and REITs, among others — pursuing a plethora of investment strategies. With that caveat, it’s fair to say that investors view Canadian properties very positively, and regard the U.S. as an attractive, familiar market which still offers liquidity and boosts yield. By investing in U.S. commercial real estate, Canadians can fill their needs and obtain a premium over similar investments in Canada.

Canadian euphoria easily explained
Why the U.S. and why now? In some ways, Canadian euphoria for the U.S. commercial property markets can be easily explained by the relative proximity and familiarity of the target markets; the ability to achieve a scale not available in domestic investments; preference for an English-based legal system; and the generally high levels of transparency and liquidity.

At the same time, the increasing flow of Canadian capital is reflective of a global trend of capital flight from virtually all corners of the world to the U.S. property markets for safety, and better, risk-adjusted returns. 

According to numerous credible surveys, the U.S. remains – far and away – the most resilient, stable and secure country for international investment. Just look at the surging popularity of the EB-5 Visa program with Asian and Latin American investors.

You may ask: Is there any downside to the rush from Canadian investors? We do not feel there is. By and large, Canadians are stable, patient and sophisticated investors. Again, we see the surge of Canadian capital as a reaffirmation that — notwithstanding the issues that America faces — the U.S. remains a global beacon for investment safety and stability.

Is this strong interest in American commercial real estate creating more competition for U.S.-based buyers? Well, yes! Of course! Most Canadian investors are both well capitalized and credible. Their significant presence in the U.S. investment market for several years now has helped buoy prices on existing properties. And at the same time, Canadian investment has helped spur the development of new opportunities. So it’s all good!

U.S. market needs foreign capital
Finally, are we getting too dependent on foreign capital in the U.S.? Well, an exhaustive response to the question would require a broader discussion of international and fiscal policy, as well as an analysis of the impact of foreign capital on bonds, stocks, exchange rates, etc. But sticking to real estate for now, the U.S. real estate market is of such a size that there is ample space — if not a need — for foreign capital to play a meaningful role.

Foreign capital has been a market stabilizer. Similar concerns were raised in the 1980s when Japanese investors were taking major positions in prominent U.S. properties, such as Rockefeller Center in New York. The U.S. seems to have come out of that so-called over-dependence just fine.

We see Canadian demand in U.S. real estate remaining strong for the foreseeable future. A big variable will be how quickly U.S. real estate prices recover from the Great Recession troughs and return to replacement-cost levels. At that point, we can reasonably expect Canadian capital — as well as that from other global players — to taper its U.S. allocation and reallocate somewhere else. Emerging markets, such as Mexico and Brazil, could be the beneficiaries of such a potential pivot.

For more on this topic, please listen to my Q2 2014 Audiocast.

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